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As filed with the Securities and Exchange Commission on April 5, 2013

Registration No. 333-167193

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 3

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

PLY GEM HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   3089   20-0645710

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

  (IRS Employer Identification No.)

5020 Weston Parkway, Suite 400

Cary, North Carolina 27513

(919) 677-3900

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Shawn K. Poe

Chief Financial Officer

Ply Gem Holdings, Inc.

5020 Weston Parkway, Suite 400

Cary, North Carolina 27513

(919) 677-3900

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

John C. Kennedy, Esq.

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, New York 10019

(212) 373-3000

 

Stephen L. Burns, Esq.

William J. Whelan III, Esq.

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, New York 10019

(212) 474-1000

Approximate date of commencement of proposed sale to public:   As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:     ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:     ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:     ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:     ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    ¨                   Accelerated filer    ¨                    Non-accelerated filer    þ                    Smaller reporting company   ¨

                             (Do not check if a smaller reporting company)

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  

Proposed Maximum

Aggregate Offering

Price(1)

  

Amount of

Registration Fee(2)

Common Stock, par value $0.01 per share    $300,000,000    $21,390

 

 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act of 1933.
(2) Previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 


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The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated April 5, 2013

Prospectus

             shares

 

LOGO

Ply Gem Holdings, Inc.

Common stock

This is an initial public offering of Ply Gem Holdings, Inc. common stock.

Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $        and $        per share. We intend to apply for listing of our common stock on the New York Stock Exchange under the symbol “PGEM.”

We are selling                 shares of common stock. The selling stockholders named in this prospectus have granted the underwriters an option to purchase a maximum of                  additional shares of common stock to cover over-allotments. We will not receive any proceeds from the sale of the shares by the selling stockholders.

Investing in our common stock involves risks. See “ Risk factors ” on page 15.

 

      Price to Public  

Underwriting

Discounts and

Commissions

  

Proceeds to

Ply Gem Holdings, Inc.

Per Share

  $   $    $

Total

  $   $    $

Delivery of the shares of common stock will be made against payment in New York, New York on or about                 , 2013.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

J.P. Morgan   Credit Suisse   Goldman, Sachs & Co.
UBS Investment Bank   Deutsche Bank Securities

Zelman Partners LLC

BB&T Capital Markets   Stephens Inc.

                , 2013.


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You should rely only on the information contained in this prospectus and any free writing prospectus we provide to you. Neither we nor the underwriters have authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither we nor the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus or such other date stated in this prospectus.

Table of contents

 

Prospectus summary

     1   

Risk factors

     15   

Cautionary note regarding forward-looking statements

     31   

Use of proceeds

     33   

Dividend policy

     34   

Capitalization

     35   

Dilution

     37   

Unaudited pro forma consolidated financial information

     39   

Selected historical consolidated financial data

     45   

Management’s discussion and analysis of financial condition and results of operations

     49   

Business

     78   

Management

     97   

Executive compensation

     105   

Principal and selling stockholders

     125   

Certain relationships and related party transactions

     129   

Description of capital stock

     140   

Shares available for future sale

     145   

Material U.S. federal income tax consequences for non-U.S. holders

     148   

Underwriting

     152   

Legal matters

     160   

Experts

     160   

Where you can find more information

     160   

Index to consolidated financial statements

     F-1   

 

 

Until                     , 2013 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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Market and industry data

Market data and other statistical information used throughout this prospectus are based on independent industry publications, government publications, reports by market research firms or other published independent sources. Some data are also based on good faith estimates by our management, which are derived from their review of internal surveys, as well as the independent sources listed above. Gary E. Robinette, our President and Chief Executive Officer, is a member of the Policy Advisory Board of Harvard University’s Joint Center for Housing Studies, and we have relied, in part, on its study for the market and statistical information included in this prospectus.

 

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Prospectus summary

This summary highlights material information about us and this offering, but does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including the “Risk factors” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus before investing. This prospectus includes forward-looking statements that involve risks and uncertainties. See “Cautionary note regarding forward-looking statements.”

Unless otherwise specified or the context requires otherwise, (i) the term “Ply Gem Holdings” refers to Ply Gem Holdings, Inc.; (ii) the term “Ply Gem Industries” refers to Ply Gem Industries, Inc., the principal operating subsidiary of Ply Gem Holdings; (iii) the terms “we,” “us,” “our,” “Ply Gem” and the “Company” refer collectively to Ply Gem Holdings and its subsidiaries; and (iv) the term “Reorganization Transactions” refers to the transactions described in “Certain relationships and related party transactions—Reorganization transactions.” 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.

Except as the context otherwise requires, references to information being “pro forma” or “on a pro forma basis” means such information is presented after giving effect to the Reorganization Transactions, the entry into the tax receivable agreement described in “Certain relationships and related party transactions—Tax receivable agreement,” this offering and the estimated use of proceeds from this offering as described under “Use of proceeds.” See “Unaudited pro forma financial information.”

Our company

We are a leading manufacturer of exterior building products in North America, operating in two reportable segments: (i) Siding, Fencing and Stone and (ii) Windows and Doors, which comprised approximately 59% and 41% of our sales, respectively, for the fiscal year ended December 31, 2012. These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl and composite railing, stone veneer and vinyl windows and doors used in both the new construction market and the home repair and remodeling market in the United States and Western Canada. Vinyl building products have the leading share of sales volume in siding and windows in the United States. We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core products. We believe that our comprehensive product portfolio and geographically diverse, low cost manufacturing platform allow us to better serve our customers and provide us with a competitive advantage over other exterior building products suppliers. For the year ended December 31, 2012, we had net sales of $1,121.3 million, adjusted EBITDA of $127.3 million and a net loss of $39.1 million.

