UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

[X]        Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2008
 
or
[  ]         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from _____________ to _____________.

Commission File Number:   333-114041

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

Delaware
 
20-0645710
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
5020 Weston Parkway, Suite 400, Cary,
 North Carolina
 
27513
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code: 919-677-3900

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

Indicate by checkmark if the registrant is a well–known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨  No  x
 
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  x No  o

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  o                       No  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x

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

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

The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant as of December 31, 2008 was $0.

The Company had 100 shares of common stock outstanding as of March 30, 2009.

Documents incorporated by reference:  None

 
 

Form 10-K Annual Report
Table of Contents




PART I
   
Item 1.
Business
2
Item 1A.
Risk Factors
13
Item 1B.
Unresolved staff comments
20
Item 2.
Properties
20
Item 3.
Legal Proceedings
21
Item 4.
Submission of Matters to a Vote of Security Holders
21
     
PART II
   
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
22
Item 6.
Selected Financial Data
23
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
38
Item 8.
Financial Statements and Supplementary Data
39
 
   Report of Independent Registered Public Accounting Firm
39
 
   Consolidated Statements of Operations
40
 
   Consolidated Balance Sheets
41
 
   Consolidated Statements of Cash Flows
42
 
   Consolidated Statements of Stockholder’s Equity (Deficit) and Comprehensive Income (Loss)
43
 
   Notes to Consolidated Financial Statements
44
Item 9.
Changes and Disagreements with Accountants on Accounting and Financial Disclosure
84
 
Item 9A.
Controls and Procedures
84
Item 9B.
Other Information
84
     
PART III
   
Item 10.
Directors, Executive Officers and Corporate Governance
85
Item 11.
Executive Compensation
88
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
101
Item 13.
Certain Relationships and Related Transactions, and Director Independence
102
Item 14.
Principal Accountant Fees and Services
103
     
PART IV
   
Item 15.
Exhibits and Financial Statement Schedule
104
 
Signatures
105












 
 



CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING COMMENTS

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

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

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

 
•
our high degree of leverage and significant debt service obligations;

 
•
restrictions under the indentures governing the Senior Secured Notes and Senior Subordinated Notes and restrictions under our senior secured asset-based revolving credit facility;

 
•
the competitive nature of our industry;

 
•
changes in interest rates, and general economic, home repair and remodeling, and new home construction market conditions;

 
•
changes in the price and availability of raw materials; and

•     changes in our relationships with our significant customers.


PART I

Item 1.  BUSINESS

Company Overview

We are a leading manufacturer of residential exterior building products in North America.  We offer a comprehensive product line of vinyl siding and skirting, vinyl windows and doors, vinyl and composite fencing and railing, and stone veneer that serves both the home repair and remodeling and new home construction sectors in the United States and Western Canada.  Vinyl building products have the leading share of sales by volume in siding and windows, and a fast growing share of sales by volume in fencing in the U.S.  We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood and aluminum windows, wood, vinyl and aluminum clad windows, and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core vinyl products.  We believe our broad product offering and geographically diverse manufacturing base allow us to better serve our customers and provide us with a competitive advantage over other vinyl building products suppliers.  We have two reportable segments: (i) Siding, Fencing, and Stone, and (ii) Windows and Doors.

 
2
 
           Additional information concerning our business is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this report.
Unless the context indicates or requires otherwise, (i) the term “Ply Gem Holdings” refers to Ply Gem Holdings, Inc.; (ii) the term “Ply Gem Industries” refers to Ply Gem Industries, Inc., our principal operating subsidiary; and (iii) the terms "we," "our," "ours," "us", “Ply Gem”, and the "Company" refer collectively to Ply Gem Holdings and its subsidiaries. The use of these terms is not intended to imply that Ply Gem Holdings and Ply Gem Industries are not separate and distinct legal entities.
 

 
History

Ply Gem Holdings was incorporated on January 23, 2004 for the purpose of acquiring Ply Gem Industries from Nortek, Inc. (“Nortek”).  Nortek was at the time a wholly-owned subsidiary of Nortek Holdings, Inc. (“Nortek Holdings”).  The Ply Gem acquisition was completed on February 12, 2004, when Nortek sold Ply Gem Industries to Ply Gem Holdings, pursuant to the terms of the stock purchase agreement among Ply Gem Investment Holdings, Inc. (“Ply Gem Investment Holdings"), Nortek and WDS LLC, dated as of December 19, 2003, as amended.  Prior to February 12, 2004, Ply Gem Holdings had no operations and Ply Gem Industries was wholly owned by a subsidiary of WDS LLC, which was a wholly owned subsidiary of Nortek.  Ply Gem Holdings, a Delaware corporation, is a wholly-owned subsidiary of Ply Gem Investment Holdings, a Delaware corporation controlled by an affiliate of CI Capital Partners LLC, formerly known as Caxton-Iseman Capital LLC.  Prior to the Ply Gem Acquisition, Ply Gem Industries was known as the Windows, Doors and Siding division of Nortek.

On August 27, 2004, Ply Gem Industries acquired all of the outstanding shares of capital stock of MWM Holding, Inc. (“MWM Holding”), in accordance with the Stock Purchase Agreement entered into among Ply Gem Industries, MWM Holding, and the selling stockholders, dated as of July 23, 2004.  MWM Holding, a Delaware corporation, is a wholly-owned subsidiary of Ply Gem Industries.  MWM Holding is the sole owner of all of the outstanding shares of capital stock of MW Manufacturers, Inc. (“MW”).  Prior to the MW acquisition, MWM Holding was owned by Investcorp SA (“Investcorp”) and its affiliates and members of MW management.

On February 24, 2006, in connection with the acquisition of AWC Holding Company (“AWC”, and together with its subsidiaries, “Alenco”), a new holding company, Ply Gem Prime Holdings, Inc. (“Ply Gem Prime Holdings”), was formed pursuant to a merger involving Ply Gem Investment Holdings.  As a result, Ply Gem Prime Holdings became the sole shareholder of Ply Gem Investment Holdings, each outstanding share of capital stock of Ply Gem Investment Holdings was converted into a share of a corresponding class of shares of the capital stock of Ply Gem Prime Holdings and Ply Gem Prime Holdings assumed Ply Gem Investment Holdings’ obligations under the Ply Gem Investment Holdings 2004 Stock Option Plan.  In connection therewith, each outstanding stock option and phantom unit of Ply Gem Investment Holdings was converted on a 1:1 basis into a stock option and phantom unit of Ply Gem Prime Holdings.

On February 24, 2006, Ply Gem completed the Alenco acquisition in accordance with a securities purchase agreement entered into among Ply Gem, all of the direct and indirect stockholders, warrant holders and stock option holders of AWC and FNL Management Corp., an Ohio corporation, as their representative on February 6, 2006.  Pursuant to the securities purchase agreement, Ply Gem purchased all of the issued and outstanding shares of common stock, warrants to purchase shares of common stock and options to purchase shares of common stock of AWC (other than certain shares of common stock of AWC held by certain members of the senior management of Alenco that were contributed separately to Ply Gem Prime Holdings, the new parent company of Ply Gem Investment Holdings, in exchange for shares of capital stock of Ply Gem Prime Holdings).  Immediately following the completion of the Alenco acquisition, AWC became a wholly owned subsidiary of Ply Gem.   The Alenco acquisition directly supports the Company’s national window strategy and today operates under common leadership with our other U.S. window businesses.

On October 31, 2006, Ply Gem completed the acquisition of Alcoa Home Exteriors, Inc. (“AHE”) in accordance with a stock purchase agreement entered into among Ply Gem, Alcoa Securities Corporation and Alcoa Inc. on September 22, 2006.  Pursuant to such stock purchase agreement, Ply Gem purchased all of the issued and outstanding shares of common stock of AHE so that, immediately following the completion of such purchase, AHE became a wholly owned subsidiary of Ply Gem.  The AHE acquisition did not include an additional investment by management.  AHE is a leading manufacturer of vinyl siding, aluminum siding, injection molded shutters and vinyl, aluminum and injection molded accessories.  As a result of the AHE acquisition, AHE became part of our Siding, Fencing, and Stone Segment and operates under common leadership with our existing siding business.

 
3
 
 
On September 30, 2007, Ply Gem completed the acquisition of CertainTeed Corporation’s vinyl window and patio door business through a stock acquisition.  On the acquisition date, the Company changed the name of the acquired business to Ply Gem Pacific Windows Corporation (“Pacific Windows”).  The acquired vinyl window business is a leading manufacturer of premium vinyl windows and patio doors and produces windows for the residential new construction and remodeling markets and produces and sells window lineals to licensed window fabricators in the eastern United States. During the first quarter of 2008, Ply Gem sold certain assets that were acquired in the Pacific Windows acquisition that had been used to produce and sell window lineals to licensed fabricators in the eastern United States.  The Pacific Windows’  vinyl window and patio door business operates three fabrication facilities which are located in Auburn, Washington, Corona, California, and Sacramento, California.  The Pacific Windows acquisition directly supports the Company’s national window strategy and today Pacific Windows operates under common leadership with our other U.S. window businesses.

On October 31, 2008, Ply Gem completed an asset acquisition of United Stone Veneer, LLC (“USV”).  USV manufactures stone veneer products and operates a manufacturing facility in Middleburg, PA.  As a result of the USV acquisition, the Company modified the name of its “Siding, Fencing, and Railing” segment to “Siding, Fencing, and Stone” during 2008.


Access to Company Information

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

 
Business Strategy

†  
Continued  Market Share Gains.   We intend to increase our market share both in our siding, fencing and stone products and in our window and door products by utilizing the breadth of our broad geographical footprint to serve customers across the United States and Canada.  Additionally, our continued investments in product innovation and quality coupled with strong customer service further enhance our ability to capture market share in each of our markets. Furthermore, we believe there is substantial opportunity across our product families to cross-sell and bundle products to further leverage our channel partners and exclusive industry relationships.

We have integrated our siding businesses into one operating group and have placed all of our siding, fencing and stone business units under common leadership to improve strategic focus, reduce costs and better serve our customers.  We have organized our U.S. window businesses under one common leadership team to enhance our strategic focus. With our extensive manufacturing capabilities, product breadth and national distribution capabilities, we believe we can provide our customers with a cost-effective, single source from which to purchase their residential exterior building products.

†  
Expand Brand Coverage and Product Innovation.   We intend to continually increase the value of the Ply Gem brands by leveraging the Ply Gem brand principles across each of the product brands in the Siding, Fencing and Stone and Windows and Doors business segments.  These principles embodied within the Ply Gem experience for all customers, include: Service, Distribution, Reliability, Selection, Innovation and Sustainability.  Together, they provide the customer a consistent and differentiated experience as compared to Ply Gem’s competitors. In addition, we plan to maximize the value of our new product innovations and technologies by deploying best practices and manufacturing techniques across our product categories. For example, we believe our innovations and expertise in manufacturing composite materials for railing products have favorably positioned our siding and accessories products for future introduction of composite materials.  Furthermore, our recent addition of manufactured stone veneer to our product offering will provide our existing siding customers with access to the fastest growing category of exterior cladding products.  Our vertical integration in producing aluminum windows positioned us to introduce a new aluminum and wood clad window, which won the new product of the day award at the 2008 International Builder’s Show. We currently employ 36 research and development professionals dedicated to new product development, reformulation, product redesign and other manufacturing and product improvements.

 
4
 

 
†  
Further Improve Operating Efficiencies.   While we have significantly improved our vinyl siding manufacturing cost structure over the last several years, we believe that there are further opportunities for improvement. We have proactively managed our manufacturing capacity in light of current depressed market conditions as was demonstrated by our closure of our Denison, Texas vinyl siding manufacturing facility in February 2008 and our announced plans to close our Hammonton, New Jersey and Phoenix, Arizona window manufacturing facilities, which will reduce manufacturing cost and improve operational efficiencies at our remaining manufacturing facilities. We have expanded our efforts to vertically integrate certain raw materials used in window lineal production, including PVC compound, as well as expanding our in-house window lineal and aluminum window inserts production.  In addition, we implemented manufacturing improvements and best practices across all of our product categories, including, for example, expansion of our virtual plant strategy in our vinyl siding facilities and further vertical integration in our window product lines which was demonstrated with the introduction of our new aluminum clad window line in early 2008. We also plan to optimize product development, sales and marketing, materials procurement, operations and administrative functions across all of our product categories. We believe that significant opportunities remain as we further leverage our buying power across raw materials as well as spending for non-raw material items by obtaining volume discounts and minimizing costs. In addition, the integration of our sales and marketing efforts across our product categories provides an ongoing opportunity to significantly improve sector penetration.
 

Industry Overview

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

Home Repair and Remodeling .
Since the early 1990’s and through 2006, demand for home repair and remodeling products remained robust as a result of strong economic growth, low interest rates and favorable demographic trends.  According to the U.S. Census Bureau, expenditures for maintenance, repairs, and improvements increased from $138.3 billion in 1997 to $175.7 billion in 2002 and $236.6 billion in 2007, representing a five and ten-year compound annual growth rate of 4.9% and 5.5%, respectively.  However, during 2007 and 2008 the ability for home owners to finance repair and remodeling expenditures, such as replacement windows or vinyl siding, has been negatively impacted by a general tightening of lending requirements by banks and other financial institutions which negatively impact consumers ability to finance home repair and remodeling expenditures.  In addition, management believes that expenditures for home repair and remodeling products is also impacted by consumer confidence which has been declining in recent months due to general economic conditions. As such, management believes expenditures for home repair and remodeling products declined in 2008 from 2007 levels and expects that expenditures for home repair and remodeling products to further decline in 2009 from 2008 levels.

New Home Construction .
New home construction experienced strong growth from the early 1990s to 2006, with housing starts having increased at a compound annual growth rate of 3.9%.  However in 2007 and 2008, single family housing starts declined by 29.8% and 40.3% respectively, according to the National Association of Home Builders, and are expected to decline further in 2009 by approximately 42.9%.

While the industry is experiencing a period of severe correction and downturn, management believes the long-term economics for new construction are favorable and supported by a favorable interest rate environment and strong demographic trends, as increasing immigration drives demand for starter homes. According to the Joint Center for Housing Studies of Harvard University, net new households between 2010 and 2020 is expected to reach 14.4 million units, as compared to 12.6 million units added from 1995 - 2005.   Additionally, the U.S. Congress recently passed an economic stimulus package that provides, among other things, favorable tax credits towards home purchases which are intended to stimulate demand in the U.S. housing market.

 
5
 
 

Description of Business

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

Siding, Fencing, and Stone Segment

Products
In our Siding, Fencing, and Stone segment, our principal products include vinyl siding and skirting, vinyl and aluminum soffit, aluminum trim coil, J-channels, wide crown molding, window and door trim, F-channels, H-molds, fascia, undersill trims, outside/inside corner posts, rain removal systems, injection molded designer accents such as shakes, shingles, scallops, shutters, vents and mounts, vinyl fence, vinyl and composite railing, and stone veneer.  We sell our siding and accessories under our Variform, Napco, Mastic Home Exteriors, and Cellwood brand names and under the Georgia-Pacific brand name through a private label program.  We also sell our Providence line of vinyl siding and accessories to Lowe’s under our Durabuilt private label brand name.  Our vinyl and vinyl-composite fencing and railing products are sold under our Kroy and Kroy Express brand names.  Our stone veneer products are sold under our United Stone Veneer brand name.  A summary of our product lines is presented below according to price point:
 
Specialty/Super Premium
·  
CSL 600 (Variform)
·  
Heritage Cedar Shingle and Round Cut   (Variform)
·  
Victoria Harbor (Variform)
·  
Cedar Select Shingle and Round Cut (Napco)
·  
American “76” Collection (Napco)
·  
Structure EPS (Mastic Home Exteriors)
·  
Cedar Discovery (Mastic Home Exteriors)
·  
Cedar Dimensions (Cellwood)
·  
Cedar Spectrum Shingle (Georgia-Pacific)
·  
Cedar Spectrum Round Cut (Georgia-Pacific)
·  
Seasons (Georgia-Pacific)
·  
Somerset (Georgia-Pacific)
·  
Board and Batten (Variform, Napco, Mastic Home Exteriors, Cellwood, and Georgia-Pacific)
·  
Kroy composite railing systems (Kroy)
·  
United Stone Veneer
Premium
·  
Timber Oak Ascent (Variform)
·  
Varigrain Preferred (Variform)
·  
American Splendor (Napco)
·  
Grand Sierra (Mastic Home Exteriors)
·  
Liberty Elite (Mastic Home Exteriors)
·  
Charleston Beaded Collection (Mastic Home Exteriors)
·  
Quest Signature   (Mastic Home Exteriors)
·  
T-lok Barkwood (Mastic Home Exteriors)
·  
Dimensions (Cellwood)
·  
Dimensions Beaded (Cellwood)
·  
Chatham Ridge (Georgia-Pacific)
·  
Cedar Lane Select (Georgia-Pacific)
·  
Kroy Express (Kroy)
Standard
·  
Camden Pointe (Variform)
·  
Nottingham  (Variform )
·  
Ashton Heights  (Variform)

 
6
 

·  
American Herald (Napco)
·  
American Tradition (Napco)
·  
Ovation (Mastic Home Exteriors)
·  
Silhouette Classic (Mastic Home Exteriors)
·  
Carvedwood 44   (Mastic Home Exteriors)
·  
Progressions (Cellwood)
·  
Heritage Hill (Georgia-Pacific)
·  
Forest Ridge (Georgia-Pacific)
·  
Shadow Ridge (Georgia-Pacific)
·  
Castle Ridge (Georgia-Pacific)
·  
Kroy Vinyl Fence and Railing Products (Kroy)
Economy
·  
Contractor’s Choice (Variform)
·  
American Comfort (Napco)
·  
Providence (Napco)
·  
Mill Creek (Mastic Home Exteriors)
·  
Trade-Mark cg (Mastic Home Exteriors)
·  
Brentwood  (Mastic Home Exteriors)
·  
Evolutions (Cellwood)
·  
Vision Pro (Georgia-Pacific)
Manufactured Housing
·  
Parkside (Georgia-Pacific)
·  
Oakside (Georgia-Pacific)
 
The breadth of our product lines and our multiple brand and price point strategy enable us to target multiple distribution channels (wholesale, retail and manufactured housing) and end sectors (home repair and remodeling and new home construction), with minimal channel conflict.
 
Customers and Distribution

We have a multi-channel distribution network that serves both the home repair and remodeling and new home construction sectors, which exhibit different, often counter-balancing, demand characteristics.  In conjunction with our multiple brand and price point strategy, we believe our multi-channel distribution strategy enables us to increase our sales and sector penetration while minimizing channel conflict.  We believe our strategy reduces our dependence on any one channel, which provides us with a greater ability to sustain our financial performance through economic fluctuations.
 
We sell our siding and accessories to specialty distributors (one-step distribution) and to wholesale distributors (two-step distribution).  Our specialty distributors sell directly to remodeling contractors and builders.  Our wholesale distributors sell to retail home centers and lumberyards who, in turn, sell to remodeling contractors, builders and consumers.  In the specialty channel we have developed an extensive network of approximately 800 independent distributors, serving over 22,000 contractors and builders nationwide.  We are exceptionally well-positioned in this channel as many of these distributors are both the largest and leading consolidators in the industry.  In the wholesale channel we are the sole supplier of vinyl siding and accessories to BlueLinx (formerly a distribution operation of the Georgia-Pacific Corporation), one of the largest building products distributors in the U.S.  Through BlueLinx and our BlueLinx dedicated sales force, our Georgia-Pacific private label vinyl siding products are sold at major retail home centers, lumberyards and manufactured housing manufacturers.  A portion of our siding and accessories is also sold directly to Lowe’s Home Improvement Centers under our Durabuilt brand name.  Our growing customer base of fencing and railing consists of fabricators, distributors, retail home centers and lumberyards.  Our customer base of manufactured stone veneer products consists of distributors, lumberyards, retailers and contractors.
 
Our largest customer, BlueLinx, made up 15.2% of the net sales of our Siding, Fencing, and Stone segment and 9.2% of our consolidated net sales for the year ended December 31, 2008.  For the year ended December 31, 2007, BlueLinx made up 16.8% of the net sales of our Siding, Fencing, and Stone segment and 10.2% of our consolidated net sales.
 

 

 
7
 


Production and Facilities

Vinyl siding, skirting, soffit and accessories are manufactured in our Kearney, Missouri, Martinsburg, West Virginia, Jasper, Tennessee, and Stuarts Draft, Virginia facilities, while all metal products are produced in our Valencia, Pennsylvania and Sidney, Ohio facilities.  All injection molded products such as shakes, shingles, scallops, shutters, vents and mounts are either manufactured in our Gaffney, South Carolina facility or purchased from outside suppliers.  The Company closed the Denison, Texas facility in early 2008 due to excess production capacity.  The vinyl and metal plants have sufficient capacity to support planned levels of sales growth for the foreseeable future.  Our fencing and railing products are currently manufactured at our York, Nebraska and Fair Bluff, North Carolina facilities.  The fencing and railing plants have sufficient capacity to support our planned sales growth for the foreseeable future.  Our stone veneer products are manufactured at our Middleburg, Pennsylvania facility.  The stone veneer plant has sufficient capacity to support our planned sales growth for the foreseeable future.  We expect our capital expenditures for our Siding, Fencing and Stone segment in the near future to be below our historical expenditure levels as a result of lower demand due to market conditions.
 
Raw Materials and Suppliers

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

We compete with other national and regional manufacturers of vinyl siding, fencing and stone products.  We believe we are one of the largest manufacturers of vinyl siding in North America, alongside CertainTeed and Alside.  We believe that we account for approximately 29% of the U.S. vinyl siding market.  Significant growth in vinyl fencing and railing has attracted many new entrants, and the sector today is fragmented.  Our fencing and railing competitors include U.S. Fence, Homeland, Westech, Bufftech, Royal, and Azek.  Our stone veneer competitors include Owens Corning, Eldorado Stone, Coronado Stone, and smaller, regional competitors. We generally compete on product quality, breadth of product offering, sales and service support.  In addition to competition from other vinyl siding, fencing and stone products, our products face competition from alternative materials: wood, metal, fiber cement and masonry siding.  Increases in competition from other vinyl exterior building products manufacturers and alternative building materials could cause us to lose customers and lead to decreases in net sales.
 
Seasonality

Markets for our products are seasonal and can be affected by inclement weather conditions.  Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods.  Because a portion of our overhead and expenses are fixed throughout the year, our operating profits tend to be lower in the first and fourth quarters.  Inclement weather conditions can affect the timing of when our products are applied or installed, causing delayed profit margins when such conditions exist.
 
We generally carry increased working capital during the first half of a fiscal year to support those months where customer demand exceeds production capacity.  We believe that this is typical within the industry.
 
Backlog

Our Siding, Fencing, and Stone segment had a backlog of approximately $6.4 million at December 31, 2008, and a backlog of approximately $12.0 million at December 31, 2007.  We expect to fill 100% of the orders during 2009.



 
8
 



Windows and Doors Segment

Products
In our Windows and Doors segment, our principal products include vinyl, aluminum and wood windows and patio doors, wood, vinyl, and aluminum windows, as well as steel and fiberglass doors that serve both new home construction and the repair and remodeling sectors in the United States and Western Canada.  Our Windows and Doors segment includes MW, Great Lakes Window, Inc. (“Great Lakes”), Alenco, Pacific Windows, and CWD Windows and Doors, Inc. (“CWD”) subsidiaries.  We have traditionally sold our windows and doors under our MW, Patriot, Twin Seal, Alenco, Builders View, Great Lakes, Ply Gem, Uniframe, Grandview, Seabrooke, Bayshore, Napco, CertainTeed, and CWD brand names.  A summary of our current product lines is presented below according to price point:

Specialty/Super Premium                                                       
·  
Uniframe (Great Lakes)
·  
Mira Premium Series (MW)
·  
Select Series (MW)
·  
Fusion (CWD)
·  
Regency (CWD)
Premium
·  
Freedom (MW)
·  
Insulate Pro Series (MW)
·  
Ply Gem Lifestyles (Great Lakes)
·  
Great Lakes Seabrooke (Great Lakes)
·  
Grandview 4000 & 5000 (Great Lakes)
·  
Napco 3500 (Great Lakes)
·  
MW 1400 (Great Lakes)
·  
Ambassador (CWD)
·  
Bryn Mawr II (Pacific Windows)
·  
Somerton II (Pacific Windows)
·  
New Castle XT (Pacific Windows)
Standard
·  
MW Pro Series (MW)
·  
Jefferson (MW)
·  
Classic (MW)
·  
TwinSeal (MW)
·  
Seabrooke (Great Lakes)
·  
Bayshore (Great Lakes)
·  
Grandview 3000 (Great Lakes)
·  
MW 1300 (Great Lakes)
·  
Napco 2500 (Great Lakes)
·  
Premier (CWD)
·  
Diplomat (CWD)
·  
Envoy (CWD)
·  
Insulate (Pacific Windows)
·  
New Castle II (Pacific Windows)
Economy
·  
Builder Series (MW)
·  
Consul (CWD)
·  
Bayshore (Great Lakes)
·  
Patriot (MW)
·  
Alenco
·  
Builders View (Alenco)



 
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In 2008, we introduced the Ply Gem Windows brand to our window and door product portfolio.  Over the next several months we will continue to rationalize the majority of our product portfolio into product collections bearing one of the three brands:  Ply Gem Windows, Great Lakes, and CWD.  A table summarizing the future product positioning is found below.

 
Ply Gem Windows
Great Lakes Window
CWD
 
New Construction
Replacement
Replacement
New Construction
 
Specialty/Super-Premium
 
Mira Premium Series
Select Series
Uniframe
Regency
Fusion
 
Premium
 
Insulate Pro Series
Premium Series
Lifestyles
Ambassador
Standard
MW Pro Series
Pro Series
Seabrooke
Envoy
Diplomat
Premier
 
Economy
 
Builder Series
Contractor Series
Bayshore
Consul

 
We have introduced new products to the portfolio which allow us to enter or further penetrate new distribution channels and customers.  The Mira Premium Series, launched in May 2008, is a high-end aluminum-clad wood window marketed to the architectural, light commercial, and custom home builder/remodeler market segments.  The Contractor Series replacement product, launched in December, is an entry-level, value-priced replacement vinyl product, which offers a unique value proposition to one-step wholesale distributors.  The Fusion window line, successfully launched by CWD in late 2007, is a high-end aluminum-clad vinyl window targeted at the custom home builder, condominium and light-commercial markets and distributed through the retail lumberyard and contractor direct channels.
 
The breadth of our product lines and our multiple brand and price point strategy enable us to target multiple distribution channels (wholesale, retail and builder direct) and end-use sectors (home repair and remodeling and new home construction), with minimal channel conflict.

Customers and Distribution

We have a multi-channel distribution and product strategy that enables us to serve both the home repair and remodeling and new home construction sectors.  By offering this broad product offering and industry leading service, we are able to meet the local needs of our customers on a national scale.  This strategy has enabled our customer base (existing and new) to simplify their supply chain by consolidating window suppliers.  Our good, better, best product and price point strategy allows us to increase our sales and sector penetration while minimizing channel conflict.  This strategy reduces our dependence on any one channel, providing us with a greater ability to sustain our financial performance through economic fluctuations.
 
The new construction product lines are sold for use in new residential and light commercial construction through a highly diversified customer base, which includes independent building material dealers, regional/national lumberyard chains, builder direct/OEMs, and retail home centers.  Our repair and remodeling window products are primarily sold through independent home improvement dealers and one-step distributors.  Dealers typically market directly to homeowners or contractors in connection with remodeling requirements while distributors concentrate on local independent retailers.
 
In Canada, sales of CWD product lines in the new construction market are predominantly made through direct sales to builders and contractors, while sales in the renovation market are made primarily through retail lumberyards.  CWD products are distributed through eight distribution centers.
 

 
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Our five largest customers, NV Ryan, 84 Lumber, Pro Build, Builders FirstSource, and Stock Building Supply, represented 24.8% of our total sales in 2008.
 

Production and Facilities

Our window and door products leverage a network of vertically integrated production and distribution facilities located in Virginia, Mississippi, North Carolina, Georgia, Texas, California and Washington.  Our window and door manufacturing facilities have benefited from our continued investment and commitment to product development and product quality combined with increasing integration of best practices across our product offerings.  In addition, beginning in 2003, Ply Gem significantly lowered its manufacturing cost basis by expanding its existing in-house capacity to extrude vinyl lineals used in the production of windows.   In 2005 and 2006, extruders were added to support the integration of the Great Lakes Window products and the Alenco acquisition.  Also in 2006, a new PVC resin blend facility was added to further reduce our cost to produce.  This successful venture not only delivered significant cost savings but also allowed us to further refine and improve our compound formulation and quality.  In 2008, the Bryan, TX facility began production of our aluminum cladding for our new custom aluminum clad program and also began producing screens for a majority of our window plants.  In 2009, we will begin producing vinyl profiles for our west coast facilities as we transition away from the older products acquired in the CertainTeed transaction to newer products based on existing platforms from our Toledo, OH facility.
 
While the market has required us to ramp down capacity in 2008, all of our facilities have the ability to increase capacity in a cost effective manner by expanding production shifts.  Ongoing capital investments will focus upon new product introductions and equipment maintenance and cost reductions.
 
Raw Materials and Suppliers

PVC compound, wood, aluminum, and glass are major components in the production of our window and door products.  Historically, changes in PVC compound and wood prices have had the most significant impact on our material cost of products sold in our Windows and Doors segment.  We are one of the largest consumers of PVC resin in North America and we continue to leverage our purchasing power on this key raw material.  As mentioned above, the PVC resin compound that is used in window lineal production is now produced on site.  The leveraging of our PVC resin buying power and the expansion of PVC resin compounding capabilities has begun to benefit all of our domestic window companies.  Our window plants have significantly consolidated glass purchases to take advantage of strategic sourcing savings opportunities.

Competition

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

Seasonality

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

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


 
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Backlog

Our Windows and Doors segment had a backlog of approximately $16.7 million at December 31, 2008, and a backlog of approximately $27.8 million at December 31, 2007.  We expect to fill 100% of the orders during 2009.


Environmental and Other Regulatory Matters

We are subject to Canadian and U.S. federal, state, provincial and local environmental laws and regulations that relate to the presence of hazardous materials, pollution and the protection of the environment, including those governing emissions to air, discharges to water, use, storage and transport of hazardous materials, storage, treatment and disposal of waste, remediation of contaminated sites, and protection of worker health and safety.  From time to time, our facilities are subject to investigation by environmental regulators.  We believe that our current operations are in substantial compliance with all applicable environmental laws and that we maintain all material permits required to operate our business.

Based on available information, we do not believe that any known compliance obligations, claims, releases or investigations will have a material adverse effect on our results of operations, cash flows or financial position. However, there can be no guarantee that these or newly discovered matters or any inability to enforce available indemnification rights we have against Nortek (an indemnity under the stock purchase agreement governing the Ply Gem acquisition) and Alcan Aluminum Corporation (an indemnity we received when we purchased our York, Nebraska facility from Alcan Aluminum Corporation in 1998) will not result in material costs.

Under the stock purchase agreement governing the MW acquisition, the sellers agreed to indemnify us for the first $250,000 in costs of compliance with the New Jersey Industrial Site Recovery Act at an MW facility in Hammonton, New Jersey and for 75% of any such costs between $250,000 and $5.5 million.  MW’s Rocky Mount, Virginia property is involved in a corrective action, relating to contamination associated with an underground storage tank formerly located at the Rocky Mount, Virginia property.  Liability for this subject contamination has been previously assumed by U.S. Industries, Inc., pursuant to its indemnity obligation under the stock purchase agreement dated August 11, 1995, whereby U.S. Industries, Inc. sold the stock of MW to Fenway Partners.  As the successor in interest of Fenway Partners, we are similary indemnified by U.S. Industries, Inc., which is currently working with the Virginia Department of Environmental Quality with respect to the subject contamination.

We voluntarily comply with the Vinyl Siding Institute (“VSI”) Certification Program with respect to our vinyl siding and accessories.  Prior to 1998, there was no commonly-adopted industry certification process for vinyl siding products.  Uniform minimum standards were available, but uniform compliance was not assured.  In 1998, the VSI, under the leadership of our former President and Chief Executive Officer, Lee Meyer, at that time the Chairman of the VSI, instituted a new industry-wide program to assure compliance with minimum product standards.  All major vinyl siding manufacturers, representing over 95% of all products, comply with these guidelines.

Under the VSI Certification Program, third party verification and certification, provided by Architectural Testing, Inc., (“ATI”) is used to ensure uniform compliance with the minimum standards set by the American Society for Testing and Materials, (“ASTM”).  Those products compliant with ASTM specifications for vinyl siding will perform satisfactorily in virtually any environment.  ATI initially inspects all qualifying products for compliance and inspects plants to assure effective quality control programs.  In addition, compliance with advertised specifications is verified.  All manufacturing plants are inspected bi-annually during unannounced visits to monitor compliance.  Upon certification, products are added to the official VSI list of certified products and are eligible to bear the official VSI certification logo.



 
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Employees

As of December 31, 2008, we had 4,711 full-time employees worldwide, of whom 4,243 were in the United States and 468 were in Canada.  Employees at our Canadian plant, our Valencia, Pennsylvania plant, and our Bryan, Texas plant are currently our only employees with whom we have a collective bargaining agreement.
·  
Approximately 5.6% of our total employees are represented by the United Brotherhood of Carpenters and Joiners of America, pursuant to a collective bargaining agreement with certain of our Canadian employees, which expires on December 4, 2010.
·  
Approximately 0.9% of our total employees are represented by the United Steelworkers of America, AFL-CIO-CLC, pursuant to a collective bargaining agreement with certain of our Valencia, Pennsylvania employees, which expires on December 1, 2011.
·  
Approximately 6.1% of our total employees are represented by the International Chemical Workers Union Council, pursuant to a collective bargaining agreement with certain of our Alenco Windows employees, which expires on December 4, 2010.


Financial Information about Geographic Areas

All of the Company’s operations are located in the United States and Canada.  Revenue from external customers for the year 2008 consists of:
·  
$1,084.1 million from United States customers
·  
$84.5 million from Canadian customers
·  
$6.4 million from all other foreign customers

Revenue from external customers for the year 2007 consists of:
·  
$1,269.8 million from United States customers
·  
$89.3 million from Canadian customers
·  
$4.4 million from all other foreign customers

Revenue from external customers for the year 2006 consists of:
·  
$981.2 million from United States customers
·  
$68.3 million from Canadian customers
·  
$5.0 million from all other foreign customers

At December 31, 2008, 2007 and 2006, long-lived assets totaled approximately $23.2 million, $51.2 million, and $44.2 million, respectively, in Canada and $771.7 million, $1,240.0 million, and $1,253.6 million, respectively, in the United States.  We are exposed to risks inherent in any foreign operation, including foreign exchange rate fluctuations.




Item 1A.  RISK FACTORS

Risks Associated with Our Business

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

Our performance is dependent to a significant extent upon the levels of home repair and remodeling and new home construction spending, all of which are affected by such factors as interest rates, inflation, consumer confidence, unemployment, and the availability of consumer credit.  Current market forecasts indicate that single family housing starts for the new construction market will decline in 2009 as compared to 2008.  If these market forecasts are correct, our net sales and net income may be adversely affected.

Availability of consumer credit could impact home repair and remodeling and new home construction sectors which could lower the demand for, and pricing of, our products, which in turn could cause our net sales and net income to decrease.

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

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

We compete with other national and regional manufacturers of vinyl exterior building products.  Some of these companies are larger and have greater financial resources than we do.  Accordingly, these competitors may be better equipped to withstand changes in conditions within the industries in which we operate and may have significantly greater operating and financial flexibility than we do.  These competitors could take a greater share of sales and cause us to lose business from our customers.  Additionally, our products face competition from alternative materials: wood, metal, fiber cement and masonry in siding, and wood in windows.  An increase in competition from other vinyl exterior building products manufacturers and alternative building materials could cause us to lose our customers and lead to decreases in net sales.

Changes in the costs and availability of raw materials, especially PVC resin and aluminum, can decrease our profit margin by increasing our costs.

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

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

Our top ten customers accounted for approximately 33.8% of our net sales in the year ended December 31, 2008.  Our largest customer, BlueLinx, distributes our vinyl siding and accessories through multiple channels within its building products distribution business, and accounted for approximately 9.2% of our 2008 net sales.  We expect a small number of customers to continue to account for a substantial portion of our net sales for the foreseeable future.

The loss of or a significant adverse change in our relationships with BlueLinx or any other major customer could cause a material decrease in our net sales.  We expect our relationship with BlueLinx to continue.

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

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

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

If we are unable to meet future capital requirements our product offering may become dated, our productivity may decrease and the quality of our products decline, which, in turn, could reduce our sales and profitability.

We periodically make capital investments to, among other things, maintain and upgrade our facilities and enhance our production processes.  As we grow our businesses, we may have to incur significant capital expenditures.  If we do not have, or are unable to obtain adequate funds to make all necessary capital expenditures when required, or if the amount of future capital expenditures are materially in excess of our anticipated or current expenditures, our product offering may become dated, our productivity may decrease and the quality of our products may decline, which, in turn, could reduce our sales and profitability.

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

Our financial performance is affected by the availability of qualified personnel and the cost of labor.  Currently, approximately 12.6% of our employees are represented by labor unions.  We are subject to the risk that strikes or other types of conflicts with personnel may arise or that we may become a subject of union organizing activity.  Furthermore, some of our direct and indirect suppliers have unionized work forces.  Strikes, work stoppages or slowdowns experienced by these suppliers could result in slowdowns or closures of facilities where components of our products are manufactured.  Any interruption in the production or delivery of our products could reduce sales of our products and increase our costs.

We may be subject to claims arising from the operations of our subsidiaries, including Ply Gem Industries, MW, Alenco, AHE, Pacific Windows, and USV prior to our acquisitions.  Our ability to seek indemnification from the former owners of our subsidiaries may be limited, in which case, we would be liable for these claims.

We have acquired all of our subsidiaries in the last several years, including Ply Gem Industries, Inc., MW, Alenco, AHE, Pacific Windows, and USV. We may be subject to claims or liabilities arising from the ownership or operation of our subsidiaries prior to our acquisition of them.  Our ability to seek indemnification from the former owners of our subsidiaries is limited by various factors, including the specific limitations contained in the respective acquisition agreement and the financial ability of the former owners.

Under the terms of the stock purchase agreement governing the acquisition of Ply Gem Industries, Nortek has agreed to indemnify us for liabilities arising from its former ownership or operations of subsidiaries or properties where such ownership or operation ceased prior to the completion of the Ply Gem acquisition, including environmental liabilities, liabilities arising in connection with certain leases, product liability and other litigations, benefit plans, and for certain other liabilities.  Our ability to seek indemnification from Nortek is, however, limited by the strength of Nortek’s financial condition, which could change in the future.  These liabilities could be significant, and if we are unable to enforce the Nortek indemnification rights, could make it difficult to pay the interest or principal amount of the notes when due.  Nortek has covenanted to use their reasonable commercial efforts to novate certain sale and lease contracts relating to discontinued operations, thereby removing us and our affiliates from certain indemnification obligations thereunder, which obligations we retained in connection with the sales of certain of our businesses.  Accordingly, during 2004 Nortek successfully novated four sale contracts relating to our discontinued operations, including our disposition of Hoover Treated Wood Products, Inc., Sagebrush Sales, Peachtree Doors and Windows and SNE Enterprises.  As a consequence, we are no longer responsible for any indemnification obligations to the buyers of these former operations.  Nortek has also covenanted that after the Ply Gem acquisition, it will not dispose of all or substantially all of its property and assets in a single transaction or series of related transactions, unless the acquirer of either its residential building products segment or HVAC segment (whichever is sold first) assumes all of Nortek’s obligations (including Nortek’s indemnification obligations) under the stock purchase agreement.

 
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We completed the acquisition of MW during 2004.  Our ability to seek indemnification from the selling stockholders of MWM Holding is restricted to breaches of a limited amount of corporate representations and warranties, and for the first $250,000 in costs of compliance by MW with the New Jersey Industrial Site Recovery Act at an MW facility in Hammonton, New Jersey and for 75% of any such costs between $250,000 and $5.5 million resulting from the compliance by MW with that same act.

We completed the acquisition of Alenco in February of 2006.  Our ability to seek indemnification from the selling stockholders of AWC Holding Company for specified matters is subject to limitations, including the periods to submit claims, minimum amount of losses suffered and aggregate amounts of recovery.

We completed the acquisition of AHE in October of 2006.  Our ability to seek indemnification from the selling stockholders of AHE for specified matters is subject to limitations, including the periods to submit claims, minimum amount of losses suffered and aggregate amounts of recovery.

We completed the acquisition of Pacific Windows in September of 2007.  Our ability to seek indemnification from the selling stockholders of Pacific Windows for specified matters is subject to limitations, including the periods to submit claims, minimum amount of losses suffered and aggregate amounts of recovery.

We completed the acquisition of USV in October 2008.  Our ability to seek indemnification from the selling stockholders of USV for specified matters is subject to limitations, including the periods to submit claims, minimum amount of losses suffered and aggregate amounts of recovery.

We could face potential product liability claims relating to products we manufacture.

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

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

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

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

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

 
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Environmental requirements may impose significant costs and liabilities on us.

 Our facilities are subject to numerous United States and Canadian federal, state, provincial and local laws and regulations relating to the presence of hazardous materials, pollution and the protection of the environment, including those governing emissions to air, discharges to water, use, storage and transport of hazardous materials, storage, treatment and disposal of waste, remediation of contaminated sites and protection of worker health and safety. From time to time, our facilities are subject to investigation by governmental regulators. In addition, we have been identified as one of many potentially responsible parties for contamination present at certain offsite locations to which we or our predecessors are alleged to have sent hazardous materials for recycling or disposal. We believe that we are in material compliance with all applicable requirements of such laws and regulations. However, our efforts to comply with environmental requirements do not remove the risk that we may be held liable, or incur fines or penalties, and that the amount of liability, fines or penalties may be material, for, among other things, releases of hazardous substances occurring on or emanating from current or formerly owned or operated properties or any associated offsite disposal location, or for newly-discovered contamination at any of our properties from activities conducted by previous occupants. Certain environmental laws impose strict, and under certain circumstances joint and several, liability for the cost of addressing releases of hazardous substances upon certain classes of persons, including site owners or operators and persons that disposed or arranged for the disposal of hazardous substances at contaminated sites. Under the stock purchase agreement governing the Ply Gem acquisition, our former parent, Nortek, has agreed to indemnify us for any such liabilities arising from our former ownership or operation of subsidiaries or properties where such ownership or operation ceased prior to the completion of the Ply Gem acquisition and for certain other properties. Our ability to seek indemnification from Nortek is, however, limited by the strength of Nortek’s financial condition. Nortek has also covenanted that after the Ply Gem acquisition, it will not dispose of all or substantially all of its property and assets in a single transaction or series of related transactions, unless the acquirer of either its residential building products segment or HVAC segment (whichever is sold first) assumes all of Nortek’s obligations (including Nortek’s indemnification obligations) under the stock purchase agreement.
 
We are currently involved in environmental proceedings involving CWD (arising from subsurface contamination discovered at our Calgary, Alberta property), and we may in the future be subject to environmental proceedings involving Thermal-Gard, Inc. (arising from groundwater contamination in Punxsutawney, Pennsylvania) and Kroy Building Products, Inc. (relating to contamination in a drinking water well in York, Nebraska). Under the stock purchase agreement governing the Ply Gem acquisition, Nortek is to indemnify us fully for any liability in connection with the Punxsutawney contamination. Alcan Aluminum Corporation assumed the obligation to indemnify us with respect to certain liabilities for environmental contamination of the York property occurring prior to 1994 when it sold the property to us in 1998. Our former subsidiary, Hoover Treated Wood Products, Inc., is involved in an environmental proceeding in connection with a contaminated landfill site in Thomson, Georgia. While we had assumed an obligation to indemnify the purchaser of our former subsidiary when we sold Hoover Treated Wood Products, Inc., our obligation has been novated and assumed by Nortek.
 
Under the stock purchase agreement governing the acquisition of MW, the sellers agreed to indemnify us for the first $250,000 in costs of compliance with the New Jersey Industrial Site Recovery Act at an MW facility in Hammonton, New Jersey and for 75% of any such costs between $250,000 and $5.5 million. In connection with the MW acquisition, MW achieved compliance with the Industrial Site Recovery Act by obtaining a Remediation in Progress waiver from the New Jersey Department of Environmental Protection based on the ongoing remediation of the site by a previous occupant. MW’s Rocky Mount, Virginia property is subject to an environmental investigation relating to contamination associated with an underground storage tank formerly located at the Rocky Mount, VA property. Liability for the underground storage tank contamination and related investigation has been previously assumed by U.S. Industries, Inc., pursuant to its indemnity obligation under the Stock Purchase Agreement dated August 11, 1995, whereby U.S. Industries, Inc. sold the stock of MW to Fenway Partners. As the successor in interest of Fenway Partners, we are similarly indemnified by U.S. Industries, Inc. U.S. Industries and MW are working to develop a course of action to address the site contamination that is acceptable to both companies and the Virginia regulatory authorities.
 

 
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Changes in environmental laws and regulations or in their enforcement, the discovery of previously unknown contamination or other liabilities relating to our properties and operations or the inability to enforce the indemnification obligations of Nortek, the MW sellers and U.S. Industries, Inc. could result in significant environmental liabilities which could make it difficult to pay the interest or principal amount of our debt when due. In addition, we might incur significant capital and other costs to comply with increasingly stringent United States or Canadian environmental laws or enforcement policies which would decrease our cash flow available to service our indebtedness.

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

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

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

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

We are controlled by our principal equity holder, which has the power to take unilateral action and whose interests in our business could conflict with yours.

                Affiliates of, and companies managed by, CI Capital Partners LLC, formerly known as Caxton-Iseman Capital, LLC, including Caxton-Iseman (Ply Gem), L.P. and Frederick Iseman, control our affairs and policies. Circumstances may occur in which the interests of these equity holders could be in conflict with the interests of creditors, including the holders of the senior secured and subordinated notes. In addition, these equity holders may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to creditors, including holders of the senior secured and subordinated notes.

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

We have substantial indebtedness.  As of December 31, 2008, we had approximately $1,114.2 million of indebtedness outstanding, including $60.0 million of outstanding borrowings under our $150.0 million senior secured asset-based revolving credit facility (the “ABL Facility”).

Our substantial amount of indebtedness could have important consequences.  For example, it could:

·  
make it more difficult for us to satisfy our obligations on the 11.75% Senior Secured Notes due 2013 (the “Senior Secured Notes”) and 9% Senior Subordinated Notes due 2012 (the “Senior Subordinated Notes”);

·  
make it more difficult to satisfy our obligations on our ABL Facility;

 
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·  
require us to dedicate a substantial portion of our cash flow from operations to interest and principal payments on our indebtedness, reducing the availability of our cash flow for other purposes, such as capital expenditures, acquisitions and working capital;
 
·  
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

·  
increase our vulnerability to general adverse economic and industry conditions;

·  
place us at a disadvantage compared to our competitors that have less debt;

·  
expose us to fluctuations in the interest rate environment because the interest rates of our ABL Facility are at variable rates; and

·  
limit our ability to borrow additional funds.

We expect to obtain the money necessary to pay our expenses, fund working capital and capital expenditures, and to pay the interest on the Senior Secured Notes, Senior Subordinated Notes, and ABL Facility from cash flow from our operations and from Ply Gem Industries’ existing and available borrowings under its ABL Facility.  Our ability to meet our expenses thus depends on our future performance, which will be affected by financial, business, economic and other factors.  We will not be able to control many of these factors, such as economic conditions in the industry in which we operate and competitive pressures.  Our cash flow may not be sufficient to allow us to pay interest on our debt (including the Senior Secured Notes and Senior Subordinated Notes) and to meet our other obligations.  If we do not have enough cash flow, we may be required to refinance all or part of our existing debt, sell assets or borrow additional money.  We may not be able to do so on terms acceptable to us or at all.  In addition, the terms of existing or future debt agreements, including the ABL Facility and the indentures governing the Senior Secured Notes and Senior Subordinated Notes, may restrict us from adopting any of these alternatives.  The failure to generate sufficient cash flow or to achieve such alternatives could reduce the value of the Senior Secured Notes and Senior Subordinated Notes and limit our ability to pay principal and interest on the notes.

The indentures for the Senior Secured Notes, Senior Subordinated Notes, and the ABL Facility impose significant operating and financial restrictions, which may prevent us from capitalizing on business opportunities.

The indentures for the Senior Secured Notes, Senior Subordinated Notes and the ABL Facility impose significant operating and financial restrictions on us.  These restrictions limit our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness, make investments, sell assets, incur certain liens, enter into agreements restricting our subsidiaries’ ability to pay dividends, or merge or consolidate.

We must refinance existing senior subordinated indebtedness prior to its maturity.  Failure to do so could have a material adverse effect upon us.

The maturity of our Senior Subordinated Notes is February 15, 2012, which is before the maturity of our Senior Secured Notes, and all outstanding loans under the ABL Facility which will be due and payable on June 9, 2013. If the Senior Subordinated Notes shall not have been refinanced in full on or prior to October 15, 2011, then the ABL Facility will become due and fully payable and the commitments thereunder will terminate on October 15, 2011. While we expect to refinance this indebtedness, we cannot assure you that we will be able to refinance this indebtedness, or whether any refinancing will be on commercially reasonable terms. There can be no assurance that the financial terms or covenants of any new credit facility and/or other indebtedness will be the same or as favorable as those under our ABL Facility, Senior Secured Notes and Senior Subordinated Notes.
 
Our ability to complete a refinancing of our ABL Facility and our Senior Subordinated Notes prior to their respective maturities is subject to a number of conditions beyond our control. For example, if a disruption in the financial markets were to occur at the time that we intended to refinance this indebtedness, we might be restricted in our ability to access the financial markets. If we are unable to refinance this indebtedness, our alternatives would consist of negotiating an extension of our ABL Facility with the lenders and seeking or raising new capital. If we were unsuccessful, the lenders under our ABL Facility and the holders of our Senior Subordinated Notes could demand repayment of the indebtedness owed to them on the relevant maturity date. As a result, our ability to pay the principal of and interest on the notes would be adversely affected.

 
19
 
 
Item 1B.  UNRESOLVED STAFF COMMENTS

Not applicable.


Item 2.  PROPERTIES

Our corporate headquarters are located in Cary, North Carolina.  We own and lease several additional properties in the U.S. and Canada.  We operate the following facilities as indicated, and each facility is leased unless indicated with “NA” under the Lease Expiration Date column below.

Location
Square Footage
 
Facility Use
Lease
Expiration Date
         
Siding, Fencing, and Stone Segment
     
Jasper, TN
270,000
 
Manufacturing and Administration
NA
Fair Bluff, NC (1)
200,000
 
Manufacturing and Administration
09/30/2024
Kearney, MO (1)
175,000
 
Manufacturing and Administration
09/30/2024
Independence, MO
233,000
 
Warehouse
01/31/2010
Valencia, PA (1)
175,000
 
Manufacturing and Administration
09/30/2024
Martinsburg, WV (1)
163,000
 
Manufacturing and Administration
09/30/2024
Martinsburg, WV
124,000
 
Warehouse
01/31/2011
York, NE (1)
76,000
 
Manufacturing
09/30/2024
Stuarts Draft, VA
257,000
 
Manufacturing and Administration
NA
Sidney, OH
819,000
 
Manufacturing and Administration
NA
Gaffney, SC
260,000
 
Manufacturing and Administration
NA
Harrisburg, VA
268,000
 
Warehouse
03/15/2015
Gaffney, SC
27,000
 
Warehouse
Month-to-month
Kansas City, MO
36,000
 
Administration
12/31/2017
Middleburg, PA
100,000
 
Manufacturing and Administration
12/31/2016
         
Windows and Doors Segment
       
Calgary, AB, Canada (1)
301,000
 
Manufacturing and Administration
09/30/2024
Walbridge, OH (1)
250,000
 
Manufacturing and Administration
09/30/2024
Walbridge, OH
30,000
 
Warehouse
06/30/2013
Rocky Mount, VA (1)
720,000
 
Manufacturing and Administration
09/30/2024
Rocky Mount, VA (1)
160,000
 
Manufacturing
09/30/2024
Rocky Mount, VA
180,000
 
Manufacturing
08/31/2016
Rocky Mount, VA
80,000
 
Warehouse
08/31/2013
Rocky Mount, VA
300,000
 
Warehouse
08/31/2016
Hammonton, NJ
360,000
 
Manufacturing and Administration
10/31/2012
Tupelo, MS
200,000
 
Manufacturing and Administration
06/16/2010
Fayetteville, NC
56,000
 
Warehouse
NA
Peachtree City, GA
148,000
 
Manufacturing
08/19/2014
Peachtree City, GA
40,000
 
Manufacturing
NA
Dallas, TX
32,000
 
Manufacturing
03/31/2010
Bryan, TX
274,000
 
Manufacturing and Administration
08/20/2014
Bryan, TX
75,000
 
Manufacturing
12/31/2014
Phoenix, AZ
156,000
 
Manufacturing
03/31/2011
Farmers Branch, TX
53,000
 
Warehouse
01/31/2010
Auburn, WA
262,000
 
Manufacturing and Administration
12/31/2013
Corona, CA
128,000
 
Manufacturing and Administration
09/30/2012
Sacramento, CA
234,000
 
Manufacturing and Administration
09/12/2019
         
Corporate
       
Cary, NC
20,000
 
Administration
10/31/2015

 (1) These properties are included in long-term leases entered into as a result of a sale/leaseback   agreement entered into in August 2004 as part of the funding for the purchase of MWM Holding.
 
20
 

 
Item 3.  LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising out of our operations.  As of December 31, 2008, we were not a party to any material legal proceedings.



Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.

 
21
 


PART II

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

Market Information

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

Holders

        As of March 30, 2009, there was one holder of record of the common stock of Ply Gem Holdings.

Dividends

        Ply Gem Holdings did not pay any dividends in respect of its common stock in the two fiscal years ended December 31, 2008 and 2007.
 
  The indentures for the Senior Secured Notes and Senior Subordinated Notes and the ABL Facility restrict the ability of Ply Gem Industries and its subsidiaries to make certain payments and transfer assets to Ply Gem Holdings.  In addition, the ABL Facility imposes restrictions on the ability of Ply Gem Holdings to make certain dividend payments.  As a result, it is unlikely that Ply Gem Holdings will pay dividends in respect of its common stock in the foreseeable future.
 
Securities authorized for issuance under equity compensation plans
 
 
The following table shows the securities authorized for issuance under the Company’s equity compensation plans as of December 31, 2008.
 
   
(A)
   
(B)
   
( C)
 
   
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
   
Weighted
average
exercise price of
outstanding
options,
warrants and
rights
   
Number of
securities available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (A))
 
 
 
 
 
Plan Category
                   
Equity compensation plans
                 
Approved by shareholders
    314,694     $ 48.79       19,371  
                         
Equity compensation plans not
                       
Approved by shareholders
    -       -       -  
                         
Total
    314,694     $ 48.79       19,371  

During the fiscal year ended December 31, 2008, no equity securities of the Company were sold by the Company that were not registered under the Securities Act of 1933, as amended, except as previously disclosed in the Company’s periodic reports.





 
22
 
 
Item 6.     SELECTED FINANCIAL DATA

The financial data set forth below is for the five-year period ended December 31, 2008.   The periods presented during calendar 2004 provide the operating results of Ply Gem Industries from the beginning of the year, January 1, 2004, until the date of the Ply Gem acquisition, February 12, 2004, as well as of Ply Gem Holdings from the date of inception of January 23, 2004 through December 31, 2004. Subsequent to the acquisition, the financial statements presented are on a different basis of accounting.  Therefore, they are not directly comparable to preceding periods. The data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated and combined financial statements, related notes and other financial information included elsewhere in this report.
 
       
Combined
 
   
Consolidated
 
Ply Gem
 
   
Ply Gem Holdings
 
Industries
 
                               
 
 
For the Year ended
Dec. 31, 2008
 
For the Year ended
Dec. 31, 2007
   
For the Year ended
Dec. 31, 2006
 
For the Year ended
Dec. 31, 2005
   
Jan. 23, 2004 to
Dec. 31, 2004
 
Jan. 1, 2004 to
Feb. 11, 2004
 
                   
                   
                   
     
(6)
   
(4)
   
(2) (3)
         
(1)
     
         
Revised (5)
   
Revised (5)
 
Revised (5)
   
Revised (5)
     
Summary of Operations
                                     
Net sales
  $ 1,175,019   $ 1,363,546     $ 1,054,468   $ 838,868     $ 585,945   $ 40,612  
Net income (loss)
    (498,475 )   4,982       6,976     21,217       18,178     (3,350 )
                                           
Total assets
    1,101,110     1,616,153       1,649,968     1,052,798       1,105,499     N/A  
Long-term debt, less current maturities
    1,114,186     1,031,223       1,042,894     635,776       702,930     N/A  

(1)  
Includes the results of MWM Holdings from the date of acquisition, August 27, 2004.
(2)  
Includes the results of Alenco from the date of acquisition, February 25, 2006.
(3)  
Includes the results of AHE from the date of acquisition, October 31, 2006.
(4)  
Includes the results of Pacific Windows from the date of acquisition, September 30, 2007.
(5)  
During 2008, the Company elected to conform its method of valuing inventory to the FIFO method from the LIFO method since the majority of the Company’s inventory utilized FIFO.  Historically, LIFO inventory comprised approximately 8% of the Company’s inventory.
See Note 5 to the consolidated financial statements for retrospective application of this change.
(6)  
Includes the results of USV from the date of acquisition, October 31, 2008.

See the Notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere herein regarding the effect on operating results of acquisitions and other matters.
23
 
Item 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS

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

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

General

We are a leading manufacturer of residential exterior building products in North America.  We offer a comprehensive product line of vinyl siding and skirting, vinyl, wood, and clad windows and doors, vinyl and composite fencing, and stone veneer that serves both the home repair and remodeling and the new home construction sectors in the United States and Western Canada.  We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core vinyl products.   We have two reportable segments: (i) Siding, Fencing, and Stone, and (ii) Windows and Doors.
 
Ply Gem Holdings, a wholly owned subsidiary of Ply Gem Investment Holdings, was incorporated on January 23, 2004 for the purpose of acquiring Ply Gem Industries from Nortek.  The Ply Gem acquisition was completed on February 12, 2004, when Nortek sold Ply Gem Industries, to Ply Gem Holdings, pursuant to the terms of the stock purchase agreement among Ply Gem Investment Holdings and Nortek and WDS LLC dated as of December 19, 2003, as amended.  Prior to February 12, 2004, the date of the Ply Gem acquisition, Ply Gem Holdings had no operations and Ply Gem Industries was a wholly-owned subsidiary of WDS LLC, which was a wholly-owned subsidiary of Nortek.

On August 27, 2004, Ply Gem Industries acquired all of the outstanding shares of capital stock of MWM Holding, in accordance with a stock purchase agreement entered into among Ply Gem, MWM Holding and the selling stockholders in the MW acquisition.  The accompanying financial statements include the operating results of MWM Holding for the period of August 27, 2004, the date of acquisition, through December 31, 2008.

On February 24, 2006, in connection with the acquisition of AWC Holding Company (“AWC”, and together with its subsidiaries, “Alenco”), a new holding company, Ply Gem Prime Holdings, was formed pursuant to a merger involving Ply Gem Investment Holdings.  As a result, Ply Gem Prime Holdings became the sole shareholder of Ply Gem Investment Holdings, each outstanding share of capital stock of Ply Gem Investment Holdings was converted into a share of a corresponding class of shares of the capital stock of Ply Gem Prime Holdings and Ply Gem Prime Holdings assumed Ply Gem Investment Holdings’ obligations under the Ply Gem Investment Holdings 2004 Stock Option Plan.  In connection therewith, each outstanding stock option and phantom unit of Ply Gem Investment Holdings was converted on a 1:1 basis into a stock option and phantom unit of Ply Gem Prime Holdings.

On February 24, 2006, Ply Gem completed the Alenco acquisition in accordance with a securities purchase agreement entered into among Ply Gem, all of the direct and indirect stockholders, warrant holders and stock option holders of AWC and FNL Management Corp., an Ohio corporation, as their representative on February 6, 2006.  Pursuant to the securities purchase agreement, Ply Gem purchased all of the issued and outstanding shares of common stock, warrants to purchase shares of common stock and options to purchase shares of common stock of AWC (other than certain shares of common stock of AWC held by certain members of the senior management of Alenco that were contributed separately to Ply Gem Prime Holdings, the new parent company of Ply Gem Investment Holdings, in exchange for shares of capital stock of Ply Gem Prime Holdings, Inc.).  Immediately following the completion of the Alenco acquisition, AWC became a wholly owned subsidiary of Ply Gem.  The accompanying financial statements include the operating results of Alenco for the period of February 24, 2006, the date of acquisition, through December 31, 2008.

On October 31, 2006, Ply Gem Industries acquired all of the outstanding shares of capital stock of AHE in accordance with a stock purchase agreement entered into among Ply Gem, Alcoa Securities Corporation, and Alcoa Inc.  The accompanying financial statements include the operating results of AHE for the period of October 31, 2006, the date of acquisition, through December 31, 2008.

        On September 30, 2007, Ply Gem Industries acquired the vinyl window and patio door business of Certain Teed Corporation through a stock acquisition.  On the acquisition date, the Company changed the name of the acquired business to Ply Gem Pacific Windows Corporation.  The accompanying financial statements include the operating results of Pacific Windows for the period September 30, 2007 through December 31, 2008.
 
24

On October 31, 2008, Ply Gem Industries completed an asset acquisition of USV.  The accompanying financial statements include the operating results of USV for the period October 31, 2008 through December 31, 2008.

We are a holding company with no operations or assets of our own other than the capital stock of our subsidiaries. The terms of Ply Gem Industries’ ABL Facility place restrictions on its ability to pay dividends and otherwise transfer assets to us. Further, the terms of the indenture governing Ply Gem Industries' Senior Subordinated Notes place restrictions on the ability of Ply Gem Industries and our other subsidiaries to pay dividends and otherwise transfer assets to us.


Financial statement presentation

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

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

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

Operating earnings.   Operating earnings represents net sales less cost of products sold, SG&A expense and amortization of intangible assets.

Comparability.    All periods after the Alenco acquisition in February 2006 include the results of operations of Alenco.  All periods after the AHE acquisition in October 2006 include the results of operations of AHE.  All periods after the Pacific Windows acquisition in September 2007 include the results of operations of Pacific Windows.  All periods after the USV acquisition in October 2008 include the results of operations of USV.

Impact of commodity pricing

Our principal raw materials, PVC resin and aluminum, have historically been subject to rapid price changes.  We have in the past been able to pass on a substantial portion of significant cost increases through price increases to our customers.  Our results of operations for individual quarters can and have been impacted by a delay between the time of PVC resin and aluminum cost increases and decreases and related price changes that we implement in our products.

Impact of weather

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

Critical Accounting Policies

The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.  Certain of our accounting policies require the application of judgments in selecting the appropriate assumptions for calculating financial estimates.  By their nature, these judgments are subject to an inherent degree of uncertainty.  We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements.  These judgments and estimates are based upon our historical experience, current trends and information available from other sources, as appropriate.  If different conditions result compared to our assumptions and judgments, the results could be materially different from our estimates.  Significant judgments and estimates are used in the Company’s goodwill and intangible asset impairment tests where different assumptions could produce varying results. Management also believes that the four areas where different assumptions could result in materially different reported results are 1) goodwill and intangible asset impairment tests, 2) accounts receivable related to estimation of allowances for doubtful accounts, 3) inventories in estimating reserves for obsolete and excess inventory, and 4) warranty reserves.  Although we believe the likelihood of a material difference in these areas is low based upon our historical experience, a 10% change in our allowance for doubtful accounts, inventory reserve estimates, and warranty reserve at December 31, 2008 would result in an approximate $0.6 million, $0.6 million, and $4.6 million impact on expenses, respectively. Additionally, we have included in the discussion that follows our estimation methodology for both accounts receivable and inventories.  While all significant policies are important to our consolidated financial statements, some of these policies may be viewed as being critical.  Our critical accounting policies include:

 
25
 
 
Revenue Recognition.   We recognize sales based upon shipment of products to our customers net of applicable provisions for discounts and allowances.  Generally, the customer takes title upon shipment and assumes the risks and rewards of ownership of the product.  For certain products, our customers take title upon delivery, at which time revenue is then recognized.  Revenue includes selling price of the product and all shipping costs paid by the customer.  Revenue is reduced at the time of sale for estimated sales returns and all applicable allowances and discounts based on historical experience.  We also provide for estimates of warranty, bad debts, shipping costs and certain sales-related customer programs at the time of sale.  Shipping and warranty costs are included in cost of products sold.  Bad debt expense and sales-related marketing programs are included in SG&A expense.  We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are reconciled to the actual amounts.

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

Inventories.   Inventories in the accompanying consolidated balance sheets are valued at the lower of cost or market.  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 since over 92% of the Company’s inventory used FIFO.  The Company believes that the FIFO method is preferable because it provides a better measure of the current value of its inventory and provides a better matching of manufacturing costs with revenues.  The change resulted in the application of a single costing method to all of the Company’s inventories.  The Company records provisions, as appropriate, to write-down obsolete and excess inventory to estimated net realizable value.  The process for evaluating obsolete and excess inventory often requires subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be sold in the normal course of business.  Accelerating the disposal process or incorrect estimates of future sales potential may cause the actual results to differ from the estimates at the time such inventory is disposed or sold.

Asset Impairment.   In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, if a triggering event occurs, we would evaluate the realizability of certain long-lived assets, which primarily consist of property and equipment and purchased intangible assets subject to amortization, based on expectations of non-discounted future cash flows for each asset group having a material amount of long-lived assets.  If circumstances indicate a potential impairment, and if the sum of the expected non-discounted future cash flow is less than the carrying amount of all assets including SFAS No. 144 long-lived assets, we would recognize an impairment loss.  A decrease in projected cash flows due to the depressed residential housing and remoldeling market was determined to be a triggering event during 2008.  The impairment test results did not indicate that an impairment existed at December 31, 2008.

Goodwill Impairment .  In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, we perform an annual test for goodwill impairment.  We assess goodwill for impairment during the fourth quarter of each year and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value.  To evaluate goodwill for impairment, the Company estimates the fair value of reporting units considering such factors as discounted cash flows and valuation multiples for comparable publicly traded companies.  A significant reduction in projected sales and earnings which would lead to a reduction in future cash flows could indicate potential impairment.  The depressed residential housing and remodeling market was determined to be a triggering event during the third quarter of 2008.  The 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’s operating earnings in the third quarter of 2008.  
 
26
 
 

The Company’s annual goodwill impairment test performed during the fourth quarter of 2008 was affected by further housing market declines as well as significant decreases in market multiples.   The test results indicated that an additional impairment of approximately $127.8 million existed in our Windows and Doors segment at December 31, 2008.  In addition, an impairment of approximately $122.2 million was indicated in our Siding, Fencing, and Stone segment.  These impairments were recognized in the respective segments in the fourth quarter of 2008. Further declines in the residential housing and remodeling markets could result in future goodwill impairments.

Income Taxes.   We account for deferred income taxes using the asset and liability method in accordance with SFAS No. 109 “Accounting for Income Taxes,” or “SFAS No. 109,” which requires that the deferred tax consequences of temporary differences between the amounts recorded in our financial statements and the amount included in our federal and state income tax returns be recognized in the balance sheet.  The amount recorded in our financial statements reflects estimates of final amounts due to timing of completion and filing of actual income tax returns.  Estimates are required with respect to, among other things, the appropriate state income tax rates to use in the various states in which we and our subsidiaries are required to file, the potential utilization of operating and capital loss carry-forwards for both federal and state income tax purposes and valuation allowances required, if any, for tax assets that may not be realized in the future.  We establish reserves when, despite our belief that our tax return positions are fully supportable, certain positions could be challenged, and the positions may not be fully sustained.  We have executed a tax sharing agreement with Ply Gem Holdings and Ply Gem Investment Holdings, Inc. pursuant to which tax liabilities for each respective party are computed on a stand-alone basis.  Our U.S. subsidiaries file unitary, combined and separate state income tax returns.  CWD Windows and Doors files separate Canadian income tax returns.

Purchase accounting.   Business acquisitions are accounted for using the purchase method of accounting. The cost of the acquired company is allocated to identifiable tangible and intangible assets based on estimated fair value with the excess allocated to goodwill.

 
Results of Operations

The following table summarizes net sales and net income by segment and is derived from the accompanying consolidated statements of operations included in this report.

   
Year ended
   
Year ended
   
Year ended
 
   
December 31,
   
December 31,
   
December 31,
 
   
2008
   
2007
   
2006
 
         
  Revised (1)   
   
 Revised (1)
 
Net Sales
                 
   Siding, Fencing, and Stone
  $ 709,432     $ 828,124     $ 502,610  
   Windows and Doors
    465,587       535,422       551,858  
Operating earnings (loss)
                       
   Siding, Fencing, and Stone
    (75,431 )     73,560       45,960  
   Windows and Doors
    (344,140 )     36,134       50,524  
   Unallocated
    (10,546 )     (7,045 )     (9,877 )
Foreign currency gain (loss)
                       
   Windows and Doors
    (911 )     3,961       77  
Interest expense, net
                       
   Siding, Fencing, and Stone
    125       110       168  
   Windows and Doors
    (518 )     (1,673 )     (1,652 )
   Unallocated
    (137,005 )     (96,431 )     (73,991 )
Income tax benefit (expense)
                       
   Unallocated
    69,951       (3,634 )     (4,147 )
Income (loss)  before cumulative
                       
   effect of accounting change
  $ (498,475 )   $ 4,982     $ 7,062  

(1) See Note 5 to the consolidated financial statements
 
27
 


The following tables set forth our results of operations based on the amounts and the percentage relationship of the items listed to net sales for the periods indicated.

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




Siding, Fencing, and Stone Segment

   
Year ended
   
Year ended
   
Year ended
 
   
December 31,
   
December 31,
   
December 31,
 
   
2008
   
2007
   
2006
 
           Revised (1)      Revised (1)  
Statement of operations data:
                                   
Net sales
  $ 709,432       100 %   $ 828,124       100 %   $ 502,610       100 %
Cost of products sold
    578,850       81.6 %     659,423       79.6 %     406,258       80.8 %
Gross profit
    130,582       18.4 %     168,701       20.4 %     96,352       19.2 %
SG&A expense
    75,240       10.6 %     86,068       10.4 %     46,571       9.3 %
Amortization of intangible assets
    8,546       1.2 %     9,073       1.1 %     3,821       0.8 %
Goodwill impairment
    122,227       17.2 %     -       0.0 %     -       0.0 %
Operating earnings (loss)
  $ (75,431 )     -10.6 %   $ 73,560       8.9 %   $ 45,960       9.1 %
 
(1) See Note 5   to the consolidated financial statements
 
As a result of the USV acquisition, the Company shortened the name of its “Siding, Fencing, Railing and Decking” segment to “Siding, Fencing, and Stone” during 2008.  The USV results were included within this segment from October 31, 2008 forward.  The other operations within this segment remain unchanged.

Net Sales
Net sales for the year ended December 31, 2008 decreased from the year ended December 31, 2007 by approximately $118.7 million or 14.3%. The decrease in net sales was driven by industry wide market declines resulting from lower single family housing starts, which negatively impacted the new construction sector and overall softness in repair and remodeling expenditures.  These market conditions negatively impacted demand for our products.  According to the National Association of Home Builders (“NAHB”), 2008 single family housing starts are estimated to show a decline of approximately 40.3% from actual levels achieved in 2007.  Additionally, according to the NAHB’s February 2009 forecast, single family housing starts are expected to decline in 2009 by 42.9% as compared to their full year 2008 estimate.  The decrease in net sales that resulted from industry wide market demand declines was partially offset by price increases that we implemented in response to increasing raw materials and freight costs as discussed below in cost of products sold and sales from USV, which was acquired in October 2008.

Net sales for the year ended December 31, 2007 increased from the year ended December 31, 2006 by approximately $325.5 million or 64.8%.  The increase was primarily due to the addition of AHE, which was acquired on October 31, 2006 and contributed approximately $478.9 million and $73.3 million of sales to the years ended December 31, 2007 and December 31, 2006, respectively. The increase in net sales due to AHE was partially offset by a decrease in sales due to industry wide market declines resulting from lower single family housing starts which negatively impacted the new construction sector of the market and corresponding decline in repair and remodeling expenditures which negatively impacted demand for our products.  According to the NAHB, 2007 single family housing starts declined by approximately 29.8% from actual levels achieved in 2006.

 

Cost of Products Sold
Cost of products sold for the year ended December 31, 2008 decreased from the year ended December 31, 2007 by approximately $80.6 million or 12.2%.  The decrease in cost of products sold was due to lower sales as discussed above, but was partially offset by higher raw material costs, primarily PVC resin and aluminum, as well as higher freight costs driven by higher oil costs.  Gross profit percentage decreased from 20.4% in 2007 to 18.4% in 2008. The decrease in gross profit percentage was driven by lower unit sales volume and increased raw material and freight costs. During 2008, we implemented selling price increases in response to higher raw material costs and freight costs, however, our gross profit percentage was negatively impacted by the delay between the time of raw material and freight cost increases and the price increases that we implemented.  Although we began to see market wide decreases in our raw material costs and freight costs during the later months of 2008, we expect corresponding decreases in our selling prices as a result of the lower raw material and freight costs.  Additionally, in light of current market conditions for building products, the Company has adjusted the size of its workforce and reduced its fixed overhead structure, including reductions in certain fixed expenses related to the vinyl siding plants in Atlanta, Georgia and Denison, Texas, which ceased production in April of 2007 and February of 2008, respectively.  The Company expects to save approximately $5.5 million and $10.0 million annually from the closure of the Atlanta, Georgia and the Denison, Texas facilities, respectively.

 Cost of products sold for the year ended December 31, 2007 increased from the year ended December 31, 2006 by approximately $253.2 million or 62.3%.  The increase in cost of products sold was primarily driven by the cost of products sold contributed by AHE which was acquired on October 31, 2006.  The increase due to the acquisition of AHE was partially offset by cost savings that the Company is realizing from its acquisition of AHE which included reduced purchased cost on certain raw materials, reduced fixed overhead and other manufacturing efficiency improvements.  Additionally, in light of current market conditions for building products, the Company has adjusted the size of its workforce and reduced its fixed overhead structure, including reductions in certain fixed expenses related to the vinyl siding plant in Atlanta, Georgia, which ceased production in April of 2007.  In addition, on October 12, 2007, the Company announced that it would close its Denison, Texas vinyl siding plant which employed approximately 180 employees.  The Company ceased production at the Denison, Texas plant in February of 2008.

SG&A Expense
SG&A expense for the year ended December 31, 2008 decreased from the year ended December 31, 2007 by approximately $10.8 million or 12.6%. The decrease in SG&A expenses was primarily due to lower selling and marketing costs and other fixed expenses that have been reduced in light of current market conditions for building products. In addition, SG&A expense for 2007 included certain expenses incurred to integrate the AHE acquisition into the Company’s Siding, Fencing and Stone segment.

SG&A expense for the year ended December 31, 2007 increased from the year ended December 31, 2006 by approximately $39.5 million or 84.8%.   The increase was due to the addition of AHE, which contributed approximately $39.2 million to SG&A expense in 2007 as compared to 2006.  During 2007, the Company reduced certain SG&A expenses in light of current market conditions and realized cost savings associated with its acquisition of AHE through the elimination of certain duplicative functions, however, these savings were largely offset in 2007 by expenses incurred to integrate the AHE acquisition into the Company’s Siding, Fencing, and Stone Segment.  The Company believes that certain expenses that were incurred during 2007 to integrate the AHE acquisition, such as computer systems consultants, are non-recurring in nature.  In addition, SG&A expense for the year ended December 31, 2007 included non-recurring costs associated with the closure of its Denison, TX vinyl siding facility which ceased production in February of 2008.

Amortization of Intangible Assets
Amortization expense for the year ended December 31, 2008 decreased from the year ended December 31, 2007 by approximately $0.5 million.  Amortization expense for the year ended December 31, 2007 increased from the year ended December 31, 2006 by approximately $5.3 million, primarily due to the addition of AHE operations.

Goodwill Impairment
During 2008, the Company conducted its annual goodwill impairment test.  As a result of the depressed residential housing and remodeling markets, the Company incurred a $122.2 million impairment charge to operating earnings during the fourth quarter for our Siding, Fencing and Stone operating segment.  This non-cash charge does not affect the Company’s cash position, liquidity, debt covenants, or have any impact on future operations.

 
29
 

Windows and Doors Segment


   
Year ended
   
Year ended
   
Year ended
 
   
December 31,
   
December 31,
   
December 31,
 
   
2008
   
2007
   
2006
 
Statement of operations data:
                                   
Net sales
  $ 465,587       100 %   $ 535,422       100 %   $ 551,858       100 %
Cost of products sold
    393,696       84.6 %     417,084       77.9 %     423,260       76.7 %
Gross profit
    71,891       15.4 %     118,338       22.1 %     128,598       23.3 %
SG&A expense
    77,154       16.6 %     69,496       13.0 %     69,171       12.5 %
Amortization of intangible assets
    11,104       2.4 %     8,558       1.6 %     8,121       1.5 %
Goodwill impairment
    327,773       70.4 %     -       0.0 %     -       0.0 %
Intangible impairment
    -       0.0 %     4,150       0.8 %     782       0.1 %
Operating earnings (loss)
    (344,140 )     -73.9 %     36,134       6.7 %     50,524       9.2 %
Currency transaction gain (loss)
  $ (911 )     -0.2 %   $ 3,961       0.7 %   $ 77       0.0 %


Net Sales
Net sales for the year ended December 31, 2008 decreased from the year ended December 31, 2007 by approximately $69.8 million, or 13.0%.  The decrease was due to lower sales of our new construction window products which were negatively impacted by market wide decreased demand that resulted from reductions in single family housing starts as discussed above, as well as lower demand for our repair and remodeling windows which declined due to a slowdown in the remodeling and replacement activity across the U.S.  The decrease in sales was partially offset by the sales from Pacific Windows which was acquired in September 2007 and price increases that were implemented in response to increasing raw material and freight costs as discussed below.

Net sales for the year ended December 31, 2007 decreased from the year ended December 31, 2006 by approximately $16.4 million, or 3.0%.  The decrease in net sales was due to lower sales of our new construction window products which were negatively impacted by market wide decreased demand that resulted from reductions in single family housing starts as discussed above, a decline in demand for our repair and remodeling windows due to a slowdown in the remodeling and replacement activity across the U.S., and the discontinuation of an unprofitable mechanical window product line that was produced at our Sarver, PA facility which was closed in June 2006.  The decline in sales of our U.S. windows and doors was partially offset by a 27% increase in sales of our Canadian window and door business as well as additional sales contributed by Alenco during the first quarter of 2007 as compared to the same period in 2006 and Pacific Windows in 2007.
 
Cost of Products Sold
Cost of products sold for the year ended December 31, 2008 decreased from the year ended December 31, 2007 by approximately $23.4 million, or 5.6%. The decrease in cost of products was due to lower sales as discussed above, but was partially offset by cost of products sold attributable to Pacific Windows, which was acquired in the fourth quarter of 2007 and by higher raw material costs, primarily PVC resin and aluminum, as well as higher freight costs driven by higher oil costs. Gross profit as a percentage of net sales decreased from 22.1% in 2007 to 15.4% in 2008.  The decrease in gross profit percentage was driven by lower unit sales volume, increased raw material and freight costs which were not fully offset by selling price increases, as well as Pacific Windows which carried a lower gross profit margin than the Company’s other window and door products.

Cost of products sold for the year ended December 31, 2007 decreased from the year ended December 31, 2006  by approximately $6.2 million, or 1.5%.  The decrease in cost of products sold was primarily driven by the lower level of sales in our new construction window products and the discontinued mechanical window product line discussed above.  The decrease in cost of products sold was partially offset by higher cost of products sold in our Canadian window and door business and due to higher volume and corresponding increases in cost of products sold for Alenco and Pacific Windows.  Cost of products sold associated with Alenco for 2007 included 12 months as compared to only 10 months in 2006.


 
SG&A Expense
SG&A expense for the year ended December 31, 2008 increased from the year ended December 31, 2007  by approximately $7.7 million, or 11.0%.  The increase in SG&A was primarily due to the addition of Pacific Windows and reorganization expenses incurred to integrate our U.S. window companies into one operating group.  The reorganization expenses are primarily comprised of fees paid to third party consultants assisting with the reorganization and integration of our U.S. window group, as well as severance costs related to positions that have been eliminated.  The Company believes that the reorganization of our U.S. window group will allow us to better serve our customers and markets, while reducing future operating costs.

SG&A expense for the year ended December 31, 2007 increased from the year ended December 31, 2006  by approximately $0.3 million, or 0.5%.  The change in SG&A expense was driven by reduced 2007 selling, marketing and professional fees of approximately $2.2 million and a reduction to the 2007 net expense due to approximately $1.2 million of cash received from an account receivable that had been fully reserved in periods prior to 2006.  In addition, SG&A expenses for the first nine months of 2006 included approximately $0.8 million of restructuring costs due to the closure of the Sarver, PA facility, and approximately $0.6 million due to the loss on the sale of the Sarver building.  The decreases were partially offset by higher SG&A expenses of approximately $5.1 million due to the addition of Alenco in 2006 and Pacific Windows in 2007.

Amortization of Intangible Assets
Amortization expense for the year ended December 31, 2008 increased from the year ended December 31, 2007 by approximately $2.5 million, due to the reclassification of the tradenames intangible asset from an indefinite lived asset.  Amortization expense for the year ended December 31, 2007 increased from the year ended December 31, 2006 by approximately $0.4 million due to the addition Alenco in 2006 and Pacific Windows in 2007.

Goodwill Impairment
During the fourth quarter, the Company conducted its annual goodwill impairment test.  As a result of the depressed residential housing and remodeling markets, the Company incurred a $127.8 million impairment charge to operating earnings during the fourth quarter for our Windows and Doors operating segment.  The $127.8 million impairment charge taken in the fourth quarter was in addition to the estimated $200.0 million impairment charge to operating earnings taken in the Company’s fiscal third quarter for our Windows and Doors operating segment.  These non-cash charges did not affect the Company’s cash position, liquidity, debt covenants, or have any impact on future operations.
 
Intangible Impairment
The Company evaluated the intangible assets (tradenames) with indefinite lives for impairment as of November 30, 2007, and determined that there was an impairment.  The impairment charge was primarily a result of a change in the assumption of long-term revenue growth related to the tradenames.  As a result, the Company wrote down those assets by approximately $4.2 million for the year ended December 31, 2007.  In 2006, due to the Sarver facility closure, intangible asset impairments of approximately $0.8 million were recognized.

Currency Transaction Gain (Loss)
Currency transaction gain (loss) changed from a gain of approximately $4.0 million for the year ended December 31, 2007 to a loss of approximately $0.9 million for the year ended December 31, 2008.  The transaction gain resulted from debt, denominated in US dollars, recorded by CWD, the Company’s Canadian subsidiary, which fluctuated due to the changing exchange rate.






 

 
31
 


   
Year ended
   
Year ended
   
Year ended
 
   
December 31,
   
December 31,
   
December 31,
 
   
2008
   
2007
   
2006
 
         
  Revised (1)
   
Revised (1)
 
Statement of operations data:
                 
Operating loss
  $ (10,546 )   $ (7,045 )   $ (9,877 )
Interest expense
    (137,395 )     (97,558 )     (74,778 )
Interest. income
    390       1,127       787  
Benefit (provision) for income taxes
  $ 69,951     $ (3,634 )   $ (4,147 )

(1) See Note 5 to the consolidated financial statements

Operating loss
Unallocated losses include items which are not directly attributed to or allocated to either of our reporting segments.  Such items include legal costs, corporate payroll, and unallocated finance and accounting expenses.  The increase of approximately $3.5 million in expenses for the year ended December 31, 2008 as compared to the prior year was primarily due to higher salary and travel and entertainment expenses due to the addition of a corporate marketing department and one-time expenses related to the move of the corporate offices to Cary, North Carolina during 2008.

The decrease of approximately $2.8 million in expenses for the year ended December 31, 2007 as compared to the prior year includes a decrease of approximately $2.5 million in deferred compensation expense and a decrease of approximately $1.4 million due to changes in the required insurance reserves, partially offset by an increase of approximately $1.1 million in salaries, benefits and professional fees.
 
Interest expense
Interest expense for the year ended December 31, 2008 increased by approximately $39.8 million, or 40.8%, over the same period in 2007.  The increase was due to the following:
·  
an increase of approximately $46.2 million due to additional interest on the $700.0 million Senior Secured Notes issued June 9, 2008,
·  
an increase of approximately $27.6 million due to interest costs incurred in the second quarter of 2008 related to the issuance of new debt (approximately $14.0 million deferred financing costs associated with previous debt, approximately $6.8 million for a prepayment premium, and approximately $6.8 million of bank amendment fees that was subsequently retired),
·  
an increase of approximately $1.8 million on ABL/revolver borrowings,
·  
a decrease of approximately $34.6 million due to interest paid in 2007 on the Company’s previous term loan which was paid off effective June 9, 2008, and
·  
a decrease of approximately $1.2 million resulting from the reclassification of 2007 third-party financing costs from other expense to interest expense.

Interest expense for the year ended December 31, 2007 increased from the year ended December 31, 2006 by approximately $22.8 million, or 30.5%, as a result of increased borrowings used to finance the Alenco Acquisition in February 2006 and the AHE Acquisition in October 2006.

Interest income
Interest income for the year ended December 31, 2008 decreased from the year ended December 31, 2007 by approximately $0.7 million, or 65.4%, as a result of lower interest rates in 2008 as compared to 2007.Interest income for the year ended December 31, 2007 increased from the year ended December 31, 2006 by approximately $0.3 million, or 43.2%, as a result of higher interest rates in 2007 as compared to 2006.

Income taxes
Income tax expense for the year ended December 31, 2008 changed from a tax provision of approximately $3.6 million for 2007 to a tax benefit of approximately $70.0 million, primarily as a result of a pre-tax loss incurred during 2008 caused primarily by the $450.0 million gooodwill impairment and the $27.6 million in deferred financing cost expenses. The Company's effective tax rate for the year ending December 31, 2008 was 38.1% excluding the goodwill impairment charge.

 
32
 

Income tax expense for the year ended December 31, 2007 increased from the prior year by approximately $0.5 million, primarily as a result of higher state tax rates as a result of the inability to utilize losses as well as the Company being unable to realize the benefit from Domestic Production activity.  In addition, the Company’s 2007 tax expense included approximately $0.6 million tax benefit to correct for rates used in prior periods for the proper graduated rate structures. 



Liquidity and Capital Resources

Our primary cash needs are for working capital, capital expenditures and debt service.  We finance these cash requirements through internally generated cash flow and funds borrowed under Ply Gem Industries’ credit facility.

Cash provided by (used in) operating activities

Net cash used in operating activities for the year ended December 31, 2008 was approximately $58.9 million.  Net cash provided by operating activities for the years ended December 31, 2007 and 2006 was approximately $73.8 million and $53.4 million, respectively.  The decrease in cash provided by operating activities for 2008 as compared to 2007 was primarily driven by lower net income.  The increase in net cash provided by operating activities for 2007 as compared to 2006 was primarily driven by higher net income before adjustments for depreciation and amortization which were higher in 2007 as compared to 2006.

Cash provided by (used in) investing activities

Net cash used in investing activities for the year ended December 31, 2008 was approximately $11.5 million.  Net cash used in investing activities for the year ended December 31, 2007 and 2006 was approximately $56.4 million and $432.2 million, respectively.  The cash used in investing activities for the year ended December 31, 2008 was primarily used for capital expenditures of approximately $16.6 million, partially offset by approximately $8.8 million of proceeds from the sale of assets.    The cash used in investing activities for the year ended December 31, 2007 was primarily used to fund the acquisition of Pacific Windows.  The cash used in investing activities for the year ended December 31, 2006 was primarily used to fund the Alenco and AHE acquisitions.

Cash provided by financing activities

Net cash provided by financing activities for the year ended December 31, 2008 was approximately $78.2 million.  Net cash used in financing activities for the year ended December 31, 2007 was approximately $15.1 million.  Net cash provided by financing activities for the year ended December 31, 2006 was approximately $405.4 million.  The cash provided by financing activities for the year ended December 31, 2008 was primarily driven by the refinancing activity in June 2008.  The cash used in financing activities for the year ended December 31, 2007 was primarily used to pay down debt.  The increase in net cash provided by financing activities for the year ended December 31, 2006 was driven by the cash provided from the financing agreement associated with the Alenco and AHE acquisitions.

Long term debt

Net cash provided by financing activities for the year ended December 31, 2008 included debt issuance costs of $26.0 million related to the $700.0 million offering of Senior Secured Notes on June 9, 2008 and the entry into the ABL Facility.  Also included in cash provided by financing activities for the year ended December 31, 2008 was a $30.0 million cash equity contribution that Ply Gem received from CI Capital Partners LLC as a condition to Ply Gem’s amendment of its prior credit facility on May 23, 2008. This amendment 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 the senior credit facility was amended and subsequently paid off on June 9, 2008 with the proceeds from the Senior Secured Notes offering.  This eliminated any potential loan covenant violation or events of default under the previous debt instrument.

 
33
 

11.75% Senior Secured Notes due 2013

On June 9, 2008, Ply Gem Industries issued $700.0 million of its Senior Secured Notes, which 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.  Ply Gem Industries used the proceeds to repay all of the outstanding indebtedness under the existing senior secured credit facility of approximately $691.2 million.  The Senior Secured Notes will mature on June 15, 2013 and bear interest at the rate of 11.75% per annum.  Interest is payable semi-annually on June 15 and December 15 of each year.

The Senior Secured Notes and the related guarantees are secured on a first-priority lien basis by substantially all of the assets (other than the assets securing our obligations under our ABL Facility on a first-lien basis, 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 on a first-lien basis.

Senior Secured Asset-Based Revolving Credit Facility

Concurrently with the closing of the issuance of the Senior Secured Notes on June 9, 2008, the Company and the subsidiaries of Ply Gem Industries entered into a senior secured asset-based revolving credit facility (the “ABL Facility”), which initially provided for revolving credit financing of up to $135.0 million, and was subsequently increased to $150.0 million as of August 14, 2008, subject to borrowing base availability, with a maturity of five years, including sub-facilities for letters of credit, swingline loans and borrowings in Canadian dollars and United States dollars by CWD.   However, the ABL Facility will mature on October 15, 2011 if Ply Gem Industries’ Senior Subordinated Notes are not refinanced by such date.  In addition, the ABL Facility provides that the revolving commitments may be further increased to $200.0 million, subject to certain terms and conditions.  
 
All obligations under the ABL Facility are fully and unconditionally guaranteed by substantially all of Ply Gem Industries’ existing and future, direct and indirect, wholly-owned domestic subsidiaries, and in any event by all subsidiaries that guarantee the notes. All obligations under the ABL Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of Ply Gem Industries and the guarantors, including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, deposit accounts, and certain related assets and proceeds of the foregoing and a second-priority security interest in, and mortgages on, substantially all of Ply Gem Industries’ material owned real property and equipment and all assets that secure the notes on a first-priority basis.
 
The obligations of CWD, which is a borrower under the Canadian sub-facility under the ABL Facility, will be secured by a first-priority security interest in substantially all of the assets of such Canadian subsidiary and by Ply Gem Industries’ and the guarantors’ assets on the same basis as borrowings by Ply Gem Industries are secured under the ABL Facility, plus additional mortgages in Canada, and a pledge by Ply Gem Industries of the remaining 35% of the equity interests of CWD pledged only to secure the Canadian sub-facility.
 
As of December 31, 2008, Ply Gem Industries had approximately $86.1 million of contractual availability and approximately $52.8 million of borrowing base availability under the ABL Facility, reflecting $60.0 million of borrowings outstanding under the ABL Facility and approximately $3.9 million of letters of credit issued under the ABL Facility. Further, as of December 31, 2008, approximately $3.2 million of letters of credit were issued apart from the ABL Facility to secure certain environmental obligations and this amount does not reduce the availability under the ABL Facility.

The interest rates applicable to loans under our ABL Facility are, at our option, equal to either a base rate plus an applicable interest margin, or an adjusted LIBOR rate plus an applicable interest margin, as defined in the ABL Facility credit agreement.  As of December 31, 2008, the Company’s interest rate on the ABL Facility was approximately 7.2%.  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 85% of the $150.0 million commitment or $127.5 million.

 

 
34
 

            The Company’s previous senior facilities with a syndicate of financial institutions and institutional lenders provided for senior secured financing of up to approximately $762.1 million, originally consisting of approximately $687.1 million of term loan facilities maturing in August 2011 and a $75.0 million revolving loan facility, including a letter of credit subfacility, maturing in February 2009.   These credit facilities imposed certain restrictions on Ply Gem Industries, including a requirement to maintain a minimum Leverage Ratio of EBITDA (adjusted for certain items as allowed) to Net Debt (as defined in the credit facility).  In April 2008, the Company revised its 2008 forecast in response to market wide increases in raw material prices and fuel costs, as well as continued declines in both the residential new construction and repair/remodeling markets.  Under the revised forecast, the Company did not expect to be able to comply with the required Leverage Ratio required for fiscal quarters in 2008 following March 29, 2008.  The failure to comply with this covenant would have caused an event of default.  On May 23, 2008, the Company entered into an amendment of the fifth amended and restated credit agreement which consisted of changes to certain debt covenant ratios.  The amendment also increased the interest rate on the term loan and extended the maturity of the revolving credit facility from February 12, 2009 to August 12, 2010.  On May 23, 2008, Ply Gem received from CI Capital Partners LLC a $30.0 million cash equity contribution as a condition to the credit facility amendment.  The outstanding indebtedness under the credit facility was subsequently paid off on June 9, 2008 with the proceeds from the Senior Secured Notes offering. 

9% 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, which are guaranteed by Ply Gem Holdings and the domestic subsidiaries of Ply Gem Industries.  Subsequently, in August of 2004 in connection with the MW acquisition, Ply Gem Industries issued an additional $135.0 million of Senior Subordinated Notes, which are guaranteed by Ply Gem Holdings and the domestic subsidiaries of Ply Gem Industries, including MWM Holding and its subsidiaries.  The Senior Subordinated Notes will mature on February 15, 2012 and bear interest at a rate of 9.0% per annum.  Interest is paid semi-annually on February 15 and August 15 of each year.

Liquidity requirements

We intend to fund our ongoing capital and working capital requirements, including our internal growth, through a combination of cash flows from operations and, if necessary, from borrowings under the revolving credit portion of our ABL Facility.  As of December 31, 2008, we had approximately $1,114.2 million of indebtedness and $86.1 million of contractual availability under the ABL facility and approximately $52.8 million of borrowing base availability reflecting $60.0 million of ABL borrowings and approximately $3.9 million of letters of credit issued under the ABL facility.  As of December 31, 2008, the Company estimates that it will pay $117.3 million in interest payments during the year ending December 31, 2009.

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

Recent developments

In March 2009, certain affiliates of the Company’s controlling stockholders acquired a majority of the outstanding Senior Subordinated Notes.  Prior to the acquisition, on March 20, 2009, Ply Gem Industries commenced a consent solicitation to amend the indenture governing 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 will become operative upon completion of the purchase of a specified amount of the Senior Subordinated Notes by certain affiliates of our controlling stockholders, which is expected to be completed in April 2009.
 
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.
 



 

 
35
 
 
Contractual Obligations
 
The following table summarizes our contractual cash obligations under financing arrangements and lease commitments as of December 31, 2008, including interest amounts.  Interest on the Senior Secured Notes and the Senior Subordinated Notes is fixed at 11.75% and 9.0%, respectively.  Interest on the ABL credit facility is variable and has been presented at the current rate.  Actual rates for future periods may differ from those presented here.
                               
                               
   
Total
   
Less Than
               
5 Years
 
   
Amount
   
1 Year
   
1 - 3 Years
   
3 - 5 Years
   
or More
 
   
(dollars in thousands)
 
                               
Long-term debt (1)
  $ 1,120,000     $ -     $ 60,000     $ 1,060,000     $ -  
Interest payments (2)
    475,111       117,303       234,068       123,740       -  
Non-cancelable lease commitments (3)
    156,740       22,073       36,148       27,476       71,043  
Purchase obligations (4)
    38,873       36,436       2,437       -       -  
Other long-term liabilities (5)
    14,560       1,456       2,912       2,912       7,280  
    $ 1,805,284     $ 177,268     $ 335,565     $ 1,214,128     $ 78,323  

 

(1)  
Long-term debt is shown before discount (premium), and consists of the Company’s Senior Secured Notes, Senior Subordinated Notes, and ABL Facility.  For more information concerning the long-term debt, see “Liquidity and Capital Resources” above.
 