Our competitive strengths

We believe the following competitive strengths differentiate us from our competitors and are critical to our continued success:

 

 

Leading Manufacturer of Exterior Building Products .  Based on our internal estimates and industry experience, we believe we have established leading positions in many of our core product categories including: No. 1 in vinyl siding in the U.S.; No. 1 in aluminum accessories in the U.S.; No. 2 in vinyl and aluminum windows in the U.S.; and No. 2 in windows and doors in Western Canada. We achieved this success by developing a broad offering of high quality

 

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products and providing superior service to our customers. We are one of the few companies in our industry that operate a geographically diverse manufacturing platform capable of servicing our customers across the entire United States and Western Canada. The scale of our operations also positions us well as customers look to consolidate their supplier base. We believe our broad offering of leading products, geographically diverse manufacturing platform and long-term customer relationships make us the manufacturer of choice for our customers’ exterior building products needs.

 

 

Comprehensive Product Portfolio with Strong Brand Recognition .  We offer a comprehensive portfolio of over twenty exterior building product categories covering a full range of price points. Our broad product line gives us a competitive advantage over other exterior building product suppliers who provide a narrower range of products by enabling us to provide our customers with a differentiated value proposition to meet their own customers’ needs. Our leading brands, such as Ply Gem ® , Mastic ® Home Exteriors, Variform ® , Napco ® , Georgia-Pacific (which we license) and Great Lakes ® Window, are well recognized in the industry. Many of our customers actively support our brands and typically become closely tied to our brands through joint marketing and training, fostering long-term relationships under the common goal of delivering a quality product.

We believe a distinguishing factor in our customers’ selection of Ply Gem as a supplier is our innovation and quality for which our brands are known. As a result, our customers’ positive experiences with one product or brand affords us the opportunity to cross-sell additional products and effectively introduce new products. Since 2007, we have successfully implemented a more unified brand strategy to expand our cross-selling opportunities between our siding and window product offerings. For instance, we consolidated certain window product offerings under the Ply Gem brand to offer a national window platform to our customers, which we believe represents a comprehensive line of new construction and home repair and remodeling windows. Our unified branding and cross-selling strategy has produced market share gains across all product categories since 2011 with a significant retail home center, a large building products distributor, a large national builder, and several regional home builders. With our extensive product line breadth, industry-leading brands and national platform, we believe we can provide our current and future customers with a more cost-effective, single source from which to purchase their exterior building products.

 

 

Multi-Channel Distribution Network Servicing a Broad Customer Base .  We have a multi-channel distribution network that serves both the new construction and home repair and remodeling end markets through our broad customer base of specialty and wholesale distributors, retail home centers, lumberyards, remodeling dealers and builders. Our multi-channel distribution strategy has increased our sales and penetration within these end markets, while limiting our exposure to any one customer or channel, such that our top ten customers only accounted for approximately 45.9% of our net sales in 2012. We believe our strategy enables us to minimize channel conflict, reduce our reliance on any one channel and reach the greatest number of end customers while providing us with the ability to increase our sales and to sustain our financial performance through economic fluctuations.

 

 

Balanced Exposure to New Construction and Home Repair and Remodeling .  Our products are used in new construction and home repair and remodeling, with our diversified product mix reducing our overall exposure to any single sector. We operate in two reportable segments: (i) Siding, Fencing and Stone, which has been weighted towards home repair and remodeling, and (ii) Windows and Doors, which has historically focused on new construction. We have begun to expand our presence in the home repair and remodel window sector through the

 

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launch of a new series of repair and remodel window products, focusing on the unique requirements of this sector while leveraging our existing customer relationships. This is one of several initiatives that have been well received by our customers and that complement our established product offerings by utilizing our national sales force to sell multiple products in our portfolio. For example, our Mastic Window product, which launched in 2011, has produced favorable results with rapid net sales growth in the repair and remodeling market by leveraging our existing relationships within this sector. We believe the diversity of our end markets and products provides us with a unique opportunity to capitalize on the overall housing market recovery.

 

 

Highly Efficient, Low Cost Operating Platform .  Since mid-2006, we have closed or consolidated eight plants, generating savings of over $30 million annually, and significantly reduced our workforce. Since 2006, we also invested approximately $91.6 million in capital expenditures, including new product introductions and upgrades to equipment, facilities and technology, to continue improving our vertically integrated manufacturing platform. For example, our multi-plant window manufacturing platform allows us to service our customers with minimal lead times across a broad geographic coverage area, providing us a competitive advantage with the ability to operate in just-in-time fashion. This capability provides a unique service proposition to our customers while allowing us to maintain minimal inventory levels in our window product offerings. In addition, as a result of our polyvinyl chloride (“PVC”) resin purchasing scale (we are one of the largest purchasers in North America based on industry estimates), we are able to secure favorable prices, terms and input availability through various cycles. Furthermore, since 2008, we have centralized numerous back office functions to our corporate office that previously resided in our business segments. This enabled us to maximize our efficiencies and minimize selling, general, and administrative expenses during the U.S. housing downturn.