(2)  
Interest payments for variable interest debt are based on current interest rates and debt obligations  at December 31, 2008.
 
(3)  
Non-cancelable lease commitments represent lease payments for facilities and equipment.
 
(4)  
Purchase obligations are defined as purchase agreements that are enforceable and legally binding and that specify all significant terms, including quantity, price and the approximate timing of the transaction.  These obligations are related primarily to inventory purchases.
 
(5)  
Other long term liabilities include pension obligations which are estimated based on the Company’s 2009 annual funding requirement.  Because we are unable to reliably estimate the timing of future tax payments related to uncertain tax positions, certain tax related obligations of approximately $7.8 million have been excluded from the table above.
 
As discussed in “Certain Relationships and Related Transactions,” the Company will pay an annual fee to an affiliate of Caxton-Iseman each year based on 2% of EBITDA.  No amount for this fee has been included in the above table.
 


Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.


Inflation; Seasonality

We do not believe that inflation has had a material impact on our business, financial condition or results of operations during the past three fiscal years.

Our performance is dependent to a significant extent upon the levels of home repair and remodeling and new home construction spending, all of which are affected by such factors as interest rates, inflation, consumer confidence and unemployment.

 

 
36
 
 
            The demand for our products is seasonal, particularly in the Northeast and Midwest regions of the United States and Western Canada where inclement weather conditions during the winter months usually reduces the level of building and remodeling activity in both the home repair and remodeling and the new home construction sectors.  Our sales in both segments are usually lower during the first and fourth quarters.  Since a portion of our manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income and net earnings tend to be lower in quarters with lower sales levels.  In addition, the demand for cash to fund our working capital is greater from late in the fourth quarter through the first quarter.


Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement addresses how to calculate fair value measurements required or permitted under other accounting pronouncements. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. On February 12, 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2 which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  This FSP partially defers the effective date of Statement 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of the FSP.  Effective for 2008, the Company adopted SFAS 157 except as it applies to those nonfinancial assets and liabilities as noted in FSP 157-2.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. This standard requires employers to recognize the underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income, which is a component of stockholders’ equity.  SFAS No. 158 does not change the amount of actuarially determined expense that is recorded in the consolidated statement of income. The new reporting requirements and related new footnote disclosure rules of SFAS No. 158 are effective for our December 31, 2008 and 2007 financial statements.  Additionally, SFAS No. 158 requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position.  For our financial statements as of December 31, 2008, we changed our September 30th measurement date for our plans’ assets and obligations to comply with this requirement.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”.  SFAS No. 159 permits entities to choose to measure certain financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for our fiscal year beginning January 1, 2008.  The Company did not elect the option to report any of the selected financial assets and liabilities at fair value.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations”.  This Statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date be measured at their fair values as of that date.  An acquirer is required to recognize assets or liabilities arising from all other contingencies (contractual contingencies) as of the acquisition date, measured at their acquisition-date fair values, only if it is more likely than not that they meet the definition of an asset or a liability in FASB Concepts Statement No. 6, Elements of Financial Statements. Any acquisition related costs are to be expensed instead of capitalized. The impact to the Company from the adoption of SFAS 141R in 2009 will depend on acquisitions at the time. The provisions of SFAS No. 141(R) are effective for the Company’s fiscal year beginning January 1, 2009, and are to be applied prospectively.

In December 2007, the FASB issued SFAS   No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. This standard establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. The provisions of SFAS No. 160 are effective for the Company’s fiscal year beginning January 1, 2009, and are to be applied prospectively.

 
37
 
 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”.  This standard reorganizes the GAAP hierarchy in order to improve financial reporting by providing a consistent framework for determining what accounting principles should be used when preparing U.S. GAAP financial statements.  SFAS 162 shall be effective 60 days after the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to Interim Auditing Standard, AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. Management is currently evaluating the impact, if any, this new standard may have on our balance sheet, results of operations, or cash flows.





Item 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 
Interest Rate Risk

Our principal interest rate exposure relates to the loans outstanding under our ABL Facility, which provides for borrowings of up to $150.0 million, bearing interest at a variable rate, based on an adjusted LIBOR rate plus an applicable interest margin or the base rate plus an applicable interest margin.  Assuming the ABL Facility is fully drawn, each quarter point increase or decrease in the interest rate would change our interest expense by approximately $0.4 million per year.  At December 31, 2008, we were not party to any interest rate swaps to manage our interest rate risk.  In the future, we may enter into interest rate swaps, involving exchange of floating for fixed rate interest payments, to reduce our exposure to interest rate volatility.

Foreign Currency Risk

Our results of operations are affected by fluctuations in the value of the U.S. dollar as compared to the value of the Canadian dollar.  In 2008, the net impact of foreign currency changes to the Company’s results of operations was a loss of $0.9 million.  The impact of foreign currency changes related to translation resulted in a decrease in stockholder’s equity of approximately $9.1 million at December 31, 2008.  The revenue or expense reported by us as a result of currency fluctuations will be greater in times of U.S. dollar devaluation and less in times of U.S. dollar appreciation. We generally do not enter into derivative financial instruments to manage foreign currency exposure.  At December 31, 2008, we did not have any significant outstanding foreign currency hedging contracts.

Commodity pricing risk

We are subject to significant market risk with respect to the pricing of our principal raw materials, which include PVC resin, aluminum, and wood.  If prices of these raw materials were to increase dramatically, we may not be able to pass such increases on to our customers and, as a result, gross margins could decline significantly.  We manage the exposure to commodity pricing risk by continuing to diversify our product mix, strategic buying programs and vendor partnering.

Inflation

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

 
Consumer and Commercial Credit
 
As general economic conditions in the United States have deteriorated significantly over the past year, the availability of consumer and commercial credit have tightened.  As such, the Company has increased its focus on the credit worthiness of our customers.  These procedures are necessary to ensure that our allowance for doubtful accounts is adequate and that we are performing proper due diligence prior to initiating sales.  We will continue to monitor these statistics over the next year to ensure that issues, if any, are identified in a timely manner to reduce risk and minimize the Company's bad debt exposure.  If general economic conditions continue to worsen, additional reserves may be necessary.
 
 
38
 
Item 8.                                 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholder
Ply Gem Holdings, Inc.:
 
We have audited the accompanying consolidated balance sheets of Ply Gem Holdings, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholder’s equity (deficit) and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2008.  In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ply Gem Holdings, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
As discussed in note 5 to the consolidated financial statements, the Company has elected to change its method of accounting for a portion of its inventory in 2008 from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. As discussed in note 7 to the consolidated financial statements, the Company adopted the recognition and disclosure requirements in 2007 and the measurement provisions in 2008 of FASB Statement of Financial Accounting Standard No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R). As discussed in note 12 to the consolidated financial statements, on January 1, 2007, the Company adopted FASB Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.  As discussed in notes 1 and 13 to the consolidated financial statements on January 1, 2006, the Company adopted FASB Statement of Financial Accounting Standard No. 123(R) (revised 2004), Share-Based Payment.
 
/s/ KPMG LLP
 
Raleigh, North Carolina
 
March 30, 2009
 

 
39
 

 
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
                   
   
For the Year
   
For the Year
   
For the Year
 
   
ended
   
ended
   
ended
 
   
December 31,
   
December 31,
   
December 31,
 
   
2008
   
2007
   
2006
 
         
Revised (1)
   
Revised (1)
 
   
(Amounts in thousands)
 
                   
Net sales
  $ 1,175,019     $ 1,363,546     $ 1,054,468  
Costs and expenses:
                       
Cost of products sold
    972,546       1,076,507       829,518  
Selling, general and administrative expenses
    162,940       162,609       125,619  
Amortization of intangible assets
    19,650       17,631       11,942  
Goodwill impairment
    450,000       -       -  
Intangible asset impairment
    -       4,150       782  
                         
Total costs and expenses
    1,605,136       1,260,897       967,861  
Operating earnings (loss)
    (430,117 )     102,649       86,607  
Foreign currency gain (loss)
    (911 )     3,961       77  
Interest expense
    (138,015 )     (99,698 )     (76,680 )
Interest income
    617       1,704       1,205  
Income (loss)  before provision (benefit) for income
                       
  taxes and cumulative effect of accounting change
    (568,426 )     8,616       11,209  
Provision (benefit) for income taxes
    (69,951 )     3,634       4,147  
Income (loss) before cumulative effect of
                       
   accounting change
    (498,475 )     4,982       7,062  
Cumulative effect of accounting change, net of
                       
   income tax benefit of $57
    -       -       (86 )
Net income (loss)
  $ (498,475 )   $ 4,982     $ 6,976  
                         
(1) See Note 5
                       



See accompanying notes to consolidated financial statements.

 
40
 


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
             
   
December 31,
   
December 31,
 
   
2008
   
2007
 
         
Revised (1)
 
   
(Amounts in thousands, except share amounts)
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 58,289     $ 52,053  
Accounts receivable, less allowances of $6,405 and $7,320, respectively
    90,527       111,653  
Inventories:
               
Raw materials
    53,060       60,003  
Work in process
    28,085       23,071  
Finished goods
    42,267       48,908  
  Total inventory
    123,412       131,982  
Prepaid expenses and other current assets
    19,985       16,462  
Deferred income taxes
    13,924       12,797  
 Total current assets
    306,137       324,947  
Property and Equipment, at cost:
               
Land
    3,709       4,017  
Buildings and improvements
    35,206       37,927  
Machinery and equipment
    253,290       240,921  
Total property and equipment
    292,205       282,865  
Less accumulated depreciation
    (122,194 )     (83,869 )
    Total property and equipment, net
    170,011       198,996  
Other Assets:
               
Intangible assets, less accumulated amortization of $64,488 and $45,081, respectively
    193,604       213,257  
Goodwill
    390,779       835,820  
Other
    40,579       43,133  
    Total other assets
    624,962       1,092,210  
    $ 1,101,110     $ 1,616,153  
                 
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
               
Current Liabilities:
               
Current maturities of long-term debt
  $ -     $ 6,873  
Accounts payable
    59,603       83,102  
Accrued expenses and taxes
    76,304       94,916  
     Total current liabilities
    135,907       184,891  
Deferred income taxes
    25,412       92,608  
Other long term liabilities
    68,233       65,644  
Long-term debt, less current maturities
    1,114,186       1,031,223  
                 
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
    209,908       180,667  
Retained earnings (accumulated deficit)
    (446,993 )     51,485  
Accumulated other comprehensive income (loss)
    (5,543 )     9,635  
     Total stockholder's equity (deficit)
    (242,628 )     241,787  
    $ 1,101,110     $ 1,616,153  
(1) See Note 5
               

S ee accompanying notes to consolidated financial statements.



PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
   
For the Year
   
For the Year
   
For the Year
 
   
ended
   
ended
   
ended
 
   
December 31,
   
December 31,
   
December 31,
 
   
2008
   
2007
   
2006
 
         
Revised (1)
   
Revised (1)
 
   
(Amounts in thousands)
 
Cash flows from operating activities:
                 
Net income (loss)
  $ (498,475 )   $ 4,982     $ 6,976  
Adjustments to reconcile net income (loss) to cash
                       
   provided by (used in) operating activities:
                       
Depreciation and amortization expense
    61,765       54,067       33,816  
Fair value premium on purchased inventory
    19       1,289       3,266  
Non-cash interest expense, net
    7,144       6,941       5,571  
(Gain) loss on foreign currency transactions
    911       (3,961 )     (77 )
Goodwill impairment
    450,000       -       -  
Intangible asset impairment
    -       4,150       782  
Loss on sale of assets
    886       356       840  
Other non-cash items
    14,047       -       1,772  
Deferred income taxes
    (71,362 )     (1,288 )     (732 )
Changes in operating assets and
                       
   liabilities, net of effects from acquisitions:
                       
Accounts receivable, net
    18,179       32,654       25,264  
Inventories
    3,306       7,523       8,065  
Prepaid expenses and other current assets
    674       7,127       (981 )
Accounts payable
    (21,885 )     (17,074 )     (38,051 )
Accrued expenses and taxes
    (15,905 )     (23,326 )     6,711  
Cash payments on restructuring liabilities
    (7,547 )     (210 )     (200 )
Other
    (622 )     614       403  
    Net cash provided by (used in) operating activities
    (58,865 )     73,844       53,425  
Cash flows from investing activities:
                       
Capital expenditures
    (16,569 )     (20,017 )     (20,318 )
Proceeds from sale of assets
    8,825       63       4,536  
Acquisitions, net of cash acquired
    (3,614 )     (36,453 )     (416,386 )
Other
    (129 )     -       -  
    Net cash used in investing activities
    (11,487 )     (56,407 )     (432,168 )
Cash flows from financing activities:
                       
Proceeds from long-term debt
    693,504       -       414,808  
Proceeds from revolver borrowings
    140,000       50,000       15,000  
Payments on long-term debt
    (677,910 )     (10,623 )     (3,467 )
Payments on revolver borrowings
    (80,000 )     (50,000 )     (15,000 )
Debt issuance costs paid
    (26,578 )     (2,100 )     (9,534 )
Equity contributions
    30,310       900       4,717  
Equity repurchases
    (1,093 )     (3,245 )     (1,128 )
    Net cash provided by (used in)
                       
      financing activities
    78,233       (15,068 )     405,396  
Impact of exchange rate movements on cash
    (1,645 )     863       (5 )
Net increase in cash and cash equivalents
    6,236       3,232       26,648  
Cash and cash equivalents at the beginning of the period
    52,053       48,821       22,173  
Cash and cash equivalents at the end of the period
  $ 58,289     $ 52,053     $ 48,821  
                         
Supplemental Information
                       
Interest paid
  $ 111,388     $ 98,847     $ 70,431  
Income taxes paid (received), net
  $ (464)     $ 6,576     $ 5,621  
                         
(1) See Note 5
                       

See accompanying notes to consolidated financial statements.

 
42
 




PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
 
                         
               
Accumulated
       
         
Retained
   
Other
   
Total
 
   
Additional
   
Earnings
   
Comprehen-
   
Stock-
 
   
Paid in
   
(Accumulated
   
sive Income
   
holder's
 
   
Capital
   
Deficit)
   
(Loss)
   
Equity (Deficit)
 
         
Revised (1)
         
Revised (1)
 
   
(Amounts in thousands)
 
                         
Balance, December 31, 2005
  $ 175,461     $ 39,527     $ 2,146     $ 217,134  
                                 
Comprehensive income:
                               
Net income
    -       6,976       -       6,976  
Currency translation
    -       -       (347 )     (347 )
Minimum pension liability, net of tax ($353)
    -       -       497       497  
Total comprehensive income
                            7,126  
Contributions
    6,331       -       -       6,331  
Balance, December 31, 2006
  $ 181,792     $ 46,503     $ 2,296     $ 230,591  
                                 
Comprehensive income:
                               
Net income
    -       4,982       -       4,982  
Currency translation
    -       -       5,658       5,658  
Minimum pension liability for actuarial
                               
  gain, net of tax ($638)
    -       -       961       961  
Total comprehensive income
                            11,601  
Adjustment to initially apply SFAS No.
                               
   158, net of tax ($460)
    -       -       720       720  
Contributions (repurchase of equity)
    (1,125 )     -       -       (1,125 )
Balance, December 31, 2007
  $ 180,667     $ 51,485     $ 9,635     $ 241,787  
                                 
Comprehensive income:
                               
Net loss
    -       (498,475 )     -       (498,475 )
Currency translation
    -       -       (9,517 )     (9,517 )
Minimum pension liability for actuarial
                               
  gain, net of tax ($3,774)
    -       -       (5,661 )     (5,661 )
Total comprehensive loss
                            (513,653 )
Adoption of SFAS No. 158 measurement date
    -       (3 )     -       (3 )
Contributions (repurchase of equity)
    29,241       -       -       29,241  
Balance, December 31, 2008
  $ 209,908     $ (446,993 )   $ (5,543 )   $ (242,628 )
                                 
(1) See Note 5
                               








See accompanying notes to consolidated financial statements.

 
43
 

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


1.  1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Ply Gem Holdings, a wholly owned subsidiary of Ply Gem Investment Holdings, Inc. (“Ply Gem Investment Holdings”), was incorporated on January 23, 2004 for the purpose of acquiring Ply Gem Industries from Nortek.  The Ply Gem acquisition was completed on February 12, 2004, when Nortek, Inc. (“Nortek”) sold Ply Gem Industries to Ply Gem Holdings, an affiliate of CI Capital Partners LLC pursuant to the terms of the stock purchase agreement among Ply Gem Investment Holdings, Nortek, and WDS LLC dated as of December 19, 2003, as amended.  Prior to February 12, 2004, the date of the Ply Gem acquisition, Ply Gem Holdings had no operations and Ply Gem Industries was wholly owned by a subsidiary of WDS LLC, which was a wholly owned subsidiary of Nortek.  As a result of the Ply Gem acquisition, we applied purchase accounting on the date of February 12, 2004.

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

On February 24, 2006, Ply Gem Industries acquired all of the outstanding shares of capital stock, warrants to purchase shares of common stock and options to purchase shares of common stock of AWC Holding Company (“AWC”, and together with its subsidiaries, “Alenco”), in accordance with a securities purchase agreement entered into among Ply Gem, all of the direct and indirect stockholders, warrant holders and stock options holders of AWC and FNL Management Corp, an Ohio corporation, as their representative.  The accompanying consolidated financial statements include the operating results of Alenco for periods after February 26, 2006, the date of acquisition.

On October 31, 2006, Ply Gem Industries acquired all of the issued and outstanding shares of common stock of Alcoa Home Exteriors, Inc. (“AHE”), in accordance with a stock purchase agreement entered into among Ply Gem Industries, Alcoa Securities Corporation, and Alcoa Inc. The accompanying consolidated financial statements include the operating results of AHE for periods after October 31, 2006, the date of acquisition.

On September 30, 2007, Ply Gem Industries completed the acquisition of CertainTeed Corporation’s vinyl window and patio door business through a stock acquisition.  On the acquisition date, the Company changed the name of the acquired business to Ply Gem Pacific Windows Corporation (“Pacific Windows”).  The accompanying consolidated financial statements include the operating results of Pacific Windows for periods after September 30, 2007, the date of acquisition.

On October 31, 2008, Ply Gem Industries completed an asset acquisition of United Stone Veneer, LLC (“USV”).  The accompanying consolidated financial statements include the operating results of USV for the period after October 31, 2008.  As a result of the USV acquisition, the Company modified the name of the “Siding, Fencing, and Railing” segment to “Siding, Fencing, and Stone” for 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.
 

 
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Principles of Consolidation and Combination

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


Reclassifications

Certain amounts in the prior fiscal year have been reclassified to conform to the presentation adopted in the current fiscal year, with no effect on net income (loss) or retained earnings (accumulated deficit).  As of December 31, 2007, the Company corrected the classification of approximately $13.2 million of cash and cash equivalents to accounts payable to reflect outstanding checks that reduce the net cash balance.  These amounts adjusted the presentation for the consolidated balance sheets and the consolidated statements of cash flows.  In addition, the Company combined “interest expense” and “other expense” into “interest expense” for the years ended December 31, 2007 and 2006 on the consolidated statement of operations.


Accounting Policies and Use of Estimates

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States involves estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expense during the reporting periods.  Certain of the Company’s accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates.  By their nature, these judgments are subject to an inherent degree of uncertainty.  The Company periodically evaluates the judgments and estimates used in their critical accounting policies to ensure that such judgments and estimates are reasonable.  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, as appropriate and are based on management’s best estimates and judgments.  We adjust such estimates and assumptions when facts and circumstances dictate.  Illiquid credit markets, volatile equity, foreign currency, and the depressed housing and remodeling market have combined to increase the uncertainty inherent in such estimates and assumptions.  If different conditions result from those assumptions used in the Company’s judgments, actual results could be materially different from the Company’s estimates.


Recognition of Sales and Related Costs, Incentives and Allowances

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

 
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Cash Equivalents

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


Inventories

Inventories in the accompanying consolidated balance sheets are valued at the lower of cost or market. 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 records provisions, as appropriate, to write-down obsolete and excess inventory to estimated net realizable value.  The process for evaluating obsolete and excess inventory often requires the Company to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be able to be sold in the normal course of business.  Accelerating the disposal process or incorrect estimates of future sales potential may cause actual results to differ from the estimates at the time such inventory is disposed or sold . As of December 31, 2008 the Company had inventory purchase commitments of approximately $36.4 million.


Property and Equipment

Property and equipment are presented at cost.  Depreciation of property and equipment are provided on a straight-line basis over estimated useful lives, which are generally as follows:

 
Buildings and improvements
10-37 years
 
Machinery and equipment, including leases
3-15 years
 
Leasehold improvements
Term of lease or useful
   
life, whichever is shorter

Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals and betterments are capitalized. When assets are sold, or otherwise disposed, the cost and related accumulated depreciation are eliminated and the resulting gain or loss is recognized in operations.


Intangible Assets, Goodwill and other Long-lived Assets

The Company applies SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), to its intangible and other long-lived assets.  SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets but does not apply to goodwill or intangible assets that are not being amortized and certain other long-lived assets.

The Company accounts for acquired goodwill and indefinite-lived intangible assets in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets ("SFAS No. 142").  Purchase accounting required by SFAS No. 141, “Business Combination” (“SFAS no.141”), involves judgment with respect to the valuation of the acquired assets and liabilities in order to determine the final amount of goodwill (see Note 2).  For significant acquisitions, the Company values items such as property and equipment and acquired intangibles based upon appraisals, and determines the value of assets and liabilities associated with pension plans based upon actuarial studies.

 
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The Company applies SFAS No, 142 to goodwill and certain intangible assets.  Under this statement, goodwill and intangible assets determined to have an indefinite useful life are no longer amortized, instead these assets are evaluated for impairment on an annual basis and whenever events or business conditions warrant.  All other intangible assets are amortized over their estimated useful lives.

The Company assesses goodwill for impairment during the fourth quarter of each year and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value.  To evaluate goodwill for impairment, the Company estimates the fair value of reporting units considering such factors as discounted cash flows and valuation multiples for comparable publicly traded companies.  A significant reduction in projected sales and earnings which would lead to a reduction in future cash flows could indicate potential impairment.


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 amounted to approximately $32.5 million and $26.6 million as of December 31, 2008 and December 31, 2007, respectively, and have been recorded in other long term assets.


Share based compensation

Effective January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payments”, which requires companies to measure and recognized compensation expense for all stock-based payments at fair value.  Under FAS 123R, share-based compensation cost for the Company’s stock option plan is measured at the grant date, based on the estimated fair value of the award, and is recognized over the requisite service period.  We adopted the provisions of FAS123R, effective January 1, 2006, using a modified prospective application.  The fair value of each option award is estimated on the date of the grant using a Black-Scholes option valuation model.  Expected volatility is based on a review of several market indicators, including peer companies.  The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option.

 
Insurance Liabilities

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





 
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Income Taxes

We account for deferred income taxes using the asset and liability method in accordance with SFAS No. 109, “Accounting for Income Taxes,” or “SFAS No. 109,” which requires that the deferred tax consequences of temporary differences between the amounts recorded in our financial statements and the amount included in our federal and state income tax returns be recognized in the balance sheet.  Estimates are required with respect to, among other things, the appropriate state income tax rates to use in the various states that 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, Inc., Ply Gem Industries, Inc. and its subsidiaries.  The existing tax sharing agreement between Ply Gem Holdings and Ply Gem Investment Holdings, Inc., under which tax liabilities for each respective party are computed on a stand-alone basis, was amended during 2006 to include Ply Gem Prime Holdings, Inc.  U.S. subsidiaries file unitary, combined and separate state income tax returns.  CWD Windows and Doors files separate Canadian income tax returns.
 
On January 1, 2007, the Company adopted the Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” an interpretation of the Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes”. This interpretation clarifies how companies calculate and disclose uncertain tax positions. The effect of adopting this interpretation did not impact any previously recorded amounts for unrecognized tax benefits.


Sales Taxes

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


Commitments and Contingencies

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

 
Liquidity
 
The Company intends to fund its ongoing capital and working capital requirements, including its internal growth, through a combination of cash flows from operations and, if necessary, from borrowings under the revolving credit portion of its ABL Facility.  As of December 31, 2008, the Company had approximately $1,114.2 million of indebtedness and $86.1 million of contractual availability under the ABL facility and approximately $52.8 million of borrowing base availability reflecting $60.0 million of ABL borrowings and approximately $3.9 million of letters of credit issued under the ABL facility.  As of December 31, 2008, the Company estimates that it will pay $117.3 million in interest payments during the year ending December 31, 2009.

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

Foreign Currency

CWD Windows and Doors, Inc. (“CWD”), the Company’s Canadian subsidiary, utilizes the Canadian dollar as its functional currency.  For reporting purposes, the Company translates the assets and liabilities of its foreign entity at the exchange rates in effect at year-end.  Net sales and expenses are translated using average exchange rates in effect during the period.  Gains and losses from foreign currency translation are credited or charged to accumulated other comprehensive income or loss in the accompanying consolidated balance sheets.  A transaction gain or loss resulting from fluctuations in the exchange rate may be recognized in the statement of operations due to debt, denominated in US dollars, recorded by CWD, the Company’s Canadian subsidiary.

For the years ended December 31, 2008, December 31, 2007, and December 31, 2006, the Company recorded a loss from foreign currency transactions of approximately $0.9 million, a gain from foreign currency transactions of approximately $4.0 million, and a gain from foreign currency transaction of approximately $0.1 million, respectively.  As of December 31, 2008 and December 31, 2007, accumulated other comprehensive income (loss) included a currency translation of approximately $0.6 million and $8.9 million, respectively.
 
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Concentration of Credit Risk

The accounts receivable balance related to one customer of our Siding, Fencing, and Stone segment was approximately $5.8 million and $6.4 million at December 31, 2008 and December 31, 2007, respectively.   This customer accounted for approximately 9.2% of net sales for the year ended December 31, 2008, 10.2% of net sales for the year ended December 31, 2007, and 16.5% of net sales for the year ended December 31, 2006.


Fair Value Measurement

In the first quarter of 2008, the Company adopted SFAS 157 “Fair Value Measurements” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This standard does not apply measurements related to share-based payments, nor does it apply to measurements related to inventory.

SFAS 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flows), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

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

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:

(Amounts in Thousands)
                       
Description
 
Total
   
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
   
Significant
Other Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
                       
     Money market funds
  $ 29,197     $ 29,197     $ -     $ -  
                                 
Liabilities:
                               
     Senior Subordinated Notes- 9%
    86,400       86,400       -       -  
     Senior Secured Notes-11.75%
    378,000       378,000       -       -  
    $ 464,400     $ 464,400     $ -     $ -  

The fair value of money market funds and 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 Financial Accounting Standards Board Staff Position No. 157-2, “Effective Date of FASB Statement No. 157”, the Company will delay application of SFAS No. 157 for non-financial assets and non-financial liabilities until January 1, 2009.  Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test.  Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.  As permitted under the deferral for non-financial assets and liabilities, SFAS No. 157 will be applicable to these fair value measurements beginning January 1, 2009.

 
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New Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”.  SFAS No. 159 permits entities to choose to measure certain financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning January 1, 2008, however the Company did not elect the option to report any of the selected financial assets and liabilities at fair value.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations”.  This Statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date to be measured at their fair values as of that date.  An acquirer is required to recognize assets or liabilities arising from all other contingencies (contractual contingencies) as of the acquisition date, measured at their acquisition-date fair values, only if it is more likely than not that they meet the definition of an asset or a liability in FASB Concepts Statement No. 6, “Elements of Financial Statements”. Any acquisition related costs are to be expensed. The impact to the Company from the adoption of SFAS 141(R) in 2009 will depend on acquisitions at the time. The provisions of SFAS No. 141(R) are effective for the Company’s fiscal year beginning January 1, 2009, and are to be applied prospectively.

In December 2007, the FASB issued SFAS   No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. This standard establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. The provisions of SFAS No. 160 are effective for the Company’s fiscal year beginning January 1, 2009, and are to be applied prospectively. The Company is currently evaluating the impact that the implementation of SFAS No. 160 will have on its financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”.  This standard reorganizes the GAAP hierarchy in order to improve financial reporting by providing a consistent framework for determining what accounting principles should be used when preparing U.S. GAAP financial statements.  SFAS No. 162 shall be effective 60 days after the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to Interim Auditing Standard, AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. Management is currently evaluating the impact, if any, this new standard may have on our balance sheet, results of operations, or cash flows.


 
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2.   PURCHASE ACCOUNTING
 

Alenco Acquisition
On February 24, 2006, Ply Gem completed the Alenco acquisition. The Company accounted for the transaction as a purchase in accordance with the provisions of SFAS No. 141, which results in a new valuation for the assets and liabilities of Alenco based upon fair values as of the purchase date.  Alenco is a leading regional manufacturer of aluminum and vinyl windows and doors for the new home construction market in the fast-growing Southern regions of the United States.  The addition of Alenco expanded the Company’s geographical reach into the southern regions and expands the Company’s window products offering with aluminum.

The purchase price, including approximately $6.0 million of value attributed to Ply Gem Prime Holdings common stock issued to replace AWC Holding Company employee’s forfeited AWC Holding Company stock, was allocated to the assets and liabilities based on their fair values.  The following is the allocation of the purchase price.

   
(in thousands)
 
Other current assets, net of cash
  $ 17,324  
Inventories
    7,312  
Property, plant and equipment
    10,580  
Trademarks
    7,000  
Customer relationships
    21,950  
Goodwill
    89,929  
Other assets
    198  
Current liabilities
    (11,929 )
Other liabilities
    (15,575 )
Purchase price, net of cash acquired
  $ 126,789  

Based on appraisals received for the purchased intangible assets, $7.0 million was assigned to trademarks and tradenames with weighted average lives of 15 years, and approximately $22.0 million was assigned to customer relationships with weighted average lives of 15 years.  As a result of this transaction, debt issue costs in the amount of approximately $3.6 million were incurred, of which approximately $2.2 were deferred and approximately $1.4 million were expensed as third-party financing costs. Approximately $89.9 million of goodwill was assigned to the Windows and Doors segment as a result of the Alenco acquisition.  None of the goodwill is expected to be deductible for tax purposes.

AHE Acquisition
On October 31, 2006, Ply Gem completed its acquisition of AHE. The Company accounted for the transaction as a purchase in accordance with the provisions of SFAS No. 141, which results in a new valuation for the assets and liabilities of AHE based upon fair values as of the purchase date.  AHE is a leading manufacturer of vinyl siding, aluminum siding, injection molded shutters and vinyl, aluminum and injection molded accessories.  The addition of AHE to Ply Gem’s portfolio enabled the Company to capitalize on attractive market opportunities and provide the Company with a strong sustainable platform to fully serve all vinyl siding market channels.

The purchase price was allocated to the assets and liabilities based on their fair values.  The following is the allocation of the purchase price.
   
(in thousands)
 
Other current assets, net of cash
  $ 83,089  
Inventories
    74,466  
Property, plant and equipment
    86,699  
Trademarks
    23,950  
Patents
    770  
Customer relationships
    36,435  
Goodwill
    147,732  
Other assets
    6,634  
Current liabilities
    (115,217 )
Other liabilities
    (48,939 )
Purchase price, net of cash acquired
  $ 295,619  


 
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Based on appraisals received for the purchased intangible assets, approximately $24.0 million was assigned to trademarks and tradenames with weighted average lives of 15 years, approximately $0.8 million was assigned to patents with weighted average lives of 20 years, and approximately $36.4 million was assigned to customer relationships with weighted average lives of 10 years. Approximately $147.7 million of goodwill was assigned to the Siding, Fencing, and Stone segment as a result of the AHE acquisition.  None of the goodwill is expected to be deductible for tax purposes.
 
As of December 31, 2006, the Company had recorded an obligation of $3.5 million current liabilities for the shut down of AHE's Atlanta facility in accordance with EITF 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." This accrual included estimates for lease payments and associated cost of the facility through the remaining lease term, severance costs and costs related to the removal of equipment and other costs required to return the facility to a state required by the lessor. In the year ended December 31, 2007, cash payments of approximately $3.5 million have reduced approximately $0.5 million and recorded as an adjustment of the cost of acquiring AHE. As a result, the accrual at December 31, 2007 was approximately $0.5 million.

 
Pacific Windows Acquisition
On September 30, 2007, Ply Gem completed its acquisition of CertainTeed Corporation’s vinyl window and patio door business through a stock acquisition.  On the acquisition date, the Company changed the name of the acquired business to Ply Gem Pacific Windows Corporation. The Company accounted for the transaction as a purchase in accordance with the provisions of SFAS No. 141, which results in a new valuation for the assets and liabilities of Pacific Windows based upon fair values as of the purchase date.  The acquired vinyl window business is a leading manufacturer of premium vinyl windows and doors and produces windows for the residential new construction and remodeling markets. The acquisition provided the Company with a presence on the west coast.

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

   
(in thousands)
 
Other current assets, net of cash
  $ 10,766  
Inventories
    9,379  
Property, plant and equipment
    19,133  
Trademarks
    1,200  
Customer relationships
    1,800  
Goodwill
    18,052  
Other assets
    1,398  
Current liabilities
    (11,916 )
Other liabilities
    (13,230 )
Purchase price, net of cash acquired
  $ 36,582  


The Company paid approximately $35.1 million on September 28, 2007 for the acquisition of Pacific Windows.  Transaction costs of approximately $1.5 million were incurred in 2007.  During 2008, the Company paid approximately $0.1 million in transaction costs for this acquisition. None of the goodwill is expected to be deductible for tax purposes.

United Stone Veneer Acquisition
On October 31, 2008, Ply Gem Industries completed the asset acquisition of USV.  The Company accounted for the transaction as a purchase in accordance with the provisions of SFAS No. 141.  USV manufactures stone veneer enabling the Company to expand its building products offering across different areas and capitalize on this product growth opportunity.  The consolidated accompanying financial statements include the operating results of USV for periods after October 31, 2008.  As a result of the USV acquisition, the company changed its “Siding, Fencing, and Railing” segment to “Siding, Fencing, and Stone” for 2008.

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.

   
(in thousands)
 
Other current assets, net of cash
  $ 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 tax purposes.

 
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3.   IMPAIRMENT
The Company’s acquisitions are accounted for under the purchase method of accounting pursuant to SFAS No. 141, “Business Combinations” .   Accordingly, the purchase price is allocated to the tangible assets and liabilities and intangible assets acquired based on their estimated fair values. The excess purchase price over the fair value is recorded as goodwill.  Identifiable intangible assets are valued separately and are amortized over their expected useful lives.
 
             SFAS No. 142, “ Goodwill and Other Intangible Assets” requires the Company to test goodwill for impairment on an annual basis and between annual tests in certain circumstances, and to write down goodwill and non-amortizable intangible assets when impaired. These assessments require the Company to estimate the fair value of its reporting units. If the Company determines that the fair value of its reporting units is less than the carrying amount, an impairment charge must be recognized against earnings for the difference between the estimated fair value of the goodwill of the reporting unit as compared to its carrying value.  The Company has two reporting units- (Siding, Fencing, and Stone) and (Windows and Doors), and therefore separate valuations are performed for each of the reporting units.  The reporting units are identical to the Company’s operating segments.  
 
Goodwill is evaluated for impairment at least annually during the fourth quarter, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition to other possible indicators, the Company considers the following factors to be the more significant or likely to trigger an interim impairment review:
  
   
 
• 
Significant under-performance relative to historical or projected future operating results;
     
 
• 
Significant negative industry or economic trends;
     
 
• 
Significant decline in its stock valuation for a sustained period; and
     
 
• 
Significant changes in the manner of its use of acquired assets or the strategy for its overall business.
 
During the quarter ended September 27, 2008, the Company conducted an interim goodwill impairment test as a result of the depressed residential housing and remodeling market.  During the fourth quarter ended December 31, 2008, the Company conducted its annual goodwill impairment test.  These impairment tests resulted in a goodwill impairment charge of $450.0 million in 2008.   The Siding, Fencing, and Stone reporting unit incurred a goodwill impairment of $122.2 million and the Windows and Doors reporting unit incurred a goodwill impairment of $327.8 million for 2008.   The reporting unit goodwill balances after impairment were as follows for December 31, 2008 and December 31, 2007.

(amounts in thousands)
   
December 31, 2008
   
December 31, 2007
 
Windows and Doors
  $ 70,683     $ 391,646  
Siding, Fencing, and Stone
    320,096       444,174  
    $ 390,779     $ 835,820  
   
A rollforward of goodwill for 2008 and 2007 is included in the table below:

 
   
(Amounts in thousands)
 
       
Balance as of December 31, 2006
  $ 811,285  
         
     Pacific Windows acquisition
    16,100  
     AHE purchase accounting
    3,500  
     Alenco purchase accounting
    (200 )
     Currency translation adjustments
    7,035  
     Income tax purchase accounting adjustments
    (1,900 )
         
Balance as of December 31, 2007
  $ 835,820  
         
     Goodwill impairment
    (450,000 )
     USV acquisition
    1,584  
     Currency translation adjustments
    (5,743 )
     Income tax purchase accounting
    7,169  
     Pacific Windows purchase accounting
    1,949  
         
Balance as of December 31, 2008
  $ 390,779  
 
53
 
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 industry multiples for current operating earnings.  These industry multiples are then applied to the Company’s trailing twelve months of operating earnings considering any reasonable control premiums.  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.

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 market multiples. However, 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.

The Company evaluated its property and equipment and intangible assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.   This analysis was triggered by a decrease in projected cash flows due to the depressed residential housing and remodeling market.  The impairment test results indicated no impairment as of December 31, 2008.

The Company also evaluated the appraisal of certain tradenames with indefinite lives in 2007, and determined that there was an impairment.  Due to acquisitions of additional window companies subsequent to the purchase of the tradenames, and the move of the Company to a ‘one company’ structure, the brands have become commingled and the sales of the original trademarks have been diluted.  As a result, the Company wrote down those assets by approximately $4.2 million.  The Company has also re-evaluated these assets and determined that due to changes in the business, these assets should be reclassified to finite-lived intangible assets effective November 30, 2007. The Company determined that the estimated useful lives of these assets, was 14 years and they will be amortized over that time period.

During 2007, the Company also evaluated the preliminary appraisals for purchased AHE intangible assets referred to in Note 2, and determined that approximately $27.3 million of AHE Trademarks previously treated as indefinite lived assets should have useful lives of 15 years with a value of approximately $24.0 million.  During 2006, intangible asset impairments of approximately $0.8 million were recognized in selling, general and administrative expenses as a result of a facility closure.
 
 
54
 
4.   INTANGIBLE ASSETS
 
The table that follows presents the major components of intangible assets as of December 31, 2008 and 2007:
 
   
Average Amortization
Period (in Years)
   
Cost
   
Accumulated
Amortization
   
Net Carrying Value
 
   
(Amounts in thousands)
 
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
            1,520       (527 )     993  
Total intangible assets
          $ 258,092     $ (64,488 )   $ 193,604  
                                 
                                 
As of December 31, 2007:
                               
Patents
   
14
    $ 12,770     $ (3,591 )   $ 9,179  
Trademarks/Tradenames
    15       85,644       (9,679 )     75,965  
Customer relationships
 
 
13
      158,158       (31,452 )     126,706  
Other
            1,520       (113 )     1,407  
Total intangible assets
          $ 258,092     $ (44,835 )   $ 213,257  
                                 
                                 
 
Amortization expense for the years ended December 31, 2008 and 2007 was approximately $19.7 million and $17.6 million, respectively.  Amortization expense for the fiscal years 2009, 2010, 2011, 2012 and 2013 is estimated to be approximately $19.6 million, $19.5 million, $19.1 million, $19.1 million, and $19.1 million, respectively.

 

 
5.   INVENTORY CHANGE
 
During 2008, the Company elected to adopt the FIFO method of inventory valuation for its entire inventory as a result of the operational decision to transfer production from the Valencia, Pennsylvania facility to the Sidney, Ohio facility.  Previously, the Valencia, Pennsylvania facility utilized the LIFO method and Sidney, Ohio utilized the FIFO method. Since over 92% of the Company’s inventory previously utilized FIFO methodology, the Company elected to utilize FIFO across all of its inventory.  The Company believes the FIFO method of accounting is preferable because it provides a better measure of the current value of its inventory and provides a better matching of manufacturing costs with revenues.  The change resulted in the application of a single costing method to all of the Company’s inventories.  Comparative financial statements of prior years have been adjusted to apply the new method retrospectively.  The retrospective change resulted in an increase to retained earnings as of January 1, 2006 of approximately $1.6 million, net of taxes of $1.2 million. The following financial statement items for fiscal years 2007 and 2006 were affected by the change in accounting principle.

Consolidated Statements of Operations
                               
   
For the year ended December 31, 2007
   
For the year ended December 31, 2006
 
   
As Computed
   
Effect of
   
As Computed
   
As Computed
   
Effect of
   
As Computed
 
   
Under LIFO
   
Change
   
Under FIFO
   
Under LIFO
   
Change
   
Under FIFO
 
Costs and expenses:
                                   
Cost of products sold
  $ 1,075,507     $ 1,000     $ 1,076,507     $ 831,418     $ (1,900 )   $ 829,518  
Total costs and expenses
    1,259,897       1,000       1,260,897       969,761       (1,900 )     967,861  
                                                 
Operating earnings (loss)
    103,649       (1,000 )     102,649       84,707       1,900       86,607  
Income (loss) before provision (benefit) for income taxes and cumulative effect of accounting change
    9,616       (1,000 )     8,616       9,309       1,900       11,209  
Provision (benefit) for income taxes
    4,002       (368 )     3,634       3,502       645       4,147  
Income (loss) before cumulative effect of accounting change
    5,614       (632 )     4,982       5,807       1,255       7,062  
Net income (loss)
  $ 5,614     $ (632 )   $ 4,982     $ 5,721     $ 1,255     $ 6,976  
 
55

Consolidated Balance Sheets
             
   
December 31, 2007
 
   
As Computed
   
Effect of
   
As Computed
 
   
Under LIFO
   
Change
   
Under FIFO
 
Inventories:
                 
    Raw materials
  $ 60,003     $ -     $ 60,003  
    Work in process
    23,071       -       23,071  
    Finished goods
    45,208       3,700       48,908  
      Total inventory
    128,282       3,700       131,982  
                         
      Total current assets
    321,247       3,700       324,947  
      Total assets
    1,612,453       3,700       1,616,153  
                         
Deferred income taxes
    91,151       1,457       92,608  
Retained earnings (accumulated deficit)
    49,242       2,243       51,485  
      Total stockholder's equity (deficit)
    239,544       2,243       241,787  
      Total liabilities and stockholder's
                       
         equity (deficit)
  $ 1,612,453     $ 3,700     $ 1,616,153  




Consolidated Statements of Cash Flows
                               
   
For the year ended December 31, 2007
   
For the year ended December 31, 2006
 
   
As Computed
   
Effect of
   
As Computed
   
As Computed
   
Effect of
   
As Computed
 
   
Under LIFO
   
Change
   
Under FIFO
   
Under LIFO
   
Change
   
Under FIFO
 
Net income (loss)
  $ 5,614     $ (632 )   $ 4,982     $ 5,721     $ 1,255     $ 6,976  
Deferred income taxes
    (920 )     (368 )     (1,288 )     (1,377 )     645       (732 )
Inventories
    6,523       1,000       7,523       9,965       (1,900 )     8,065  
     Net cash provided by (used in)  operating activities
    73,844       -       73,844       53,425       -       53,425  


Had the Company continued to apply the LIFO method, the impact on the consolidated Statement of Operations during 2008 would have been an increase in operating earnings of approximately $0.8 million for the year ended December 31, 2008.

 
56
 
6.   LONG-TERM DEBT
 
Long-term debt in the accompanying consolidated balance sheets at December 31, 2008 and 2007 consists of the following:

   
December 31 , 2008
   
December 31, 2007
 
   
(Amounts in thousands)
 
             
  Senior term loan facility
  $ -     $ 677,910  
  ABL facility
    60,000       -  
  Senior subordinated notes due 2012, net
    of unamortized premium of $146 and $186
    360,146       360,186  
  Senior secured notes due 2013, net of
    unamortized discount of $5,960
    694,040       -  
      1,114,186       1,038,096  
  Less current maturities
    -       6,873  
    $ 1,114,186     $ 1,031,223  

 
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.

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 our obligations under our senior secured asset-based revolving credit facility, or ABL Facility, which consist primarily of accounts receivable and inventory) of Ply Gem Industries and the Guarantors and on a second-priority lien basis by the assets that secure the ABL Facility.

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 of 1933 requiring separate financial statements of such subsidiary to be filed with the SEC.  As of December 31, 2008, no subsidiary’s stock has been excluded from the collateral arrangement due to the Rule 3-16 requirement.
 
57
 
 
ABL Facility

Concurrently with the Senior Secured Notes offering, Ply Gem Industries, the Company and the subsidiaries of Ply Gem Industries entered into a new senior secured asset-based revolving credit facility (the “ABL Facility”).  The ABL Facility provides for revolving credit financing of up to $150.0 million, subject to borrowing base availability, with a maturity of five years including sub-facilities for letters of credit, swingline loans, and borrowings in Canadian dollars and United States dollars by CWD.  However, the ABL Facility will mature on October 15, 2011 if Ply Gem Industries’ Senior Subordinated Notes are not refinanced by such date.  In addition, the ABL Facility provides that the revolving commitments may be increased to $200.0 million, subject to certain terms and conditions.  The Company had borrowings of $60.0 million outstanding under the ABL Facility as of December 31, 2008.

As of December 31, 2008, Ply Gem Industries had approximately $86.1 million of contractual availability and approximately $52.8 million of borrowing base availability under the ABL Facility, reflecting $60.0 million of borrowings outstanding under the ABL Facility and approximately $3.9 million of letters of credit issued under the ABL Facility. Further, as of December 31, 2008, approximately $3.2 million of letters of credit were issued apart from the ABL Facility to secure certain environmental obligations and this amount does not reduce the availability under the ABL Facility.

The interest rates applicable to loans under our ABL Facility are, at our option, equal to either a base rate plus an applicable interest margin, or an adjusted LIBOR rate plus an applicable interest margin, as defined in the ABL Facility credit agreement.  As of December 31, 2008, the Company’s interest rate on the ABL Facility was approximately 7.2%.  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 85% of the $150.0 million commitment or $127.5 million.

All obligations under the ABL Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of Ply Gem Industries and the Guarantors, including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, deposit accounts, and certain related assets and proceeds of the foregoing and a second-priority security interest in, and mortgages on, substantially all of Ply Gem Industries’ material owned real property and equipment and all assets that secure the Senior Secured Notes on a first-priority basis.

9.00% Senior Subordinated Notes due 2012

Concurrently with the acquisition of Ply Gem Industries on February 12, 2004, Ply Gem Industries issued $225.0 million aggregate principal amount of its Senior Subordinated Notes, which are guaranteed by Ply Gem Holdings and the domestic subsidiaries of Ply Gem Industries.  Subsequently, in August of 2004 in connection with the MW acquisition, Ply Gem Industries issued an additional $135.0 million of Senior Subordinated Notes, which are guaranteed by Ply Gem Holdings and the domestic subsidiaries of Ply Gem Industries, including MWM Holding and its subsidiaries.  Ply Gem Industries pays interest semi-annually on February 15 and August 15 of each year.  The Senior Subordinated Notes contain 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.

Senior Term Loan Facility

The Company’s senior facilities with a syndicate of financial institutions and institutional lenders provided for senior secured financing of up to approximately $762.1 million, originally consisting of approximately $687.1 million of term loan facilities maturing in August 2011 and a $75.0 million revolving loan facility, including a letter of credit subfacility, maturing in February 2009.  On May 23, 2008, the Company entered into an amendment of the fifth amended and restated credit agreement which consisted of changes to certain debt covenant ratios.  The amendment also increased the interest rate on the term loan and extended the maturity of the revolving credit facility from February 12, 2009 to August 12, 2010.  On May 23, 2008, Ply Gem received from CI Capital Partners LLC a $30.0 million cash equity contribution as a condition to the credit facility amendment.  On June 9, 2008, the Company used the proceeds from the Senior Secured Notes offering to pay off the existing obligation under the senior term loan facility.