Through our strong cost controls, vertically-integrated manufacturing platform, continued investment in technology, focus on safety and significant purchasing scale, we have improved efficiency in our manufacturing facilities while maintaining a low fixed cost structure of approximately 21% of our total cost structure, which provides significant operating leverage as the housing market recovers. Furthermore, our manufacturing facilities are among the safest in North America with four of them having received the highest federal, state and/or provincial safety award and rating. We believe that we have one of the most efficient and safest operating platforms in the exterior building products industry, helping to drive our profitability.

 

 

Proven Track Record of Acquisition Integration and Cost Savings Realization .  Our six acquisitions since early 2004 have enhanced our geographic diversity, expanded our product offerings and enabled us to enter new product categories. Our acquisition of United Stone Veneer (now branded Ply Gem Stone) in 2008 enabled us to enter the stone veneer product category, which is one of the fastest growing categories of exterior cladding products. We have maintained a disciplined focus on integrating new businesses, rather than operating them separately, and have realized meaningful synergies as a result. Through facility and headcount rationalizations, strategic sourcing and other manufacturing improvements, we have permanently eliminated over $50 million in aggregate costs. We view our ability to identify, execute and integrate acquisitions as one of our core strengths and expect that this offering will significantly improve our financial position and flexibility, enabling us to lead the continued consolidation of the exterior building products industry.

 

 

Strong Management Team with Significant Ownership .  We are led by a committed senior management team that has an average of over 20 years of relevant industry experience. Our

 

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current senior management, with financial and advisory support from affiliates of CI Capital Partners LLC, has successfully transformed Ply Gem from operating as a holding company with a broad set of brand offerings to an integrated business model under the Ply Gem brand, positioning our Company to grow profitably and rapidly as the housing market recovers. As of December 31, 2012, after giving effect to the Reorganization Transactions (assuming a public offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus)), members of our management team held common stock and stock awards representing approximately         % of the shares of our Company, which will decline to         % upon completion of this offering.

Our business strategy

We are pursuing the following business and growth strategies:

 

 

Capture Growth Related to Housing Market Recovery .  As a leading manufacturer of exterior building products, we intend to capitalize on the continued recovery in the new construction market and the anticipated recovery in the home repair and remodeling market. The National Association of Home Builders’ (“NAHB”) 2012 estimate of single family housing starts was 535,000, which was approximately 49% below the 50-year average, representing a significant opportunity for growth as activity improves to rates that are more consistent with historical levels. Furthermore, we believe that the underinvestment in homes during the recent recession and the overall age of the U.S. housing stock will drive significant future spending for home repair and remodeling.

We expect homeowners’ purchases to focus on items that provide the highest return on investment, have positive energy efficiency attributes and provide potential cost savings. Our broad product offering addresses expected demand growth from all of these key trends through our exposure to the new construction and the home repair and remodeling end markets, diverse price points, the high recovery value for home improvements derived from our core product categories and the ability to provide products that qualify for energy efficiency rebate and tax programs currently in effect or under consideration.

 

 

Continue to Increase Market Penetration .  We intend to increase the market penetration of our siding, fencing and stone products and our window and door products by leveraging the breadth of our product offering and broad geographical footprint to serve customers across North America and by pursuing cross-selling opportunities. Additionally, our continued investments in product innovation and quality, coupled with strong customer service, further enhance our ability to capture increased sales in each of our core product categories. In 2012, we maintained our U.S. vinyl siding leading market position at approximately 36.0%. We increased our market position to 36.0% in 2011 from 32.3% in 2010 due in part to a significant customer win in the retail sales channel as well as with a top national builder. In 2012, we also continued to achieve strategic market share gains obtaining new regional window business with a large home center.

The national builder win by our siding business in 2011 was an existing top ten customer in our window business. We believe that this demonstrates the substantial opportunity across our product categories to cross-sell and bundle products, thereby increasing revenues from our existing channel partners and industry relationships. Another example of this cross-selling opportunity is our 2010 introduction of a new vinyl windows line under our Ply Gem brand as well as under our Mastic Home Exteriors brand, historically associated with vinyl siding products. We expect to build upon our market positions as the housing market recovers from its current levels and to further enhance our leading positions.

 

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Expand Brand Coverage and Product Innovation .  Ply Gem’s brand building efforts extend across multiple media, including national trade journals, website marketing, social media and national consumer magazines and broadcast outlets, both in the United States and Canada, resulting in over 10 million trade impressions and more than 200 million consumer impressions in 2012. Significant brand recognition in 2012 included Fox News “Fox and Friends” morning program, Better Homes and Gardens Magazine and The New York Times, each focusing on Ply Gem’s ability to deliver a complete exterior as a single manufacturer, something we call “The Designed Exterior by Ply Gem.” Our products also frequently receive industry recognition. For example, Consumer Reports placed The Designed Exterior at the top of their list for “Five Trends you can take home from the International Builders Show” in 2012.

We will continue to increase the value of the Ply Gem brands by introducing new product categories for our customers and by developing innovative new products within our existing product categories. For example, we have developed a complete series of window products under the Ply Gem brand to target the higher margin home repair and remodeling window end market. Furthermore, our 2008 addition of stone veneer to our product offering in the Siding, Fencing and Stone segment provides existing siding customers with access to the fastest growing category of exterior cladding products. In 2013, we announced that we will be manufacturing and selling cellular PVC trim and mouldings, a low-maintenance alternative to traditional wood trim designed to work well with siding, within the estimated $1.4 billion residential trim market.

During 2012, we continued our focus on innovation by establishing a new entity under Ply Gem Industries, Foundation Labs by Ply Gem, LLC (“Foundation Labs”), whose mission and purpose is to house product development from idea creation to product commercialization. By having dedicated resources committed to product development, we are investing in our future. The result of our commitment to product development and innovation has been demonstrated in the approximately $441.7 million of incremental annualized sales that we recognized for new products introduced from 2009 to 2012.

 

 

Drive Operational Leverage and Further Improvements .   While we reduced our production capacity during the past several years, we have retained the flexibility to bring back idled lines, facilities and production shifts in order to increase our production as market conditions improve. This incremental capacity can be selectively restarted, providing us with the ability to match increasing customer demand levels as the housing market returns to historical levels of approximately one million or more single family housing starts without the need for significant capital investment. In our Windows and Doors segment, where we have historically focused on new construction, we believe that our new window products for home repair and remodeling will be able to drive increased volumes through these manufacturing facilities and enhance operating margins.

Over the past several years, we have significantly improved our manufacturing cost structure; however, there are opportunities for further improvements. We believe that the continued expansion of lean manufacturing and vertical integration in our manufacturing facilities, along with the further consolidation of purchases of key raw materials, supplies and services will continue to provide us with cost advantages compared to our competitors. In addition, the integration of our sales and marketing efforts across our product categories provides an ongoing opportunity to significantly improve our customer penetration and leverage the strength of our brands. Furthermore, we have centralized many back office functions into our corporate office in Cary, North Carolina, and believe that additional opportunities remain. We

 

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believe all of these factors should drive continued growth in profitability while improving our cash flow and capital efficiency.

Building products end markets

Demand for exterior building products, including siding, fencing, stone, windows and doors, is primarily driven by construction of new homes and repair and remodeling of existing 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 economic factors.

New home construction

Management believes that a U.S. housing recovery is underway on a national basis, supported by favorable demographic trends, historically low interest rates and consumers who are increasingly optimistic about the U.S. housing market. New construction in the United States experienced strong growth from the early 1990s to 2006, with housing starts increasing at a compounded annual growth rate of 3.8%. However, from 2006 to 2012, single family housing starts are estimated to have declined 64% according to the NAHB. While the industry has experienced a period of severe correction, management believes that the long-term economic outlook for new construction in the United States is favorable and supported by an attractive interest rate environment, increasing consumer confidence, improving employment growth and strong demographics, as new household formations and increasing immigration drives demand for starter homes. According to the Joint Center for Housing Studies of Harvard University, net new household formations between 2010 and 2020 are expected to be approximately 11.8 million units.

Moreover, during 2012, single family housing starts are estimated to have increased 23.2% to 535,000 compared to 2011, having declined by 7.9% during the 2010 to 2011 period. Finally, the NAHB is currently forecasting single family housing starts to further increase in 2013 and 2014 by 23.0% and 28.9%, respectively.

Home repair and remodeling

Management believes that the U.S. home repair and remodeling products market is poised for a recovery. Since the early 1990s and through 2006, demand for home repair and remodeling products in the United States increased at a compounded annual growth rate of 4.3%, according to the U.S. Census Bureau, as a result of strong economic growth, low interest rates and favorable demographics. However, beginning in 2007 the ability for homeowners 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 financial institutions and the significant decrease in home values, which limited the amount of home equity against which homeowners could borrow. Management believes that expenditures for home repair and remodeling products are also affected by consumer confidence that continued to be depressed during 2012 due to general economic conditions, debt ceiling and national budget deliberations, and unemployment levels. Management believes the long-term economic outlook of the demand for home repair and remodeling products in the United States is favorable and supported by the move towards more energy-efficient products, recent underinvestment in home maintenance and repair, and an aging housing stock.

 

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Risks associated with our business

Our business is subject to numerous risks, which are highlighted in the section entitled “Risk factors . These risks represent challenges to the successful implementation of our strategy and the growth of our business. Some of these risks are:

 

 

Downturns in the home repair and remodeling or the new construction end markets, or the economy or the availability of consumer credit, could adversely impact our end users and lower the demand for, and pricing of, our products, which in turn could cause our net sales and net income to decrease.

 

 

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

 

 

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

 

 

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 that they purchase from us.

 

 

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

 

 

Our ability to operate and our growth potential could be materially and adversely affected if we cannot employ, train and retain qualified personnel at a competitive cost.

 

 

As of December 31, 2012, on an adjusted basis after giving effect to the Reorganization Transactions and this offering, we would have had approximately $         million of indebtedness outstanding. The significant amount of our indebtedness may limit the cash flow available to invest in the ongoing needs of our business.

 

 

We may be unable to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful. We may also be unable to generate sufficient cash to make required capital expenditures.

For a discussion of these and other risks you should consider before making an investment in our common stock, see the section entitled “Risk factors” beginning on page 15.

 

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Our principal stockholders

After giving effect to the Reorganization Transactions (assuming a public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus)), affiliates of, and companies managed by, CI Capital Partners LLC (“CI Capital Partners”), including Caxton-Iseman (Ply Gem), L.P. and Caxton-Iseman (Ply Gem) II, L.P. (collectively, the “CI Partnerships”), will beneficially own approximately         % of our common stock. Upon completion of this offering, after giving effect to the Reorganization Transactions (assuming a public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus)), the CI Partnerships are expected to beneficially own approximately         % of our outstanding common stock, or         % if the underwriters exercise their over-allotment option in full.