 
58
 
 
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 year ended December 31, 2008 which has been recorded within interest expense on the Statement of Operations.  The $27.6 million was comprised of approximately $14.0 million of non-cash deferred financing costs associated with the previous term debt, approximately $6.8 million for a prepayment premium, and approximately $6.8 million of bank amendment fees that were subsequently retired. The Company deferred costs of approximately $26.6 million as of December 31, 2008 which has been recorded within other assets in the Consolidated Balance Sheets at December 31, 2008.

The following table summarizes the Company’s long-term debt maturities due in each fiscal year after December 31, 2008:
                                                                                                                                                                                                                  (Amounts in thousands)
2009
  $ -  
2010
    -  
2011
    -  
2012
    360,146  
2013
    754,040  
Thereafter
    -  
    $ 1,114,186  

 
7.   DEFINED BENEFIT PLANS

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

Prior to 2008, the Company used a September 30th measurement date for both plans.  As a result of the adoption of SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R)”, the Company changed the measurement date for both plans to December 31, effective with the current year.  The table that follows provides a reconciliation of benefit obligations, plan assets, and funded status of the combined plans in the accompanying consolidated balance sheets at December 31, 2008 and 2007:
   
December 31,
   
December 31,
 
   
2008
   
2007
 
   
(Amounts in thousands)
 
Change in projected benefit obligation
           
Benefit obligation at beginning of year
  $ 33,910     $ 34,488  
Service cost
    193       314  
Interest cost
    2,003       1,948  
Adjustment due to change in measurement date
    548       -  
Actuarial loss (gain)
    (1,221 )     (1,207 )
Benefits and expenses paid
    ( 3 , 188 )     (1, 633 )
Projected benefit obligation at end of year
  $ 3 2 , 245     $ 33,910  
                 
Change in plan assets
               
Fair value of plan assets at beginning of year
  $ 29,488     $ 26,212  
Actual return on plan assets
    (8,470 )     3,532  
Employer and participant contributions
    1,310       1,377  
Adjustment due to change in measurement date
    550       -  
Benefits and expenses paid
    ( 3,187 )     (1,633 )
Fair value of plan assets at end of year
  $     19 , 691     $ 29,488  
                 
Funded status and financial position:
               
Fair value of plan assets at beginning of year
  $ 19,691     $ 29,488  
Benefit obligation at end of year
    32,245       33,910  
Subtotal
    (12,554 )     (4,422 )
Amount contributed during fourth quarter
    -       366  
Funded status
    (12,554 )      (4,056 )
                 
Amount recognized in the balance sheet consists of:
         
Current liability
  $ (1,810 )   $ (1,500 )
Noncurrent liability
     (10,744 )      (2,556 )
Liability recognized in the balance sheet
  $ ( 12,554 )   $ (4,056 )
 
The accumulated benefit obligation for the combined plans was approximately $32.2 million, and $33.9 million as of December 31, 2008 and December 31, 2007, respectively.
59
 
On December 31, 2007, the Company adopted the recognition and disclosure provisions of SFAS No. 158.  SFAS No. 158 required the Company to recognize the funded status of its pension plans in the December 31, 2007 balance sheet, with a corresponding adjustment to accumulated other comprehensive income (loss).  This requirement did not have an effect on the Company’s balance sheet due to the fact that the Company has included the entire funded status of its pension plans on its balance sheets since the Company’s acquisition in 2004.  The Company was also not affected by the SFAS No. 158 requirement to adjust accumulated other comprehensive income for unrecognized prior service costs remaining from the initial adoption of SFAS No. 87.  As a result of the adoption of SFAS No. 158, as of December 31, 2007, the Company recognized in accumulated other comprehensive income (loss), actuarial gains that are not recognized as net periodic  pension costs.  The effect of recognizing the minimum liability is included in the table below.

   
At December 31, 2007
       
   
Prior to Application
of SFAS No. 158
   
Effect of Adopting
SFAS No. 158
   
As Reported at
December 31, 2007
 
 
Other long term liabilities
  $ (5,261 )   $ 1,205     $ (4,056 )
Deferred income tax asset
    2,001       (470 )     1,531  
Accumulated other comprehensive
                       
   income, net of tax
    (8,915 )     (720 )     (9,635 )
 

 
Amounts recognized in accumulated other comprehensive income at December 31, 2008 and December 31, 2007 consisted of:
   
 December 31, 2008
 
December 31, 2007
 
Initial net asset (obligation)
$ 
-    $ -  
Prior service credit (cost)
  -      -  
Net (gain) loss
  8,244      (1,205 )
Accumulated other comprehensive loss (income)
$
8,244   
 $
(1,205 )


Plan assets consist of cash and cash equivalents, fixed income mutual funds, equity mutual funds, as well as other investments.  The discount rate for the projected benefit obligation was chosen based upon rates of returns available for high-quality fixed-income securities as of the plan's measurement date.   With advice from our actuaries, the Company reviewed several bond indices, comparative data, and the plan's anticipated cash flows to determine a single discount rate which would approximate the rate in which the obligation could be effectively settled.  The expected long-term rate of return on assets is based on the Company’s historical rate of return. The weighted average rate assumptions used in determining pension costs and the projected benefit obligation for the periods indicated are as follows:
 
 
For the year
   
For the year
   
For the year
 
   
ended
   
ended
   
ended
 
   
December 31,
   
December 31,
   
December 31,
 
   
2008
   
2007
   
2006
 
                   
Discount rate for projected
                 
   benefit obligation
    6.35 %     6.00 %     5.75 %
Discount rate for pension costs
    6.00 %     5.75 %     5.50 %
Expected long-term average
                       
   return on plan assets
    7.50 %     7.75 %     7.75 %

 
60

 
The Company’s net periodic benefit expense for the combined plans for the periods indicated consists of the following components : (in thousands)

 
For the year
   
For the year
   
For the year
 
   
ended
   
ended
   
ended
 
   
December 31,
   
December 31,
   
December 31,
 
 
 
2008
   
2007
   
2006
 
                   
Service cost
  $ 193     $ 314     $ 329  
Interest cost
    2,004       1,947       1,857  
Expected return on plan assets
    (2,201 )     (2,025 )     (1,798 )
Net periodic benefit expense (income)
  $ (4 )   $ 236     $ 388  

 

 
The weighted-average asset allocations at December 31, 2008 and 2007, by asset category are as follows:

Combined Plans
 
 December 31,
December 31,
 
   
 2008
   
2007
 
Asset Category
           
   Equity securities
   
48%
      58%  
   Debt securities
    51%       41%  
   Other
    1%      
1%
 

The plan assets are invested to maximize returns without undue exposure to risk.  The investment objectives are also to produce a total return exceeding the median of a universe of portfolios with similar average asset allocation and investment style objectives, and to earn a return, net of fees, greater or equal to the long-term rate of return used in the actuarial computations.

Risk is controlled by maintaining a portfolio of assets that is diversified across a variety of asset classes, investment styles and investment managers.  The plan’s asset allocation policies are consistent with the established investment objectives and risk tolerances.  The asset allocation policies are developed by examining the historical relationships of risk and return among asset classes, and are designed to provide the highest probability of meeting or exceeding the return objectives at the lowest possible risk.  For 2009, the target allocation is 36%-86% for equity securities and 30%-55% for fixed income securities.

The Ply Gem Plan was frozen as of December 31, 1998, and no further increases in benefits may occur as a result of increases in service or compensation.

The MW Plan was frozen for salaried participants as of October 31, 2004, and no further increases in benefits for salaried participants may occur as a result of increases in service or compensation.  The MW Plan was frozen for non-salaried participants during 2005.  No additional non-salaried participants may enter the plan, but increases in benefits as a result of increases in service or compensation will still occur.
During fiscal year 2009, the Company expects to make cash contributions to the combined plans of approximately $1.5 million.

 
61
 
The following table shows expected benefit payments for the next five fiscal years and the aggregate five years thereafter from the combined plans. These benefit payments consist of qualified defined benefit plan payments that are made from the respective plan trusts and do not represent an immediate cash outflow to the Company.

Fiscal Year
 
Expected Benefit Payments
 
   
(in thousands)
 
       
2009
  $ 1,810  
2010
    1,720  
2011
    1,920  
2012
    2,080  
2013
    2,030  
2014-2018
    11,740  

The Company has an unfunded nonqualified Supplemental Executive Retirement Plan for certain employees.  The projected benefit obligation relating to this unfunded plan totaled approximately $299,000 and $311,000 at December 31, 2008 and 2007, respectively.  The Company has recorded this obligation in other long term liabilities in the consolidated balance sheets as of December 31, 2008 and 2007.
Pension expense for the plan was approximately $18,000 and $19,000 for the years ended December 31, 2008 and 2007, respectively.

 
 
 
8.   DEFINED CONTRIBUTION PLANS
 

The Company has defined contribution 401(k) plans covering substantially all employees.  The Company has historically provided a matching contribution that can vary by subsidiary.  The level varies between 25% of the first 6% of employee contributions to 100% of the first 6% of employee contributions.  The majority of the subsidiaries have a match of 50% of the first 6% contributions.  Each matching contribution formula is approved on an annual basis.  The Company also has the option of making discretionary contributions. The Company’s contributions were approximately $1.5 million for the year ended December 31, 2008, $4.3 million for the year ended December 31, 2007, and approximately $3.1 million for the year ended December 31, 2006.   Effective April 1, 2008, the Company suspended matching contributions for all subsidiaries until financial conditions improve sufficiently to allow reinstatement.





9.   COMMITMENTS AND CONTINGENCIES
 
At December 31, 2008, the Company is obligated under lease agreements for the rental of certain real estate and machinery and equipment used in its operations.  Future minimum rental obligations aggregate approximately $156.7 million at December 31, 2008.  Certain of our lease agreements contain clauses for rent increases based on the consumer price index. The obligations are payable as follows:

                                                                                                                                                                                                                                            (Amounts in thousands)
2009
  $ 22,073  
2010
    19,264  
2011
    16,884  
2012
    15,132  
2013
    12,344  
Thereafter
    71,043  


 
62
 

Total rental expense for all operating leases amounted to approximately $30.3 million for the year ended December 31, 2008, $23.7 million for the year ended December 31, 2007, and $17.3  million for the year ended December 31, 2006 respectively.

In connection with the Ply Gem acquisition, in which Ply Gem Industries was acquired from Nortek in February 2004, Nortek has agreed to indemnify the Company for certain liabilities as set forth in the stock purchase agreement governing the Ply Gem acquisition.  In the event Nortek is unable to satisfy amounts due under these indemnifications, the Company would be liable.  The Company believes that Nortek has the financial capacity to honor its indemnification obligations and therefore does not anticipate incurring any losses related to liabilities indemnified by Nortek under the stock purchase agreement.  A receivable related to this indemnification has been recorded in other long-term assets in the approximate amount of $7.8 million and $8.2 million at December 31, 2008 and December 31, 2007, respectively.  The Company has indemnified third parties in certain transactions involving dispositions of former subsidiaries.  As of December 31, 2008 and December 31, 2007, the Company has recorded liabilities in relation to these indemnifications of approximately $2.7 million and $3.0 million, respectively, in current liabilities and $5.1 million and $5.2 million, respectively, in long-term liabilities, consisting of the following:

   
(amounts in thousands)
 
   
2008
   
2007
 
  Product claim liabilities
  $ 3,718     $ 3,780  
  Multiemployer pension plan withdrawal liability
    3,492       3,681  
  Other
    584       721  
    $ 7,794     $ 8,182  

The product claim liabilities of approximately $3.7 million and $3.8 million at December 31, 2008 and December 31, 2007, respectively, consisting of approximately $2.3 million and $2.3 million recorded in current liabilities and approximately $1.4 million and $1.5 million recorded in long term liabilities, represents the estimated costs to resolve the outstanding matters related to a former subsidiary of the Company, which is a defendant in a number of lawsuits alleging damage caused by alleged defects in certain pressure treated wood products.  The Company had indemnified the buyer of the former subsidiary for all known liabilities and future claims relating to such matters and retained the rights to all potential reimbursements related to insurance coverage.  Many of the suits have been resolved by dismissal or settlement with amounts being paid out of insurance proceeds or other third party recoveries.  The Company and the former subsidiary continue to vigorously defend the remaining suits.  Certain defense and indemnity costs are being paid out of insurance proceeds and proceeds from a settlement with suppliers of material used in the production of the treated wood products.  The Company and the former subsidiary have engaged in coverage litigation with certain insurers and have settled coverage claims with several of the insurers.

The multiemployer pension liability of approximately $3.5 million and $3.7 million recorded in long term liabilities at December 31, 2008 and December 31, 2007, respectively, relate to liabilities assumed by the Company in 1998 when its former subsidiary, Studley Products, Inc. (“Studley”) was sold.  In connection with the sale, Studley ceased making contributions to the Production Service and Sales District Council Pension Fund (the “Pension Fund”), and the Company assumed responsibility for all withdrawal liabilities to be assessed by the Pension Fund.  Accordingly, the Company is making quarterly payments of approximately $0.1 million to the Pension Fund through 2018 based upon the assessment of withdrawal liability received from the Pension Fund.  The multiemployer pension liability represents the present value of the quarterly payment stream using a 6% discount rate as well as an estimate of additional amounts that may be assessed in the future by the Pension Fund under the contractual provisions of the Pension Fund.

Included in the indemnified items are accrued liabilities as of December 31, 2008 and 2007, of approximately $0.4 million and $0.5 million, respectively, in accrued expenses to cover the estimated costs of known litigation claims, including the estimated cost of legal services, that the Company is contesting including certain employment and former shareholder litigation related to the Company.

The Company sells a number of products and offers a number of warranties.  The specific terms and conditions of these warranties vary depending on the product sold.  The Company estimates the costs that may be incurred under their warranties and records a liability for such costs at the time of sale.  Factors that affect the Company’s warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction.  The Company periodically assesses the adequacy of the recorded warranty claims and adjusts the amounts as necessary.  As of December 31, 2008 and 2007, warranty liabilities of approximately $12.1 million and $11.5 million, respectively, have been recorded in current liabilities and approximately $33.6 million and $38.4 million, respectively, have been recorded in long term liabilities.

 
63
 
 

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

   
For the year
   
For the year
 
   
ended
   
ended
 
   
December 31, 2008
   
December 31, 2007
 
             
Balance, beginning of period
  $ 49,899     $ 36,947  
Warranty expense provided during period
    3,953       7,633  
Settlements made during period
    (8,843 )     (7,693 )
Liability assumed with acquisitions
    644       13,012  
Balance, end of period
  $ 45,653     $ 49,899  

The Company is subject to other contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, product liability, warranty and modification, adjustment or replacement of component parts of units sold, which may include product recalls.  Product liability, environmental and other legal proceedings also include matters with respect to businesses previously owned.  The Company has used various substances in their products and manufacturing operations, which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers’ compensation statutes, rules, regulations and case law is unclear. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated.  It is impossible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities, including lawsuits, and therefore in these cases, no such estimate has been made.








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

Accrued expenses and taxes, net, consist of the following at December 31, 2008 and December 31, 2007:
 
   
December 31, 2008
   
December 31, 2007
 
   
(Amounts in thousands)
 
             
Insurance
  $ 5,169     $ 6,566  
Employee compensation and benefits
    6,705       19,722  
Sales and marketing
    18,023       20,384  
Product warranty
    12,069       11,453  
Short-term product claim liability
    2,321       2,321  
Accrued freight
    748       753  
Interest
    17,238       12,426  
Accrued severance
    471       1,931  
Accrued pension
    1,810       1,500  
Accrued deferred compensation
    1,886       -  
Accrued taxes
    1,188       5,844  
Other
    8,676       12,016  
    $ 76,304     $ 94,916  

 

 
64
 
The 2007 accrued severance amounts in the above table include amounts resulting from the purchase of AHE during the fourth quarter of 2006.  During 2007 cash severance payments were paid out for approximately $3.9 million and the severance accrual estimate was increased by approximately $0.1 million, resulting in an accrual of zero as of December 31, 2007.  No severance costs were expensed.  Also included in the above accrued severance amounts are accruals for Denison restructuring (Note 11).
 
Other long-term liabilities consist of the following at December 31, 2008 and December 31, 2007:
 
   
December 31, 2008
   
December 31, 2007
 
   
(Amounts in thousands)
 
             
Insurance
  $ 3,697     $ 4,757  
Pension liabilities
    10,744       2,556  
Multiemployer pension withdrawal liability
    3,492       3,681  
Product warranty
    33,584       38,446  
Long-term product claim liability
    1,396       1,459  
Long-term deferred compensation
    3,416       4,810  
Liabilities for tax uncertainties
    7,806       7,193  
Other
    4,098       2,742  
    $ 68,233     $ 65,644  

 

11.   RESTRUCTURING
 

In October 2007, the Company commenced its plan to close the Denison, Texas facility.  The Company began to shift production to other facilities within the Company during November 2007, and production ceased at the Denison facility during February 2008.

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 will remain open on a reduced production schedule, primarily performing contract coating for third parties.  Total costs are expected to be approximately $2.5 million. Termination benefits costs are expected to be approximately $0.8 million, contract termination costs are expected to be approximately $0.2 million and other restructuring costs are expected to be $1.5 million.

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 will cease at Hammonton and Phoenix by April 2009.  By shifting production to other facilities within the Company, the closures will reduce costs and increase operating efficiencies.  Total costs are expected to be approximately $6.6 million, including approximately $1.4 million for personnel-related costs, approximately $0.5 million for contract termination costs, and approximately $4.7 million in other facilities-related costs, which include approximately $4.3 million in lease costs.
 
65

 
The following table summarizes the Company’s restructuring activity for the year ended December 31, 2008:

( amounts in thousands)
 
Accrued as of
   
Cash payments
   
Expensed
   
Accrued as of
 
   
December 31, 2007
   
During 2008
   
During 2008
   
December 31, 2008
 
Denison, TX
                       
Severance costs
  $ 1,931     $ (2,040 )   $ 109     $ -  
Contract terminations
    -       -       -       -  
Equipment removal and other
    -       (4,715 )     4,715       -  
    $ 1,931     $ (6,755 )   $ 4,824     $ -  
                                 
Valencia, PA
                               
Severance costs
  $ -     $ (315 )   $ 558     $ 243  
Contract terminations
    -       -       -       -  
Equipment removal and other
    -       (447 )     447       -  
    $ -     $ (762 )   $ 1,005     $ 243  
                                 
Hammonton, NJ
                               
Severance costs
  $ -     $ -     $ 217     $ 217  
Contract terminations
    -       -       -       -  
Equipment removal and other
    -       (22 )     22       -  
    $ -     $ (22 )   $ 239     $ 217  
                                 
Phoenix, AZ
                               
Severance costs
  $ -     $ -     $ 11     $ 11  
Contract terminations
    -       -       -       -  
Equipment removal and other
    -       (8 )     8       -  
    $ -     $ (8 )   $ 19     $ 11  

For the year ended December 31, 2008, the Company incurred restructuring costs of approximately $6.1 million.  Approximately $5.8 million were recorded in selling, general and administrative expenses in the Siding, Fencing and Stone segment and approximately $0.3 million were recorded in selling, general and administrative expenses in the Windows and Doors segment.  During 2007, cash severance payments were paid for approximately $0.2 million and the accrual balance was approximately $1.9 million as of December 31, 2007.

66
 
12.   INCOME TAXES
 
 
   
For the year
   
For the year
   
For the year
 
   
ended
   
ended
   
ended
 
   
December 31, 2008
   
December 31, 2007
   
December 31, 2006
 
         
Revised (1)
   
Revised (1)
 
                   
Domestic
  $ (548,749 )   $ (7,897 )   $ 3,700  
Foreign
    (19,677 )     16,51 3       7,509  
    $ (568,426 )   $  8 ,61 6     $ 11 , 2 09  

 
The following is a summary of the provision (benefit) for income taxes included in the accompanying consolidated statement of operations: (in thousands)
 
   
For the year
   
For the year
   
For the year
 
   
ended
   
ended
   
ended
 
   
December 31, 2008
   
December 31, 2007
   
December 31, 2006
 
         
Revised (1)
   
Revised (1)
 
Federal:
                 
  Current
  $ (628 )   $ 142     $ 4,615  
  Deferred
     (62,281 )     (2, 707 )     ( 3,368 )
      (62,909 )     (2, 565 )     1,247  
State:
                       
  Current
  $ 298     $ 1,476     $ 584  
  Deferred
    (3,765 )        ( 895 )     ( 507 )
      (3,467 )         581           77  
Foreign:
                       
  Current
  $ 3,976     $ 4,011     $ 2,063  
  Deferred
    (7,551 )             1,607       760  
      (3,575 )         5 , 618       2,823  
                         
Total
  $ (69,951 )   $     3,634     $     4 , 147  

(1)  See Note 5 to the consolidated financial statements.
 
 
67
The table that follows reconciles the federal statutory income tax rate of continuing operations to the effective tax rate of such earnings of approximately 12.31% for the year ended December 31, 2008,  41.62% for the year ended December 31, 2007, and 37.62% for the year ended December 31, 2006.  ( in thousands ).

   
For the year
   
For the year
   
For the year
 
   
ended
   
ended
   
ended
 
   
December 31, 2008
   
December 31, 2007
   
December 31, 2006
 
         
Revised (1)
   
Revised (1)
 
Income tax provision (benefit) at the federal
                 
statutory rate
  $ (198,949 )   $ 3,015     $ 3,923  
                         
Net change from stautory rate:
                       
Prior period federal adjustment
    -       (563 )     -  
 
State income tax provision (benefit),
                       
   net of federal income tax benefit,
                       
   including the effect of Michigan Law
                       
   change, valuation allowances, and goodwill impairment
    (21,086 )     542       52  
 
Impairment of goodwill
    146,928       -       -  
Taxes at non-U.S. statutory rate
    643       (161 )     (146 )
 
Additional provisions for uncertain tax provisions
    1,703       269       -  
 
Other, net
    810         532       318  
    $ (69,951 )   $   3,634     $ 4 , 147  
 
(1)  See Note 5 to the consolidated financial statements.

The tax effect of temporary differences, which gave rise to significant portions of deferred income tax assets and liabilities as of December 31, 2008 and 2007 are as follows (in thousands):
       
   
December 31, 2008
   
December 31, 2007
 
         
Revised (1)
 
Deferred tax assets:
           
Accounts receivable
  $ 2,125     $ 2,234  
Accrued rebates
    900       -  
Insurance reserves
    2,982       3,289  
Warranty reserves
    12,517       13,775  
Pension accrual
    6,882       1,999  
Deferred financing
    2,797       2,900  
Deferred compensation
    70       604  
Plant closure/relocation
    95       1,677  
Other assets, net
    13,282       3,460  
Capital loss carry-forwards and net loss
    operating carry-forwards
    34,968       1,723  
State net operating loss carry-forwards
    5,725       2,492  
Valuation allowance
    (1,067 )     (858 )
         Total deferred tax assets
    81,276       33,295  
Deferred tax liabilities:
             
Property and equipment, net
    (29,141 )     (31,186 )
Inventories
    (4,402 )     (2,878 )
Intangible assets, net
    (57,590 )     (77,384 )
Unrealized foreign currency gain
    -       (1,023 )
Other liabilities, net
    (1,631 )     (635 )
         Total deferred tax liabilities
    (92,764 )     (113,106 )
Net deferred tax liability
  $ (11,488 )   $ (79,811 )
 
(1)  See Note 5 to the consolidated financial statements.
 
68
 
  As of December 31, 2008, the Company has approximately $99.9 million of federal net operating loss carry-forwards which can be used to offset future taxable income.  These carry-forwards will expire between the years of 2017 and 2028 if not utilized.  The Company has approximately $5.7 million (net of federal benefit) of deferred tax assets related to state NOL carry-forwards which can be used to offset future state taxable income.  The Company has established a valuation allowance of approximately $1.0 million for these state NOL carry-forwards.  During 2007, Ply Gem had approximately $0.4 million of unused capital loss carry-forwards that expired.  The Company had established a valuation allowance for these carry-forwards. Further declines in the residential housing and remodeling markets could cause taxable income to decrease in future tax years and result in the need for additional valuation allowances on the federal and state level.  Future tax planning strategies implemented by the company could reduce or eliminate this risk.

   The Company has not provided United States income taxes or foreign withholding taxes on un-remitted foreign earnings in Canada. Notwithstanding the provisions within the American Jobs Creation Act of 2004, the Company continues to consider these amounts to be permanently invested.  As of December 31, 2008, accumulated foreign earnings in Canada were approximately $8.8 million.
 
The Company adopted the provisions of Financial Accounting Standards Board, ("FASB"), interpretation No. 48, "Accounting for Uncertain Tax Positions - an interpretation of FASB Statement No. 109" ("FIN 48") in the first quarter of 2007.   At adoption the Company did not adjust the carrying amount of its long-term contingency reserve of approximately $6.7 million, which includes interest of approximately $0.1 million.   Of this amount, approximately $0.1 million, if recognized, would have an impact on the Company’s effective tax rate.  During 2008, t he Company assumed certain new tax positions and incurred interest.  As of December 31, 2008, the reserve is now approximately $7.8 million which includes interest of approximately $1.5 million.  Of this amount, approximately $7.4 million, if recognized, would have an impact on the Company’s effective tax rate.

The Company has elected to treat interest and penalties on uncertain tax positions as income tax expense in its consolidated Statement of Operations.  Interest charges have been recorded in the Balance Sheet in the contingency reserve account recorded within other long-term liabilities in the consolidated Balance Sheet. No accrual for tax penalties was recorded upon adoption of FIN 48.
 
The Company currently has no ongoing income tax examinations with the Internal Revenue Service or other tax authorities.  The Company’s federal and state income tax filings for the years 2005, 2006, 2007, and 2008 remain subject to examination by taxing authorities.  Additionally, the Company has federal net operating loss carry-forwards from years 1999 through 2003 that could be subject to examination.

The following is a rollforward of tax contingencies from January 1, 2007 through December 31, 2008.

Balance at January 1, 2007
  $ 6,566  
     Additions based on tax positions related to current year
    114  
     Additions for tax positions of prior years
    197  
     Reductions for tax positions of prior years
    -  
     Settlement or lapse of applicable statutes
       
Unrecognized tax benefits balance at December 31, 2007
  $ 6,877  
Additions based on tax positions related to current year
    -  
Additions for tax positions of prior years
    1,800  
Reductions for tax positions of prior years
    -  
Settlement or lapse of applicable statutes
    (1,287 )
Unrecognized tax benefits balance at December 31, 2008
  $ 7,390  


During the next 12 months, it is reasonably possible the Company may reverse $6.1 million of the tax contingency reserves primarily related to additional federal and state taxes that have expiring statutes of limitations.

 
 
69
 


13.   STOCK-BASED COMPENSATION
 
Stock Option Plan

On February 12, 2004, Ply Gem Investment Holdings’ Board of Directors adopted the Ply Gem Investment Holdings 2004 Stock Option Plan (the “Plan”) allowing for grants of options to purchase up to 148,050 shares of Ply Gem Investment Holdings common stock under nonqualified stock options or incentive stock options and on November 30, 2004, increased the grants allowed under the plan up to 184,065 shares.  On February 24, 2006 in connection with the Alenco acquisition, a new holding company, Ply Gem Prime Holdings, was formed pursuant to a merger involving Ply Gem Investment Holdings.  As a result, Ply Gem Prime Holdings became the sole shareholder of Ply Gem Investment Holdings, each outstanding share of capital stock of Ply Gem Investment Holdings was converted into a share of a corresponding class of shares of the capital stock of Ply Gem Prime Holdings and Ply Gem Prime Holdings  assumed Ply Gem Investment Holdings’ obligations under the Ply Gem Investment Holdings 2004 Stock Option Plan and the Ply Gem Investment Holdings Phantom Stock Plan.  In connection therewith, each outstanding stock option and phantom unit of Ply Gem Investment Holdings was converted on a 1:1 basis into a stock option and phantom unit of Ply Gem Prime Holdings.   Employees, directors and consultants of Ply Gem Prime Holdings or any of its majority-owned subsidiaries are eligible for options, as specified in the Plan.  Ply Gem Prime Holdings’ Board of Directors may, among other things, select recipients of options grants, determine whether options will be nonqualified or incentive stock options, set the number of shares that may be purchased pursuant to option exercise, and determine other terms and conditions of options. The exercise price of an option must be at least the estimated fair market value of a share of common stock as of the grant date.  Options generally vest over five years from the date of grant, unless specified otherwise in any individual option agreement.  Generally, options will expire on the tenth anniversary of the grant date or in connection with termination of employment.  The Board of Directors has the discretion to accelerate the vesting and exercisability of outstanding options.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payments.”   The Company elected the modified prospective transition method as permitted by SFAS No. 123(R) and, accordingly, prior periods were not restated to reflect the impact of SFAS No. 123(R).  In accordance with SFAS No. 123(R), the Company considered these options to be liability-classified awards based on the fact that the employee has the ability to put shares back to the company in certain circumstances, thus avoiding exposure to the risk and rewards of ownership for a reasonable period of time.  On September 29, 2006, the Company amended the put right section of its Stockholders’ Agreement to require that Stockholders must have held vested shares for a minimum of six-months from the last day of the quarter during which such shares vested in order to receive the put right price formula for vested shares to ensure that stockholders are exposed to the risks and rewards of true equity ownership.  As a result, the Company modified its accounting treatment, and as of September 30, 2006 began treating these stock options as equity-classified awards.  The impact of this modification was to reclassify approximately $0.1 million from a liability account to Additional Paid in Capital.

The value of the options did not change due to the modification to the Stockholders’ Agreement, and no additional compensation expense was recorded.

As a result of adopting SFAS No. 123(R), a cumulative effect of accounting change for approximately $0.09 million (net of a tax benefit of approximately $0.06 million) was recognized during the first quarter of 2006.  Due to the decrease in the value of the options, a reduction of compensation expense of approximately $0.02 million and $0.08 million was recognized for the three month and nine months ended September 30, 2006.  The implementation of SFAS No. 123(R) did not have any impact on cash flows during 2006.

The fair value of each option was estimated on the date of grant and updated each reporting period until the modification on September 29, 2006, using the Black-Scholes option pricing method.  The assumptions used in the model are outlined in the following table:



 
70
 


   
December 31, 2008
   
December 31, 2007
   
December 31, 2006
 
Weighted average fair value of options granted
  $ 0.77     $ 0.75     $ 1.01  
Weighted average assumptions used:
                       
     Expected volatility
    30%       30%       30%  
     Expected term (in years)
    5       5       5  
     Risk-free interest rate
    4.92%       4.59%       4.70%  
     Expected dividend yield
    0%       0%       0%  

Due to the fact that Ply Gem Prime Holding’s shares are not publicly traded, a valuation was performed to assist in the determination of the fair value of the shares, which was determined to be $10.00 per share and $6.00 per share at December 31, 2005 and September 29, 2006, respectively. The Company estimated its expected volatility through the review of several market indicators, including peer companies.

Before adopting FASB 123(R), the Company accounted for employee options in accordance with APB 25.  No stock-based employee compensation cost was reflected in the Statement of Operations, as all options granted under the plan had an exercise price at least equal to the fair value of the underlying common stock on the date of grant.

A summary of changes in stock options outstanding during the year ended December 31, 2008 is presented below:
   
Stock Options
   
Weighted-Average Exercise
Price
   
Weighted-Average Remaining Contractual Term (Years)
 
                   
Balance at January 1, 2008
    248,594     $ 38.12       7.95  
    Granted
    107,500     $ 80.00       9.89  
    Forfeited or expired
    (41,400 )   $ 65.80       -  
Balance at December 31, 2008
    314,694     $ 48.79       7.83  

As of December 31, 2008, no options have vested.  At December 31, 2008, the Company had approximately $0.1 million of total unrecognized compensation expense that will be recognized over the weighted average period of 2.82 years.

Other Share-Based compensation

Upon completion of the acquisitions of Ply Gem Industries and MWM Holding, certain members of management contributed their investments in predecessor companies in exchange for phantom common stock units in Ply Gem Investment Holdings, which were governed by the Ply Gem Prime Investment Holdings Phantom Stock Plan.  As described above, in connection with the Alenco acquisition, Ply Gem Prime Holdings assumed Ply Gem Investment Holdings’ obligations under the Phantom Plan, and each outstanding phantom unit of Ply Gem Investment Holdings was converted on a 1:1 basis into a phantom unit of Ply Gem Prime Holdings.  (References to the “Phantom Plan” in this section refer to the predecessor and amended versions of such plan.)

Under the Phantom Plan (until it, and the units outstanding thereunder, were subsequently amended, as described below), each participant’s interest in the plan was recorded in a bookkeeping account, and each account was deemed invested in Ply Gem Prime Holdings’ stock.  No stock was initially issued under the Phantom Plan, but, upon liquidation and payment of a participant’s account under the Phantom Plan, the value of the account generally was to be paid to the participant either in shares of Ply Gem Prime Holdings’ stock having a fair value equal to the account balance or in cash, at the discretion of Ply Gem Prime Holdings.

Certain terms of the Phantom Plan were governed by the Ply Gem Prime Holdings’ Stockholders’ Agreement (and the predecessor agreement for Ply Gem Investment Holdings), which gave the participant put rights in certain circumstances to put the stock back to Ply Gem Prime Holdings, Inc. at a price determined using predefined formulas contained in the Stockholders’ Agreement and the Phantom Plan.  The Stockholders’ Agreement and the Phantom Plan contained two separate put right price formulas that were used to determine the participants’ account balances.  The determination of which put right price formula was applicable to each of the participants’ phantom common stock awards was based upon the participant’s reaching certain vesting requirements described in the Stockholders’ Agreement.  Based on the above, the Company accounted for these awards of phantom common shares under the modified prospective transition method of SFAS No. 123(R) as liability-classified awards.

 
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On September 25, 2006, the Company amended the Phantom Plan, so that each award under the Phantom plan was converted into a cash-denominated account earning interest through a fixed date.  Phantom common shares valued at approximately $1.7 million were paid out, and approximately $1.2 million of common stock was purchased by the holders of the phantom common shares.  Approximately $1.7 million was recognized as compensation expense during the third quarter of 2006 as a result of the pay out of Phantom common shares, and approximately $0.9 million was recognized as compensation expense during the third quarter of 2006 as a result of the pay out of Phantom preferred shares.

A summary of changes in phantom common stock units outstanding during the year ended December 31, 2006 is presented below:
   
Phantom Common
Stock Units
 
Balance at January 1, 2006
    179,915  
    Repurchased
    (13,590 )
    Converted to cash account
    (166,325 )
Balance at December 31, 2006
    -  

Upon completion of each of the Ply Gem acquisition, MW acquisition and Alenco acquisition, certain members of management made a cash contribution to Ply Gem Prime Holdings in exchange for shares of Ply Gem Prime Holdings’ common stock.  (As described above, investments in connection with the Ply Gem acquisition and the MW acquisition were in Ply Gem Investment Holdings common stock, which stock was later converted into Ply Gem Prime Holdings common stock in connection with the Alenco acquisition.)  Management’s shares of common stock are governed by the Ply Gem Prime Holdings Stockholders’ Agreement which gives the management participants put rights in certain circumstances to put the stock back to Ply Gem Prime Holdings at a price that is determined using defined formulas contained within the Stockholders’ Agreement.  The Stockholders’ Agreement contains two separate put right price formulas. The determination of which put right price formula will be applicable to each of the participant’s common stock shares is based upon the participants reaching certain vesting requirements which are described in the Stockholders’ Agreement.  The common shares generally vest at a rate of 20% per year of service, but may vest earlier if certain events occur.  Based on the above, the Company has accounted for these awards of common shares under the modified transition method of SFAS No. 123(R) as liability-classified awards.

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

   
Common Stock Shares Owned by Management
 
Balance at January 1, 2008
    675,758  
    Shares issued
    2,327  
    Shares repurchased
    (35,190 )
Balance at December 31, 2008
    642,895  

 
 
 

 
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14.   SEGMENT INFORMATION
 
Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS 131) requires companies to report certain information about operating segments in their financial statements and established standards for related disclosures about products and services, geographic areas and major customers.  SFAS 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance.  Operating segments meeting certain aggregation criteria may be combined into one reportable segment for disclosure purposes. Comparative information for prior years is presented to conform to our current organizational structure.
 
The Company has two reportable segments: 1) Siding, Fencing, and Stone and 2) Windows and Doors.  As a result of the USV acquisition, the Company shortened the name of its “Siding, Fencing, Railing and Decking” segment to “Siding, Fencing, and Stone” during 2008.  The USV results were included within this segment from October 31, 2008 forward.  The other operations within this segment remain unchanged.

The income before income taxes of each segment includes the revenue generated on transactions involving products within that segment less identifiable expenses.  Unallocated income and expenses include items which are not directly attributed to or allocated to either of our reporting segments.  Such items include interest, legal costs, corporate payroll, and unallocated finance and accounting expenses. Unallocated corporate assets include cash and certain receivables.  Interest expense is presented net of investment income.

Following is a summary of the Company’s segment information:  
 
     
For the Year Ended
   
For the Year Ended
   
For the Year Ended
 
     
December 31, 2008
   
December 31, 2007
   
December 31, 2006
 
     
 
   
Revised (1)
   
Revised (1)
 
     
(Amounts in thousands)
 
Net Sales
             
Siding, Fencing, and Stone
  $ 709,432   $ 828,124   $ 502,610  
Windows and Doors
    465,587     535,422     551,858  
    $ 1,175,019   $ 1,363,546   $ 1,054,468  
                     
Operating Earnings (loss)
                   
Siding, Fencing, and Stone
  $ (75,431 ) $ 73,560   $ 45,960  
Windows and Doors
    (344,140 )   36,134     50,524  
Unallocated
    (10,546 )   (7,045 )   (9,877 )
    $ (430,117 ) $ 102,649   $ 86,607  
                     
Interest expense, net
                   
Siding, Fencing, and Stone
  $ (125 ) $ (110 ) $ (168 )
Windows and Doors
    518     1,673     1,652  
Unallocated
    137,005     96,431     73,991  
    $ 137,398   $ 97,994   $ 75,475  
Depreciation and amortization
                   
Siding, Fencing, and Stone
  $ 34,249   $ 33,858   $ 16,259  
Windows and Doors
    27,389     20,168     17,516  
Unallocated
    127     41     41  
    $ 61,765   $ 54,067   $ 33,816  
Income tax expense (benefit)
                   
Unallocated
  $ (69,951 ) $ 3,634   $ 4,147  
                     
Capital expenditures
                   
Siding, Fencing, and Stone
  $ 6,770   $ 11,260   $ 4,032  
Windows and Doors
    9,491     8,757     16,286  
Unallocated
    308     -     -  
    $ 16,569   $ 20,017   $ 20,318  
  (1) See Note 5 to the Consolidated Financial Statements.                    
     
As of December 31, 
   
As of December 31, 
       
Total assets
   
2008 
   
2007 
       
Siding, Fencing, and Stone
  $ 652,560   $ 819,408        
Windows and Doors
    357,151     715,559        
Unallocated
    91,399     81,186        
    $ 1,101,110   $ 1,616,153        
 

The operating loss for the Siding, Fencing, and Stone segment and the Windows and Doors segment includes goodwill impairments of approximately $122.2 million and approximately $327.8 million, respectively, in 2008.

Our Canadian subsidiary, which had sales of approximately $82.2 million for the year ended December 31, 2008, represents a majority of our sales to foreign customers.  Other subsidiaries’ sales outside the United States are less than 1% of our total sales.


15.   RELATED PARTY TRANSACTIONS

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

Under the Debt Financing Advisory Agreement (the “Debt Financing Advisory Agreement”) we entered into with the Caxton-Iseman Party, the Company paid the Caxton-Iseman Party a debt financing arrangement and advisory fee, equal to 2.375% of the aggregate amount of the debt financing incurred in connection with the Ply Gem Acquisition ($11.4 million), in the first quarter of 2004.  Pursuant to the General Advisory Agreement, the Company paid the Caxton-Iseman Party a transaction fee of 1) $6.4 million in connection with the MW Acquisition in November 2004, 2) $2.4 million in connection with the Alenco Acquisition in March 2006, 3) $6.1 million in connection with the AHE acquisition in October 2006, 4) $0.7 million in connection with the Pacific Windows Corporation acquisition in September 2007, and 5) $0.1 in connection with the USV acquisition in October 2008 (in each case, the fee, as described above, was 2% of the purchase price paid in the respective acquisition).  During 2006, approximately $0.4 million and $1.0 million were expensed as third-party financing fees for the Alenco Acquisition and the AHE Acquisition, respectively, and were reported in the Statement of Operations as interest expense.  The remaining amounts were capitalized as part of the purchase price for the respective acquisitions.  Under the ‘General Advisory Agreement” the Company paid and expensed as a component of selling, general, and administrative expenses, a management fee of approximately $1.7 million, $3.5 million, and $2.5 million, for the years ended December 31, 2008, 2007 and 2006, respectively.

The initial term of the General Advisory Agreement is 10 years, and is automatically renewable for consecutive one-year extensions, unless Ply Gem Industries or the Caxton-Iseman Party provide notice of termination.  In addition, the General Advisory Agreement may be terminated by the Caxton-Iseman Party at any time, upon the occurrence of specified change of control transactions or upon an initial public offering of the Company’s shares or shares of any of our parent companies.  If the General Advisory Agreement is terminated for any reason prior to the end of the initial term, Ply Gem Industries will pay to the Caxton Iseman Party an amount equal to the present value of the annual advisory fees that would have been payable through the end of the initial term, based on the Company’s cost of funds to borrow amounts under our senior credit facilities.

 
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  On May 23, 2008, in connection with an amendment to our prior credit facilities and as a condition to such amendment, affiliates of CI Capital Partners LLC made (i) an $18 million cash investment in Ply Gem Prime Holdings and received 14,518 shares of Ply Gem Prime Holdings’ common stock and 210,482 shares of Ply Gem Prime Holdings’ Class A common stock and (ii) a $12 million cash investment in Ply Gem Investment Holdings, and received 12,000 shares of senior preferred stock. Ply Gem Prime Holdings and Ply Gem Investment Holdings then made an aggregate $30 million capital contribution to Ply Gem Holdings, which in turn contributed such amount to the capital of Ply Gem Industries.

 
16.   QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
 
The following is a summary of the quarterly results of operations.
 
   
Quarter  Ended
   
Quarter Ended
   
Quarter Ended
   
Quarter Ended
 
   
December 31,  2008
   
September 27, 2008
   
June 28, 2008
   
March 29, 2008
 
   
(Amounts in thousands)
 
                         
Net sales
  $ 234,541     $ 342,825     $ 341,280     $ 256,373  
                                 
Gross profit
    32,769       67,410       70,187       32,107  
                                 
Net income (loss)
    (266,308 )     (190,832 )     (19,493 )     (21,842 )

 
   
Quarter Ended
   
Quarter Ended
   
Quarter Ended
   
Quarter Ended
 
   
December 31, 2007
   
September 29, 2007
   
June 30, 2007
   
March 31, 2007
 
   
 Revised (1)
   
 Revised (1)
   
 Revised (1)
   
 Revised (1)
 
   
(Amounts in thousands)
 
                         
Net sales
  $ 317,902     $ 369,675     $ 390,695     $ 285,274  
                                 
Gross profit
    57,150       85,400       97,549       46,940  
                                 
Net income (loss)
    (12,570 )     11,462       17,112       (11,022 )
 
(1) See Note 5 to the consolidated financial statements.
 
The net loss for the quarter ended September 27, 2008 includes a goodwill impairment of $200.0 million and the net loss for the quarter ended December 31, 2008 includes a goodwill impairment of an additional $250.0 million.

The gross profit and net loss for the quarter ended December 31, 2007 includes an adjustment to the carrying value of consignment inventory that was previously expensed to cost of goods sold in prior periods.  The impact of this adjustment is to increase pretax income and gross margin by approximately $1.0 million and to decrease the net loss for the quarter by approximately $0.6 million.  The impact of this adjustment is not material to previously reported periods.


17.   SUBSEQUENT EVENT

In March 2009, certain affiliates of the Company’s controlling stockholders acquired a majority of the outstanding Senior Subordinated Notes.  Prior to the acquisition, on March 20, 2009, Ply Gem Industries commenced a consent solicitation to amend the indenture governing 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 will become operative upon completion of the purchase of a specified amount of the Senior Subordinated Notes by certain affiliates of our controlling stockholders, which is expected to be completed in April 2009.
 
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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18.   GUARANTOR/NON-GUARANTOR
 
The Senior Secured Notes and Senior Subordinated Notes were both issued by our direct subsidiary, Ply Gem Industries, and are fully and unconditionally guaranteed on a joint and several basis by the Company and certain of Ply Gem Industries’ wholly owned subsidiaries.  Accordingly, the following guarantor and non-guarantor information is presented as of December 31, 2008 and December 31, 2007, for the years ended December 31, 2008, 2007, and 2006.  The non-guarantor information presented represents our Canadian subsidiary, CWD.


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 
For the year ended December 31, 2008
 
                                     
   
Guarantor
   
Issuer
         
Non-
             
   
Ply Gem
   
Ply Gem
   
Guarantor
   
Guarantor
   
Consolidating
       
   
Holdings, Inc.
   
Industries, Inc.
   
Subsidiaries
   
Subsidiary
   
Adjustments
   
Consolidated
 
   
(Amounts in thousands)
 
                                     
Net sales
  $ -     $ -     $ 1,092,830     $ 82,189     $ -     $ 1,175,019  
Costs and expenses:
                                               
Cost of products sold
    -       -       918,324       54,222       -       972,546  
Selling, general and
                                               
    administrative expenses
    -       10,546       138,817       13,577       -       162,940  
Intercompany administrative
                                               
    charges
    -       -       10,937       -       (10,937 )     -  
Amortization of intangible assets
    -       -       19,650       -       -       19,650  
Goodwill impairment
    -       -       418,549       31,451       -       450,000  
Total costs and expenses
    -       10,546       1,506,277       99,250       (10,937 )     1,605,136  
Operating earnings (loss)
    -       (10,546 )     (413,447 )     (17,061 )     10,937       (430,117 )
Foreign currency loss
    -       -       -       (911 )     -       (911 )
Intercompany interest
    -       128,864       (127,672 )     (1,192 )     -       -  
Interest expense
    -       (137,395 )     -       (620 )     -       (138,015 )
Interest income
    -       390       134       93       -       617  
Intercompany administrative income
    -       10,937       -       -       (10,937 )     -  
Loss before equity in
                                               
   subsidiariies loss
    -       (7,750 )     (540,985 )     (19,691 )     -       (568,426 )
Equity in subsidiaries loss
    (498,475 )     (491,679 )     -       -       990,154       -  
Loss before benefit
                                               
   for income taxes
    (498,475 )     (499,429 )     (540,985 )     (19,691 )     990,154       (568,426 )
Benefit for income taxes
    -       (954 )     (65,423 )     (3,574 )     -       (69,951 )
Net loss
  $ (498,475 )   $ (498,475 )   $ (475,562 )   $ (16,117 )   $ 990,154     $ (498,475 )
                                                 
Other comprehensive income (loss):
                                               
  Foreign currency translation adjustments
    -       -       -       (9,517 )     -       (9,517 )
  Minimum pension liability for actuarial gain
    -       (2,855 )     (2,806 )     -       -       (5,661 )
Total comprehensive loss
  $ (498,475 )   $ (501,330 )   $ (478,368 )   $ (25,634 )   $ 990,154     $ (513,653 )

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PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 
For the year ended December 31, 2007
 
                                     
   
Guarantor
   
Issuer
         
Non-
             
   
Ply Gem
   
Ply Gem
   
Guarantor
   
Guarantor
   
Consolidating
       
   
Holdings, Inc.
   
Industries, Inc.
   