CI Capital Partners is a leading private equity investment firm specializing in leveraged buyouts of middle-market companies located primarily in North America. Since its inception, CI Capital Partners’ investment activities have been managed by Frederick Iseman and Steven Lefkowitz who have invested together for over 20 years. CI Capital Partners’ senior investment professionals have over 70 years of collective experience at CI Capital Partners.

Reorganization transactions

In connection with this offering, we will merge with our parent corporation and engage in a series of transactions that will convert the outstanding subordinated debt, common stock and preferred stock of our parent corporation into common equity and result in a single class of our common stock outstanding.

Currently, Ply Gem Prime Holdings, Inc. (“Ply Gem Prime”) owns 100% of our capital stock. Immediately prior to the closing of this offering, Ply Gem Prime will merge with and into Ply Gem Holdings, with Ply Gem Holdings being the surviving entity. In the reorganization merger, we will issue a total of         shares of our common stock, representing         % of our outstanding common stock after giving effect to this offering. In the reorganization merger, all of the preferred stock of Ply Gem Prime (including the subordinated debt of Ply Gem Prime that will have been converted into preferred stock as part of the Reorganization Transactions) will be converted into a number of shares of our common stock based on the initial public offering price of our common stock and the liquidation value of and the maximum dividend amount in respect of the preferred stock. The holders of common stock of Ply Gem Prime will receive an aggregate number of shares of our common stock equal to the difference between                  and the number of shares of our common stock issued to the holders of preferred stock of Ply Gem Prime. Based on an assumed public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus), in the reorganization merger, holders of preferred stock of Ply Gem Prime will receive an aggregate of          shares of our common stock and holders of common stock of Ply Gem Prime will receive an aggregate of          shares of our common stock.

Finally, in connection with the reorganization merger, options to purchase shares of common stock of Ply Gem Prime will be converted into options to purchase shares of our common stock with adjustments to the number of shares and per share exercise prices. See “ Certain relationships and related party transactions — Reorganization transactions.

 

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Corporate information

We were incorporated under the laws of the State of Delaware on January 23, 2004. Our principal executive offices are located at 5020 Weston Parkway, Suite 400, Cary, North Carolina 27513. Our telephone number is (919) 677-3900. Our website is www.plygem.com. Information contained on our website does not constitute a part of this prospectus.

 

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The offering

 

Common stock outstanding before this offering

shares.

 

Common stock offered by us

shares.

 

Common stock offered by the selling stockholders

shares if the underwriters exercise their over-allotment option in full.

 

Common stock to be outstanding immediately after this offering

shares.

 

Over-allotment option

The underwriters have an option for a period of 30 days after the date of this prospectus to purchase up to                additional shares of our common stock from the selling stockholders to cover over-allotments.

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $        million, after deducting the underwriting discount and estimated offering expenses payable by us. We intend to use the net proceeds to us (i) to redeem, repurchase or repay a portion of our outstanding indebtedness and (ii) to pay transaction fees and other expenses.

 

  We will not receive any proceeds from the sale of our common stock by the selling stockholders if the underwriters exercise their option to purchase additional shares from the selling stockholders.

 

  See “ Use of proceeds .”

 

Listing

We intend to apply to list our common stock on the New York Stock Exchange (“NYSE”) under the symbol “PGEM.”

 

Dividend policy

We do not intend to declare or pay any cash dividends on our common stock for the foreseeable future. See “ Dividend policy .”

 

Risk factors

You should read the “ Risk factors ” section of this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock.

The number of shares of our common stock outstanding after this offering excludes             shares that are subject to options granted pursuant to the Ply Gem Prime Holdings, Inc. 2004 Stock Option Plan (the “2004 Option Plan”) as of                  , 2012 at a weighted average exercise price of $        per share and             shares reserved for issuance under the Ply Gem Prime Holdings, Inc. Long Term Incentive Plan (the “LTIP”, and together with the 2004 Option Plan, the “Equity Plans”). See “ Executive compensation .”

 

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Unless we indicate otherwise, all information in this prospectus:

 

 

assumes that the underwriters do not exercise their option to purchase from the selling stockholders up to             shares of our common stock to cover over-allotments;

 

 

assumes a public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus); and

 

 

gives effect to the Reorganization Transactions.

 

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Summary historical and pro forma consolidated financial

data of Ply Gem Holdings, Inc.

The summary historical consolidated financial data presented below as of December 31, 2012 and for each of the years in the three year period ended December 31, 2012 have been derived from, and should be read together with, our audited consolidated financial statements and the accompanying notes included elsewhere in this prospectus. Except as otherwise noted below, the summary unaudited pro forma consolidated financial data presented below gives effect to the transactions described under “ Unaudited pro forma financial information.

The information set forth below should be read in conjunction with “ Capitalization, ” “ Unaudited pro forma financial information, ” “ Selected historical consolidated financial data, ” “ Management’s discussion and analysis of financial condition and results of operations ” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Accordingly, amounts, percentages and figures shown as totals may not be the arithmetic aggregation of the individual amounts, percentages or figures that comprise or precede them.