Subsidiaries
   
Subsidiary
   
Adjustments
   
Consolidated
 
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
 
   
(Amounts in thousands)
 
                                     
Net sales
  $ -     $ -     $ 1,275,571     $ 87,975     $ -     $ 1,363,546  
Costs and expenses:
                                               
Cost of products sold
    -       -       1,017,986       58,521       -       1,076,507  
Selling, general and
                                               
    administrative expenses
    -       7,045       140,990       14,574       -       162,609  
Intercompany administrative
                                               
    charges
    -       -       12,762       -       (12,762 )     -  
Amortization of intangible assets
    -       -       17,631       -       -       17,631  
Intangible asset impairment
    -       -       4,150       -       -       4,150  
Total costs and expenses
    -       7,045       1,193,519       73,095       (12,762 )     1,260,897  
Operating earnings (loss)
    -       (7,045 )     82,052       14,880       12,762       102,649  
Foreign currency gain
    -       -       -       3,961       -       3,961  
Intercompany interest
    -       91,418       (91,039 )     (379 )     -       -  
Interest expense
    -       (97,558 )     (1 )     (2,139 )     -       (99,698 )
Interest income
    -       1,127       388       189       -       1,704  
Intercompany administrative income
    -       12,762       -       -       (12,762 )     -  
Income (loss) before equity in
                                               
   subsidiaries' income (loss)
    -       704       (8,600 )     16,512       -       8,616  
Equity in subsidiaries' income (loss)
    4,982       4,571       -       -       (9,553 )     -  
Income before provision (benefit)
                                               
   for income taxes
    4,982       5,275       (8,600 )     16,512       (9,553 )     8,616  
Provision (benefit) for income taxes
    -       293       (2,111 )     5,452       -       3,634  
Net income (loss)
  $ 4,982     $ 4,982     $ (6,489 )   $ 11,060     $ (9,553 )   $ 4,982  
                                                 
Other comprehensive income (loss):
                                               
  Foreign currency translation adjustments
    -       -       -       5,658       -       5,658  
  Minimum pension liability for actuarial gain
    -       73       888       -       -       961  
Total comprehensive income (loss)
  $ 4,982     $ 5,055     $ (5,601 )   $ 16,718     $ (9,553 )   $ 11,601  



(1) See Note 5 to the consolidated financial statements

77

PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 
For the year ended December 31, 2006
 
                                     
   
Guarantor
   
Issuer
         
Non-
             
   
Ply Gem
   
Ply Gem
   
Guarantor
   
Guarantor
   
Consolidating
       
   
Holdings, Inc.
   
Industries, Inc.
   
Subsidiaries
   
Subsidiary
   
Adjustments
   
Consolidated
 
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
 
   
(Amounts in thousands)
 
                                     
Net sales
  $ -     $ -     $ 985,335     $ 69,133     $ -     $ 1,054,468  
Costs and expenses:
                                               
Cost of products sold
    -       -       782,240       47,278       -       829,518  
Selling, general and
                                               
    administrative expenses
    -       9,877       103,829       11,913       -       125,619  
Intercompany administrative
                                               
    charges
    -       -       9,118       -       (9,118 )     -  
Amortization of intangible assets
    -       -       11,942       -       -       11,942  
Intangible asset impairment
    -       -       782       -       -       782  
Total costs and expenses
    -       9,877       907,911       59,191       (9,118 )     967,861  
Operating earnings (loss)
    -       (9,877 )     77,424       9,942       9,118       86,607  
Foreign currency gain
    -       -       -       77       -       77  
Intercompany interest
    -       66,987       (66,222 )     (765 )     -       -  
Interest expense
    -       (74,778 )     -       (1,902 )     -       (76,680 )
Interest income
    -       787       261       157       -       1,205  
Intercompany administrative income
    -       9,118       -       -       (9,118 )     -  
Income (loss) before equity in
                                               
   subsidiaries' income
    -       (7,763 )     11,463       7,509       -       11,209  
Equity in subsidiaries' income
    6,976       11,898       -       -       (18,874 )     -  
Income before income taxes and
                                               
  cumulative effect of accounting change
    6,976       4,135       11,463       7,509       (18,874 )     11,209  
Provision (benefit) for income taxes
    -       (2,927 )     4,596       2,478       -       4,147  
Income before cumulative
                                               
  effect of accounting change
    6,976       7,062       6,867       5,031       (18,874 )     7,062  
Cumulative effect of accounting change
    -       (86 )     -       -       -       (86 )
Net Income
  $ 6,976     $ 6,976     $ 6,867     $ 5,031     $ (18,874 )   $ 6,976  
                                                 
Other comprehensive income:
                                               
  Foreign currency translation adjustments
    -       -       -       (347 )     -       (347 )
  Minimum pension liability
    -       362       135       -       -       497  
Total comprehensive income
  $ 6,976     $ 7,338     $ 7,002     $ 4,684     $ (18,874 )   $ 7,126  

(1) See Note 5 to the consolidated financial statements
78
 
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATING BALANCE SHEET
 
As of December 31, 2008
 
                                     
   
Guarantor
   
Issuer
         
Non-
             
   
Ply Gem
   
Ply Gem
   
Guarantor
   
Guarantor
   
Consolidating
       
   
Holdings, Inc.
   
Industries, Inc.
   
Subsidiaries
   
Subsidiary
   
Adjustments
   
Consolidated
 
   
(Amounts in thousands)
 
ASSETS
                                   
Current Assets:
                                   
Cash and cash equivalents
  $ -     $ 46,181     $ 4,490     $ 7,618     $ -     $ 58,289  
Accounts receivable, net
    -       -       83,537       6,990       -       90,527  
Inventories:
                                               
   Raw materials
    -       -       49,448       3,612       -       53,060  
   Work in process
    -       -       27,137       948       -       28,085  
   Finished goods
    -       -       40,133       2,134       -       42,267  
   Total inventory
    -       -       116,718       6,694       -       123,412  
Prepaid expenses and other
                                               
   current assets
    -       3,956       15,559       470       -       19,985  
Deferred income taxes
    -       -       13,924       -       -       13,924  
     Total current assets
    -       50,137       234,228       21,772       -       306,137  
Investments in subsidiaries
    (242,628 )     (289,731 )     -       -       532,359       -  
Property and Equipment, at cost:
                                               
Land
    -       -       3,565       144       -       3,709  
Buildings and improvements
    -       -       34,378       828       -       35,206  
Machinery and equipment
    -       1,246       246,211       5,833       -       253,290  
      -       1,246       284,154       6,805       -       292,205  
Less accumulated depreciation
    -       (257 )     (119,426 )     (2,511 )     -       (122,194 )
Total property and equipment, net
    -       989       164,728       4,294       -       170,011  
Other Assets:
                                               
Intangible assets, net
    -       -       193,604       -       -       193,604  
Goodwill
    -       -       371,833       18,946       -       390,779  
Intercompany note receivable
    -       1,107,260       -       -       (1,107,260 )     -  
Other
    -       40,273       306       -       -       40,579  
    Total other assets
    -       1,147,533       565,743       18,946       (1,107,260 )     624,962  
    $ (242,628 )   $ 908,928     $ 964,699     $ 45,012     $ (574,901 )   $ 1,101,110  
                                                 
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
                                 
Current Liabilities:
                                               
Current maturities of long-term debt
  $ -     $ -     $ -     $ -     $ -     $ -  
Accounts payable
    -       1,070       55,304       3,229       -       59,603  
Accrued expenses and taxes
    -       24,600       49,795       1,909       -       76,304  
     Total current liabilities
    -       25,670       105,099       5,138       -       135,907  
Deferred income taxes
    -       -       22,469       2,943       -       25,412  
Intercompany note payable
    -       -       1,088,999       18,261       (1,107,260 )     -  
Other long term liabilities
    -       11,700       55,623       910       -       68,233  
Long-term debt, less current
                                               
   maturities
    -       1,114,186       -       -       -       1,114,186  
Commitments and contingencies
                                               
Stockholder's Equity (Deficit):
                                               
Preferred stock
    -       -       -       -       -       -  
Common stock
    -       -       -       -       -       -  
Additional paid-in-capital
    209,908       209,908       122,063       9,524       (341,495 )     209,908  
Retained earnings (accumulated deficit)
    (446,993 )     (446,993 )     (429,554 )     8,838       867,709       (446,993 )
Accumulated other
                                               
   comprehensive income (loss)
    (5,543 )     (5,543 )     -       (602 )     6,145       (5,543 )
    $ (242,628 )   $ 908,928     $ 964,699     $ 45,012     $ (574,901 )   $ 1,101,110  

 
79
 
 
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATING BALANCE SHEET
 
As of December 31, 2007
 
                                     
   
Guarantor
   
Issuer
         
Non-
             
   
Ply Gem
   
Ply Gem
   
Guarantor
   
Guarantor
   
Consolidating
       
   
Holdings, Inc.
   
Industries, Inc.
   
Subsidiaries
   
Subsidiary
   
Adjustments
   
Consolidated
 
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
 
   
(Amounts in thousands)
 
ASSETS
                                   
Current Assets:
                                   
Cash and cash equivalents
  $ -     $ 40,446     $ 5,423     $ 6,184     $ -     $ 52,053  
Accounts receivable, net
    -       -       100,221       11,432       -       111,653  
Inventories:
                                               
   Raw materials
    -       -       55,506       4,497       -       60,003  
   Work in process
    -       -       21,987       1,084       -       23,071  
   Finished goods
    -       -       45,996       2,912       -       48,908  
   Total inventory
    -       -       123,489       8,493       -       131,982  
Prepaid expenses and other
                                               
   current assets
    -       3,451       12,622       389       -       16,462  
Deferred income taxes
    -       -       12,797       -       -       12,797  
     Total current assets
    -       43,897       254,552       26,498       -       324,947  
Investments in subsidiaries
    241,787       118,104       -       -       (359,891 )     -  
Property and Equipment, at cost:
                                               
Land
    -       -       3,840       177       -       4,017  
Buildings and improvements
    -       106       36,865       956       -       37,927  
Machinery and equipment
    -       49       234,750       6,122       -       240,921  
      -       155       275,455       7,255       -       282,865  
Less accumulated depreciation
    -       (126 )     (81,417 )     (2,326 )     -       (83,869 )
Total property and equipment, net
    -       29       194,038       4,929       -       198,996  
Other Assets:
                                               
Intangible assets, net
    -       -       213,257       -       -       213,257  
Goodwill
    -       -       789,575       46,245       -       835,820  
Intercompany note receivable
    -       1,088,999       -       -       (1,088,999 )     -  
Other
    -       37,932       5,201       -       -       43,133  
    Total other assets
    -       1,126,931       1,008,033       46,245       (1,088,999 )     1,092,210  
    $ 241,787     $ 1,288,961     $ 1,456,623     $ 77,672     $ (1,448,890 )   $ 1,616,153  
                                                 
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
                                 
Current Liabilities:
                                               
Current maturities of long-term debt
  $ -     $ 6,623     $ -     $ 250     $ -     $ 6,873  
Accounts payable
    -       346       77,364       5,392       -       83,102  
Accrued expenses and taxes
    -       18,477       69,597       6,842       -       94,916  
     Total current liabilities
    -       25,446       146,961       12,484       -       184,891  
Deferred income taxes
    -       -       88,323       4,285       -       92,608  
Intercompany note payable
    -       -       1,088,999       -       (1,088,999 )     -  
Other long term liabilities
    -       10,818       53,663       1,163       -       65,644  
Long-term debt, less current
                                               
   maturities
    -       1,010,910       -       20,313       -       1,031,223  
Commitments and contingencies
                                               
Stockholder's Equity (Deficit):
                                               
Preferred stock
    -       -       -       -       -       -  
Common stock
    -       -       -       -       -       -  
Additional paid-in-capital
    180,667       180,667       32,669       5,559       (218,895 )     180,667  
Retained earnings (accumulated deficit)
    51,485       51,485       46,008       24,955       (122,448 )     51,485  
Accumulated other
                                               
   comprehensive income (loss)
    9,635       9,635       -       8,913       (18,548 )     9,635  
    $ 241,787     $ 1,288,961     $ 1,456,623     $ 77,672     $ (1,448,890 )   $ 1,616,153  
 
(1) See Note 5 to the consolidated financial statements

 
80
 
 
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATING STATEMENT OF CASH FLOWS
 
For the year ended December 31, 2008
 
                                     
   
Guarantor
   
Issuer
         
Non-
             
   
Ply Gem
   
Ply Gem
   
Guarantor
   
Guarantor
   
Consolidating
       
   
Holdings, Inc.
   
Industries, Inc.
   
Subsidiaries
   
Subsidiary
   
Adjustments
   
Consolidated
 
   
(Amounts in thousands)
 
Cash flows from operating
                                   
activities:
                                   
Net income (loss)
  $ (498,475 )   $ (498,475 )   $ (475,562 )   $ (16,117 )   $ 990,154     $ (498,475 )
Adjustments to reconcile net
                                               
income (loss) to cash provided by
                                               
(used in) operating activities:
                                               
Depreciation and amortization
                                               
   expense
    -       136       60,855       774       -       61,765  
Fair value premium on purchased inventory
    -       -       19       -       -       19  
Non-cash interest expense, net
    -       7,144       -       -       -       7,144  
Gain on foreign currency transactions
    -       -       -       911       -       911  
Goodwill impairment
    -       -       418,549       31,451       -       450,000  
Loss on sale of assets
    -       -       886       -       -       886  
Other non-cash items
    -       14,047       -       -       -       14,047  
Deferred income taxes
    -       -       (71,293 )     (69)       -       (71,362 )
Equity in subsidiaries' net income (loss)
    498,475       491,679       -       -       (990,154 )     -  
Changes in operating assets and
                                               
   liabilities:
                                               
Accounts receivable, net
    -       -       15,415       2,764       -       18,179  
Inventories
    -       -       3,046       260       -       3,306  
Prepaid expenses and other
                                               
   current assets
    -       2,649       (1,771 )     (204 )     -       674  
Accounts payable
    -       724       (21,306 )     (1,303 )     -       (21,885 )
Accrued expenses and taxes
    -       1,732       (6,315 )     (11,322 )     -       (15,905 )
Cash payments on restructuring liabilities
    -       -       (7,547 )     -       -       (7,547 )
Other
    -       24       18       (664 )     -       (622 )
    Net cash provided by (used in)
                                               
    operating activities
    -       19,660       (85,006 )     6,481       -       (58,865 )
Cash flows from investing
                                               
activities:
                                               
Capital expenditures
    -       (704 )     (14,765 )     (1,100 )     -       (16,569 )
Proceeds from sale of assets
    -       5,810       3,015       -       -       8,825  
Acquisitions, net of cash acquired
    -       -       (3,614 )     -       -       (3,614 )
Other
    -       (129 )     -       -       -       (129 )
    Net cash provided by (used in)
                                               
    investing activities
    -       4,977       (15,364 )     (1,100 )     -       (11,487 )
Cash flows from financing
                                               
activities:
                                               
Proceeds from long-term debt
    -       693,504       -       -       -       693,504  
Proceeds from revolver borrowings
    -       140,000       -       -       -       140,000  
Proceeds from intercompany
                                            -  
   investment
    -       (117,698 )     99,437       18,261       -       -  
Payments on long-term debt
    -       (657,347 )     -       (20,563 )     -       (677,910 )
Payments on revolver borrowings
    -       (80,000 )     -       -       -       (80,000 )
Debt issuance costs paid
    -       (26,578 )     -       -       -       (26,578 )
Equity contributions
    -       30,310       -       -       -       30,310  
Equity repurchases
    -       (1,093 )     -       -       -       (1,093 )
    Net cash provided by (used in)
                                               
    financing activities
    -       (18,902 )     99,437       (2,302 )     -       78,233  
Impact of exchange rate movement
                                               
    on cash
    -       -       -       (1,645 )     -       (1,645 )
Net increase (decrease) in cash
                                               
    and cash equivalents
    -       5,735       (933 )     1,434       -       6,236  
Cash and cash equivalents at the
                                               
    beginning of the period
    -       40,446       5,423       6,184       -       52,053  
Cash and cash equivalents at the end
                                               
    of the period
  $ -     $ 46,181     $ 4,490     $ 7,618     $ -     $ 58,289  
 
81
 
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATING STATEMENT OF CASH FLOWS
 
For the year ended December 31, 2007
 
                                     
   
Guarantor
   
Issuer
         
Non-
             
   
Ply Gem
   
Ply Gem
   
Guarantor
   
Guarantor
   
Consolidating
       
   
Holdings, Inc.
   
Industries, Inc.
   
Subsidiaries
   
Subsidiary
   
Adjustments
   
Consolidated
 
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
 
   
(Amounts in thousands)
 
Cash flows from operating
                                   
activities:
                                   
Net income (loss)
  $ 5,614     $ 5,614     $ (6,489 )   $ 11,060     $ (10,817 )   $ 4,982  
Adjustments to reconcile net
                                               
income (loss) to cash provided by
                                               
operating activities:
                                               
Depreciation and amortization
                                               
   expense
    -       41       53,312       714       -       54,067  
Fair value premium on purchased inventory
    -       -       1,289       -       -       1,289  
Non-cash interest expense, net
    -       6,941       -       -       -       6,941  
Gain on foreign currency transactions
    -       -       -       (3,961 )     -       (3,961 )
Intangible asset impairment
    -       -       4,150       -       -       4,150  
Loss on sale of assets
    -       -       356       -       -       356  
Deferred income taxes
    -       -       (2,856 )     1,568       -       (1,288 )
Equity in subsidiaries' net income (loss)
    (5,614 )     (5,203 )     -       -       10,817       -  
Changes in operating assets and
                                               
   liabilities:
                                               
Accounts receivable, net
    -       -       33,665       (1,011 )     -       32,654  
Inventories
    -       -       7,283       240       -       7,523  
Prepaid expenses and other
                                               
   current assets
    -       4,553       2,446       128       -       7,127  
Accounts payable
    -       131       (17,055 )     (150 )     -       (17,074 )
Accrued expenses and taxes
    -       (1,844 )     (23,764 )     2,282       -       (23,326 )
Cash payments on restructuring liabilities
    -       -       (210 )     -       -       (210 )
Other
    -       45       (199 )     768       -       614  
    Net cash provided by
                                               
    operating activities
    -       10,278       51,928       11,638       -       73,844  
Cash flows from investing
                                               
activities:
                                               
Capital expenditures
    -       -       (18,973 )     (1,044 )     -       (20,017 )
Proceeds from sale of assets
    -       -       63       -       -       63  
Acquisitions, net of cash acquired
    -       (36,453 )     -       -       -       (36,453 )
    Net cash used in investing
                                               
    activities
    -       (36,453 )     (18,910 )     (1,044 )     -       (56,407 )
Cash flows from financing
                                               
activities:
                                               
Proceeds from revolver borrowings
    -       50,000       -       -       -       50,000  
Proceeds from intercompany
                                            -  
   investment
    -       41,178       (36,832 )     (4,346 )     -       -  
Payments on long-term debt
    -       (6,373 )     -       (4,250 )     -       (10,623 )
Payments on revolver borrowings
    -       (50,000 )     -       -       -       (50,000 )
Debt issuance costs paid
    -       (2,100 )     -       -       -       (2,100 )
Equity contributions
    -       900       -       -       -       900  
Equity repurchases
    -       (3,245 )     -       -       -       (3,245 )
    Net cash provided by (used in)
                                               
    financing activities
    -       30,360       (36,832 )     (8,596 )     -       (15,068 )
Impact of exchange rate movement
                                               
    on cash
    -       -       -       863       -       863  
Net increase (decrease) in cash
                                               
    and cash equivalents
    -       4,185       (3,814 )     2,861       -       3,232  
Cash and cash equivalents at the
                                               
    beginning of the period
    -       36,261       9,237       3,323       -       48,821  
Cash and cash equivalents at the end
                                               
    of the period
  $ -     $ 40,446     $ 5,423     $ 6,184     $ -     $ 52,053  
(1) See Note 5 to the consolidated financial statements
 
82
 
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATING STATEMENT OF CASH FLOWS
 
For the year ended December 31, 2006
 
                                     
   
Guarantor
   
Issuer
         
Non-
             
   
Ply Gem
   
Ply Gem
   
Guarantor
   
Guarantor
   
Consolidating
       
   
Holdings, Inc.
   
Industries, Inc.
   
Subsidiaries
   
Subsidiary
   
Adjustments
   
Consolidated
 
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
   
Revised (1)
 
   
(Amounts in thousands)
 
Cash flows from operating
                                   
activities:
                                   
Net income (loss)
  $ 5,721     $ 5,721     $ 6,867     $ 5,031     $ (16,364 )   $ 6,976  
Adjustments to reconcile net
                                               
income (loss) to cash provided by
                                               
(used in) operating activities:
                                               
Depreciation and amortization
                                               
   expense
    -       41       33,190       585       -       33,816  
Fair value premium on purchased inventory
    -       -       3,266       -       -       3,266  
Non-cash interest expense, net
    -       5,571       -       -       -       5,571  
Gain on foreign currency transactions
    -       -       -       (77 )     -       (77 )
Intangible asset impairment
    -       -       782       -       -       782  
Loss on sale of assets
    -       -       840       -       -       840  
Other non-cash items
    -       1,094       678       -       -       1,772  
Deferred income taxes
    -       -       (1,636 )     904       -       (732 )
Equity in subsidiaries' net income (loss)
    (5,721 )     (10,643 )     -       -       16,364       -  
Changes in operating assets and
                                               
   liabilities:
                                               
Accounts receivable, net
    -       -       27,414       (2,150 )     -       25,264  
Inventories
    -       -       9,297       (1,232 )     -       8,065  
Prepaid expenses and other
                                               
   current assets
    -       221       (1,194 )     (8 )     -       (981 )
Accounts payable
    -       (271 )     (39,170 )     1,390       -       (38,051 )
Accrued expenses and taxes
    -       55       5,083       1,573       -       6,711  
Cash payments on restructuring liabilities
    -       -       (200 )     -       -       (200 )
Other
    -       1,221       (664 )     (154 )     -       403  
    Net cash provided by
                                               
    operating activities
    -       3,010       44,553       5,862       -       53,425  
Cash flows from investing
                                               
activities:
                                               
Capital expenditures
    -       -       (18,942 )     (1,376 )     -       (20,318 )
Proceeds from sale of assets
    -       -       4,536       -       -       4,536  
Acquisitions, net of cash acquired
    -       (416,386 )     -       -       -       (416,386 )
    Net cash used in investing
                                               
    activities
    -       (416,386 )     (14,406 )     (1,376 )     -       (432,168 )
Cash flows from financing
                                               
activities:
                                               
Proceeds from long-term debt
    -       414,320       -       488       -       414,808  
Proceeds from revolver borrowings
    -       15,000       -       -       -       15,000  
Proceeds from intercompany
                                            -  
   investment
    -       35,040       (30,040 )     (5,000 )     -       -  
Payments on long-term debt
    -       (3,279 )     -       (188 )     -       (3,467 )
Payments on revolver borrowings
    -       (15,000 )     -       -       -       (15,000 )
Debt issuance costs paid
    -       (9,534 )     -       -       -       (9,534 )
Equity contributions
    -       4,717       -       -       -       4,717  
Equity repurchases
    -       (1,128 )     -       -       -       (1,128 )
    Net cash provided by (used in)
                                               
    financing activities
    -       440,136       (30,040 )     (4,700 )     -       405,396  
Impact of exchange rate movement
                                               
    on cash
    -       -       -       (5 )     -       (5 )
Net increase (decrease) in cash
                                               
    and cash equivalents
    -       26,760       107       (219 )     -       26,648  
Cash and cash equivalents at the
                                               
    beginning of the period
    -       9,501       9,130       3,542       -       22,173  
Cash and cash equivalents at the end
                                               
    of the period
  $ -     $ 36,261     $ 9,237     $ 3,323     $ -     $ 48,821  

(1) See Note 5 to the consolidated financial statements
83
 
 
Item 9.             CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

 
Not Applicable



Item 9A.
CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of December 31, 2008 were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms and the information required to be disclosed by us is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting
 
Management of the Company (Ply Gem Holdings) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (principal executive officer) and the Chief Financial Officer (principal financial officer), the Company’s management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 as required by Rule 13a-15(c) under the Exchange Act. In making this assessment, the Company’s management used the criteria set forth in the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation conducted under the framework in “Internal Control – Integrated Framework,” the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2008.
 
This report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Annual Report on Form 10-K.

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

 

 
Item 9B.
OTHER INFORMATION

None
 
84

 
PART III

Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The Board of Directors of Ply Gem Prime Holdings, Inc., Ply Gem Investment Holdings, Inc., Ply Gem Holdings, and Ply Gem Industries are identical.

Name
Age
Position(s)
Frederick J. Iseman
56
Chairman of the Board and Director
Gary E. Robinette
60
President, Chief Executive Officer and Director
Shawn K. Poe
47
Vice President and Chief Financial Officer
John Wayne
47
President, Siding Group
Lynn Morstad
45
President, U.S. Windows Group
Bryan Sveinson
50
President, CWD Windows & Doors, Inc.
Keith Pigues
46
Senior Vice President, Chief Marketing Officer
Robert A. Ferris
66
Director
Steven M. Lefkowitz
44
Director
John D. Roach
65
Director
Michael Haley
58
Director
Edward M. Straw
70
Director
Timothy T. Hall
39
Director

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

Frederick J. Iseman – Chairman of the Board and Director
Since the Ply Gem Acquisition, Frederick Iseman has served as our chairman of the Board of Directors.  Mr. Iseman is currently Chairman and CEO of CI Capital Partners LLC (formerly Caxton-Iseman Capital LLC), a private equity firm which was founded by Mr. Iseman in 1993.  Prior to establishing CI Capital Partners, Mr. Iseman founded Hambro-Iseman Capital Partners, a merchant banking firm.  From 1988 to 1990, Mr. Iseman was a member of the Hambro International Venture Fund.  Mr. Iseman is a former Chairman of the Board of Anteon International Corporation and is the Chairman of the Board of Buffets Holdings, Inc. and Buffets, Inc.

Gary E. Robinette – President, Chief Executive Officer and Director
Gary E. Robinette was appointed President and Chief Executive Officer of the Company in October 2006, replacing Lee Meyer who had previously announced his retirement.  Prior to joining Ply Gem, Mr. Robinette served as Executive Vice President and COO at Stock Building Supply, a Wolseley company, since September 1998, and was also a member of the Wolseley North American Management Board.  Mr. Robinette held the position of President of Erb Lumber Inc., a Wolseley company, from 1993-1998 and served as Chief Financial Officer and Vice President of Carolina Holdings which was the predecessor company of Stock Building Supply.  Mr. Robinette received a BS in accounting from Tiffin University, where he is a member of the Board of Trustees, and a MBA from Xavier University, where he is a member of the President’s Advisory Board.  He is also a member of Harvard University’s Joint Center for Housing Studies.

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

John Wayne – President, Siding Group
Mr. Wayne was appointed President of our siding and accessories subsidiaries in January 2002.  Mr. Wayne joined our company in 1998, and prior to his appointment to President had been Vice President of Sales and Marketing for our Variform and Napco siding and accessories subsidiaries.  Prior to joining us, Mr. Wayne worked for Armstrong World Industries, Inc. from 1985 to 1998, holding a variety of sales management positions, including Vice President of Sales.  Mr. Wayne graduated from the University of Wisconsin in 1984 with a BBA in Finance and Marketing.  Mr. Wayne served as the Chairman of the VSI, the Chairman of the VSI Code and Regulatory Committee, and Chairman of the VSI Board of Directors through December 2007 when his term ended.

 
85
 

 

Lynn Morstad - President, U.S. Windows Group
Mr. Morstad was appointed President of our U.S. Windows Group in October 2007 after having served as President of our New Construction Window Group since November 2006.  Prior to that, Mr. Morstad served as President, Chief Operating Officer and Chief Financial Officer respectively of MW Manufacturers Inc., a Ply Gem subsidiary he joined in 2000.  From March 1998 to May 2000, Mr. Morstad was employed by the Dr. Pepper/Seven Up division of Cadbury Schweppes as Vice President and Corporate Controller. In addition, Mr. Morstad served in senior financial positions with various divisions of the Newell Company for more than eight years.  Mr. Morstad is a graduate of the University of Iowa and is a Certified Public Accountant.

Bryan Sveinson – President, CWD Windows & Doors
Mr. Sveinson was appointed President of CWD Windows & Doors, Inc. in April 1999.  Mr. Sveinson joined our company in 1993, and prior to his appointment as President held successive positions as Controller, Vice President of Finance, and Vice President of Business Development.  Prior to joining us, Mr. Sveinson held senior finance positions with a commercial printing company and a soft drink manufacturing and distribution company.  Mr. Sveinson graduated from the University of Calgary in 1981 with a Bachelor of Management Degree in Finance.  In addition, Mr. Sveinson is a professional accountant, having achieved a Certified Management Accountant designation in 1991.  Mr. Sveinson is also a past director of the Canadian Window and Door Manufacturing Association.

Keith Pigues – Senior Vice President, Chief Marketing Officer
Mr. Pigues was appointed Senior Vice President and Chief Marketing Officer in August 2007.  Prior to joining Ply Gem, he served as Vice President of Marketing at CEMEX U.S. Operations from 2005 to 2007.  Previously, Mr. Pigues served in senior marketing and strategy positions at RR Donnelley, ADP and Honeywell International.  Mr. Pigues received a BS in electrical engineering from Christian Brothers University in 1984, and an MBA from the University of North Carolina Kenan-Flagler Business School in 1993.

Robert A. Ferris – Director
Since the Ply Gem Acquisition, Robert A. Ferris has served as a director. Mr. Ferris retired as Managing Director of CI Capital Partners LLC (formerly Caxton-Iseman Capital LLC) in December 2007, and was employed by CI Capital Partners since March 1998.  From 1981 to February 1998, Mr. Ferris was a General Partner of Sequoia Associates (a private investment firm headquartered in Menlo Park, California).  Prior to founding Sequoia Associates, Mr. Ferris was a Vice President of Arcata Corporation, a New York Stock Exchange-listed company.  Mr. Ferris is a former director of Anteon International Corporation, and is a director of Buffets Holdings, Inc. and Buffets, Inc.  Effective January 1, 2008, Mr. Ferris assumed the position of President of Celtic Capital LLC, the investment manager of the entities that primarily hold the assets and investments of the Ferris Family.

Steven M. Lefkowitz – Director
Since the Ply Gem Acquisition, Steven M. Lefkowitz has served as a director.  Mr. Lefkowitz is President of CI Capital Partners LLC (formerly Caxton-Iseman Capital LLC) and has been employed by CI Capital Partners since 1993.  From 1988 to 1993, Mr. Lefkowitz was employed by Mancuso & Company, a private investment firm, and served in several positions including as Vice President and as a Partner of Mancuso Equity Partners.  Mr. Lefkowitz is a former director of Anteon International Corporation, and is a director of Buffets Holdings, Inc. and Buffets, Inc.

John D. Roach - Director
Since the Ply Gem Acquisition, Mr. Roach has served as a director.  Mr. Roach is Chairman of the Board and Chief Executive Officer of Stonegate International, a private investment and advisory services company, and has been employed by Stonegate International since 2001.  Mr. Roach served as Chairman of the Board, President and Chief Executive Officer of Builders FirstSource, Inc. from 1998 to 2001; and as Chairman of the Board, President and Chief Executive Officer of Fibreboard Corporation from 1991 to 1997.  Mr. Roach is a director of Kaiser Aluminum Corporation and its subsidiary, Kaiser Aluminum & Chemical Corporation, a director of Material Sciences Corp., a provider of materials-based solutions, a director of URS Corporation, an engineering firm, a director PMI Group, Inc., a provider of credit enhancement products and lender services, and a director of VeriSign, a leading provider of internet infrastructure services.
 

 
86
 

Michael Haley – Director
In June 2005, Mr. Haley announced his retirement as Chairman of MW Manufacturers, but has remained as a director. In January 2005, Mr. Haley was appointed chairman of MW and Senior Vice President of Sales and Marketing and Director for Ply Gem Industries.  Mr. Haley joined MW in June 2001 as President and served in this capacity until being named Chairman.  Prior to joining MW, Mr. Haley had been the President of American of Martinsville (a subsidiary of La-Z-Boy Inc.) from 1994 until May 2001.  In addition, Mr. Haley was President of Loewenstein Furniture Group from 1988 to 1994.  Mr. Haley graduated from Roanoke College in 1973 with a Bachelor’s Degree in Business Administration. From April 2006 to present, Mr. Haley has served as an advisor to Fenway Partners, a private equity firm.

Edward M. Straw – Director
In May 2006, the Board of Directors approved the addition of Mr. Straw as a member of the board.  Mr. Straw retired from the Navy as a three-star admiral in 1996, and has since held senior executive positions in industry.  From March 2000 to February 2005, Mr. Straw was President of Global Operations for the Estee Lauder Companies, Inc.  Prior to Estee Lauder, Mr. Straw was President of Ryder Integrated Logistics, Inc. and Senior Vice President of Compaq Computer Corporation.  He is currently the Chairman of Odyssey Logistics and Technology and is a member of the boards of MeadWestvacto, Eddie Bauer and Panther Expedited Services.  In addition, he is a strategic advisor to IBM Federal Services.  Mr. Straw holds a MBA from George Washington University and a BS degree from the U.S. Naval Academy.

Timothy T. Hall – Director
In December 2006, the Board of Directors approved the addition of Mr. Hall as a member of the board.  Mr. Hall is a Principal at CI Capital Partners LLC (formerly Caxton-Iseman Capital LLC) and has been employed by CI Capital Partners since 2001.  Prior to Caxton-Iseman, Mr. Hall was a Vice President at FrontLine Capital and an Assistant Vice President at GE Equity.  Mr. Hall has a MBA from Columbia Business School and a B.S. from Lehigh University.


Audit Committee Financial Expert
Our Board of Directors has determined Timothy Hall to be the “audit committee financial expert” as defined by the SEC regulations implementing Section 407 of the Sarbanes-Oxley Act of 2002.  Mr. Hall is not an “independent” director as the term is used for the purposes of the New York Stock Exchange’s listing requirements.  The audit committee members are Mr. Hall and Mr. Lefkowitz.


Compensation Committee
The Company’s compensation committee is chaired by Mr. Hall, and consists of the entire board of directors.


Board of Directors Meetings
The Company’s Board of Directors met four times during 2008.


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

 

 
87
 
 
Item 11.
EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Overview

This compensation discussion describes the material elements of compensation of the Company’s executive officers who served as named executive officers during our fiscal year ended December 31, 2008.  The individuals who served as the principal executive officer and principal financial officer during 2008, as well as the other individuals included in the Summary Compensation Table below, are referred to as the “named executive officers.”  This compensation discussion focuses primarily on compensation awarded to, earned by, or paid to the named executive officers in 2008, as reflected in the following tables and related footnotes and narratives, but also describes compensation actions taken before or after 2008 to the extent that it enhances an understanding of the executive compensation disclosure.

The principal elements of our executive compensation program are base salary, annual cash incentives, other personal benefits and perquisites, post-termination severance, and equity-based interests.  The Company’s other personal benefits and perquisites consist of life insurance benefits and car allowances.  The named executive officers are also eligible to participate in our 401(k) plan and our company-wide employee benefit health and welfare programs.

During 2006, certain named executive officers held awards of phantom stock units under our phantom stock plan, and these awards were converted during 2006 into cash-denominated deferred compensation accounts.  The phantom plan and deferred compensation accounts are described below.


Compensation Program Objectives and Philosophy

General Philosophy

Our compensation philosophy is designed to provide a total compensation package to our executive officers that is competitive within the building materials industry and enables us to attract, retain, and motivate the appropriate talent for long-term success.  We believe that total compensation should be reflective of individual performance but should also vary with our performance in achieving financial and non-financial objectives, thus rewarding the attainment of these objectives.

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

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

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

 
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2008 Target Award Opportunities .  Our 2008 performance measures included such corporate measures as economic value added (EVA) improvement and Adjusted EBITDA.  Depending upon each officer’s responsibilities, a target award opportunity was established as a percentage of the individual officer’s base salary at a range from 75% to 100% of base salary.  The target cash incentive opportunity percentage of base salary for each individual officer is established based upon the position within the Company and is comparable to like positions within our company.   After the end of 2008, Mr. Robinette reviewed our annual cash incentive plans, the attainment of performance measures and resulting awards with our compensation committee and our Board. However, no annual target cash incentives were paid to any of the named executive officers due to the lower Adjusted EBITDA amounts realized by the Company in light of the depressed residential housing and remodeling markets for the year ended December 31, 2008.  For the year ended December 31, 2008, annual target cash incentive opportunities for the named executive officers were:  100% of base salary for Mr. Robinette, and 75% of base salary for Mr. Poe, Mr. Wayne, Mr. Morstad, and Mr. Pigues.

The 2008 performance targets for executive officers were comprised of 40% Adjusted EBITDA, 30% sales growth, and 30% EVA, with the 2008 performance target for Adjusted EBITDA being approximately $184.1 million, sales growth targets of approximately $124.5 million and EVA improvement of approximately $86.2 million.

·  
Perquisites and Other Personal Benefits
In General .  We provide the opportunity for our named executive officers to receive certain perquisites and other personal benefits, including car allowances and Company-paid life insurance premiums.  We provide these benefits to provide an additional useful benefit for our executives, and we believe that providing these benefits is essential to our ability to remain competitive in the general marketplace for attracting and retaining executive talent.

Total Compensation Comparison .  For the year ended December 31, 2008, personal benefits and perquisites accounted for approximately 13.2% of total compensation for our named executive officers.

·  
Equity Awards
In General .  We have provided the opportunity for our named executive officers to purchase both shares of common stock, par value $.01 per share (“Common Stock”) and senior preferred stock, par value $.01 per share (“Senior Preferred Stock”) in Ply Gem Prime Holdings, Inc. (“Prime Holdings”), our indirect parent company.

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

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

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

Incentive Stock – Protected and Unprotected .  Common Stock that is purchased as Incentive Stock becomes “Protected” over time, based on the officer’s continued service to our Company.  Twenty percent (20%) of each officer’s Incentive Stock becomes Protected on the first anniversary of the date of purchase and on each of the next four anniversaries.  If the officer’s employment with us is terminated at any time, no remaining Incentive Stock that is not Protected (“Unprotected”) will become Protected.  In addition, if a realization event or an initial public offering occurs at any time, any Incentive Stock that is Unprotected becomes immediately fully Protected.

Incentive Stock – Termination of Employment .  If a named executive officer’s Incentive Stock becomes Protected, the officer may have the opportunity to receive a greater per share price for such stock if the stock is purchased by the Company.  Specifically, if the named executive officer’s employment with us is terminated for reasons other than cause, then Prime Holdings has the right to purchase the officer’s shares of Protected Incentive Stock at a price per share (the “Protected Stock Purchase Price”) equal to the quotient obtained by dividing (x) the excess of (i) a multiple of consolidated EBITDA over (ii) consolidated indebtedness, less the amount of unrestricted cash of Prime Holdings and its consolidated subsidiaries as of the date of termination by (y) the number of shares of fully diluted Common Stock on the date of the officer’s termination of employment.  For any Incentive Stock that is Unprotected as of termination, the purchase price is the lesser of (a) the original purchase price paid by the officer for the Incentive Stock, plus or minus any change in adjusted retained earnings per share from the date the shares were originally purchased through the end of the most recent fiscal quarter preceding the date of termination of employment and (b) the Protected Stock Purchase Price.  If the officer is terminated for Cause, all Incentive Stock held by the officer, whether or not Protected, will be repurchased by Prime Holdings for the same price applicable to Unprotected Incentive Stock in the preceding sentence.

We believe that this schedule whereby Incentive Stock becomes Protected over time aids in our ability to retain executive officers by requiring the executives’ continued service to the Company.  In addition, because this schedule provides that the officers’ Incentive Stock becomes protected upon certain corporate transactions, this schedule will give the officers the incentive to work toward achieving such a transaction and to share in the value received by other shareholders.

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

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

None of the named executive officers purchased either Common Stock or Senior Preferred Stock during 2008.

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

 
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SFAS 123(R) was adopted by the Company as of January 1, 2006, and, for the first three quarters of 2006, the phantom units were recognized under SFAS 123(R) as liability awards that had to be marked to market every quarter.  In addition, in 2004, 2005, and 2006, new tax rules governing nonqualified deferred compensation required a re-examination of the structure of the phantom stock plan.  Because of the risk of volatility associated with the above accounting treatment and the complexity associated with tax and accounting rule changes, the Company’s Board of Directors determined that the cost associated with the administrative, accounting and tax work for the phantom stock units was excessive and outweighed the benefits of continuing to permit the officers to hold such units.

As such, in September 2006, the Company converted all phantom common and preferred stock units held by each named executive officer into a cash account payable on a fixed schedule in years 2007 and beyond.  The value of the portion of each cash account that represented phantom common units equaled the number of phantom common stock units credited to the phantom plan account on September 25, 2006 multiplied by $10.00.  From September 25, 2006 through January 31, 2007, the value of the cash account was updated as if interest was credited on such value and compounded at December 31, 2006 at a rate equal to the applicable federal rate for short-term loans.  This portion of the account was paid to each officer in a single lump-sum cash payment on January 31, 2007.  The value of the portion of the cash account that represented the value of the phantom preferred stock units equaled the face amount of the number of shares of Senior Preferred Stock represented by such units.  This portion of the account is credited with deemed earnings, as if with interest, at an annual rate of 10% compounded semi-annually as of each June 30 and December 31, from the date of issuance of the phantom preferred stock unit through the date of payment.  This portion of the account is payable on each of August 31, 2009, 2010, and 2011, such that one third of the original face amount, plus deemed earnings, is paid on each such date, or, if earlier, the officer’s death, disability or a change of control.

As a result of the conversion of the phantom stock plan awards described above, as of December 31, 2007 there were no phantom common or preferred stock units outstanding.

In connection with the conversion described above, the Board authorized Prime Holdings to allow the officers to invest in Common Stock on September 25, 2006, which stock was either Incentive Stock or not, in the same proportion that the officer’s phantom units had been deemed invested in such stock.

·  
Stock options
The Company may grant the named executive officers an option to purchase shares of Common Stock pursuant to the Ply Gem Prime Holdings, Inc. 2004 Stock Option Plan (the “Option Plan”).  Options granted pursuant to the Option Plan are intended to qualify as incentive stock options under the Internal Revenue Code of 1986, as amended.  Each of our named executive officers was granted an option to purchase shares of Common Stock during the year ended December 31, 2008, as described in the “Grants of Plan-Based Awards” table.
 
Employment Agreements
·  
President and Chief Executive Officer
In October 2006, Mr. Robinette joined the Company and was appointed as our President and Chief Executive Officer.  In connection with such appointment, Mr. Robinette entered into an employment agreement with us, pursuant to which we have agreed to pay him an annual base salary of not less than $530,000 and an annual cash incentive target of 100% of base salary.  In addition, Mr. Robinette was provided the opportunity by our compensation committee and Board to purchase 125,660 shares of Common Stock, at a price of $10.00 per share and 7,434 shares of Senior Preferred Stock at a price of $100.00 per share.  In November 2008, the Company finalized a retention agreement with Mr. Robinette to continue to provide service through September 1, 2011 at which point Mr. Robinette would be entitled to receive a one-time, lump-sum cash payment of $2,000,000 which the Board determined to be a reasonable and necessary amount to retain Mr. Robinette’s services and remain competitive in the marketplace for executive talent.  The Company provided this retention opportunity to Mr. Robinette because the Company believes that Mr. Robinette’s experience and talent are necessary to guide the Company through the depressed residential and housing markets which currently exist.

·  
Post-termination severance
In General .  We provide the opportunity for certain of our named executive officers to be protected under the severance provisions contained within their retention agreements and, for Mr. Robinette, his employment agreement by providing salary continuation if employment is terminated under certain circumstances (two years for Mr. Robinette and one year for our other named executive officers).  If the payment of severance to Mr. Robinette causes him to become subject to the golden parachute excise tax rules, then we will pay him a gross-up amount so that after all taxes are paid on the gross-up, he will have enough funds remaining to pay the excise tax imposed on the severance payments.  We provide this opportunity to attract and retain an appropriate caliber of talent for the position.  These retention agreements and Mr. Robinette’s employment agreement were approved by our Board of Directors, and the terms of these agreements can be found in individual agreements that have previously been filed as exhibits with the Securities and Exchange Commission (SEC).  We believe the terms of our retention agreements and of Mr. Robinette’s employment agreement are consistent with the provisions and benefit levels of other companies based upon reviewing disclosures made by those companies with the SEC.  We believe the arrangements and benefits opportunity contained within our retention agreements and Mr. Robinette’s employment agreement are reasonable and allow us to remain competitive in the general marketplace for executive talent.  These arrangements are described in detail in the “Potential Payments Upon Termination or Change in Control” section below. The employment agreement between Mr. Robinette and the Company establishes the terms of his employment including salary and benefits, annual cash incentive award target and severance provisions in the event of termination of Mr. Robinette’s employment.
 
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·  
Chief Financial Officer Retention Payment
In November of 2008, the Company finalized a retention agreement with Mr. Poe to continue to provide service through September 1, 2011 at which point Mr. Poe would be entitled to receive a one-time, lump-sum cash payment of $650,000 which the Board determined to be a reasonable and necessary amount to retain Mr. Poe’s services and remain competitive in the marketplace for executive talent.  The Company provided this retention opportunity to Mr. Poe because the Company believes that Mr. Poe’s experience and talent are necessary to guide the Company through the depressed residential and housing markets which currently exist.
 
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The following table shows information concerning the annual compensation during 2008 for services provided to us by our President and Chief Executive Officer, our Vice President and Chief Financial Officer and our three other most highly compensated executive officers.

 
Summary Compensation Table

                                               
Name and Principal Position                                              
 
 
Year
 
Salary
($)
   
Bonus
($)
   
Stock
and Option
Awards
($) (1)
   
Non-Equity
Incentive Plan
Compensation
($) (2)
   
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings ($) (3)
   
All Other
Compensation
($) (4)
   
 
 
 
Total
($)
 
                                               
                                               
Gary E. Robinette
 
2008
  $ 580,000     $ -     $ 4,971     $ -     $ -     $ 41,136     $ 626,107  
  President &
 
2007
    530,000       -       -       506,680       -       25,081       1,061,761  
  Chief Executive Officer
 
2006
    112,115  (6)     133,589  (7)     -       -       -       -       245,704  
                                                             
Shawn K. Poe
 
2008
    300,000       -       1,519       -       -       56,624       358,143  
  Vice President &
 
2007
    275,000       50,000  (5)     -       197,175       -       22,133       544,308  
  Chief Financial Officer
 
2006
    222,861       77,000  (8)     -       115,375       -       163,682       578,918  
   
 
                                                       
John Wayne
 
2008
    388,500       -       16,025       -       -       47,306       451,831  
  President, Siding Group
 
2007
    370,000       -       -       301,920       -       25,409       697,329  
   
2006
    298,077       76,000  (8)     -       258,137       -       419,495       1,051,709  
                                                             
Lynn Morstad
 
2008
    370,000       -       14,124       -       -       29,561       413,685  
  President, Windows & Doors
 
2007
    326,250       -       -       -       -       13,110       339,360  
  
 
2006
    304,231       18,000  (8)     -       150,000       -       232,511       704,742  
   
 
                                                       
Keith Pigues
 
2008
    288,500       -       149       -       -       117,568       406,217  
  Sr Vice President, Marketing
                                                           
   
                                                           


(1)  
For the year 2008, the amounts in this column represent the SFAS 123(R) expense attributed to the stock options granted to the respective named executive officers. The amounts in this column also represent, for all shares of Common Stock and Senior Preferred Stock and all awards of phantom common and preferred stock units held by each named executive officer in 2006 and 2007, the dollar amount recognized for financial statement reporting purposes with respect to 2006 in accordance with SFAS 123(R).  Because no expense was recognized under SFAS 123(R) during 2006 or 2007, the amount in each row of this column for each of these years is zero.  (See Note 13 to the financial statements “Stock Based Compensation” for a discussion of the assumptions made in this valuation.)  As described in the “Compensation Discussion and Analysis – Phantom Common and Preferred Stock Units” section above, the awards under the phantom stock plan were amended on September 25, 2006.  These awards were reported under SFAS 123(R) through the end of the third quarter of the 2006 fiscal year.  During the fourth quarter of 2006, we recognized nonqualified deferred compensation expense in respect of the cash accounts that were established in connection with the conversion of the phantom plan, and the value of these accounts is included in the “All Other Compensation” column of this table with respect to 2006 as described in more detail below in footnote (4).
(2)  
The amounts in this column represent performance-based cash bonuses earned for services rendered during 2008, 2007 and 2006.  These incentive bonuses are described in the “Compensation Discussion and Analysis - Annual Cash Incentive Awards” section above.
(3)  
None of the named executive officers, other than Lynn Morstad, are covered by either of the Company’s pension plans. No amount is included for Mr. Morstad because the aggregate actuarial present value of his pension benefit under the MW Manufacturing Inc. Retirement Plan and SERP plan decreased by $1,432 and $246, respectively, during 2008.  During 2006, the aggregate actuarial present value of his pension benefit under the MW Manufacturing Inc. Retirement Plan and SERP plan decreased by $235 and $198, respectively. The named executive officers did not receive any above-market or preferential earnings on compensation deferred on a basis that is not tax-qualified.