 

       Year ended December 31,  
(amounts in thousands (except per share data))      2012        2011        2010   

Statement of operations data:(1)

      

Net sales

   $ 1,121,301      $ 1,034,857      $ 995,906   

Cost of products sold

     877,102        824,325        779,946   
  

 

 

   

 

 

   

 

 

 

Gross profit

     244,199        210,532        215,960   

Operating expenses:

      

Selling, general and administrative expenses

     147,242        138,912        130,460   

Amortization of intangible assets

     26,937        26,689        27,099   

Write-off of previously capitalized offering costs

                   1,571   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     174,179        165,601        159,130   
  

 

 

   

 

 

   

 

 

 

Operating earnings

     70,020        44,931        56,830   

Foreign currency gain

     409        492        510   

Interest expense

     (103,133     (101,488     (122,992

Interest income

     91        104        159   

Gain (loss) on modification or extinguishment of debt(2)

     (3,607     (27,863     98,187   
  

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     (36,220     (83,824     32,694   

Provision for income taxes

     2,835        683        5,027   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (39,055   $ (84,507   $ 27,667   
  

 

 

   

 

 

   

 

 

 

Basic and diluted earnings (loss) attributable to common stockholders per common share

   $ (390.55   $ (845.07   $ 276.67   

 

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(amounts in thousands (except per share data))    Year ended December 31,  
   2012     2011     2010  

Pro forma earnings per share:(3)(4)

                        

Basic earnings per share

   $                    

Diluted earnings per share

      

Weighted average shares outstanding:

      

Basic weighted average shares outstanding

      

Diluted weighted average shares outstanding

      

Other data:

      

Adjusted EBITDA(5)

   $ 127,262      $ 114,501      $ 123,054   

Capital expenditures

     24,646        11,490        11,105   

Depreciation and amortization

     52,277        54,020        60,718   

Annual single family housing starts(6)

     535        434        471   

Selected statements of cash flows data:

      

Net cash provided by (used in):

      

Operating activities

   $ 48,704      $ (3,459   $ 6,748   

Investing activities

     (24,553     (11,388     (9,073

Financing activities

     (8,813     9,198        2,407   

 

 

 

Balance sheet data:    As of December 31, 2012  
   Actual     Pro Forma(4)(7)  

Cash and cash equivalents

   $ 27,194      $                    

Total assets

     881,850     

Total long-term debt

     964,384     

Stockholder’s deficit

     (314,942        

 

(1)   In April 2012, we adopted the financial presentation provision of Accounting Standard Update 2011-05, Presentation of Comprehensive Income.

 

(2)   During the year ended December 31, 2012, we incurred a loss on modification or extinguishment of debt of approximately $3.6 million consisting of $1.5 million in call premiums, $0.4 million expense of unamortized debt issuance costs associated with the 13.125% Senior Subordinated Notes due 2014 (the “13.125% Senior Subordinated Notes”), $0.3 million expense of unamortized discount for the 13.125% Senior Subordinated Notes, and $1.4 million expense of third party fees for the 13.125% Senior Subordinated Notes. During the year ended December 31, 2011, we incurred a loss on modification or extinguishment of debt of approximately $27.9 million consisting of $10.9 million in tender premiums, $2.8 million expense of unamortized debt issuance costs associated with the 11.75% Senior Secured Notes due 2013 (the “11.75% Senior Secured Notes”), $0.8 million expense of unamortized discounts for the 11.75% Senior Secured Notes, $12.3 million expense of third party fees for the 8.25% Senior Secured Notes due 2018 (the “8.25% Senior Secured Notes”), and $1.2 million for the expense of unamortized debt issuance costs for the previous senior secured asset-based revolving credit facility. During the year ended December 31, 2010, we recorded a non-cash gain on extinguishment of debt of approximately $98.2 million in connection with the redemption of the 9% Senior Subordinated Notes due 2012 (the “9% Senior Subordinated Notes”) arising from a net reacquisition price of approximately $261.8 million versus the carrying value of the 9% Senior Subordinated Notes of $360.0 million. 

 

(3)   Reflects the Reorganization Transactions and the change in the Company’s capital structure prior to the completion of this offering.

The following details the computation of the pro forma earnings per common share and is unaudited:

 

(amounts in thousands (except per share data))    For the year ended
December 31, 2012
 

Net loss

   $ (39,055

Unaudited pro forma weighted average common share calculation:

  

Conversion of Ply Gem Prime Holdings common stock

  

Conversion of Ply Gem Prime Holdings preferred stock

  

Unaudited basic pro forma weighted average shares outstanding

  

Treasury stock effect of outstanding stock options

  

Unaudited diluted pro forma weighted average shares outstanding

  

Pro forma earnings per common share:

  

Pro forma basic earnings per common share

  

Pro forma diluted earnings per common share

  

 

 

 

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(4)   The summary unaudited pro forma financial data are based upon available information and certain assumptions as discussed in the notes to the unaudited pro forma financial information presented under “Unaudited pro forma financial information.” The summary unaudited pro forma financial data are for informational purposes only and do not purport to represent what our results of operations or financial position actually would have been if each such transaction had occurred on the dates specified, nor does this data purport to represent the results of operations for any future period.