 
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(4)  
The amounts in this column with respect to 2008 consist of the following items for each named executive officer shown below:
·  
Gary E. Robinette :  $10,500 car allowance, $20,550 company 401(k) contributions and profit sharing, and $10,086 insurance premiums.
·  
Shawn K. Poe :   $8,400 car allowance, $20,634 company 401(k) contributions and profit sharing, $16,149 insurance premiums, and $11,441 relocation payment.
·  
John Wayne :  $10,500 car allowance, $20,550 company 401(k) contributions and profit sharing, and $16,256 insurance premiums.
·  
Lynn Morstad: $11,334 company car benefit, and $1,992 company 401(k) contributions and profit sharing, and $16,235 insurance premiums.
·  
Keith Pigues :  $8,400 car allowance, $5,247 company 401(k) contributions and profit sharing, $16,136 insurance premiums, and $87,785 relocation payment.
The amounts in this column with respect to 2007 consist of the following items for each officer shown below:
·  
Gary E. Robinette :  $10,500 car allowance, $13,500 company 401(k) contributions and profit sharing, and $1,081 insurance premiums.
·  
Shawn K. Poe :   $7,700 car allowance, $13,500 company 401(k) contributions and profit sharing, and $933 insurance premiums.
·  
John Wayne :  $10,500 car allowance, $13,500 company 401(k) contributions and profit sharing, $1,409 insurance premiums.
·  
Lynn Morstad : $6,105 company car benefit, $6,525 company 401(k) contributions, and $480 insurance premiums.
The amounts in this column with respect to 2006 consist of the following items for each officer shown below:
·  
Shawn K. Poe :  $135,900 value of cash deferred compensation account created in connection with phantom plan conversion described in the “Compensation Discussion and Analysis – Phantom Common and Preferred Stock Units” section above, $7,200 car allowance, $13,228 company 401(k) contributions and profit sharing, and $7,354 insurance premiums.
·  
John Wayne : $388,350 value of cash deferred compensation account created in connection with phantom plan conversion described in the “Compensation Discussion and Analysis – Phantom Common and Preferred Stock Units” section above, $10,500 car allowance, $13,200 company 401(k) contributions and profit sharing, and $7,445 insurance premiums
·  
Lynn Morstad: $213,786 value of cash deferred compensation account created in connection with phantom plan conversion described in the “Compensation Discussion and Analysis – Phantom Common and Preferred Stock Units” section above, $9,632 car allowance, $6,085 company 401(k) contributions, $3,008 insurance premiums.

(5)  
Represents 50% of a total $100,000 special bonus that Mr. Poe was eligible to receive if he remained employed with the Company through December 31, 2007.
(6)  
Represents the dollar value of the base salary earned by Mr. Robinette for the period from the date that he commenced employment in October 2006 through December 31, 2006.
(7)  
Represents the guaranteed bonus paid to Mr. Robinette pursuant to his employment agreement.
(8)  
Represents the Special Bonus awarded on September 25, 2006 in connection with the conversion of awards under the phantom stock plan, described in the “Compensation Discussion and Analysis – Special Bonuses” section above.


 
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Grants of Plan-Based Awards for 2008

 
 
 
Name
 
Stock Option Grant Date
 
Estimated Future Payouts Under Non-Equity Incentive Plan Awards Target
($) (1)
   
All Other Option Awards:
Number Of Securities
Underlying Options
(#) (2)
   
Exercise Or Base Price
of Option Awards
($/Sh)
   
Grant Date Fair Value
of Stock and
Option Awards
 
                             
Gary E. Robinette
 
October 2, 2008
  $ 580,000       4,918     $ 80     $ 4,971  
                                     
Shawn K. Poe
 
October 2, 2008
    225,000       1,503       80       1,519  
                                     
John Wayne
 
October 2, 2008
    194,250       3,216       80       3,250  
   
December 5, 2008
            15,000       80       12,775  
                                     
Lynn Morstad
 
October 2, 2008
    185,000       3,863       80       3,904  
   
December 5, 2008
            12,000       80       10,220  
                                     
Keith Pigues
 
October 2, 2008
    144,250       147       80       149  

 

(1)  
These amounts represent the annual target cash incentive opportunities as a percentage of base salary for each named executive officer.  For the year ended December 31, 2008, no incentive awards were provided to any of the named executive officers due to the lower EBITDA amounts realized by the Company in light of the depressed residential housing and remodeling markets.
(2)  
These amounts represent stock options granted to each of the named executive officers during 2008.

During 2008, each of the named executive officers was granted an option to purchase shares of Common Stock pursuant to the Option Plan at an exercise price of $80 per share.  Each option becomes vested and exerciseable with respect to 20% of the shares covered by the option on each of the first five anniversaries of the grant date.



Outstanding Equity Awards at Fiscal Year-End for 2008

 
 
 
 
 
Name
 
 
Number of Securities
Underlying Unexecercised
Options
(#)
Unexcercisable
(1)
   
Option Exercise Price
($)
 
 
Option Expiration Date
 
 
Number of   Shares
or Units of Stock that
Have Not Vested
(#) (2)
   
Market Value of Shares
or Units of Stock That
Have Not Vested 
($) (3)
 
                           
Gary E. Robinette
    4,918     $ 80  
October 2, 2018
    66,000     $ -  
                                   
Shawn K. Poe
    1,503     $ 80  
October 2, 2018
    7,683       -  
                                   
John Wayne
    3,216     $ 80  
October 2, 2018
    9,061       -  
      15,000     $ 80  
December 5, 2018
               
                                   
Lynn Morstad
    3,863     $ 80  
October 2, 2018
    9,600       -  
      12,000     $ 80  
December 5, 2018
               
                                   
Keith Pigues
    23,200     $ 80  
August 27, 2017
    3,000       -  
      147     $ 80  
October 2, 2018
               


 
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                   (1)  Each option becomes vested and exercisable with respect to 20% of the shares covered by the option on each of the first five
anniversaries of the grant date.
(2)  The Stock Awards set forth in this table become Protected as described in the “Compensation Discussion and Analysis –        
Common Stock” section above.
(3)  
Because the Company’s Common Stock is not publicly traded, and the value per share under the valuation formula contained within the Stockholders’ Agreement was zero at December 31, 2008, a market value of zero is shown.


Stock Vested for 2008

   
Stock Awards
 
   
Number of Shares
   
Value Realized on
 
 
 
Acquired on Vesting
   
Vesting
 
Name    
(#) (1)
   
($) (2)
 
               
               
Gary E. Robinette
    22,000     $ -  
                 
Shawn K. Poe
    7,683     $ -  
                 
John Wayne
    9,061     $ -  
                 
Lynn Morstad
    9,600     $ -  
                 
Keith Pigues
    750     $ -  


(1)  
The Stock Awards in this table represent the number of shares of Common Stock that were either vested on the date of grant or that became Protected during 2008, as described in the “Compensation Discussion and Analysis – Common Stock” section above.
(2)  
This amount represents the value of the shares of Common Stock that became Protected during 2008. Because the Company’s Common Stock is not publicly traded and the value per share under the valuation formula contained within the Stockholders’ Agreement was zero at December 31, 2008, a market value of zero is shown.  These shares remain subject to certain transfer restrictions provided in a stockholders’ agreement with Prime Holdings and there is no current market in which the officers may sell such shares.


Pension Benefits for 2008

     
Number of Years
   
Present Value of
   
Payments During Last
Name
Plan Name
 
Credited Service
   
Accumulated Benefit
   
Fiscal Year
 
       
(#)
 
($)
   
($)
 
(a)
(b)
 
(c)
   
(d) (1)
   
(e)
 
                       
Gary E. Robinette
NA
    -       -       -  
                           
Shawn K. Poe
NA
    -       -       -  
                           
John Wayne
NA
    -       -       -  
                           
Lynn Morstad
MW Retirement Plan              
MW SERP Plan
   
4 (2)
4 (2)
   
 $
 
24,450
10,372
     
-
-
 
                           
Keith Pigues
NA
    -       -       -  

(1) The material assumptions used to derive the present value of the accumulated pension benefit shown in this table area set forth in footnote number 7 "Defined Benefit Plans" to our financial statements.
(2) The number in this column is less than the number of the officer's actual years of service with the Company. This is because the plans have been frozen, as described below.
96
 
 
Pension Plans
The Company maintains the MW Manufacturing Inc. Retirement Plan, at tax-qualified defined benefit retirement plans, acquired with the MW Acquisition in August 2004 (the "MW Plan"). Mr. Morstad  is a  participant in the MW Plan. None of the other named executive officers are participants in the Company's pension plans.
 
The MW Plans' benefits are calculated based upon years of service with the company and compensation levels during the service period. Benefits under the MW Plan were frozen with respect to all salaried employees effective December 31, 1992. The decision to freeze the benefit provisions affects any executive officer under the MW Plan.
 
The normal retirement date to receive full benefits is the first calendar month following the participant's 65th birthday. There are provisions under the MW Plan for a reduced benefits amount upon election of early retirement prior to age 65, with this option available to all participants of the MW Plan, including executive officers.
 
The benefit payment options under the MW Plan is:
  • Life annuity
  • Period certain annuities
  • Joint and survivor annuitiy (if married)
  • In some cases a full or partial lump sum payment
 
 
97
 

Nonqualified Deferred Compensation for 2008

   
Aggregate
   
Aggregate
 
   
Earnings
   
Balance
 
   
in Last FY
   
at Last FYE
 
Name
 
($)
   
($) (1) (2)
 
             
Gary E. Robinette
    -       -  
                 
Shawn K. Poe
    -     $ 138,452  
                 
John Wayne
    -       395,632  
                 
Lynn Morstad
    -       -  
                 
Keith Pigues
    -       -  

(1)  
These amounts do not represent above-market or preferential earnings on compensation deferred on a basis that is not tax-qualified, and these amounts were not reported in the “Summary Compensation Table” above.
(2)  
The aggregate balance at December 31, 2008 represents the balance of the cash-denominated deferred compensation accounts established in connection with the conversion of the phantom stock plan awards on September 25, 2006, as described in the “Compensation Discussion and Analysis – Phantom Common and Preferred Stock Units” section above.





Termination or Change in Control Arrangements for 2008

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

   
Years
   
Severance
   
Benefits
   
Bonus
   
Total
 
Name
       
($)
   
($)
   
($) (1)
   
($)
 
                               
Employment Agreement:
                             
Gary E. Robinette
    2     $ 1,060,000     $ 20,172     $ -     $ 1,080,172  
                                         
Retention Agreements:
                                       
Shawn K. Poe
    1       300,000       16,150       -       316,150  
                                         
John Wayne
    1       388,500       16,256       -       404,756  
                                         
Lynn Morstad
    1       370,000       16,234       -       386,234  
                                         
Keith Pigues
    1       288,500       16,136       -       304,636  


(1) For the year ended December 31, 2008, no incentive awards were provided to any of the namedexecutive officers due to the lower EBITDA amounts realized by the Company in light of thedepressed residential housing and remodeling markets.  Therefore, the bonus paid as a result of a termination or change in control would be zero.



 
98
 


Mr. Robinette’s employment agreement and the retention agreements for each of Mr. Poe, Mr. Wayne, Mr. Morstad, and Mr. Pigues provide that the officer will receive payments and benefits if he is terminated without “cause” or resigns following a “material adverse change”.  “Cause” means certain failures to perform duties after demand by the Board or obey the Board or a senior executive of the Company, a material act of dishonesty in connection with executive duties, or conviction of a felony, a fraudulent or dishonest misdemeanor, or a civil judgment for fraud.
“Material adverse change” is defined in Mr. Robinette’s employment agreement as assignment of duties inconsistent with his position, reduction of salary or target bonus, or Company action that would deny him any material employee benefit, without his consent.  “Material adverse change” in the retention agreements is defined the same as in Mr. Robinette’s employment agreement; however, it does not include a reduction in target bonus, but does include the Company requiring the executive to be based more than 50 miles from his current office location, as well as any Company breach of any provision of the retention agreement.
To receive any payments or benefits in connection with a termination for cause or material adverse change, the executive must release certain claims against the Company.  In addition, the executive must comply with certain restrictive covenants, including a covenant not to compete with our business for two years following termination in the case of Mr. Robinette and one year following termination in the case of all other executives.  The restrictive covenants also prohibit the executives from soliciting our employees for two years following termination in the case of Mr. Robinette and one year following termination in the case of all other executives.  The covenants also prohibit disclosure of our confidential information and the mailing of disparaging statements about the Company and our people.
Mr. Robinette’s Employment Agreement provides that he will receive an amount equal to two years of his base salary at the time of termination, plus medical insurance benefit coverage paid over the 24 months following termination.  In addition, Mr. Robinette will be eligible to receive payment of a “Year 1 Bonus” equal to the amount that would have been actually earned and paid to Mr. Robinette under the cash incentive award plan had he been employed for the entire 12 month period of the year, plus a “Year 2 Bonus” equal to a pro-rated portion of the Year 1 Bonus based upon the number of months that Mr. Robinette was employed with the Company during the year of termination of his employment with the Company.  If Mr. Robinette dies or becomes disabled prior to September 1, 2011, he will be paid a pro rata portion of the $2,000,000 retention payment described above under “Employment Agreements – President and Chief Executive Officer”.
For the named executive officers other than Mr. Robinette, if the named executive officer’s employment is terminated during the year, the officer is eligible to receive an amount equal to one year of base salary at the rate of the time of termination, paid over a one year period, plus a pro rata portion of an amount equal to the lesser of the officer’s annual cash incentive award target or the actual cash incentive award that would have been paid under the incentive award plan had the officer been employed at the date that such cash incentive award is actually paid, paid in a lump sum as soon as practicable following the date on which the amount which will be paid is determined. The named executive officers other than Mr. Robinette, are also eligible to receive a lump sum payment equal to a pro rata portion of any annual cash bonus the officer would have received with respect to the year of termination, paid when bonuses are paid to other executives, as well as continuation of medical and dental benefits for one year following termination of employment.
Mr. Poe may be eligible to receive severance in addition to that shown in the table above worth up to one additional year if at the end of the 12 month period following his termination he has not been able to obtain employment providing him with a salary of at least $300,000.  If Mr. Poe dies or becomes disabled prior to September 1, 2011, he will be paid a pro rata portion of the $650,000 retention payment described above under “Employment Agreements – Chief Financial Officer Retention Payment”.
The named executive officers may be entitled to receive a cash payment for their individual shares of Incentive Stock, if Prime Holdings elects to exercise its call right under the Stockholders’ Agreement. If Prime Holdings had exercised its call right on December 31, 2007, the named executive officers would not have received any money for any of the shares of common stock.  Because shares of the Company’s Common Stock are not publicly traded and the value per share at December 31, 2008 per the formula contained in the Stockholders’ Agreement is zero, no amount has been reflected in the table for incentive equity.

 
99
 

In addition, upon a change in control, all Common Stock held by the named executive officers that is Unprotected will become Protected and all options to purchase Common Stock will become fully vested.  If a change in control had occurred on December 31, 2008, applying the Protected price formula in the Stockholders’ Agreement based on EBITDA as of that date, the value per share of Common Stock would be zero.  If on December 31, 2008 we had undergone a change in control, the value attributed to the acceleration of the options would have been $0, as the exercise price of $80 for the options is more than the value per share of common stock of $0 on December 31, 2008.






Director Compensation for 2008

Name    
Fees Earned or Paid in Cash
($)
   
All Other Compensation
($) (1)
   
Total
($)
 
                   
Frederick J. Iseman
  $ -     $ -     $ -  
                         
Robert A. Ferris
    -       -       -  
                         
Steven M. Lefkowitz
    -       -       -  
                         
John D. Roach
    60,000       13,862       73,862  
                         
Michael Haley
    60,000       6,000       66,000  
                         
Edward M. Straw
    60,000       6,000       66,000  
                         
Timothy T. Hall
    -       -       -  

(1)  
All Other Compensation includes payment of a $2,000 payment per each board meeting attended and payment for other non-board advisory services provided.

 
100
 


Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Ply Gem Holdings is the sole holder of all 100 issued and outstanding shares of Ply Gem Industries’ common stock. Ply Gem Investment Holdings is the sole holder of all 100 issued and outstanding shares of common stock of Ply Gem Holdings.  Ply Gem Prime Holdings, Inc. is the sole holder of all 100 issued and outstanding shares of common stock of Ply Gem Investment Holdings.

The following table sets forth the number and percentage of the outstanding shares of common stock of Ply Gem Prime Holdings Inc. beneficially owned as of March 30, 2009 by:

 
•
each named executive officer;

 
•
each of our directors;

 
•
each person known to us to be the beneficial owner of more than 5% of the common stock of Ply Gem Prime Holdings; and

 
•
all of our executive officers and directors as a group.

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

   
Shares Beneficially
 
   
Owned (1)
 
   
Common
       
Name of Beneficial Owner
 
Shares (2)
   
%
 
             
Caxton-Iseman (Ply Gem), L.P. (3)
    617,426       16.5 %
Caxton-Iseman (Ply Gem) II, L.P. (3)
    2,482,019       66.3 %
Frederick J. Iseman (3) (4)
    3,099,445       82.8 %
Robert A. Ferris (3)
    -       *  
Steven M. Lefkowitz (3)
    -       *  
Gary E. Robinette (5)
    125,660       3.4 %
Shawn K. Poe
    38,417       1.0 %
John Wayne
    45,304       1.2 %
Lynn Morstad
    54,409       1.5 %
Keith Pigues
    3,750       *  
John D. Roach (6)
    3,577       *  
Michael Haley
    10,939       *  
Edward M. Straw
    -       *  
Timothy Hall (3)
    -       *  
All Directors and Executive Officers as a Group
    3,513,616       93.9 %
 
* Less than 1%.

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

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

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

 
(4)
By virtue of his indirect control of Caxton-Iseman (Ply Gem), L.P. and Caxton-Iseman (Ply Gem) II, L.P., Mr. Iseman is deemed to beneficially own (i) the 3,099,445 shares of common stock of Ply Gem Prime Holdings held by those entities and (ii) the 684,579 shares of senior preferred stock of Ply Gem Investment Holdings held by those entities which is 91.8% of the outstanding shares of senior preferred stock of Ply Gem Investment Holdings.

 
101
 
 
 
(5)
Mr. Robinette purchased 125,660 shares of common stock in 2006.

(6)    Address is c/o Stonegate International, 100 Crescent Court, Dallas, Texas 75201.


The table in Item 5 setting forth the securities authorized for issuance under equity compensation plans is hereby incorporated by reference.





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

 
Upon completion of the Ply Gem Acquisition, Ply Gem Industries 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”.

Under the Debt Financing Advisory Agreement, Ply Gem Industries paid the Caxton-Iseman Party a debt financing arrangement and advisory fee, equal to 2.375% of the aggregate amount of the debt financing incurred in connection with the Ply Gem Acquisition ($11.4 million).

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

In connection with the MW Acquisition, pursuant to the General Advisory Agreement, in November 2004 the Company paid the Caxton-Iseman Party a transaction fee equal to 2% of the purchase price of the equity of MWM Holdings, Inc. ($6.4 million).  In connection with the Alenco Acquisition, in March 2006 the Company paid the Caxton-Iseman Party a transaction fee equal to 2% of the purchase price of the equity of AWC ($2.4 million).   In connection with the AHE Acquisition, in October 2006 the Company paid the Caxton-Iseman Party a transaction fee equal to 2% of the purchase price of AHE ($6.1 million). In connection with the Pacific Windows Acquisition, in October 2007 the Company paid the Caxton-Iseman Party a transaction fee equal to 2% of the purchase price of Pacific Windows ($0.7 million).  In connection with the USV Acquisition, in October 2008 the Company paid the Caxton-Iseman Party a transaction fee equal to 2% of the purchase price of USV ($0.1 million).
 
Under the General Advisory Agreement the Company paid a management fee of approximately $1.7 million for the year ended December 31, 2008, approximately $3.5 million for the year ended December 31, 2007, and approximately $2.5 million for the year ended December 31, 2006.
 

 
102
 

The initial term of the General Advisory Agreement is 10 years, and is automatically renewable for consecutive one-year extensions, unless Ply Gem Industries or the Caxton-Iseman Party provide notice of termination.  In addition, the General Advisory Agreement may be terminated by the Caxton-Iseman Party at any time, upon the occurrence of specified change of control transactions or upon an initial public offering of our shares or shares of any of our parent companies.  If the General Advisory Agreement is terminated for any reason prior to the end of the initial term, Ply Gem Industries will pay to the Caxton-Iseman Party an amount equal to the present value of the annual advisory fees that would have been payable through the end of the initial term, based on our cost of funds to borrow amounts under our senior credit facilities.
 
On May 23, 2008, in connection with an amendment to our prior credit facilities and as a condition to such amendment, affiliates of CI Capital Partners LLC made (i) an $18 million cash investment in Ply Gem Prime Holdings and received 14,518 shares of Ply Gem Prime Holdings’ common stock and 210,482 shares of Ply Gem Prime Holdings’ Class A common stock and (ii) a $12 million cash investment in Ply Gem Investment Holdings, and received 12,000 shares of senior preferred stock. Ply Gem Prime Holdings and Ply Gem Investment Holdings then made an aggregate $30 million capital contribution to Ply Gem Holdings, which in turn contributed such amount to the capital of Ply Gem Industries.

As a result of the Ply Gem Acquisition, Ply Gem Investment Holdings is the common parent of an affiliated group of corporations that will include Ply Gem Holdings, Ply Gem and their subsidiaries. Ply Gem Investment Holdings will elect to file consolidated federal income tax returns on behalf of the group. Accordingly, Ply Gem Investment Holdings, Ply Gem and Ply Gem Holdings have entered into a Tax Sharing Agreement, under which Ply Gem and Ply Gem Holdings will make payments to Ply Gem Investment Holdings. These payments will not be in excess of the tax liabilities of Ply Gem, Ply Gem Holdings, and their respective subsidiaries, if these tax liabilities had been computed on a stand-alone basis.

Before entering into any related party transaction, it is the Company’s policy to submit the proposed transaction to the Board for approval.
 
As of December 31, 2008, none of the Company’s current non-employee directors qualified as independent directors as defined in Section 303A of the NYSE’s Listed Company Manual.
 

 

 

 
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate fees billed to us by the independent registered public accounting firm, KPMG LLP, for services rendered during fiscal years 2008 and 2007. 
 
 ( in thousands ):
   
2008
   
2007
 
Audit Fees (1)
  $ 1,363     $ 1,034  
Audit-Related Fees (2)
    -       103  
Tax Fees (3)
    -       25  
    Total Fees
  $ 1,363     $ 1,162  
 
(1)  Consists primarily of fees paid for audit and registration statements.
(2)  Consists primarily of fees paid for due diligence, and accounting consultation.
(3)  Consists primarily of fees paid for tax compliance and consultation.

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

 
103
 
 
PART IV

Item 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)  The following documents are filed as part of this report:

1.  Consolidated Financial Statements

The consolidated financial statements and related notes, together with the report of KPMG LLP, appear in Part II, Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

2.  Schedule II Valuation and Qualifying Accounts – page 109
 
All other schedules have been omitted because they are not applicable, are insignificant or the required information is shown in the consolidated statements or notes thereto.
 
3.  
Exhibits Filed  – See Exhibit Index
 
104
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PLY GEM HOLDINGS, INC.
(Registrant)

Date:  March 30, 2009
 
 

 
By:
 
/s/ Gary E. Robinette       
 
 
Gary E. Robinette       
   
President and Chief Executive Officer

 
 
 
 
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
Title
Date
     
/s/ Gary E. Robinette 
President, Chief Executive Officer and Director
March 30, 2009
Gary E. Robinette
(Principal Executive Officer)
 
     
/s/ Shawn K. Poe 
Vice President, Chief Financial Officer, Treasurer and Secretary
March 30, 2009
Shawn K. Poe
(Principal Financial and Accounting Officer)
 
     
/s/ Frederick J. Iseman 
Chairman of the Board and Director
March 30, 2009
Frederick J. Iseman
   
     
/s/ Robert A. Ferris 
Director
March 30, 2009
Robert A. Ferris
   
     
/s/ Steven M. Lefkowitz 
Director
March 30, 2009
Steven M. Lefkowitz
   
     
/s/ John D. Roach 
Director
March 30, 2009
John D. Roach
   
     
/s/ Michael P. Haley 
Director
March 30, 2009
Michael P. Haley
   
     
/s/ Edward M. Straw 
Director
March 30, 2009
Edward M. Straw
   
     
/s/ Timothy T. Hall 
Director
March 30, 2009
Timothy T. Hall
   

 
105
EXHIBIT INDEX

Exhibit Number
Description
2.1
Stock Purchase Agreement, dated as of December 19, 2003, among Ply Gem Investment Holdings, Inc., (f/k/a CI Investment Holdings, Inc.), Nortek, Inc. and WDS LLC (incorporated by reference from Exhibit 2.1 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
2.2
Stock Purchase Agreement, dated as of July 23, 2004, among Ply Gem Industries, Inc., MWM Holding, Inc. and the stockholders listed on Schedule 1 thereto (incorporated by reference from Exhibit 2.2 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
2.3
Securities Purchase Agreement, dated as of February 6, 2006, among Ply Gem Industries, Inc., and all of the direct and indirect stockholders, warrant holders and stock option holders of AWC Holding Company and FNL Management Corp., an Ohio corporation, as their representative (incorporated by reference from Exhibit 2.1 on Form 8-K dated March 2, 2006 (File No. 333-114041-07)).
 
2.4
Stock Purchase Agreement, dated as of September 22, 2006, among Ply Gem Industries, Inc., Alcoa Securities Corporations and Alcoa Inc. (incorporated by reference from Exhibit 2.1 to the Company’s Form 8-K, dated November 6, 2006 (File No. 333-114041-07)).
 
2.5
First Amendment, dated as of October 31, 2006, to the Stock Purchase Agreement, dated as of September 22, 2006, among Ply Gem Industries, Inc., Alcoa Securities Corporations and Alcoa Inc. (incorporated by reference from Exhibit 2.2 to the Company’s Form 8-K, dated November 6, 2006 (File No. 333-114041-07)).
 
3.1
Certificate of Incorporation of Ply Gem Holdings, Inc. (incorporated by reference from Exhibit 3.3 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
3.2
Amended Bylaws of Ply Gem Holdings, Inc. (incorporated by reference from Exhibit 3.4 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
4.1
Indenture, dated as of February 12, 2004, among Ply Gem Industries, Inc., the Guarantors thereto and U.S. Bank National Association, as Trustee (incorporated by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
4.2
First Supplemental Indenture, dated as of August 27, 2004, among Ply Gem Industries, MWM Holding, Inc., MW Manufacturers Holding Corp., MW Manufacturers Inc., Lineal Technologies, Inc., Patriot Manufacturing, Inc. and U.S. Bank National Association, as trustee (incorporated by reference from Exhibit 4.4 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
4.3
Second Supplemental Indenture, dated as of February 24, 2006, among Ply Gem Industries, Inc., the guarantors party thereto and U.S. Bank National Association, as trustee (incorporated by reference from Exhibit 4.1 to the Company’s Form 8-K, dated March 2, 2006 (File No. 333-114041-07)).
 
4.4
Third Supplemental Indenture, dated as of October 31, 2006, among Ply Gem Industries, Inc., the guarantors party thereto and U.S. Bank National Association, as trustee (incorporated by reference from Exhibit 4.1 to the Company’s Form 8-K, dated November 6, 2006 (File No. 333-114041-07)).
 
4.5
Fourth Supplemental Indenture, dated as of May 29, 2008, among Ply Gem Industries, Inc., Ply Gem Pacific Windows Corporation and U.S. Bank National Association, as trustee (incorporated by reference from Exhibit 4.12 to the Company’s Form 10-Q, dated August 11, 2008 (File No. 333-114041-07)).
 
4.6
Fifth Supplemental Indenture, dated as of March 24, 2008, among Ply Gem Industries, Inc., the other guarantors party thereto and U.S. Bank National Association, as trustee.
 
4.7
Credit Agreement, dated June 9, 2008, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., CWD Windows and Doors, Inc., the other borrowers named therein, Credit Suisse, as Administrative Agent, U.S. Swing Line Lender and U.S. L/C Issuer, General Electric Capital Corporation, as Collateral Agent, Credit Suisse, Toronto Branch, as Canadian Swing Line Lender and Canadian L/C Issuer, the other lenders party thereto, Credit Suisse Securities (USA) LLC, as Sole Lead Arranger and Sole Bookrunner, and General Electric Capital Corporation, as Syndication Agent, and UBS Loan Finance LLC, as Documentation Agent (incorporated by reference from Exhibit 4.3 to the Company’s Form 10-Q, dated August 11, 2008 (File No. 333-114041-07)).
 
 
106
 
4.8
Indenture, dated as of June 9, 2008, among Ply Gem Industries, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee and Noteholder Collateral Agent (incorporated by reference from Exhibit 4.1 to the Company’s Form 10-Q, dated August 11, 2008 (File No. 333-114041-07)).
 
4.9
Lien Subordination and Intercreditor Agreement, dated as of June 9, 2008, among General Electric Capital Corporation, as Collateral Agent, U.S. Bank National Association, as Trustee and Noteholder Collateral Agent, Ply Gem Industries, Inc., Ply Gem Holdings, Inc. and the subsidiaries of Ply Gem Industries, Inc. listed on Schedule I thereto (incorporated by reference from Exhibit 4.4 to the Company’s Form 10-Q, dated August 11, 2008 (File No. 333-114041-07)).
 
4.10
Collateral Agreement, dated June 9, 2008, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., the Guarantors named therein and U.S. Bank National Association, as Noteholder Collateral Agent (incorporated by reference from Exhibit 4.5 to the Company’s Form 10-Q, dated August 11, 2008 (File No. 333-114041-07)).
 
4.11
Intellectual Property Collateral Agreement, dated June 9, 2008, by Ply Gem Industries, Inc., Ply Gem Holdings, Inc. and the subsidiaries of Ply Gem Industries, Inc. listed on the Annex thereto in favor of U.S. Bank National Association, as Noteholder Collateral Agent (incorporated by reference from Exhibit 4.6 to the Company’s Form 10-Q, dated August 11, 2008 (File No. 333-114041-07)).
 
4.12
U.S. Security Agreement, dated June 9, 2008, among Ply Gem Industries, Inc., the domestic Guarantors party thereto, General Electric Capital Corporation, as Collateral Agent, and Credit Suisse Securities (USA) LLC, as Administrative Agent (incorporated by reference from Exhibit 4.7 to the Company’s Form 10-Q, dated August 11, 2008 (File No. 333-114041-07)).
 
4.13
U.S. Guaranty, dated June 9, 2008, among the domestic Guarantors party thereto and General Electric Capital Corporation, as Collateral Agent (incorporated by reference from Exhibit 4.8 to the Company’s Form 10-Q, dated August 11, 2008 (File No. 333-114041-07)).
 
4.14
Intellectual Property Security Agreement, dated June 9, 2008, among Ply Gem Industries, Inc., certain domestic Guarantors party thereto and General Electric Capital Corporation, as Collateral Agent (incorporated by reference from Exhibit 4.9 to the Company’s Form 10-Q, dated August 11, 2008 (File No. 333-114041-07)).
 
4.15
Canadian Security Agreement, dated June 9, 2008, by CWD Windows and Doors, Inc. in favor of General Electric Capital Corporation, as Collateral Agent (incorporated by reference from Exhibit 4.10 to the Company’s Form 10-Q, dated August 11, 2008 (File No. 333-114041-07)).
 
4.16
Intellectual Property Security Agreement, dated June 9, 2008, by CWD Windows and Doors, Inc. in favor of General Electric Capital Corporation, as Collateral Agent (incorporated by reference from Exhibit 4.11 to the Company’s Form 10-Q, dated August 11, 2008 (File No. 333-114041-07)).
 
10.1*
Amended and Restated Ply Gem Prime Holdings Phantom Stock Plan, dated as of February 24, 2006. (incorporated by reference from Exhibit 10.3 to the Company’s Form 10-K, dated March 27, 2006 (File No. 333-114041-07)).
 
10.2*
Amendment to Ply Gem Prime Holdings Phantom Stock Plan, dated as of September 25, 2006. (incorporated by reference from Exhibit 10.3 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
 
10.3*
Phantom Incentive Unit Award Agreement Amendment letter to Lynn Morstad, dated as of September 25, 2006. (incorporated by reference from Exhibit 10.5 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
 
10.4*
Phantom Incentive Unit Award Agreement Amendment letter to Michael Haley, dated as of September 25, 2006. (incorporated by reference from Exhibit 10.6 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
 
10.5*
Phantom Incentive Unit Award Agreement Amendment letter to Lee Meyer, dated as of September 25, 2006. (incorporated by reference from Exhibit 10.8 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
 
10.6*
Phantom Incentive Unit Award Agreement Amendment letter to Mark Montgomery, dated as of September 25, 2006. (incorporated by reference from Exhibit 10.9 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
 
10.7*
Ply Gem Prime Holdings 2004 Stock Option Plan, dated as of February 24, 2006. (incorporated by reference from Exhibit 10.4 to the Company’s Form 10-K, dated March 27, 2006 (File No. 333-114041-07)).
 
 
107
 
10.8*
Form of Incentive Stock Option Agreement for Ply Gem Prime Holdings, Inc. 2004 Stock Option Plan. (incorporated by reference from Exhibit 10.5 to the Company’s Form 10-K, dated March 27, 2006 (File No. 333-114041-07)).
 
10.9
Debt Financing Advisory Agreement dated as of February 12, 2004, between Ply Gem Industries, Inc. and CxCIC LLC (incorporated by reference from Exhibit 10.13 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
10.10
General Advisory Agreement dated as of February 12, 2004, between Ply Gem Industries, Inc. and CxCIC LLC (incorporated by reference from Exhibit 10.14 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
10.11
Tax Sharing Agreement dated as of February 12, 2004, between Ply Gem Investment Holdings, Inc., Ply Gem Holdings Inc. and Ply Gem Industries, Inc. (incorporated by reference from Exhibit 10.15 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
10.12
Stock Purchase Agreement, dated as of November 22, 2002, between Alcoa Building Products, Inc., Ply Gem Industries, Inc. and Nortek, Inc. (incorporated by reference from Exhibit 10.18 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
 
10.13*
Amended and Restated Retention Agreement with John Wayne, dated as of December 31, 2008.
 
10.14*
Amended and Restated Retention Agreement with Lynn Morstad, dated as of December 31, 2008.
 
10.15*
Amended and Restated Retention Agreement with Keith Pigues, dated as of December 31, 2008.
 
10.16*
Employment Agreement with Gary Robinette, dated as of August 14, 2006. (incorporated by reference from Exhibit 10.2 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
 
10.17*
Retention Bonus Award letter to Gary Robinette, dated as of November 7, 2008 (incorporated by reference from Exhibit 10.1 to the Company’s Form 10-Q, dated November 10, 2008 (File No. 333-114041-07).
 
10.18*
Amended and Restated Retention Agreement with Shawn Poe, dated as of November 7, 2008 (incorporated by reference from Exhibit 10.1 to the Company’s Form 10-Q, dated November 10, 2008 (File No. 333-114041-07)).
 
10.19*
Letter to Shawn Poe, dated as of February 11, 2009, regarding Renewal of Amended and Restated Retention Agreement.
 
18.1
Preferability letter from KPMG LLP.
 
21.1
List of Subsidiaries (incorporated by reference from Exhibit 21.1 to the Company’s Registration Statement on Form S-4 (File No. 333-153262)).
 
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*  Management Agreement
 
108

 
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
PLY GEM HOLDINGS, INC. AND SUBSIDIARIES
December 31, 2008
(In Thousands)
 
                                           
   
Balance at
Beginning
of Year
   
Charged to
Costs and
Expenses
   
Charged to
Other
Accounts
   
Addition
Due to Pacific Windows Acquisition
   
Addition
Due to Alenco and AHE Acquisitions
   
Uncollectible accounts
written off, net of
recoveries
   
Balance at
End of
Year
 
Year ended December 31, 2008
                                         
   Allowance for doubtful accounts and sales allowances…………
  $ 7,320     $ 3,091     $  965     $ -     $  -     $ (4,971 )   $ 6,405  
                                                         
Year ended December 31, 2007
                                                       
   Allowance for doubtful accounts and sales allowances…………
  $ 6,802     $ 1,864     $ (1,351 )   $ 1,541     $  -     $ (1,536 )   $ 7,320  
                                                         
Year ended December 31, 2006
                                                       
   Allowance for doubtful accounts and sales allowances…………
  $ 8,320     $ 1,016     $ ( 7 )   $ -     $  1,179     $ (3,706 )   $ 6,802  


See accompanying report of independent registered public accounting firm.
 
109
 

 
Exhibit 4.6   
 
Execution Version   
 

FIFTH SUPPLEMENTAL INDENTURE

FIFTH SUPPLEMENTAL INDENTURE (the “Fifth Supplemental Indenture”), dated as of March 24, 2009, among Ply Gem Industries, Inc. (the “Company”), the guarantors party hereto (the “Guarantors”) and U.S. Bank National Association, as trustee (the “Trustee”).
 
WHEREAS, the Company, the Guarantors and the Trustee are parties to the Indenture dated as of February 12, 2004, as supplemented by the First Supplemental Indenture, dated as of August 27, 2004, as further supplemented by the Second Supplemental Indenture, dated as of February 24, 2006, as further supplemented by the Third Supplemental Indenture, dated as of October 31, 2006, and as further supplemented by the Fourth Supplemental Indenture, dated as of May 29, 2008 (as supplemented to date, the “Indenture”), to provide for the issuance of the Company’s 9% Senior Subordinated Notes due 2012;
 
WHEREAS, pursuant to Section 9.02 of the Indenture, the Company, the Guarantors and the Trustee may, with the written consent of the Holders of at least a majority in aggregate principal amount of the Notes then outstanding, make certain amendments to the Indenture without notice to any Holder;
 
WHEREAS, the board of directors of the Company fixed March 20, 2009, as the record date (the “Record Date”) for the purpose of determining the Holders entitled to consent to the amendments to the Indenture and the Notes set forth in this Fifth Supplemental Indenture (the “Amendments”);
 
WHEREAS, Holders of at least a majority in aggregate principal amount of the Notes outstanding as of the Record Date have given and not withdrawn their consent to the Amendments; and
 
WHEREAS, the execution of this Fifth Supplemental Indenture by the parties hereto is in all respects authorized by the provisions of the Indenture, and the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel with respect to such authorization, and all things necessary to make this Fifth Supplemental Indenture a valid agreement of the Company, the Guarantors and the Trustee in accordance with its terms have been done.
 
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company, the Guarantors and the Trustee hereby agree for the equal and ratable benefit of all Holders of the Notes as follows:
 
ARTICLE I  
 
DEFINITIONS
 
1.1   Definitions .  For purposes of this Fifth Supplemental Indenture, the terms defined in the recitals shall have the meanings therein specified; any terms defined in the Indenture and not defined herein shall have the same meanings herein as therein defined; and references to Articles or Sections shall, unless the context indicates otherwise, be references to Articles or Sections of the Indenture.
 
1.2   Effect .  This Fifth Supplemental Indenture shall become effective upon its execution by the parties hereto.  Notwithstanding the foregoing, the Amendments set forth in Article II below shall not become operative until the consummation of the acquisition of an aggregate of $184,632,000 principal amount of the Notes by Caxton-Iseman (Ply Gem) III, L.P. and/or Caxton-Iseman (Ply Gem) IV, L.P. pursuant to those certain Note Purchase Agreements in effect on the date hereof (collectively, the “Note Purchase Agreements”).  If the transactions contemplated by the Note Purchase Agreements are not consummated and $184,632,000 principal amount of the Notes subject thereto are not purchased pursuant to the Note Purchase Agreements, then the Amendments set forth in Article II below shall have no effect and the Indenture and the Notes shall be deemed to be so amended so that they read the same as they did immediately prior to the date hereof.
 
ARTICLE II  
 
AMENDMENTS
 
2.1   Amendments .  The Indenture is hereby amended as follows:
 
(a)   The text of each of Sections 4.03, 4.04, 4.05, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.19 and 4.20 is hereby deleted in its entirety and these Sections shall be of no further force and effect and the words “Intentionally Omitted” shall be inserted, in each case, in place of the deleted text.
 
(b)   Section 4.18 is hereby amended to read as follows:
 
“The Issuer shall comply with Trust Indenture Act § 314(a).”
 
(c)   Section 5.01(a) is hereby amended and restated as follows:
 
“(a)  The Issuer will not, directly or indirectly, in a single transaction or a series of related transactions, (a) consolidate or merge with or into another Person (other than a merger with an Affiliate solely for the purpose of and with the effect of changing the Issuer’s jurisdiction of incorporation to another State of the United States or forming a holding company for the Issuer), or sell, lease, transfer, convey or otherwise dispose of or assign all or substantially all of the assets of the Issuer or the Issuer and the Restricted Subsidiaries (taken as a whole) or (b) adopt a Plan of Liquidation unless, in either case:
 
(1) either:
 
(a) the Issuer will be the surviving or continuing Person; or
 
(b) the Person formed by or surviving such consolidation or merger or to which such sale, lease, conveyance or other disposition shall be made (or, in the case of a Plan of Liquidation, any Person to which assets are transferred) expressly assumes, by supplemental indenture in form and substance reasonably satisfactory to the Trustee, all of the obligations of the Issuer under the Notes and this Indenture; and
 
(2) immediately prior to and immediately after giving effect to such transaction, no Default shall have occurred and be continuing.”
 
(d)   Section 5.01(b) is hereby amended and restated as follows:
 
“(b) Parent will not, directly or indirectly, in a single transaction or a series of related transactions, (a) consolidate or merge with or into another Person, or sell, lease, transfer, convey or otherwise dispose of or assign all or substantially all of the assets of Parent and its Subsidiaries (taken as a whole) or (b) adopt a Plan of Liquidation unless, in either case:
 
2
(1) either:
 
(a) Parent will be the surviving or continuing Person; or
 
(b) the Person formed by or surviving such consolidation or merger or to which such sale, lease, conveyance or other disposition shall be made (or, in the case of a Plan of Liquidation, any Person to which assets are transferred) (collectively, the “ Parent Successor ”) (unless the Parent Successor is the Issuer) expressly assumes, by supplemental indenture in form and substance reasonably satisfactory to the Trustee, all of the obligations of Parent under the Notes and this Indenture; and
 
(2) immediately after giving effect to such transaction, no Default shall have occurred and be continuing.”
 
(e)   Section 5.01(c) is hereby amended by deleting the phrase “, this Indenture and the Registration Rights Agreement, and, in the case of a consolidation or merger with Parent, is a corporation, limited liability company or limited partnership organized and existing under the laws of any State of the United States of America or the District of Columbia” in clause (1)(b) and replacing the phrase with “and this Indenture.”
 
(f)   Section 6.01 is hereby amended as follows:
 
(i)   by deleting the phrase “or in respect of its obligations to make a Change of Control Offer as described under Section 4.09 (whether or not such compliance is prohibited by the subordination provisions of this Indenture)” from clause (3); and
 
(ii)   by deleting the text of each of clauses (4), (5) and (6) in its entirety and by inserting “Intentionally Omitted”, in each case, in place of the deleted text.
 
(g)   Section 8.01 is hereby amended by deleting the text “, 4.03 (as to the legal existence of the Issuer only)” from the third paragraph.
 
(h)   Section 8.02(c) is hereby amended by deleting the phrase “Sections 4.03 (other than with respect to the legal existence of the Issuer), 4.04, 4.05 and 4.09 through 4.20, clause (3) of Section 5.01(a)” in the first sentence and replacing such phrase with “Section 4.18” and by deleting the phrase “, (5), (6)” in the last sentence.
 
(i)   Section 8.03 is hereby amended and restated as follows:
 
“The following shall be the conditions to the application of either Section 8.02(b) or 8.02(c) hereof to the outstanding Notes:
 
(1) the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders, U.S. Legal Tender, U.S. Government Obligations or a combination thereof, in such amounts as will be sufficient (without reinvestment) to pay the principal of and interest on the Notes on the stated date for payment or on the Redemption Date of the principal or installment of principal of or interest on the Notes,
 
(2)  Intentionally Omitted,
 
(3)  Intentionally Omitted,
 
(4)  Intentionally Omitted,
 
(5)  Intentionally Omitted,
 
(6)  the Issuer shall have delivered to the Trustee an Officers’ Certificate stating that the deposit was not made by it with the intent of preferring the Holders over any other of its creditors or with the intent of defeating, hindering, delaying or defrauding any other of its creditors or others, and
 
(7)  the Issuer shall have delivered to the Trustee an Officers’ Certificate stating that the conditions provided for in clauses (1) and (6) of this Section 8.03 have been complied with.”
 
3
(j)   The text of Section 9 of the Notes is hereby deleted in its entirety and replaced with the words “Intentionally Omitted.”
 
(k)   The text of Section 14 of the Notes is hereby deleted in its entirety and replaced with the words “Intentionally Omitted.”
 
(l)   Any definitions used exclusively in the provisions of the Indenture or Notes that are deleted pursuant to this Article II, and any definitions used exclusively within such definitions, are hereby deleted in their entirety from the Indenture and the Notes, and all references in the Indenture and the Notes to paragraphs, Sections, Articles or other terms or provisions of the Indenture referred to in this Article II above or that have been otherwise deleted pursuant to this Fifth Supplemental Indenture are hereby deleted in their entirety.
 
ARTICLE III  
 
MISCELLANEOUS
 
3.1   Effect of the Supplemental Indenture .  This Fifth Supplemental Indenture supplements the Indenture and shall be a part and subject to all the terms thereof.  Except as supplemented hereby, the Indenture and the Notes issued thereunder shall continue in full force and effect.
 
3.2   Counterparts .  This Fifth Supplemental Indenture may be executed in counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument.
 
3.3   GOVERNING LAW .  THIS FIFTH SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
 
3.4   Notice of Supplemental Indenture .  The Company shall mail notice of this Fifth Supplemental Indenture to the Holders as required by Section 9.02 of the Indenture.
 
3.5   Conflict with Trust Indenture Act .  If any provision of this Fifth Supplemental Indenture limits, qualifies or conflicts with any provision of the Trust Indenture Act that may not be so limited, qualified or conflicted with, such provision of the Trust Indenture Act shall control.  If any provision of this Fifth Supplemental Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the provision of the Trust Indenture Act shall be deemed to apply to the Indenture as so modified or to be excluded by this Fifth Supplemental Indenture, as the case may be.
 
3.6   Separability Clause .  In case any provision of this Fifth Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
 
3.7   Effect of Headings .  The Article and Section headings herein are for convenience only and shall not affect the construction hereof.
 
3.8   Benefits of Supplemental Indenture, etc .  Nothing in this Fifth Supplemental Indenture, the Indenture or the Notes, express or implied, shall give to any person, other than the parties hereto and thereto and their successors hereunder and thereunder and the Holders of the Notes, any benefit of any legal or equitable right, remedy or claim under the Indenture, this Fifth Supplemental Indenture or the Notes.
 
3.9   Successors and Assigns .  All agreements by the Company in this Fifth Supplemental Indenture and the Notes shall bind their respective successors.
 
3.10   Trustee .  The Trustee makes no representations as to the validity or sufficiency of this Fifth Supplemental Indenture.  The recitals and statements herein are deemed to be those of the Company and not of the Trustee.
 

 
[Remainder of page intentionally left blank]
 

 
4
 

IN WITNESS WHEREOF, the parties hereto have caused this Fifth Supplemental Indenture to be duly executed on this 24th day of March, 2009.
 
PLY GEM HOLDINGS , INC.
 