 

(5)   Adjusted EBITDA means net income (loss) plus interest expense (net of interest income), provision (benefit) for income taxes, depreciation and amortization, non-cash foreign currency transactions gain/(loss), non-cash loss (gain) on modification or extinguishment of debt, amortization of non-cash write-off of the portion of excess purchase price from acquisitions allocated to inventories, write-off of previously capitalized offering costs, environmental remediation, restructuring and integration expenses, customer inventory buybacks, impairment charges and management fees paid under our advisory agreement with an affiliate of the CI Partnerships. Other companies may define adjusted EBITDA differently and, as a result, our measure of adjusted EBITDA may not be directly comparable to adjusted EBITDA of other companies. Management believes that the presentation of adjusted EBITDA included in this prospectus provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business. We have included adjusted EBITDA because it is a key financial measure used by management to (i) assess our ability to service our debt and/or incur debt and meet our capital expenditure requirements; (ii) internally measure our operating performance; and (iii) determine our incentive compensation programs. In addition, our senior secured asset-based revolving credit facility (the “ABL Facility”) has certain covenants that apply ratios utilizing this measure of adjusted EBITDA.

Despite the importance of this measure in analyzing our business, measuring and determining incentive compensation and evaluating our operating performance, as well as the use of adjusted EBITDA measures by securities analysts, lenders and others in their evaluation of companies, adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. generally accepted accounting principles (“U.S. GAAP”); nor is adjusted EBITDA intended to be a measure of liquidity or free cash flow for our discretionary use. Some of the limitations of adjusted EBITDA are:

 

   

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures;

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense or the cash requirements to service interest or principal payments under the 9.375% Senior Notes due 2017 (the “9.375% Senior Notes”), the 8.25% Senior Secured Notes, the 11.75% Senior Secured Notes, the 13.125% Senior Subordinated Notes or the ABL Facility;

 

   

Adjusted EBITDA does not reflect income tax payments we are required to make; and

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements.

Adjusted EBITDA included in this prospectus should be considered in addition to, and not as a substitute for, net earnings or operating earnings in accordance with U.S. GAAP as a measure of performance in accordance with U.S. GAAP. You are cautioned not to place undue reliance on adjusted EBITDA. The adjusted EBITDA amounts are unaudited.

The following table presents our calculation of adjusted EBITDA reconciled to net income (loss) and is unaudited:

 

       Year ended December 31,  
(amounts in thousands)    2012     2011     2010  

Net income (loss)

   $ (39,055   $ (84,507   $ 27,667   

Interest expense, net

     103,042        101,384        122,833   

Provision for income taxes

     2,835        683        5,027   

Depreciation and amortization

     52,277        54,020        60,718   

Non-cash gain on foreign currency transactions

     (409     (492     (510

Non-cash (gain) loss on modification or extinguishment of debt(2)

     3,607        27,863        (98,187

Write-off of previously capitalized offering costs

                   1,571   

Restructuring and integration expenses

     1,677        1,616        910   

Customer inventory buybacks

     768        10,087        574   

Environmental remediation

            1,580          

Management fees(8)

     2,520        2,267        2,451   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 127,262      $ 114,501      $ 123,054   

 

(6)   Single family housing starts data furnished by NAHB forecast (as of February 2, 2013). These amounts are unaudited.

 

(7)  

Gives effect to the Reorganization Transactions, the creation of liabilities in connection with entering into the tax receivable agreement described in “Certain relationships and related party transactions—Tax receivable agreement,” this offering and the application of the net proceeds from this offering as described under “Use of proceeds” as if such transactions took place on December 31, 2012. These amounts are unaudited.

 

(8)   After the completion of this offering, the advisory agreement with an affiliate of the CI Partnerships will be terminated and management fees will no longer be paid.

 

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Risk factors

Investing in our common stock involves substantial risks. In addition to the other information in this prospectus, you should carefully read and consider the risk factors set forth below before deciding to invest in our common stock. Any of the following risks could adversely affect our business, results of operations, financial condition and liquidity. The market price of our common stock could decline if one or more of these risks and uncertainties develop into actual events, causing you to lose all or part of your investment in our common stock. Certain statements in “Risk factors” are forward-looking statements. See “Cautionary note regarding forward-looking statements.”

Risks associated with our business

Downturns in the home repair and remodeling or the new construction end markets, or the economy or the availability of consumer credit, could adversely impact our end users and 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 construction spending, which declined significantly in the 2009 through 2011 period as compared to 2008 recovering slightly in 2012 compared to historical levels and are affected by such factors as interest rates, inflation, consumer confidence, unemployment and the availability of consumer credit.

Our performance is also 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 is 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. Trends such as declining home values, increased home foreclosures and tightening of credit standards by lending institutions, have negatively impacted the home repair and remodeling and the new construction sectors. If these credit market trends continue or worsen, our net sales and net income may be adversely affected.

We face competition from other 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 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 in 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, such as wood, metal, fiber cement and masonry in siding, and wood in windows. An increase in competition from other 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 margins 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

 

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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.

Certain of our customers have been expanding and may continue to expand through consolidation and internal growth, which may increase their buying power, which could materially and adversely affect our revenues, results of operations and financial position.

Certain of our important customers are large companies with significant buying power. In addition, potential further consolidation in the distribution channels could enhance the ability of certain of our customers to seek more favorable terms, including pricing, for the products that they purchase from us. Accordingly, our ability to maintain or raise prices in the future may be limited, including during periods of raw material and other cost increases. If we are forced to reduce prices or to maintain prices during periods of increased costs, or if we lose customers because of pricing or other methods of competition, our revenues, operating results and financial position may be materially and adversely affected.