 
By:
/s/ Shawn K. Poe                   
 
Name:  Shawn K. Poe
 
Title: Vice President
 
 
PLY GEM HOLDINGS, INC., as Guarantor
 
 
 
By:
/s/ Shawn K. Poe                  
 
Name: Shawn K. Poe
 
Title: Vice President
 
GREAT LAKES WINDOW, INC.
KROY BUILDING PRODUCTS, INC.
NAPCO, INC.
VARIFORM, INC.
MWM HOLDING, INC.
MW MANUFACTURERS INC.
AWC HOLDING COMPANY
ALENCO HOLDING CORPORATION
AWC ARIZONA, INC.
ALENCO INTERESTS, L.L.C.
ALENCO EXTRUSION MANAGEMENT, L.L.C.
ALENCO BUILDING PRODUCTS MANAGEMENT, L.L.C.
ALENCO TRANS, INC.
GLAZING INDUSTRIES MANAGEMENT, L.L.C.
NEW ALENCO EXTRUSION, LTD.
NEW ALENCO WINDOW, LTD.
NEW GLAZING INDUSTRIES, LTD.
ALENCO EXTRUSION GA, L.L.C.
ALUMINUM SCRAP RECYCLE, L.L.C.
ALENCO WINDOW GA, L.L.C.
ALCOA HOME EXTERIORS, INC.
PLY GEM PACIFIC WINDOWS CORPORATION
 
, each as a Guarantor
 
 
By:
/s/ Shawn K. Poe                   
 
Name: Shawn K. Poe
 
Title: Vice President
 

[Signature page to Fifth Supplemental Indenture]

 
 
 


 
 
U.S. BANK NATIONAL ASSOCIATION,
 
as Trustee
 
By:
 
/s/ Richard Prokosch              
 
Name: Richard Prokosch
 
Title: Vice President
 

[Signature page to Fifth Supplemental Indenture]

 
 
 

 
Exhibit 10.13
 
Ply Gem Industries, Inc.
5020 Weston Pkwy, Suite 400
Cary, North Carolina 27513



 
December 31, 2008
 
Mr. John C. Wayne
1235 West 61 st Street
Kansas City, MO  64113

 
Re:           Amended and Restated Retention Agreement
 
Dear Mr. Wayne:
 
Ply Gem Industries, Inc. (“Ply Gem”) considers the continuity of management essential to the best interests of Ply Gem and its stockholders and desires to reinforce and encourage your continued attention and dedication to your duties to Ply Gem and its subsidiaries and affiliates (each, an “Employer”).  To assure your continued focus on your duties to your Employer, the Board of Directors of Ply Gem (the “Board”) has authorized Ply Gem to enter into this letter agreement with you, which is an amended and restated version of the Retention Agreement between you and Ply Gem, dated December 1, 2005 (as amended from time to time prior to the date hereof, the “Original Retention Agreement”).  This letter agreement sets forth the compensation that Ply Gem agrees to pay you if your employment is terminated during the term of this agreement under the circumstances described herein.
 
This letter agreement sets forth the terms and conditions of Ply Gem’s agreement to pay you the compensation under the circumstances described herein, and the parties to this letter agreement acknowledge the receipt and sufficiency of good and valuable consideration in support of this letter agreement, including the covenants and agreements set forth herein.
 
1.   Term
 
This letter agreement is effective as of the date hereof and shall expire on December 31, 2009 (the “Expiration Date”) provided, that, Ply Gem shall have the right to renew this letter agreement for successive one year periods (each, a “Renewal Term”), which right it must exercise prior the Expiration Date, or the last day of any Renewal Term, as applicable.
 
2.   Compensation
 
If, during the term of this agreement, your employment is terminated (A) by your Employer without “Cause” or (B) by you following a “Material Adverse Change” (as such terms are defined below), and subject to (X) your execution of a Release and Restrictive Covenant Agreement substantially in the form attached to this
 

 
 
 

letter agreement as Exhibit A (the “Release and Restrictive Covenant Agreement”) within 30 days following the date of your termination of employment and (Y) your continued compliance with such Release and Restrictive Covenant Agreement for the periods described therein, you will be entitled to receive:
 
(a)   An amount equal to your annual base salary in effect on the date of your termination (which, for the avoidance of doubt shall not include any amounts in respect of any car allowance or payments for any other perquisites or benefits that you may be entitled to).  This salary continuation shall be payable in equal installments over the 12-month period following the date of your termination of employment (the “Payment Period”), in accordance with your Employer’s normal payroll practices;
 
(b)   An amount equal to the pro rata portion, based upon the percentage of such year that shall have elapsed through the date of your termination of employment, of the lesser of (I) your target annual cash bonus with respect to the fiscal year during which your termination of employment occurs (the “Year of Termination”) and (II) the actual annual cash bonus you would have received with respect to the Year of Termination based on actual performance during that year, measured as of the time such performance is measured for purposes of paying annual cash bonuses to other executives of your Employer with respect to such year (the “Pro Rata Bonus”).  You shall be paid a lump sum cash payment equal to the Pro Rata Bonus when annual cash bonuses with respect to the Year of Termination are paid to other executives of your Employer, which shall be not later than March 15 next following the close of the fiscal year to which the bonus relates; provided that it shall not be a breach of this letter agreement if payment is made later in such year to the extent financial results are not available by March 15 so long as payment is made by payroll as soon as practicable following certification of such results;
 
(c)   To the extent not already paid prior to the date of your termination, an amount equal to the actual annual cash bonus you would have received with respect to the year prior to the Year of Termination based on actual performance during that year, measured as of the time such performance is measured for purposes of paying annual cash bonuses to other executives of your Employer with respect to such year (the “Actual Bonus”).  You shall be paid a lump sum cash payment equal to the Actual Bonus as soon as reasonably practicable following the date that the amount of the Actual Bonus is determined, which shall be not later than March 15 next following the close of the fiscal year to which the bonus relates; provided that it shall not be a breach of this letter agreement if payment is made later in such year to the extent financial results are not available by March 15 so long as payment is made by payroll as soon as practicable following certification of such results;
 
(d)   Continuation of medical and dental benefits for you and your spouse and dependents, if any, during the Payment Period, in the
 

 
2
 
 
same plans and on the same basis (including, without limitation, contribution rates) as such benefits are provided from time to time to actively employed executives of your Employer, subject to the terms of such plans as the same may exist from time to time; provided, that, the Employer’s obligation to provide such medical and dental benefits shall cease at the time you become eligible for such benefits from another employer; and
 
(e)   (i) Your base salary through the date of termination; (ii) any declared but unpaid annual cash bonus for any fiscal year preceding the year in which the termination occurs; (iii) reimbursement for any unreimbursed business expenses properly incurred by you in accordance with Employer policy through your date of termination; and (iv) any other amounts, including without limitation, accrued but unused vacation, required to be paid to you under any applicable state statute or regulation.
 
The Employer shall have the authority to delay the provision of any amounts or benefits under this letter agreement to the extent it reasonably deems necessary to comply with Section 409A(a)(2)(B)(i) of the Internal Revenue Code of 1986, as amended (the “Code”) (relating to payments made to “specified employees”); in such event any such amount or benefit to which you would otherwise be entitled during the six-month period following your separation from service will be provided or paid on the first business day following the expiration of such six-month period, or, if earlier, the date of death.  For purposes of Section 409A of the Code, the right to a series of installment payments under this letter agreement shall be treated as a right to a series of separate payments except where otherwise specifically provided.
 
Your employment shall not be deemed to be terminated by your Employer without Cause or by you following a Material Adverse Change, and you shall not be entitled to any payments or benefits under this Section 2 solely on account of, the sale or disposition by Ply Gem or any Employer, or any parent of Ply Gem or any Employer, as applicable, of the subsidiary or division for which you are employed if you are offered employment by the purchaser or acquirer of such subsidiary or division and such acquirer or purchaser agrees to assume the terms of this letter agreement.
 
Notwithstanding anything to the contrary in this letter agreement, no further payments or benefits are due under this Section 2, and all other benefits, if any, due you following a termination of employment shall be determined in accordance with the plans, policies and practices of your Employer.  In addition, subject to applicable state law, Ply Gem and any Employer, as applicable, shall have the right to reclaim any amounts already paid to you under this Section 2 if, at any time during the Restricted Period (as such term is defined in the attached Release and Restrictive Covenant Agreement) after your employment is terminated, (i) you breach any of the provisions of Section VI of the Release and Restrictive Covenant Agreement, or (ii) the Board determines, in good faith,  that grounds existed, on or prior to the date of termination of your employment with Employer, including prior to the date of this letter agreement, for your Employer to terminate your employment for Cause; provided, that, in all events you will be entitled to receive amounts in sub-clauses (i), (iii), and (iv) of Section 2(e) above.
 

 
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3. Definitions
 
For purposes of this letter agreement, “Cause” shall mean:  (i) your willful and continued failure to perform substantially your material duties (other than any such failures resulting from, or contributed to by, incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to you by the Board, which notice specifically identifies the manner in which you have not substantially performed your material duties, and you neglect to cure such failure within 30 days; (ii) a willful failure to follow the lawful direction of the Board or of the senior executive officer of Ply Gem to whom you directly report (if applicable); (iii) your material act of dishonesty or breach of trust in connection with the performance of your duties to Ply Gem or your Employer; (iv) your conviction of, or plea of guilty or no contest to, (x) any felony or (y) any misdemeanor having as its predicate element fraud, dishonesty or misappropriation; or (v) a civil judgment in which Employer is awarded damages from you in respect of a claim of loss of funds through fraud or misappropriation by you, which has become final and is not subject to further appeal.
 
For purposes of this letter agreement, a “Material Adverse Change” shall mean any of the following, without your express written consent:
 
(1)  
Assignment to you of any duties that are inconsistent with your position, duties and responsibilities and status with Employer as of the date of this Agreement;
 
(2)  
Your Employer’s reduction of your base salary;
 
(3)  
Without your express written consent, your Employer’s requiring you to be based anywhere other than within 50 miles of your office location immediately prior to such required relocation, except for required travel on your Employer’s business;
 
(4)  
Any action by your Employer that would deprive you of any material employee benefit enjoyed by you, except where such change is applicable to all employees participating in such benefit plan;
 
(5)  
Any breach by Ply Gem or your Employer of any provision of this letter agreement or the Release and Restrictive Covenant Agreement.
 
4.   Release and Restrictive Covenant Agreement
 
All payments and benefits described in Section 2 of this letter agreement are conditional upon and subject to your execution of the Release and Restrictive Covenant Agreement.
 

 
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5. Notices
 
Any notice required by this letter agreement must be in writing and will be deemed to have been duly given (i) if delivered personally or by overnight courier service , sent by facsimile transmission or mailed by United States registered mail, return receipt requested, postage prepaid, and (ii) addressed to the respective addresses or sent via facsimile to the respective facsimile numbers, as the case may be, as set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt; provided, however, that (X) notices sent by personal delivery or overnight courier shall be deemed given when delivered; (Y) notices sent by facsimile transmission shall be deemed given upon the sender’s receipt of confirmation of complete transmission, and (Z) notices sent by United States registered mail shall be deemed given two days after the date of deposit in the United States mail .
 
 
If to you, to the address as shall most currently appear on the records of your Employer
 
 
If to Ply Gem, to:

 
Ply Gem Industries, Inc.
 
5020 Weston Parkway, Suite 400
                                                        Cary, North Carolina 27513
                                                       Fax: (919) 677-3914              
                                                         Attn:  Senior Vice President, Human Resources
 
6.   General
 
Your Employer may withhold from any amounts payable under Section 2 of this letter agreement such federal, state, local or other taxes required to be withheld pursuant to applicable law or regulation.
 
The payments and benefits provided for in Section 2 of this letter agreement shall not be counted as compensation for purposes of determining benefits under other benefit plans, programs, policies and agreements of your Employer, except to the extent expressly provided therein or herein.
 
This letter agreement is not intended to result in any duplication of payments or benefits to you and does not give you any right to any compensation or benefits from Ply Gem or your Employer except as specifically stated in this letter agreement.
 
For you to receive the payments and benefits described in Section 2 of this letter agreement, you will not be required to seek other employment or otherwise mitigate the obligations of your Employer under this letter agreement.  Except as described in Section 2(d) of this letter agreement, there will be no offset against any amounts due under this letter agreement on account of any remuneration attributable to any subsequent employment that you may obtain.
 

 
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This letter agreement is not a contract of employment and does not give you any right of continued employment or limit the right of your Employer to terminate or change the status of your employment at any time or change any employment policies.
 
This letter agreement is governed by the laws of the state of Delaware, without reference to the principles of conflict of laws which would cause the laws of another state to apply.  By signing this letter agreement, you and Ply Gem irrevocably agree, for the exclusive benefit of the other, that any and all suits, actions or proceedings relating to Section VI of the Release and Restrictive Covenant Agreement (collectively, “Proceedings” and, individually, a “Proceeding”) will be maintained in either the courts of the State of Delaware or the federal District Courts sitting in Wilmington, Delaware (collectively, the “Chosen Courts”) and that the Chosen Courts shall have exclusive jurisdiction to hear and determine or settle any such Proceeding and that any such Proceedings shall only be brought in the Chosen Courts.  You and Ply Gem irrevocably waive any objection that you or Ply Gem may have now or hereafter to the laying of the venue of any Proceedings in the Chosen Courts and any claim that any Proceedings have been brought in an inconvenient forum and further irrevocably agree that a judgment in any Proceeding brought in the Chosen Courts shall be conclusive and binding upon you and Ply Gem and may be enforced in the courts of any other jurisdiction.
 
You and Ply Gem agree that this letter agreement involves at least $100,000 and that this letter agreement has been entered into in express reliance on Section 2708 of Title 6 of the Delaware Code.  You and Ply Gem irrevocably and unconditionally agree (i) that, to the extent you or Ply Gem are not otherwise subject to service of process in the State of Delaware, you or Ply Gem will appoint (and maintain an agreement with respect to) an agent in the State of Delaware as your agent for acceptance of legal process and notify Ply Gem or you, as applicable, of the name and address of said agent, (ii) that service of process may also be made on you or Ply Gem by pre-paid certified mail with a validated proof of mailing receipt constituting evidence of valid service sent to you or Ply Gem at the address set forth in this letter agreement, as such address may be changed from time to time pursuant hereto, and (iii) that service made pursuant to clause (i) or (ii) above shall, to the fullest extent permitted by applicable law, have the same legal force and effect as if served upon such party personally within the State of Delaware.
 
Your rights under this letter agreement are not transferable, assignable or subject to lien or attachment.
 
You and Ply Gem acknowledge that you intend that the compensation arrangements set forth in this agreement either are not governed by or are in compliance with Section 409A of the Code; however, owing to the uncertain application of Section 409A of the Code, Ply Gem agrees to use its reasonable best efforts such that no earlier and/or additional taxes to you will arise under Section 409A of the Code as a result of any compensation payable under this letter agreement.
 
This letter agreement contains the entire understanding and agreement between you and Ply Gem in respect of the matters addressed herein, and supersedes any and all prior agreements and understandings, whether written or oral, with respect to such matters including, without limitation, the Original Retention Agreement.  This letter
 

 
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agreement may not be amended except in a writing signed by you and by an authorized officer on behalf of Ply Gem.
 
 
Sincerely,

PLY GEM INDUSTRIES, INC.
 
 
By
 
/s/ Gary E. Robinette    
Name:
 
Gary E. Robinette       
Title:
 
President and Chief Executive Officer
 
 
 
Acknowledged and Agreed:
 
 
 
/s/ John C. Wayne               
John C. Wayne
 

 
7
 
Exhibit A

RELEASE AND RESTRICTIVE COVENANT AGREEMENT
 
This Release and Restrictive Covenant Agreement (the “Agreement”) is entered into by and between John C. Wayne (the “Employee”) and Ply Gem Industries, Inc. (the “Company”), on ______________ ___, 20___.
 
I.   Release of Claims
 
In partial consideration of certain of the payments and benefits described in Section 2 of the letter agreement between you and the Company, dated December 31 2008 (the “Letter”), to which the Employee agrees the Employee is not entitled until and unless he executes this Agreement, the Employee, for and on behalf of himself and his heirs and assigns, subject to the last sentence of this paragraph, hereby waives and releases any common law, statutory or other complaints, claims, charges or causes of action of any kind whatsoever, both known and unknown, in law or in equity, which the Employee ever had, now has or may have against the Company and its shareholders and their respective subsidiaries, successors, assigns, affiliates, directors, officers, partners, members, employees or agents (collectively, the “Releasees”) by reason of facts or omissions which have occurred on or prior to the date that the Employee signs this Agreement, including, without limitation, any complaint, charge or cause of action arising under federal, state or local laws pertaining to employment, including the Age Discrimination in Employment Act of 1967 (“ADEA,” a law which prohibits discrimination on the basis of age), the National Labor Relations Act, the Civil Rights Act of 1991, the Americans With Disabilities Act of 1990, Title VII of the Civil Rights Act of 1964, all as amended; and all other federal, state and local laws and regulations.  By signing this Agreement, the Employee acknowledges that he intends to waive and release any rights known or unknown that he may have against the Releasees under these and any other laws; provided, that the Employee does not waive or release claims with respect to the right to enforce his rights under the Letter (the “Unreleased Claims”).
 
II.   Proceedings
 
The Employee acknowledges that he has not filed any complaint, charge, claim or proceeding, except with respect to an Unreleased Claim, if any, against any of the Releasees before any local, state or federal agency, court or other body (each individually a “Proceeding”).  The Employee represents that he is not aware of any basis on which such a Proceeding could reasonably be instituted.  The Employee (a) acknowledges that he will not initiate or cause to be initiated on his behalf any Proceeding and will not participate in any Proceeding, in each case, except as required by law; and (b) waives any right he may have to benefit in any manner from any relief (whether monetary or otherwise) arising out of any Proceeding, including any Proceeding conducted by the Equal Employment Opportunity Commission (“EEOC”).  Further, the Employee understands that, by executing this Agreement, he will be limiting the availability of certain remedies that he may have against the Company and limiting also his ability to pursue certain claims against the Releasees.  Notwithstanding the above, nothing in Section I of this Agreement shall prevent the Employee from (x) initiating or causing to be initiated on his behalf any complaint, charge, claim or proceeding against
 

 
 
 

the Company before any local, state or federal agency, court or other body challenging the validity of the waiver of his claims under the ADEA contained in Section I of this Agreement (but no other portion of such waiver); or (y) initiating or participating in an investigation or proceeding conducted by the EEOC.
 
III.   Time to Consider
 
The Employee acknowledges that he has been advised that he has 21 days from the date of receipt of this Agreement to consider all the provisions of this Agreement and he does hereby knowingly and voluntarily waive said given 21 day period.  THE EMPLOYEE FURTHER ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT CAREFULLY, HAS BEEN ADVISED BY THE COMPANY TO, AND HAS IN FACT, CONSULTED AN ATTORNEY, AND FULLY UNDERSTANDS THAT BY SIGNING BELOW HE IS GIVING UP CERTAIN RIGHTS WHICH HE MAY HAVE TO SUE OR ASSERT A CLAIM AGAINST ANY OF THE RELEASEES, AS DESCRIBED IN SECTION I OF THIS AGREEMENT AND THE OTHER PROVISIONS HEREOF.  THE EMPLOYEE ACKNOWLEDGES THAT HE HAS NOT BEEN FORCED OR PRESSURED IN ANY MANNER WHATSOEVER TO SIGN THIS AGREEMENT, AND THE EMPLOYEE AGREES TO ALL OF ITS TERMS VOLUNTARILY.
 
IV.   Revocation
 
The Employee hereby acknowledges and understands that the Employee shall have seven days from the date of the Employee’s execution of this Agreement to revoke this Agreement (including, without limitation, any and all claims arising under the ADEA) and that neither the Company nor any other person is obligated to provide any benefits to the Employee pursuant to Section 2 of the Letter until eight days have passed since the Employee’s signing of this Agreement without the Employee having revoked this Agreement, in which event the Company immediately shall arrange and/or pay for any such benefits otherwise attributable to said eight-day period, consistent with the terms of the Letter.  If the Employee revokes this Agreement, the Employee will be deemed not to have accepted the terms of this Agreement, and no action will be required of the Company under any section of this Agreement.
 
V.   No Admission
 
This Agreement does not constitute an admission of liability or wrongdoing of any kind by the Employee or the Company.
 
VI.   Restrictive Covenants
 
A.   Non-Competition/Non-Solicitation
 
The Employee acknowledges and recognizes the highly competitive nature of the businesses of the Company and its subsidiaries and controlled affiliates and accordingly agrees as follows:
 

 
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1. During the period commencing on the date of the Employee’s termination of employment and ending on the last day of the Payment Period (as defined in Section 2(a) of the Letter) (the “Restricted Period”), or such longer period as described in the last sentence of Section VII of this Agreement, the Employee will not, directly or indirectly,   (w) engage in any “Competitive Business” (as defined below) for the Employee’s own account, (x) enter the employ of, or render any services to, any person engaged in any Competitive Business, (y) acquire a financial interest in, or otherwise become actively involved with, any person engaged in any Competitive Business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant, or (z) interfere with business relationships between the Company and customers or suppliers of, or consultants to, the Company.
 
2.   For purposes of this Section VI, a “Competitive Business” means, as of any date, including during the Restricted Period, any person or entity (including any joint venture, partnership, firm, corporation or limited liability company) that engages in or proposes to engage in the following activities in any geographical area in which the business unit for which the Employee works does business:  the manufacture and sale of stone veneer, manufactured stone, cultured stone, vinyl or composite siding, metal accessories, injection molded exterior cladding products, vinyl decking, vinyl or composite railing and any other building product category that the Ply Gem Siding Group may manufacture or sell within the tenure of your employment with Ply Gem.
 
3.   For purposes of this Section VI and of Section VII of this Agreement, the Company shall be construed to include the Company and its subsidiaries and controlled affiliates.
 
4.   Notwithstanding anything to the contrary in this Agreement, the Employee may, directly or indirectly, own, solely as an investment, securities of any person engaged in the business of the Company which are publicly traded on a national or regional stock exchange or on the over-the-counter market if the Employee (A) is not a controlling person of, or a member of a group which controls, such person and (B) does not, directly or indirectly, own one percent (1%) or more of any class of securities of such person.
 
5.   During the Restricted Period, the Employee will not, directly or indirectly, without the Company’s written consent, solicit or encourage to cease to work with the Company any employee or any consultant of the Company or any person who was an employee of or consultant then under contract with the Company within the six-month period preceding such activity.  In addition, during the Restricted Period, the Employee will not, without the Company’s written consent, directly or indirectly hire any person who is or who was, within the six-month period preceding such activity, an employee of the Company.
 
6.   The Employee understands that the provisions of this Section VI.A may limit the Employee’s ability to earn a livelihood in a business similar to the business of the Company, but the Employee nevertheless agrees and hereby acknowledges that (A) such provisions do not impose a greater restraint than is necessary to protect the goodwill
 

 
3
 

or other business interests of the Company, (B) such provisions contain reasonable limitations as to time, territory and scope of activity to be restrained, (C) such provisions are not harmful to the general public and (D) such provisions are not unduly burdensome to the Employee.  In consideration of the foregoing and in light of the Employee’s education, skills and abilities, the Employee agrees that he shall not assert that, and it should not be considered that, any provisions of Section VI.A. or otherwise are void, voidable or unenforceable or should be voided or held unenforceable.
 
7.   It is expressly understood and agreed that, although the Employee and the Company consider the restrictions contained in this Section VI.A to be reasonable, if a judicial determination is made by a court of competent jurisdiction that the time, territory or scope or any other restriction contained in this Section VI.A or elsewhere in this Agreement is an unenforceable restriction against the Employee, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time, territory and scope and to such maximum extent as such court may judicially determine or indicate to be enforceable.  Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.
 
B.   Nondisparagement
 
The Employee agrees (whether during or after the Employee’s employment with the Company) not to issue, circulate, publish or utter any false or disparaging statements, remarks or rumors about the Company or the shareholders, officers, directors or managers of the Company other than to the extent reasonably necessary in order to (i) assert a bona fide claim against the Company arising out of the Employee’s employment with the Company, or (ii) respond in a truthful and appropriate manner to any legal process or give truthful and appropriate testimony in a legal or regulatory proceeding.  
 
C.   Company Policies
 
The Employee agrees to abide by the terms of any employment policies or codes of conduct of the Company that apply to the Employee after termination of employment.
 
D.   Confidentiality/Company Property
 
The Employee shall not, without the prior written consent of the Company, use, divulge, disclose or make accessible to any other person, firm, partnership, corporation or other entity any “Confidential Information” (as defined below), except while employed by the Company, in furtherance of the business of and for the benefit of the Company, or any “Personal Information” (as defined below); provided that the Employee may disclose such information when required to do so by a court of competent jurisdiction, by any governmental agency having supervisory authority over the business of the Company and/or its affiliates, as the case may be, or by any
 

 
4
 
 
administrative body or legislative body (including a committee thereof) with jurisdiction to order the Employee to divulge, disclose or make accessible such information; provided, further, that in the event that the Employee is ordered by a court or other government agency to disclose any Confidential Information or Personal Information, the Employee shall (i) promptly notify the Company of such order, (ii) at the written request of the Company, diligently contest such order at the sole expense of the Company as expenses occur, and (iii) at the written request of the Company, seek to obtain, at the sole expense of the Company, such confidential treatment as may be available under applicable laws for any information disclosed under such order.  For purposes of this Section VI.D, (i) “Confidential Information” shall mean non-public information concerning the financial data, strategic business plans, product development (or other proprietary product data), customer lists, marketing plans and other proprietary or confidential information relating to the business of the Company or its affiliates or customers, that, in any case, is not otherwise available to the public (other than by the Employee’s breach of the terms hereof) and (ii) “Personal Information” shall mean any information concerning the personal, social or business activities of the shareholders, officers or directors of the Company.  Upon termination of the Employee’s employment with the Company, the Employee shall return all Company property, including, without limitation, files, records, disks and any media containing Confidential Information or Personal Information.
 
E.   Developments
 
All discoveries, inventions, ideas, technology, formulas, designs, software, programs, algorithms, products, systems, applications, processes, procedures, methods, modifications, improvements and enhancements conceived, developed or otherwise made or created or produced by the Employee, alone or with others, and in any way relating to the business or any proposed business of the Company of which the Employee has been made aware, or the products or services of the Company of which the Employee has been made aware, whether or not subject to patent, copyright or other protection and whether or not reduced to tangible form, at any time during the Employee’s employment with the Company or any subsidiary of the Company (collectively, “Developments”) shall be the sole and exclusive property of the Company.  The Employee agrees to, and hereby does, assign to the Company, without any further consideration, all of the Employee’s right, title and interest throughout the world in and to all Developments.  The Employee agrees that all such Developments that are copyrightable may constitute works made for hire under the copyright laws of the United States and, as such, acknowledges that the Company is the author of such Developments and owns all of the rights comprised in the copyright of such Developments, and the Employee hereby assigns to the Company, without any further consideration, all of the rights comprised in the copyright and other proprietary rights the Employee may have in any such Development to the extent that it might not be considered a work made for hire.  The Employee shall make and maintain adequate and current written records of all Developments and shall disclose all Developments promptly, fully and in writing to the Company promptly after development of the same, and at any time upon request.
 

 
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             F. Cooperation
 
At any time after the date of the Employee’s termination of employment, the Employee agrees to cooperate (i) with the Company in the defense of any legal matter involving any matter that arose during the Employee’s employment with the Company and (ii) with all government authorities on matters pertaining to any investigation, litigation or administrative proceeding pertaining to the Company.  The Company will reimburse the Employee for any earnings lost by the Employee and any reasonable travel and out of pocket expenses incurred by the Employee in providing such cooperation.
 
VII.   Enforcement
 
The Employee acknowledges and agrees that the Company’s remedies at law for a breach or threatened breach of any of the provisions of Sections VI.A,B,D and E of this Agreement would be inadequate, and in recognition of this fact, the Employee agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.  In addition, the Company shall be entitled to immediately cease paying any amounts remaining due or providing any benefits to the Employee pursuant to Section 2 of the Letter and, subject to applicable state law, to reclaim any amounts already paid under Section 2 of the Letter upon a good faith determination by the Board of Directors of the Company that the Employee has violated any provision of Section VI of this Agreement, subject to payment of all such amounts upon a final determination that the Employee had not violated Section VI of this Agreement.  If the Employee breaches any of the covenants contained in Section VI.A, B, D or E of this Agreement, and the Company Group obtains injunctive relief with respect thereto, the period during which the Employee is required to comply with that particular covenant shall be extended by the same period that the Employee was in breach of such covenant prior to the effective date of such injunctive relief.
 
VIII.   General Provisions
 
A.   No Waiver; Severability
 
A failure of the Company or any of the Releasees to insist on strict compliance with any provision of this Agreement shall not be deemed a waiver of such provision or any other provision hereof.  If any provision of this Agreement is determined to be so broad as to be unenforceable, such provision shall be interpreted to be only so broad as is enforceable, and in the event that any provision is determined to be entirely unenforceable, such provision shall be deemed severable, such that all other provisions of this Agreement shall remain valid and binding upon the Employee and the Releasees.
 
B.   Governing Law
 
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
 

 
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IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO AGREEMENTS MADE AND TO BE WHOLLY PERFORMED WITHIN THAT STATE, WITHOUT REGARD TO ITS CONFLICT OF LAWS PROVISIONS OR THE CONFLICT OF LAWS PROVISIONS OF ANY OTHER JURISDICTION WHICH WOULD CAUSE THE APPLICATION OF ANY LAW OTHER THAN THAT OF THE STATE OF DELAWARE.
 
Each party to this Agreement irrevocably agrees for the exclusive benefit of the other that any and all suits, actions or proceedings relating to Section VI of this Agreement (collectively, “Proceedings” and, individually, a “Proceeding”)  shall be maintained in either the courts of the State of Delaware or the federal District Courts sitting in Wilmington, Delaware (collectively, the “Chosen Courts”) and that the Chosen Courts shall have exclusive jurisdiction to hear and determine or settle any such Proceeding and that any such Proceedings shall only be brought in the Chosen Courts.  Each party irrevocably waives any objection that it may have now or hereafter to the laying of the venue of any Proceedings in the Chosen Courts and any claim that any Proceedings have been brought in an inconvenient forum and further irrevocably agrees that a judgment in any Proceeding brought in the Chosen Courts shall be conclusive and binding upon it and may be enforced in the courts of any other jurisdiction.
 
Each of the parties hereto agrees that this Agreement involves at least $100,000 and that this Agreement has been entered into in express reliance on Section 2708 of Title 6 of the Delaware Code.  Each of the parties hereto irrevocably and unconditionally agrees (i) that, to the extent such party is not otherwise subject to service of process in the State of Delaware, it will appoint (and maintain an agreement with respect to) an agent in the State of Delaware as such party’s agent for acceptance of legal process and notify the other parties hereto of the name and address of said agent, (ii) that service of process may also be made on such party by pre-paid certified mail with a validated proof of mailing receipt constituting evidence of valid service sent to such party at the address set forth in this Agreement, as such address may be changed from time to time pursuant hereto, and (iii) that service made pursuant to clause (i) or (ii) above shall, to the fullest extent permitted by applicable law, have the same legal force and effect as if served upon such party personally within the State of Delaware.
 
C.   Counterparts
 
This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
 
D.   Notice
 
For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally, if delivered by overnight courier service , if sent by facsimile transmission or if mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses or sent via facsimile to
 

 
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the respective facsimile numbers, as the case may be, as set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt; provided, however, that (i) notices sent by personal delivery or overnight courier shall be deemed given when delivered, (ii) notices sent by facsimile transmission shall be deemed given upon the sender’s receipt of confirmation of complete transmission, and (iii) notices sent by United States registered mail shall be deemed given two days after the date of deposit in the United States mail .
 
 
If to the Employee, to the address as shall most currently appear on the records of the Company
 
 
If to the Company, to:

 
Ply Gem Industries, Inc.
 
5020 Weston Parkway, Suite 400
 Cary, North Carolina 27513
 Fax: (919) 677-3914
Attn:  Senior Vice President, Human Resources
 

 
IN WITNESS WHEREOF , the parties hereto have duly executed this Agreement as of the day and year first above written.
 

 
EMPLOYEE


______________________________
John C. Wayne


PLY GEM INDUSTRIES, INC.


By:___________________________
Name:  Gary E. Robinette
Title:  President and Chief Executive Officer

 
8
 

 
Exhibit 10.14
 
Ply Gem Industries, Inc.
5020 Weston Pkwy, Suite 400
Cary, North Carolina 27513



 
December 31, 2008
 
Mr. Lynn Morstad
5973 Sugar Loaf Mtn. Road
Roanoke, VA 24018

 
Re:           Amended and Restated Retention Agreement
 
Dear Mr. Morstad:
 
Ply Gem Industries, Inc. (“Ply Gem”) considers the continuity of management essential to the best interests of Ply Gem and its stockholders and desires to reinforce and encourage your continued attention and dedication to your duties to Ply Gem and its subsidiaries and affiliates (each, an “Employer”).  To assure your continued focus on your duties to your Employer, the Board of Directors of Ply Gem (the “Board”) has authorized Ply Gem to enter into this letter agreement with you, which is an amended and restated version of the Retention Agreement between you and Ply Gem, dated February 1, 2006 (as amended from time to time prior to the date hereof, the “Original Retention Agreement”).  This letter agreement sets forth the compensation that Ply Gem agrees to pay you if your employment is terminated during the term of this agreement under the circumstances described herein.
 
This letter agreement sets forth the terms and conditions of Ply Gem’s agreement to pay you the compensation under the circumstances described herein, and the parties to this letter agreement acknowledge the receipt and sufficiency of good and valuable consideration in support of this letter agreement, including the covenants and agreements set forth herein.
 
1.   Term
 
This letter agreement is effective as of the date hereof and shall expire on December 31, 2009 (the “Expiration Date”) provided, that, Ply Gem shall have the right to renew this letter agreement for successive one year periods (each, a “Renewal Term”), which right it must exercise prior the Expiration Date, or the last day of any Renewal Term, as applicable.
 
2.   Compensation
 
If, during the term of this agreement, your employment is terminated (A) by your Employer without “Cause” or (B) by you following a “Material Adverse Change” (as such terms are defined below), and subject to (X) your execution of a Release and Restrictive Covenant Agreement substantially in the form attached to this
 

 
 
 

letter agreement as Exhibit A (the “Release and Restrictive Covenant Agreement”) within 30 days following the date of your termination of employment and (Y) your continued compliance with such Release and Restrictive Covenant Agreement for the periods described therein, you will be entitled to receive:
 
(a)   An amount equal to your annual base salary in effect on the date of your termination (which, for the avoidance of doubt shall not include any amounts in respect of any car allowance or payments for any other perquisites or benefits that you may be entitled to).  This salary continuation shall be payable in equal installments over the 12-month period following the date of your termination of employment (the “Payment Period”), in accordance with your Employer’s normal payroll practices;
 
(b)   An amount equal to the pro rata portion, based upon the percentage of such year that shall have elapsed through the date of your termination of employment, of the lesser of (I) your target annual cash bonus with respect to the fiscal year during which your termination of employment occurs (the “Year of Termination”) and (II) the actual annual cash bonus you would have received with respect to the Year of Termination based on actual performance during that year, measured as of the time such performance is measured for purposes of paying annual cash bonuses to other executives of your Employer with respect to such year (the “Pro Rata Bonus”).  You shall be paid a lump sum cash payment equal to the Pro Rata Bonus when annual cash bonuses with respect to the Year of Termination are paid to other executives of your Employer, which shall be not later than March 15 next following the close of the fiscal year to which the bonus relates; provided that it shall not be a breach of this letter agreement if payment is made later in such year to the extent financial results are not available by March 15 so long as payment is made by payroll as soon as practicable following certification of such results;
 
(c)   To the extent not already paid prior to the date of your termination, an amount equal to the actual annual cash bonus you would have received with respect to the year prior to the Year of Termination based on actual performance during that year, measured as of the time such performance is measured for purposes of paying annual cash bonuses to other executives of your Employer with respect to such year (the “Actual Bonus”).  You shall be paid a lump sum cash payment equal to the Actual Bonus as soon as reasonably practicable following the date that the amount of the Actual Bonus is determined, which shall be not later than March 15 next following the close of the fiscal year to which the bonus relates; provided that it shall not be a breach of this letter agreement if payment is made later in such year to the extent financial results are not available by March 15 so long as payment is made by payroll as soon as practicable following certification of such results;
 
(d)   Continuation of medical and dental benefits for you and your spouse and dependents, if any, during the Payment Period, in the
 

 
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same plans and on the same basis (including, without limitation, contribution rates) as such benefits are provided from time to time to actively employed executives of your Employer, subject to the terms of such plans as the same may exist from time to time; provided, that, the Employer’s obligation to provide such medical and dental benefits shall cease at the time you become eligible for such benefits from another employer; and
 
(e)   (i) Your base salary through the date of termination; (ii) any declared but unpaid annual cash bonus for any fiscal year preceding the year in which the termination occurs; (iii) reimbursement for any unreimbursed business expenses properly incurred by you in accordance with Employer policy through your date of termination; and (iv) any other amounts, including without limitation, accrued but unused vacation, required to be paid to you under any applicable state statute or regulation.
 
The Employer shall have the authority to delay the provision of any amounts or benefits under this letter agreement to the extent it reasonably deems necessary to comply with Section 409A(a)(2)(B)(i) of the Internal Revenue Code of 1986, as amended (the “Code”) (relating to payments made to “specified employees”); in such event any such amount or benefit to which you would otherwise be entitled during the six-month period following your separation from service will be provided or paid on the first business day following the expiration of such six-month period, or, if earlier, the date of death.  For purposes of Section 409A of the Code, the right to a series of installment payments under this letter agreement shall be treated as a right to a series of separate payments except where otherwise specifically provided.
 
Your employment shall not be deemed to be terminated by your Employer without Cause or by you following a Material Adverse Change, and you shall not be entitled to any payments or benefits under this Section 2 solely on account of, the sale or disposition by Ply Gem or any Employer, or any parent of Ply Gem or any Employer, as applicable, of the subsidiary or division for which you are employed if you are offered employment by the purchaser or acquirer of such subsidiary or division and such acquirer or purchaser agrees to assume the terms of this letter agreement.
 
Notwithstanding anything to the contrary in this letter agreement, no further payments or benefits are due under this Section 2, and all other benefits, if any, due you following a termination of employment shall be determined in accordance with the plans, policies and practices of your Employer.  In addition, subject to applicable state law, Ply Gem and any Employer, as applicable, shall have the right to reclaim any amounts already paid to you under this Section 2 if, at any time during the Restricted Period (as such term is defined in the attached Release and Restrictive Covenant Agreement) after your employment is terminated, (i) you breach any of the provisions of Section VI of the Release and Restrictive Covenant Agreement, or (ii) the Board determines, in good faith,  that grounds existed, on or prior to the date of termination of your employment with Employer, including prior to the date of this letter agreement, for your Employer to terminate your employment for Cause; provided, that, in all events you will be entitled to receive amounts in sub-clauses (i), (iii), and (iv) of Section 2(e) above.
 

 
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3. Definitions
 
For purposes of this letter agreement, “Cause” shall mean:  (i) your willful and continued failure to perform substantially your material duties (other than any such failures resulting from, or contributed to by, incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to you by the Board, which notice specifically identifies the manner in which you have not substantially performed your material duties, and you neglect to cure such failure within 30 days; (ii) a willful failure to follow the lawful direction of the Board or of the senior executive officer of Ply Gem to whom you directly report (if applicable); (iii) your material act of dishonesty or breach of trust in connection with the performance of your duties to Ply Gem or your Employer; (iv) your conviction of, or plea of guilty or no contest to, (x) any felony or (y) any misdemeanor having as its predicate element fraud, dishonesty or misappropriation; or (v) a civil judgment in which Employer is awarded damages from you in respect of a claim of loss of funds through fraud or misappropriation by you, which has become final and is not subject to further appeal.
 
For purposes of this letter agreement, a “Material Adverse Change” shall mean any of the following, without your express written consent:
 
(1)  
Assignment to you of any duties that are inconsistent with your position, duties and responsibilities and status with Employer as of the date of this Agreement;
 
(2)  
Your Employer’s reduction of your base salary;
 
(3)  
Without your express written consent, your Employer’s requiring you to be based anywhere other than within 50 miles of your office location immediately prior to such required relocation, except for required travel on your Employer’s business;
 
(4)  
Any action by your Employer that would deprive you of any material employee benefit enjoyed by you, except where such change is applicable to all employees participating in such benefit plan;
 
(5)  
Any breach by Ply Gem or your Employer of any provision of this letter agreement or the Release and Restrictive Covenant Agreement.
 
4.   Release and Restrictive Covenant Agreement
 
All payments and benefits described in Section 2 of this letter agreement are conditional upon and subject to your execution of the Release and Restrictive Covenant Agreement.
 

 
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5. Notices
 
Any notice required by this letter agreement must be in writing and will be deemed to have been duly given (i) if delivered personally or by overnight courier service , sent by facsimile transmission or mailed by United States registered mail, return receipt requested, postage prepaid, and (ii) addressed to the respective addresses or sent via facsimile to the respective facsimile numbers, as the case may be, as set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt; provided, however, that (X) notices sent by personal delivery or overnight courier shall be deemed given when delivered; (Y) notices sent by facsimile transmission shall be deemed given upon the sender’s receipt of confirmation of complete transmission, and (Z) notices sent by United States registered mail shall be deemed given two days after the date of deposit in the United States mail .
 
 
If to you, to the address as shall most currently appear on the records of your Employer
 
 
If to Ply Gem, to:

 
Ply Gem Industries, Inc.
 
5020 Weston Parkway, Suite 400
 Cary, North Carolina 27513
 Fax: (919) 677-3914
 Attn:  Senior Vice President, Human Resources
 
6.   General
 
Your Employer may withhold from any amounts payable under Section 2 of this letter agreement such federal, state, local or other taxes required to be withheld pursuant to applicable law or regulation.
 
The payments and benefits provided for in Section 2 of this letter agreement shall not be counted as compensation for purposes of determining benefits under other benefit plans, programs, policies and agreements of your Employer, except to the extent expressly provided therein or herein.
 
This letter agreement is not intended to result in any duplication of payments or benefits to you and does not give you any right to any compensation or benefits from Ply Gem or your Employer except as specifically stated in this letter agreement.
 
For you to receive the payments and benefits described in Section 2 of this letter agreement, you will not be required to seek other employment or otherwise mitigate the obligations of your Employer under this letter agreement.  Except as described in Section 2(d) of this letter agreement, there will be no offset against any amounts due under this letter agreement on account of any remuneration attributable to any subsequent employment that you may obtain.
 

 
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This letter agreement is not a contract of employment and does not give you any right of continued employment or limit the right of your Employer to terminate or change the status of your employment at any time or change any employment policies.
 
This letter agreement is governed by the laws of the state of Delaware, without reference to the principles of conflict of laws which would cause the laws of another state to apply.  By signing this letter agreement, you and Ply Gem irrevocably agree, for the exclusive benefit of the other, that any and all suits, actions or proceedings relating to Section VI of the Release and Restrictive Covenant Agreement (collectively, “Proceedings” and, individually, a “Proceeding”) will be maintained in either the courts of the State of Delaware or the federal District Courts sitting in Wilmington, Delaware (collectively, the “Chosen Courts”) and that the Chosen Courts shall have exclusive jurisdiction to hear and determine or settle any such Proceeding and that any such Proceedings shall only be brought in the Chosen Courts.  You and Ply Gem irrevocably waive any objection that you or Ply Gem may have now or hereafter to the laying of the venue of any Proceedings in the Chosen Courts and any claim that any Proceedings have been brought in an inconvenient forum and further irrevocably agree that a judgment in any Proceeding brought in the Chosen Courts shall be conclusive and binding upon you and Ply Gem and may be enforced in the courts of any other jurisdiction.
 
You and Ply Gem agree that this letter agreement involves at least $100,000 and that this letter agreement has been entered into in express reliance on Section 2708 of Title 6 of the Delaware Code.  You and Ply Gem irrevocably and unconditionally agree (i) that, to the extent you or Ply Gem are not otherwise subject to service of process in the State of Delaware, you or Ply Gem will appoint (and maintain an agreement with respect to) an agent in the State of Delaware as your agent for acceptance of legal process and notify Ply Gem or you, as applicable, of the name and address of said agent, (ii) that service of process may also be made on you or Ply Gem by pre-paid certified mail with a validated proof of mailing receipt constituting evidence of valid service sent to you or Ply Gem at the address set forth in this letter agreement, as such address may be changed from time to time pursuant hereto, and (iii) that service made pursuant to clause (i) or (ii) above shall, to the fullest extent permitted by applicable law, have the same legal force and effect as if served upon such party personally within the State of Delaware.
 
Your rights under this letter agreement are not transferable, assignable or subject to lien or attachment.
 
You and Ply Gem acknowledge that you intend that the compensation arrangements set forth in this agreement either are not governed by or are in compliance with Section 409A of the Code; however, owing to the uncertain application of Section 409A of the Code, Ply Gem agrees to use its reasonable best efforts such that no earlier and/or additional taxes to you will arise under Section 409A of the Code as a result of any compensation payable under this letter agreement.
 
This letter agreement contains the entire understanding and agreement between you and Ply Gem in respect of the matters addressed herein, and supersedes any and all prior agreements and understandings, whether written or oral, with respect to such matters including, without limitation, the Original Retention Agreement.  This letter
 

 
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agreement may not be amended except in a writing signed by you and by an authorized officer on behalf of Ply Gem.
 
 
Sincerely,

PLY GEM INDUSTRIES, INC.
 
By:
 
/s/ Gary E. Robinette       
Name:
 
Gary E. Robinette       
Title:
 
President and Chief Executive Officer
 
 
 
 
Acknowledged and Agreed:

 
 
/s/ Lynn Morstad                
Lynn Morstad
 

 
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Exhibit A

RELEASE AND RESTRICTIVE COVENANT AGREEMENT
 
This Release and Restrictive Covenant Agreement (the “Agreement”) is entered into by and between Lynn Morstad (the “Employee”) and Ply Gem Industries, Inc. (the “Company”), on ______________ ___, 20___.
 
I.   Release of Claims
 
In partial consideration of certain of the payments and benefits described in Section 2 of the letter agreement between you and the Company, dated December 31 2008 (the “Letter”), to which the Employee agrees the Employee is not entitled until and unless he executes this Agreement, the Employee, for and on behalf of himself and his heirs and assigns, subject to the last sentence of this paragraph, hereby waives and releases any common law, statutory or other complaints, claims, charges or causes of action of any kind whatsoever, both known and unknown, in law or in equity, which the Employee ever had, now has or may have against the Company and its shareholders and their respective subsidiaries, successors, assigns, affiliates, directors, officers, partners, members, employees or agents (collectively, the “Releasees”) by reason of facts or omissions which have occurred on or prior to the date that the Employee signs this Agreement, including, without limitation, any complaint, charge or cause of action arising under federal, state or local laws pertaining to employment, including the Age Discrimination in Employment Act of 1967 (“ADEA,” a law which prohibits discrimination on the basis of age), the National Labor Relations Act, the Civil Rights Act of 1991, the Americans With Disabilities Act of 1990, Title VII of the Civil Rights Act of 1964, all as amended; and all other federal, state and local laws and regulations.  By signing this Agreement, the Employee acknowledges that he intends to waive and release any rights known or unknown that he may have against the Releasees under these and any other laws; provided, that the Employee does not waive or release claims with respect to the right to enforce his rights under the Letter (the “Unreleased Claims”).
 
II.   Proceedings
 
The Employee acknowledges that he has not filed any complaint, charge, claim or proceeding, except with respect to an Unreleased Claim, if any, against any of the Releasees before any local, state or federal agency, court or other body (each individually a “Proceeding”).  The Employee represents that he is not aware of any basis on which such a Proceeding could reasonably be instituted.  The Employee (a) acknowledges that he will not initiate or cause to be initiated on his behalf any Proceeding and will not participate in any Proceeding, in each case, except as required by law; and (b) waives any right he may have to benefit in any manner from any relief (whether monetary or otherwise) arising out of any Proceeding, including any Proceeding conducted by the Equal Employment Opportunity Commission (“EEOC”).  Further, the Employee understands that, by executing this Agreement, he will be limiting the availability of certain remedies that he may have against the Company and limiting also his ability to pursue certain claims against the Releasees.  Notwithstanding the above, nothing in Section I of this Agreement shall prevent the Employee from (x) initiating or causing to be initiated on his behalf any complaint, charge, claim or proceeding against
 

 
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the Company before any local, state or federal agency, court or other body challenging the validity of the waiver of his claims under the ADEA contained in Section I of this Agreement (but no other portion of such waiver); or (y) initiating or participating in an investigation or proceeding conducted by the EEOC.
 
III.   Time to Consider
 
The Employee acknowledges that he has been advised that he has 21 days from the date of receipt of this Agreement to consider all the provisions of this Agreement and he does hereby knowingly and voluntarily waive said given 21 day period.  THE EMPLOYEE FURTHER ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT CAREFULLY, HAS BEEN ADVISED BY THE COMPANY TO, AND HAS IN FACT, CONSULTED AN ATTORNEY, AND FULLY UNDERSTANDS THAT BY SIGNING BELOW HE IS GIVING UP CERTAIN RIGHTS WHICH HE MAY HAVE TO SUE OR ASSERT A CLAIM AGAINST ANY OF THE RELEASEES, AS DESCRIBED IN SECTION I OF THIS AGREEMENT AND THE OTHER PROVISIONS HEREOF.  THE EMPLOYEE ACKNOWLEDGES THAT HE HAS NOT BEEN FORCED OR PRESSURED IN ANY MANNER WHATSOEVER TO SIGN THIS AGREEMENT, AND THE EMPLOYEE AGREES TO ALL OF ITS TERMS VOLUNTARILY.
 
IV.   Revocation
 
The Employee hereby acknowledges and understands that the Employee shall have seven days from the date of the Employee’s execution of this Agreement to revoke this Agreement (including, without limitation, any and all claims arising under the ADEA) and that neither the Company nor any other person is obligated to provide any benefits to the Employee pursuant to Section 2 of the Letter until eight days have passed since the Employee’s signing of this Agreement without the Employee having revoked this Agreement, in which event the Company immediately shall arrange and/or pay for any such benefits otherwise attributable to said eight-day period, consistent with the terms of the Letter.  If the Employee revokes this Agreement, the Employee will be deemed not to have accepted the terms of this Agreement, and no action will be required of the Company under any section of this Agreement.
 
V.   No Admission
 
This Agreement does not constitute an admission of liability or wrongdoing of any kind by the Employee or the Company.
 
VI.   Restrictive Covenants
 
A.   Non-Competition/Non-Solicitation
 
The Employee acknowledges and recognizes the highly competitive nature of the businesses of the Company and its subsidiaries and controlled affiliates and accordingly agrees as follows:
 

 
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1. During the period commencing on the date of the Employee’s termination of employment and ending on the last day of the Payment Period (as defined in Section 2(a) of the Letter) (the “Restricted Period”), or such longer period as described in the last sentence of Section VII of this Agreement, the Employee will not, directly or indirectly,   (w) engage in any “Competitive Business” (as defined below) for the Employee’s own account, (x) enter the employ of, or render any services to, any person engaged in any Competitive Business, (y) acquire a financial interest in, or otherwise become actively involved with, any person engaged in any Competitive Business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant, or (z) interfere with business relationships between the Company and customers or suppliers of, or consultants to, the Company.
 
2.   For purposes of this Section VI, a “Competitive Business” means, as of any date, including during the Restricted Period, any person or entity (including any joint venture, partnership, firm, corporation or limited liability company) that engages in or proposes to engage in the following activities in any geographical area in which the business unit for which the Employee works does business:  the manufacture and sale of stone veneer, manufactured stone, cultured stone, vinyl or composite siding, metal accessories, injection molded exterior cladding products, vinyl decking, vinyl or composite railing, vinyl windows, vinyl clad windows, aluminum windows, aluminum clad windows, wood windows and any other building product category that Ply Gem may manufacture or sell within the tenure of your employment with Ply Gem.
 
3.   For purposes of this Section VI and of Section VII of this Agreement, the Company shall be construed to include the Company and its subsidiaries and controlled affiliates.
 
4.   Notwithstanding anything to the contrary in this Agreement, the Employee may, directly or indirectly, own, solely as an investment, securities of any person engaged in the business of the Company which are publicly traded on a national or regional stock exchange or on the over-the-counter market if the Employee (A) is not a controlling person of, or a member of a group which controls, such person and (B) does not, directly or indirectly, own one percent (1%) or more of any class of securities of such person.
 
5.   During the Restricted Period, the Employee will not, directly or indirectly, without the Company’s written consent, solicit or encourage to cease to work with the Company any employee or any consultant of the Company or any person who was an employee of or consultant then under contract with the Company within the six-month period preceding such activity.  In addition, during the Restricted Period, the Employee will not, without the Company’s written consent, directly or indirectly hire any person who is or who was, within the six-month period preceding such activity, an employee of the Company.
 
6.   The Employee understands that the provisions of this Section VI.A may limit the Employee’s ability to earn a livelihood in a business similar to the business of the Company, but the Employee nevertheless agrees and hereby acknowledges that (A)
 

 
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such provisions do not impose a greater restraint than is necessary to protect the goodwill or other business interests of the Company, (B) such provisions contain reasonable limitations as to time, territory and scope of activity to be restrained, (C) such provisions are not harmful to the general public and (D) such provisions are not unduly burdensome to the Employee.  In consideration of the foregoing and in light of the Employee’s education, skills and abilities, the Employee agrees that he shall not assert that, and it should not be considered that, any provisions of Section VI.A. or otherwise are void, voidable or unenforceable or should be voided or held unenforceable.
 
7.   It is expressly understood and agreed that, although the Employee and the Company consider the restrictions contained in this Section VI.A to be reasonable, if a judicial determination is made by a court of competent jurisdiction that the time, territory or scope or any other restriction contained in this Section VI.A or elsewhere in this Agreement is an unenforceable restriction against the Employee, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time, territory and scope and to such maximum extent as such court may judicially determine or indicate to be enforceable.  Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.
 
B.   Nondisparagement
 
The Employee agrees (whether during or after the Employee’s employment with the Company) not to issue, circulate, publish or utter any false or disparaging statements, remarks or rumors about the Company or the shareholders, officers, directors or managers of the Company other than to the extent reasonably necessary in order to (i) assert a bona fide claim against the Company arising out of the Employee’s employment with the Company, or (ii) respond in a truthful and appropriate manner to any legal process or give truthful and appropriate testimony in a legal or regulatory proceeding.  
 
C.   Company Policies
 
The Employee agrees to abide by the terms of any employment policies or codes of conduct of the Company that apply to the Employee after termination of employment.
 
D.   Confidentiality/Company Property
 
The Employee shall not, without the prior written consent of the Company, use, divulge, disclose or make accessible to any other person, firm, partnership, corporation or other entity any “Confidential Information” (as defined below), except while employed by the Company, in furtherance of the business of and for the benefit of the Company, or any “Personal Information” (as defined below); provided that the Employee may disclose such information when required to do so by a court of competent jurisdiction, by any governmental agency having supervisory authority over
 

 
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the business of the Company and/or its affiliates, as the case may be, or by any administrative body or legislative body (including a committee thereof) with jurisdiction to order the Employee to divulge, disclose or make accessible such information; provided, further, that in the event that the Employee is ordered by a court or other government agency to disclose any Confidential Information or Personal Information, the Employee shall (i) promptly notify the Company of such order, (ii) at the written request of the Company, diligently contest such order at the sole expense of the Company as expenses occur, and (iii) at the written request of the Company, seek to obtain, at the sole expense of the Company, such confidential treatment as may be available under applicable laws for any information disclosed under such order.  For purposes of this Section VI.D, (i) “Confidential Information” shall mean non-public information concerning the financial data, strategic business plans, product development (or other proprietary product data), customer lists, marketing plans and other proprietary or confidential information relating to the business of the Company or its affiliates or customers, that, in any case, is not otherwise available to the public (other than by the Employee’s breach of the terms hereof) and (ii) “Personal Information” shall mean any information concerning the personal, social or business activities of the shareholders, officers or directors of the Company.  Upon termination of the Employee’s employment with the Company, the Employee shall return all Company property, including, without limitation, files, records, disks and any media containing Confidential Information or Personal Information.
 
E.   Developments
 
All discoveries, inventions, ideas, technology, formulas, designs, software, programs, algorithms, products, systems, applications, processes, procedures, methods, modifications, improvements and enhancements conceived, developed or otherwise made or created or produced by the Employee, alone or with others, and in any way relating to the business or any proposed business of the Company of which the Employee has been made aware, or the products or services of the Company of which the Employee has been made aware, whether or not subject to patent, copyright or other protection and whether or not reduced to tangible form, at any time during the Employee’s employment with the Company or any subsidiary of the Company (collectively, “Developments”) shall be the sole and exclusive property of the Company.  The Employee agrees to, and hereby does, assign to the Company, without any further consideration, all of the Employee’s right, title and interest throughout the world in and to all Developments.  The Employee agrees that all such Developments that are copyrightable may constitute works made for hire under the copyright laws of the United States and, as such, acknowledges that the Company is the author of such Developments and owns all of the rights comprised in the copyright of such Developments, and the Employee hereby assigns to the Company, without any further consideration, all of the rights comprised in the copyright and other proprietary rights the Employee may have in any such Development to the extent that it might not be considered a work made for hire.  The Employee shall make and maintain adequate and current written records of all Developments and shall disclose all Developments promptly, fully and in writing to the Company promptly after development of the same, and at any time upon request.
 

 
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            F. Cooperation
 
At any time after the date of the Employee’s termination of employment, the Employee agrees to cooperate (i) with the Company in the defense of any legal matter involving any matter that arose during the Employee’s employment with the Company and (ii) with all government authorities on matters pertaining to any investigation, litigation or administrative proceeding pertaining to the Company.  The Company will reimburse the Employee for any earnings lost by the Employee and any reasonable travel and out of pocket expenses incurred by the Employee in providing such cooperation.
 
VII.   Enforcement
 
The Employee acknowledges and agrees that the Company’s remedies at law for a breach or threatened breach of any of the provisions of Sections VI.A,B,D and E of this Agreement would be inadequate, and in recognition of this fact, the Employee agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.  In addition, the Company shall be entitled to immediately cease paying any amounts remaining due or providing any benefits to the Employee pursuant to Section 2 of the Letter and, subject to applicable state law, to reclaim any amounts already paid under Section 2 of the Letter upon a good faith determination by the Board of Directors of the Company that the Employee has violated any provision of Section VI of this Agreement, subject to payment of all such amounts upon a final determination that the Employee had not violated Section VI of this Agreement.  If the Employee breaches any of the covenants contained in Section VI.A, B, D or E of this Agreement, and the Company Group obtains injunctive relief with respect thereto, the period during which the Employee is required to comply with that particular covenant shall be extended by the same period that the Employee was in breach of such covenant prior to the effective date of such injunctive relief.
 
VIII.   General Provisions
 
A.   No Waiver; Severability
 
A failure of the Company or any of the Releasees to insist on strict compliance with any provision of this Agreement shall not be deemed a waiver of such provision or any other provision hereof.  If any provision of this Agreement is determined to be so broad as to be unenforceable, such provision shall be interpreted to be only so broad as is enforceable, and in the event that any provision is determined to be entirely unenforceable, such provision shall be deemed severable, such that all other provisions of this Agreement shall remain valid and binding upon the Employee and the Releasees.
 
B.   Governing Law
 
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
 

 
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IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO AGREEMENTS MADE AND TO BE WHOLLY PERFORMED WITHIN THAT STATE, WITHOUT REGARD TO ITS CONFLICT OF LAWS PROVISIONS OR THE CONFLICT OF LAWS PROVISIONS OF ANY OTHER JURISDICTION WHICH WOULD CAUSE THE APPLICATION OF ANY LAW OTHER THAN THAT OF THE STATE OF DELAWARE.
 
Each party to this Agreement irrevocably agrees for the exclusive benefit of the other that any and all suits, actions or proceedings relating to Section VI of this Agreement (collectively, “Proceedings” and, individually, a “Proceeding”)  shall be maintained in either the courts of the State of Delaware or the federal District Courts sitting in Wilmington, Delaware (collectively, the “Chosen Courts”) and that the Chosen Courts shall have exclusive jurisdiction to hear and determine or settle any such Proceeding and that any such Proceedings shall only be brought in the Chosen Courts.  Each party irrevocably waives any objection that it may have now or hereafter to the laying of the venue of any Proceedings in the Chosen Courts and any claim that any Proceedings have been brought in an inconvenient forum and further irrevocably agrees that a judgment in any Proceeding brought in the Chosen Courts shall be conclusive and binding upon it and may be enforced in the courts of any other jurisdiction.
 
Each of the parties hereto agrees that this Agreement involves at least $100,000 and that this Agreement has been entered into in express reliance on Section 2708 of Title 6 of the Delaware Code.  Each of the parties hereto irrevocably and unconditionally agrees (i) that, to the extent such party is not otherwise subject to service of process in the State of Delaware, it will appoint (and maintain an agreement with respect to) an agent in the State of Delaware as such party’s agent for acceptance of legal process and notify the other parties hereto of the name and address of said agent, (ii) that service of process may also be made on such party by pre-paid certified mail with a validated proof of mailing receipt constituting evidence of valid service sent to such party at the address set forth in this Agreement, as such address may be changed from time to time pursuant hereto, and (iii) that service made pursuant to clause (i) or (ii) above shall, to the fullest extent permitted by applicable law, have the same legal force and effect as if served upon such party personally within the State of Delaware.
 
C.   Counterparts
 
This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
 
D.   Notice
 
For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally, if delivered by overnight courier service , if sent by facsimile transmission or if mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses or sent via facsimile to
 

 
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the respective facsimile numbers, as the case may be, as set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt; provided, however, that (i) notices sent by personal delivery or overnight courier shall be deemed given when delivered, (ii) notices sent by facsimile transmission shall be deemed given upon the sender’s receipt of confirmation of complete transmission, and (iii) notices sent by United States registered mail shall be deemed given two days after the date of deposit in the United States mail .
 
 
If to the Employee, to the address as shall most currently appear on the records of the Company
 
 
If to the Company, to:

 
Ply Gem Industries, Inc.
 
5020 Weston Parkway, Suite 400
 Cary, North Carolina 27513
 Fax: (919) 677-3914
 Attn:  Senior Vice President, Human Resources
 

 
IN WITNESS WHEREOF , the parties hereto have duly executed this Agreement as of the day and year first above written.
 

 
EMPLOYEE


______________________________
Lynn Morstad


PLY GEM INDUSTRIES, INC.


By:___________________________
Name:  Gary E. Robinette
Title:  President and Chief Executive Officer

 
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Exhibit 10.15
 
Ply Gem Industries, Inc.
5020 Weston Pkwy, Suite 400
Cary, North Carolina 27513



 
December 31, 2008
 
Mr. Dwayne Keith Pigues
1409 Silvering Way
Raleigh, NC  27613

 
Re:           Amended and Restated Retention Agreement
 
Dear Mr. Pigues:
 
Ply Gem Industries, Inc. (“Ply Gem”) considers the continuity of management essential to the best interests of Ply Gem and its stockholders and desires to reinforce and encourage your continued attention and dedication to your duties to Ply Gem and its subsidiaries and affiliates (each, an “Employer”).  To assure your continued focus on your duties to your Employer, the Board of Directors of Ply Gem (the “Board”) has authorized Ply Gem to enter into this letter agreement with you, which is an amended and restated version of the Retention Agreement between you and Ply Gem, dated August 27, 2007 (as amended from time to time prior to the date hereof, the “Original Retention Agreement”).  This letter agreement sets forth the compensation that Ply Gem agrees to pay you if your employment is terminated during the term of this agreement under the circumstances described herein.
 
This letter agreement sets forth the terms and conditions of Ply Gem’s agreement to pay you the compensation under the circumstances described herein, and the parties to this letter agreement acknowledge the receipt and sufficiency of good and valuable consideration in support of this letter agreement, including the covenants and agreements set forth herein.
 
1.   Term
 
This letter agreement is effective as of the date hereof and shall expire on December 31, 2009 (the “Expiration Date”) provided, that, Ply Gem shall have the right to renew this letter agreement for successive one year periods (each, a “Renewal Term”), which right it must exercise prior the Expiration Date, or the last day of any Renewal Term, as applicable.
 
2.   Compensation
 
If, during the term of this agreement, your employment is terminated (A) by your Employer without “Cause” or (B) by you following a “Material Adverse Change” (as such terms are defined below), and subject to (X) your execution of a Release and Restrictive Covenant Agreement substantially in the form attached to this
 

 
 
 

letter agreement as Exhibit A (the “Release and Restrictive Covenant Agreement”) within 30 days following the date of your termination of employment and (Y) your continued compliance with such Release and Restrictive Covenant Agreement for the periods described therein, you will be entitled to receive:
 
(a)   An amount equal to your annual base salary in effect on the date of your termination (which, for the avoidance of doubt shall not include any amounts in respect of any car allowance or payments for any other perquisites or benefits that you may be entitled to).  This salary continuation shall be payable in equal installments over the 12-month period following the date of your termination of employment (the “Payment Period”), in accordance with your Employer’s normal payroll practices;
 
(b)   An amount equal to the pro rata portion, based upon the percentage of such year that shall have elapsed through the date of your termination of employment, of the lesser of (I) your target annual cash bonus with respect to the fiscal year during which your termination of employment occurs (the “Year of Termination”) and (II) the actual annual cash bonus you would have received with respect to the Year of Termination based on actual performance during that year, measured as of the time such performance is measured for purposes of paying annual cash bonuses to other executives of your Employer with respect to such year (the “Pro Rata Bonus”).  You shall be paid a lump sum cash payment equal to the Pro Rata Bonus when annual cash bonuses with respect to the Year of Termination are paid to other executives of your Employer, which shall be not later than March 15 next following the close of the fiscal year to which the bonus relates; provided that it shall not be a breach of this letter agreement if payment is made later in such year to the extent financial results are not available by March 15 so long as payment is made by payroll as soon as practicable following certification of such results;
 
(c)   To the extent not already paid prior to the date of your termination, an amount equal to the actual annual cash bonus you would have received with respect to the year prior to the Year of Termination based on actual performance during that year, measured as of the time such performance is measured for purposes of paying annual cash bonuses to other executives of your Employer with respect to such year (the “Actual Bonus”).  You shall be paid a lump sum cash payment equal to the Actual Bonus as soon as reasonably practicable following the date that the amount of the Actual Bonus is determined, which shall be not later than March 15 next following the close of the fiscal year to which the bonus relates; provided that it shall not be a breach of this letter agreement if payment is made later in such year to the extent financial results are not available by March 15 so long as payment is made by payroll as soon as practicable following certification of such results;
 
(d)   Continuation of medical and dental benefits for you and your spouse and dependents, if any, during the Payment Period, in the
 

 
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same plans and on the same basis (including, without limitation, contribution rates) as such benefits are provided from time to time to actively employed executives of your Employer, subject to the terms of such plans as the same may exist from time to time; provided, that, the Employer’s obligation to provide such medical and dental benefits shall cease at the time you become eligible for such benefits from another employer; and
 
(e)   (i) Your base salary through the date of termination; (ii) any declared but unpaid annual cash bonus for any fiscal year preceding the year in which the termination occurs; (iii) reimbursement for any unreimbursed business expenses properly incurred by you in accordance with Employer policy through your date of termination; and (iv) any other amounts, including without limitation, accrued but unused vacation, required to be paid to you under any applicable state statute or regulation.
 
The Employer shall have the authority to delay the provision of any amounts or benefits under this letter agreement to the extent it reasonably deems necessary to comply with Section 409A(a)(2)(B)(i) of the Internal Revenue Code of 1986, as amended (the “Code”) (relating to payments made to “specified employees”); in such event any such amount or benefit to which you would otherwise be entitled during the six-month period following your separation from service will be provided or paid on the first business day following the expiration of such six-month period, or, if earlier, the date of death.  For purposes of Section 409A of the Code, the right to a series of installment payments under this letter agreement shall be treated as a right to a series of separate payments except where otherwise specifically provided.
 
Your employment shall not be deemed to be terminated by your Employer without Cause or by you following a Material Adverse Change, and you shall not be entitled to any payments or benefits under this Section 2 solely on account of, the sale or disposition by Ply Gem or any Employer, or any parent of Ply Gem or any Employer, as applicable, of the subsidiary or division for which you are employed if you are offered employment by the purchaser or acquirer of such subsidiary or division and such acquirer or purchaser agrees to assume the terms of this letter agreement.
 
Notwithstanding anything to the contrary in this letter agreement, no further payments or benefits are due under this Section 2, and all other benefits, if any, due you following a termination of employment shall be determined in accordance with the plans, policies and practices of your Employer.  In addition, subject to applicable state law, Ply Gem and any Employer, as applicable, shall have the right to reclaim any amounts already paid to you under this Section 2 if, at any time during the Restricted Period (as such term is defined in the attached Release and Restrictive Covenant Agreement) after your employment is terminated, (i) you breach any of the provisions of Section VI of the Release and Restrictive Covenant Agreement, or (ii) the Board determines, in good faith,  that grounds existed, on or prior to the date of termination of your employment with Employer, including prior to the date of this letter agreement, for your Employer to terminate your employment for Cause; provided, that, in all events you will be entitled to receive amounts in sub-clauses (i), (iii), and (iv) of Section 2(e) above.
 

 
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3. Definitions
 
For purposes of this letter agreement, “Cause” shall mean:  (i) your willful and continued failure to perform substantially your material duties (other than any such failures resulting from, or contributed to by, incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to you by the Board, which notice specifically identifies the manner in which you have not substantially performed your material duties, and you neglect to cure such failure within 30 days; (ii) a willful failure to follow the lawful direction of the Board or of the senior executive officer of Ply Gem to whom you directly report (if applicable); (iii) your material act of dishonesty or breach of trust in connection with the performance of your duties to Ply Gem or your Employer; (iv) your conviction of, or plea of guilty or no contest to, (x) any felony or (y) any misdemeanor having as its predicate element fraud, dishonesty or misappropriation; or (v) a civil judgment in which Employer is awarded damages from you in respect of a claim of loss of funds through fraud or misappropriation by you, which has become final and is not subject to further appeal.
 
For purposes of this letter agreement, a “Material Adverse Change” shall mean any of the following, without your express written consent:
 
(1)  
Assignment to you of any duties that are inconsistent with your position, duties and responsibilities and status with Employer as of the date of this Agreement;
 
(2)  
Your Employer’s reduction of your base salary;
 
(3)  
Without your express written consent, your Employer’s requiring you to be based anywhere other than within 50 miles of your office location immediately prior to such required relocation, except for required travel on your Employer’s business;
 
(4)  
Any action by your Employer that would deprive you of any material employee benefit enjoyed by you, except where such change is applicable to all employees participating in such benefit plan;
 
(5)  
Any breach by Ply Gem or your Employer of any provision of this letter agreement or the Release and Restrictive Covenant Agreement.
 
4.   Release and Restrictive Covenant Agreement
 
All payments and benefits described in Section 2 of this letter agreement are conditional upon and subject to your execution of the Release and Restrictive Covenant Agreement.
 

 
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5. Notices
 
Any notice required by this letter agreement must be in writing and will be deemed to have been duly given (i) if delivered personally or by overnight courier service , sent by facsimile transmission or mailed by United States registered mail, return receipt requested, postage prepaid, and (ii) addressed to the respective addresses or sent via facsimile to the respective facsimile numbers, as the case may be, as set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt; provided, however, that (X) notices sent by personal delivery or overnight courier shall be deemed given when delivered; (Y) notices sent by facsimile transmission shall be deemed given upon the sender’s receipt of confirmation of complete transmission, and (Z) notices sent by United States registered mail shall be deemed given two days after the date of deposit in the United States mail .
 
 
If to you, to the address as shall most currently appear on the records of your Employer
 
 
If to Ply Gem, to:

 
Ply Gem Industries, Inc.
 
5020 Weston Parkway, Suite 400
 Cary, North Carolina 27513
 Fax: (919) 677-3914
 Attn:  Senior Vice President, Human Resources
 
6.   General
 
Your Employer may withhold from any amounts payable under Section 2 of this letter agreement such federal, state, local or other taxes required to be withheld pursuant to applicable law or regulation.
 
The payments and benefits provided for in Section 2 of this letter agreement shall not be counted as compensation for purposes of determining benefits under other benefit plans, programs, policies and agreements of your Employer, except to the extent expressly provided therein or herein.
 
This letter agreement is not intended to result in any duplication of payments or benefits to you and does not give you any right to any compensation or benefits from Ply Gem or your Employer except as specifically stated in this letter agreement.
 
For you to receive the payments and benefits described in Section 2 of this letter agreement, you will not be required to seek other employment or otherwise mitigate the obligations of your Employer under this letter agreement.  Except as described in Section 2(d) of this letter agreement, there will be no offset against any amounts due under this letter agreement on account of any remuneration attributable to any subsequent employment that you may obtain.
 

 
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This letter agreement is not a contract of employment and does not give you any right of continued employment or limit the right of your Employer to terminate or change the status of your employment at any time or change any employment policies.
 
This letter agreement is governed by the laws of the state of Delaware, without reference to the principles of conflict of laws which would cause the laws of another state to apply.  By signing this letter agreement, you and Ply Gem irrevocably agree, for the exclusive benefit of the other, that any and all suits, actions or proceedings relating to Section VI of the Release and Restrictive Covenant Agreement (collectively, “Proceedings” and, individually, a “Proceeding”) will be maintained in either the courts of the State of Delaware or the federal District Courts sitting in Wilmington, Delaware (collectively, the “Chosen Courts”) and that the Chosen Courts shall have exclusive jurisdiction to hear and determine or settle any such Proceeding and that any such Proceedings shall only be brought in the Chosen Courts.  You and Ply Gem irrevocably waive any objection that you or Ply Gem may have now or hereafter to the laying of the venue of any Proceedings in the Chosen Courts and any claim that any Proceedings have been brought in an inconvenient forum and further irrevocably agree that a judgment in any Proceeding brought in the Chosen Courts shall be conclusive and binding upon you and Ply Gem and may be enforced in the courts of any other jurisdiction.
 
You and Ply Gem agree that this letter agreement involves at least $100,000 and that this letter agreement has been entered into in express reliance on Section 2708 of Title 6 of the Delaware Code.  You and Ply Gem irrevocably and unconditionally agree (i) that, to the extent you or Ply Gem are not otherwise subject to service of process in the State of Delaware, you or Ply Gem will appoint (and maintain an agreement with respect to) an agent in the State of Delaware as your agent for acceptance of legal process and notify Ply Gem or you, as applicable, of the name and address of said agent, (ii) that service of process may also be made on you or Ply Gem by pre-paid certified mail with a validated proof of mailing receipt constituting evidence of valid service sent to you or Ply Gem at the address set forth in this letter agreement, as such address may be changed from time to time pursuant hereto, and (iii) that service made pursuant to clause (i) or (ii) above shall, to the fullest extent permitted by applicable law, have the same legal force and effect as if served upon such party personally within the State of Delaware.
 
Your rights under this letter agreement are not transferable, assignable or subject to lien or attachment.
 
You and Ply Gem acknowledge that you intend that the compensation arrangements set forth in this agreement either are not governed by or are in compliance with Section 409A of the Code; however, owing to the uncertain application of Section 409A of the Code, Ply Gem agrees to use its reasonable best efforts such that no earlier and/or additional taxes to you will arise under Section 409A of the Code as a result of any compensation payable under this letter agreement.
 
This letter agreement contains the entire understanding and agreement between you and Ply Gem in respect of the matters addressed herein, and supersedes any and all prior agreements and understandings, whether written or oral, with respect to such matters including, without limitation, the Original Retention Agreement.  This letter
 

 
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agreement may not be amended except in a writing signed by you and by an authorized officer on behalf of Ply Gem.
 
 
Sincerely,

PLY GEM INDUSTRIES, INC.
 
By:
 
/s/ Gary E. Robinette       
Name:
 
Gary E. Robinette       
Title:
 
President and Chief Executive Officer
 
 
 
 
 
Acknowledged and Agreed:
 
 
 
/s/ Dwayne Keith Pigues     
Dwayne Keith Pigues
 

 
7
 
Exhibit A

RELEASE AND RESTRICTIVE COVENANT AGREEMENT
 
This Release and Restrictive Covenant Agreement (the “Agreement”) is entered into by and between Dwayne Keith Pigues (the “Employee”) and Ply Gem Industries, Inc. (the “Company”), on ______________ ___, 20___.
 
I.   Release of Claims
 
In partial consideration of certain of the payments and benefits described in Section 2 of the letter agreement between you and the Company, dated December 31 2008 (the “Letter”), to which the Employee agrees the Employee is not entitled until and unless he executes this Agreement, the Employee, for and on behalf of himself and his heirs and assigns, subject to the last sentence of this paragraph, hereby waives and releases any common law, statutory or other complaints, claims, charges or causes of action of any kind whatsoever, both known and unknown, in law or in equity, which the Employee ever had, now has or may have against the Company and its shareholders and their respective subsidiaries, successors, assigns, affiliates, directors, officers, partners, members, employees or agents (collectively, the “Releasees”) by reason of facts or omissions which have occurred on or prior to the date that the Employee signs this Agreement, including, without limitation, any complaint, charge or cause of action arising under federal, state or local laws pertaining to employment, including the Age Discrimination in Employment Act of 1967 (“ADEA,” a law which prohibits discrimination on the basis of age), the National Labor Relations Act, the Civil Rights Act of 1991, the Americans With Disabilities Act of 1990, Title VII of the Civil Rights Act of 1964, all as amended; and all other federal, state and local laws and regulations.  By signing this Agreement, the Employee acknowledges that he intends to waive and release any rights known or unknown that he may have against the Releasees under these and any other laws; provided, that the Employee does not waive or release claims with respect to the right to enforce his rights under the Letter (the “Unreleased Claims”).
 
II.   Proceedings
 
The Employee acknowledges that he has not filed any complaint, charge, claim or proceeding, except with respect to an Unreleased Claim, if any, against any of the Releasees before any local, state or federal agency, court or other body (each individually a “Proceeding”).  The Employee represents that he is not aware of any basis on which such a Proceeding could reasonably be instituted.  The Employee (a) acknowledges that he will not initiate or cause to be initiated on his behalf any Proceeding and will not participate in any Proceeding, in each case, except as required by law; and (b) waives any right he may have to benefit in any manner from any relief (whether monetary or otherwise) arising out of any Proceeding, including any Proceeding conducted by the Equal Employment Opportunity Commission (“EEOC”).  Further, the Employee understands that, by executing this Agreement, he will be limiting the availability of certain remedies that he may have against the Company and limiting also his ability to pursue certain claims against the Releasees.  Notwithstanding the above, nothing in Section I of this Agreement shall prevent the Employee from (x) initiating or causing to be initiated on his behalf any complaint, charge, claim or proceeding against
 

 
 
 

the Company before any local, state or federal agency, court or other body challenging the validity of the waiver of his claims under the ADEA contained in Section I of this Agreement (but no other portion of such waiver); or (y) initiating or participating in an investigation or proceeding conducted by the EEOC.
 
III.   Time to Consider
 
The Employee acknowledges that he has been advised that he has 21 days from the date of receipt of this Agreement to consider all the provisions of this Agreement and he does hereby knowingly and voluntarily waive said given 21 day period.  THE EMPLOYEE FURTHER ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT CAREFULLY, HAS BEEN ADVISED BY THE COMPANY TO, AND HAS IN FACT, CONSULTED AN ATTORNEY, AND FULLY UNDERSTANDS THAT BY SIGNING BELOW HE IS GIVING UP CERTAIN RIGHTS WHICH HE MAY HAVE TO SUE OR ASSERT A CLAIM AGAINST ANY OF THE RELEASEES, AS DESCRIBED IN SECTION I OF THIS AGREEMENT AND THE OTHER PROVISIONS HEREOF.  THE EMPLOYEE ACKNOWLEDGES THAT HE HAS NOT BEEN FORCED OR PRESSURED IN ANY MANNER WHATSOEVER TO SIGN THIS AGREEMENT, AND THE EMPLOYEE AGREES TO ALL OF ITS TERMS VOLUNTARILY.
 
IV.   Revocation
 
The Employee hereby acknowledges and understands that the Employee shall have seven days from the date of the Employee’s execution of this Agreement to revoke this Agreement (including, without limitation, any and all claims arising under the ADEA) and that neither the Company nor any other person is obligated to provide any benefits to the Employee pursuant to Section 2 of the Letter until eight days have passed since the Employee’s signing of this Agreement without the Employee having revoked this Agreement, in which event the Company immediately shall arrange and/or pay for any such benefits otherwise attributable to said eight-day period, consistent with the terms of the Letter.  If the Employee revokes this Agreement, the Employee will be deemed not to have accepted the terms of this Agreement, and no action will be required of the Company under any section of this Agreement.
 
V.   No Admission
 
This Agreement does not constitute an admission of liability or wrongdoing of any kind by the Employee or the Company.
 
VI.   Restrictive Covenants
 
A.   Non-Competition/Non-Solicitation
 
The Employee acknowledges and recognizes the highly competitive nature of the businesses of the Company and its subsidiaries and controlled affiliates and accordingly agrees as follows:
 

 
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1. During the period commencing on the date of the Employee’s termination of employment and ending on the last day of the Payment Period (as defined in Section 2(a) of the Letter) (the “Restricted Period”), or such longer period as described in the last sentence of Section VII of this Agreement, the Employee will not, directly or indirectly,   (w) engage in any “Competitive Business” (as defined below) for the Employee’s own account, (x) enter the employ of, or render any services to, any person engaged in any Competitive Business, (y) acquire a financial interest in, or otherwise become actively involved with, any person engaged in any Competitive Business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant, or (z) interfere with business relationships between the Company and customers or suppliers of, or consultants to, the Company.
 
2.   For purposes of this Section VI, a “Competitive Business” means, as of any date, including during the Restricted Period, any person or entity (including any joint venture, partnership, firm, corporation or limited liability company) that engages in or proposes to engage in the following activities in any geographical area in which the business unit for which the Employee works does business:  the manufacture and sale of stone veneer, manufactured stone, cultured stone, vinyl or composite siding, metal accessories, injection molded exterior cladding products, vinyl decking, vinyl or composite railing, vinyl windows, vinyl clad windows, aluminum windows, aluminum clad windows, wood windows and any other building product category that Ply Gem may manufacture or sell within the tenure of your employment with Ply Gem.
 
3.   For purposes of this Section VI and of Section VII of this Agreement, the Company shall be construed to include the Company and its subsidiaries and controlled affiliates.
 
4.   Notwithstanding anything to the contrary in this Agreement, the Employee may, directly or indirectly, own, solely as an investment, securities of any person engaged in the business of the Company which are publicly traded on a national or regional stock exchange or on the over-the-counter market if the Employee (A) is not a controlling person of, or a member of a group which controls, such person and (B) does not, directly or indirectly, own one percent (1%) or more of any class of securities of such person.
 
5.   During the Restricted Period, the Employee will not, directly or indirectly, without the Company’s written consent, solicit or encourage to cease to work with the Company any employee or any consultant of the Company or any person who was an employee of or consultant then under contract with the Company within the six-month period preceding such activity.  In addition, during the Restricted Period, the Employee will not, without the Company’s written consent, directly or indirectly hire any person who is or who was, within the six-month period preceding such activity, an employee of the Company.
 
6.   The Employee understands that the provisions of this Section VI.A may limit the Employee’s ability to earn a livelihood in a business similar to the business of the Company, but the Employee nevertheless agrees and hereby acknowledges that (A)
 

 
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such provisions do not impose a greater restraint than is necessary to protect the goodwill or other business interests of the Company, (B) such provisions contain reasonable limitations as to time, territory and scope of activity to be restrained, (C) such provisions are not harmful to the general public and (D) such provisions are not unduly burdensome to the Employee.  In consideration of the foregoing and in light of the Employee’s education, skills and abilities, the Employee agrees that he shall not assert that, and it should not be considered that, any provisions of Section VI.A. or otherwise are void, voidable or unenforceable or should be voided or held unenforceable.
 
7.   It is expressly understood and agreed that, although the Employee and the Company consider the restrictions contained in this Section VI.A to be reasonable, if a judicial determination is made by a court of competent jurisdiction that the time, territory or scope or any other restriction contained in this Section VI.A or elsewhere in this Agreement is an unenforceable restriction against the Employee, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time, territory and scope and to such maximum extent as such court may judicially determine or indicate to be enforceable.  Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.
 
B.   Nondisparagement
 
The Employee agrees (whether during or after the Employee’s employment with the Company) not to issue, circulate, publish or utter any false or disparaging statements, remarks or rumors about the Company or the shareholders, officers, directors or managers of the Company other than to the extent reasonably necessary in order to (i) assert a bona fide claim against the Company arising out of the Employee’s employment with the Company, or (ii) respond in a truthful and appropriate manner to any legal process or give truthful and appropriate testimony in a legal or regulatory proceeding.  
 
C.   Company Policies
 
The Employee agrees to abide by the terms of any employment policies or codes of conduct of the Company that apply to the Employee after termination of employment.
 
D.   Confidentiality/Company Property
 
The Employee shall not, without the prior written consent of the Company, use, divulge, disclose or make accessible to any other person, firm, partnership, corporation or other entity any “Confidential Information” (as defined below), except while employed by the Company, in furtherance of the business of and for the benefit of the Company, or any “Personal Information” (as defined below); provided that the Employee may disclose such information when required to do so by a court of competent jurisdiction, by any governmental agency having supervisory authority over
 

 
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the business of the Company and/or its affiliates, as the case may be, or by any administrative body or legislative body (including a committee thereof) with jurisdiction to order the Employee to divulge, disclose or make accessible such information; provided, further, that in the event that the Employee is ordered by a court or other government agency to disclose any Confidential Information or Personal Information, the Employee shall (i) promptly notify the Company of such order, (ii) at the written request of the Company, diligently contest such order at the sole expense of the Company as expenses occur, and (iii) at the written request of the Company, seek to obtain, at the sole expense of the Company, such confidential treatment as may be available under applicable laws for any information disclosed under such order.  For purposes of this Section VI.D, (i) “Confidential Information” shall mean non-public information concerning the financial data, strategic business plans, product development (or other proprietary product data), customer lists, marketing plans and other proprietary or confidential information relating to the business of the Company or its affiliates or customers, that, in any case, is not otherwise available to the public (other than by the Employee’s breach of the terms hereof) and (ii) “Personal Information” shall mean any information concerning the personal, social or business activities of the shareholders, officers or directors of the Company.  Upon termination of the Employee’s employment with the Company, the Employee shall return all Company property, including, without limitation, files, records, disks and any media containing Confidential Information or Personal Information.
 
E.   Developments
 
All discoveries, inventions, ideas, technology, formulas, designs, software, programs, algorithms, products, systems, applications, processes, procedures, methods, modifications, improvements and enhancements conceived, developed or otherwise made or created or produced by the Employee, alone or with others, and in any way relating to the business or any proposed business of the Company of which the Employee has been made aware, or the products or services of the Company of which the Employee has been made aware, whether or not subject to patent, copyright or other protection and whether or not reduced to tangible form, at any time during the Employee’s employment with the Company or any subsidiary of the Company (collectively, “Developments”) shall be the sole and exclusive property of the Company.  The Employee agrees to, and hereby does, assign to the Company, without any further consideration, all of the Employee’s right, title and interest throughout the world in and to all Developments.  The Employee agrees that all such Developments that are copyrightable may constitute works made for hire under the copyright laws of the United States and, as such, acknowledges that the Company is the author of such Developments and owns all of the rights comprised in the copyright of such Developments, and the Employee hereby assigns to the Company, without any further consideration, all of the rights comprised in the copyright and other proprietary rights the Employee may have in any such Development to the extent that it might not be considered a work made for hire.  The Employee shall make and maintain adequate and current written records of all Developments and shall disclose all Developments promptly, fully and in writing to the Company promptly after development of the same, and at any time upon request.
 

 
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            F. Cooperation
 
At any time after the date of the Employee’s termination of employment, the Employee agrees to cooperate (i) with the Company in the defense of any legal matter involving any matter that arose during the Employee’s employment with the Company and (ii) with all government authorities on matters pertaining to any investigation, litigation or administrative proceeding pertaining to the Company.  The Company will reimburse the Employee for any earnings lost by the Employee and any reasonable travel and out of pocket expenses incurred by the Employee in providing such cooperation.
 
VII.   Enforcement
 
The Employee acknowledges and agrees that the Company’s remedies at law for a breach or threatened breach of any of the provisions of Sections VI.A,B,D and E of this Agreement would be inadequate, and in recognition of this fact, the Employee agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available.  In addition, the Company shall be entitled to immediately cease paying any amounts remaining due or providing any benefits to the Employee pursuant to Section 2 of the Letter and, subject to applicable state law, to reclaim any amounts already paid under Section 2 of the Letter upon a good faith determination by the Board of Directors of the Company that the Employee has violated any provision of Section VI of this Agreement, subject to payment of all such amounts upon a final determination that the Employee had not violated Section VI of this Agreement.  If the Employee breaches any of the covenants contained in Section VI.A, B, D or E of this Agreement, and the Company Group obtains injunctive relief with respect thereto, the period during which the Employee is required to comply with that particular covenant shall be extended by the same period that the Employee was in breach of such covenant prior to the effective date of such injunctive relief.
 
VIII.   General Provisions
 
A.   No Waiver; Severability
 
A failure of the Company or any of the Releasees to insist on strict compliance with any provision of this Agreement shall not be deemed a waiver of such provision or any other provision hereof.  If any provision of this Agreement is determined to be so broad as to be unenforceable, such provision shall be interpreted to be only so broad as is enforceable, and in the event that any provision is determined to be entirely unenforceable, such provision shall be deemed severable, such that all other provisions of this Agreement shall remain valid and binding upon the Employee and the Releasees.
 
B.   Governing Law
 
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
 

 
6
 

IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO AGREEMENTS MADE AND TO BE WHOLLY PERFORMED WITHIN THAT STATE, WITHOUT REGARD TO ITS CONFLICT OF LAWS PROVISIONS OR THE CONFLICT OF LAWS PROVISIONS OF ANY OTHER JURISDICTION WHICH WOULD CAUSE THE APPLICATION OF ANY LAW OTHER THAN THAT OF THE STATE OF DELAWARE.
 
Each party to this Agreement irrevocably agrees for the exclusive benefit of the other that any and all suits, actions or proceedings relating to Section VI of this Agreement (collectively, “Proceedings” and, individually, a “Proceeding”)  shall be maintained in either the courts of the State of Delaware or the federal District Courts sitting in Wilmington, Delaware (collectively, the “Chosen Courts”) and that the Chosen Courts shall have exclusive jurisdiction to hear and determine or settle any such Proceeding and that any such Proceedings shall only be brought in the Chosen Courts.  Each party irrevocably waives any objection that it may have now or hereafter to the laying of the venue of any Proceedings in the Chosen Courts and any claim that any Proceedings have been brought in an inconvenient forum and further irrevocably agrees that a judgment in any Proceeding brought in the Chosen Courts shall be conclusive and binding upon it and may be enforced in the courts of any other jurisdiction.
 
Each of the parties hereto agrees that this Agreement involves at least $100,000 and that this Agreement has been entered into in express reliance on Section 2708 of Title 6 of the Delaware Code.  Each of the parties hereto irrevocably and unconditionally agrees (i) that, to the extent such party is not otherwise subject to service of process in the State of Delaware, it will appoint (and maintain an agreement with respect to) an agent in the State of Delaware as such party’s agent for acceptance of legal process and notify the other parties hereto of the name and address of said agent, (ii) that service of process may also be made on such party by pre-paid certified mail with a validated proof of mailing receipt constituting evidence of valid service sent to such party at the address set forth in this Agreement, as such address may be changed from time to time pursuant hereto, and (iii) that service made pursuant to clause (i) or (ii) above shall, to the fullest extent permitted by applicable law, have the same legal force and effect as if served upon such party personally within the State of Delaware.
 
C.   Counterparts
 
This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
 
D.   Notice
 
For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally, if delivered by overnight courier service , if sent by facsimile transmission or if mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses or sent via facsimile to
 

 
7
 

the respective facsimile numbers, as the case may be, as set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt; provided, however, that (i) notices sent by personal delivery or overnight courier shall be deemed given when delivered, (ii) notices sent by facsimile transmission shall be deemed given upon the sender’s receipt of confirmation of complete transmission, and (iii) notices sent by United States registered mail shall be deemed given two days after the date of deposit in the United States mail .
 
 
If to the Employee, to the address as shall most currently appear on the records of the Company
 
 
If to the Company, to:

 
Ply Gem Industries, Inc.
 
5020 Weston Parkway, Suite 400
 Cary, North Carolina 27513
 Fax: (919) 677-3914
 
 Attn:  Senior Vice President, Human Resources
 

 
IN WITNESS WHEREOF , the parties hereto have duly executed this Agreement as of the day and year first above written.
 

 
EMPLOYEE


______________________________
Dwayne Keith Pigues


PLY GEM INDUSTRIES, INC.


By:___________________________
Name:  Gary E. Robinette
Title:  President and Chief Executive Officer

 
8
 

 
Exhibit 10.19   
Ply Gem Industries, Inc.
5020 Weston Parkway, Suite 400
Cary, NC 27513


February 11, 2009
 
Shawn K. Poe
1560 Parkside Drive
Liberty, MO 64068
 

 
Re:           Renewal of Amended and Restated Retention Agreement
 
Dear Shawn:
 
This letter is to serve as your notification that Ply Gem Industries, Inc. (“Ply Gem”) has elected to execute its Renewal Term right under your current Amended and Restated Retention Agreement dated November 7, 2008 for a period of one year.  As such, all applicable rights and terms as outlined in your Amended and Restated Retention Agreement dated November 7, 2008 will remain in effect through February 12, 2010.
 
Please sign this letter in the space provided below as your acknowledgement and agreement of this Renewal Term agreement and return this original to me, and retain a copy for your own records.
 
 
Sincerely,

PLY GEM INDUSTRIES, INC.
 
 
By:
 /s/ Gary E. Robinette   
 
Name:
Gary E. Robinette
 
Title:      President and Chief Executive Officer
 
 
 
Acknowledged and Agreed:
 
 
/s/ Shawn K. Poe                
Shawn K. Poe
 


 
 
 

 
Exhibit 18.1   

 
March 30, 2009
 

Ply Gem Holdings, Inc.
Cary, N.C.

Ladies and Gentlemen:

We have audited the consolidated balance sheets of Ply Gem Holdings, Inc. and subsidiaries (the "Company") as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholder’s equity (deficit) and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2008, and have reported thereon under date of March 30, 2009. The aforementioned consolidated financial statements and our audit report thereon are included in the Company's annual report on Form 10-K for the year ended December 31, 2008. As stated in Note 5 to those consolidated financial statements, the Company changed its method of accounting for inventory costing for a portion of its inventory from a last-in, first-out (LIFO) method to a first-in, first-out (FIFO) method and states that the newly adopted accounting principle is preferable in the circumstances because it provides a better measure of the current value of its inventory and provides a better matching of manufacturing costs with revenues.  The change resulted in the application of a single costing method to all of the Company’s inventories.  In accordance with your request, we have reviewed and discussed with Company officials the circumstances and business judgment and planning upon which the decision to make this change in the method of accounting was based.

With regard to the aforementioned accounting change, authoritative criteria have not been established for evaluating the preferability of one acceptable method of accounting over another acceptable method. However, for purposes of the Company's compliance with the requirements of the Securities and Exchange Commission, we are furnishing this letter.

Based on our review and discussion, with reliance on management's business judgment and planning, we concur that the newly adopted method of accounting is preferable in the Company's circumstances.

Very truly yours,

/s/ KPMG LLP

 
 
 

 
 
Exhibit 31.1
 
 
 
Certification Pursuant To
Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
I, Gary E. Robinette, certify that:
 
1.    I have reviewed this annual report on Form 10- K of Ply Gem Holdings, Inc.;
 
2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)  evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)  disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to  adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
Date: March 30, 2009  
 
         
   
/s/ Gary E. Robinette       
Name:
 
Gary E. Robinette
Title:
 
President and Chief Executive Officer
 
 
 
 
 

 

 
Exhibit 31.2
 
 
 
Certification Pursuant To
Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
I, Shawn K. Poe, certify that:
 
1.    I have reviewed this annual report on Form 10-K of Ply Gem Holdings, Inc.;
 
2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)  evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)  disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to  adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
Date: March 30, 2009  
 
         
   
/s/ Shawn K. Poe      
Name:
 
Shawn K. Poe
Title:
 
Vice President, Chief Financial Officer, Treasurer and Secretary
 
 
 
 
 

 
Exhibit 32.1
 
Certification Pursuant to
18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the annual report on Form 10-K of Ply Gem Holdings, Inc., a Delaware corporation (the “Company”), for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
 
1.           the Report fully complies, in all material respects, with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2.           the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date:  March 30, 2009
/s/ Gary E. Robinette                         
Gary E. Robinette
President and Chief Executive Officer
Ply Gem Holdings, Inc.

 

 

 
 
 

 
Exhibit 32.2
 
Certification Pursuant to
18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the annual report on Form 10-K of Ply Gem Holdings, Inc., a Delaware corporation (the “Company”), for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
 
1.           the Report fully complies, in all material respects, with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2.           the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date:  March 30, 2009
/s/ Shawn K. Poe                                
Shawn K. Poe
Vice President, Chief Executive Officer,Treasurer and Secretary
Ply Gem Holdings, Inc.