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 that they purchase from us.

Our top ten customers accounted for approximately 45.9% of our net sales in the year ended December 31, 2012. Our largest customer distributes our products within its building products distribution business, and accounted for approximately 10.5% of our consolidated 2012 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 our largest customer or any other major customer could cause a material decrease in our net sales. 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 flows. 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 that could affect the timing of the demand for our products and cause reduced profit margins when such conditions exist.

Markets for our products are seasonal and can be affected by inclement weather conditions. Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods. Because much of our overhead and operating expenses are spread ratably 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.

 

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Increases in 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 cost of labor. As of December 31, 2012, approximately 14.5% of our employees were represented by labor unions. We are subject to the risk that strikes or other types of conflicts with personnel may arise or that we may become a subject of union organizing activity. Furthermore, some of our direct and indirect suppliers have unionized work forces. Strikes, work stoppages or slowdowns experienced by these suppliers could result in slowdowns or closures of facilities where components of our products are manufactured. Any interruption in the production or delivery of our products could reduce sales of our products and increase our costs.

Our ability to operate and our growth potential could be materially and adversely affected if we cannot employ, train and retain qualified personnel at a competitive cost.

Many of the products that we manufacture and assemble require manual processes in plant environments. We believe that our success depends upon our ability to employ, train and retain qualified personnel with the ability to design, manufacture and assemble these products. In addition, our ability to expand our operations depends in part on our ability to increase our skilled labor force as the housing market recovers in the United States and Western Canada. A significant increase in the wages paid by competing employers could result in a reduction of our qualified labor force, increases in the wage rates that we must pay, or both. In addition, our ability to quickly and effectively train additional workforce to handle the increased volume and production while minimizing labor inefficiencies and maintaining product quality will be a strategic initiative in a housing market recovery. If either of these events were to occur, our cost structure could increase, our margins could decrease, and any growth potential could be impaired.

We may be subject to claims arising from the operations of our various businesses arising from periods prior to the dates we acquired them. 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, including Ply Gem Industries, MWM Holding, Inc. (“MWM Holding”), AWC Holding Company (“AWC,” and together with its subsidiaries, “Alenco”), Mastic Home Exteriors, Inc. (formerly known as Alcoa Home Exteriors) (“MHE”) and Ply Gem Pacific Windows Corporation (“Pacific Windows”), and substantially all of the assets of Ply Gem Stone and Greendeck Products, LLC (“Greendeck”), in the last several years. We may be subject to claims or liabilities arising from the ownership or operation of our subsidiaries for the periods prior to our acquisition of them, including environmental liabilities. These claims or liabilities could be significant. Our ability to seek indemnification from the former owners of our subsidiaries for these claims or liabilities is limited by various factors, including the specific limitations contained in the respective acquisition agreement and the financial ability of the former owners to satisfy such claims or liabilities. If we are unable to enforce our indemnification rights against the former owners or if the former owners are unable to satisfy their obligations for any reason, including because of their current financial position, we could be held liable for the costs or obligations associated with such claims or liabilities, which could adversely affect our operating performance.

 

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We could face potential product liability claims, including class action claims, relating to products we manufacture.

We face an inherent business risk of exposure to product liability claims, including class action 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, Buckley, and Morstad, 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 the loss of their 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 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 goods could cause us to cease manufacturing one or more of our products for a period of time.

Environmental requirements may impose significant costs and liabilities on us.

Our facilities are subject to numerous United States and Canadian federal, state, provincial and local laws and regulations relating to 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

 

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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 may be held liable, or incur fines or penalties in connection with such requirements or liabilities 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 known or newly-discovered contamination at any of our properties from activities conducted by previous occupants. The amount of such liability, fine or penalty may be material. 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, Inc. (“Nortek”), has agreed to indemnify us, subject to certain limitations, for environmental 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 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, as well as by limits to the indemnity.

We are currently involved in environmental proceedings involving Ply Gem Canada, Inc. (“Ply Gem Canada”) and Alberta Environment (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), Kroy Building Products, Inc. (relating to contamination in a drinking water well in York, Nebraska) and MHE (relating to a closed landfill site in Sidney, Ohio). Under the stock purchase agreement governing the Ply Gem acquisition, Nortek has agreed 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 with the Georgia Department of Natural Resources 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. Our ability to seek indemnification or enforce other obligations is, however, limited by the strength of the financial condition of the indemnitor or responsible party, which could change in the future, as well as by limits to any such indemnities or obligations.

In 2011, MW Manufacturers Inc. (“MW”), a subsidiary of MWM Holding, entered into an Administrative Order on Consent with the United States Environmental Protection Agency (“EPA”), Region III, under Section 3008(h) of the Resource Conservation and Recovery Act (RCRA), primarily relating to contamination associated with an underground storage tank formerly located at its Rocky Mount, Virginia property. As part of the Administrative Order on Consent, MW provided the EPA with a facility investigation work plan and a preliminary cost estimate of approximately $1.8 million over the remediation period. This facility investigation work plan was approved by the EPA for initiation of remediation work in December 2012. Certain liabilities for this subject contamination have 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

 

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Partners, we are similarly indemnified by U.S. Industries, Inc. Our ability to seek indemnification from U.S. Industries is, however, limited by the terms of the indemnity as well as the strength of U.S. Industries’ financial condition, which could change in the future.

In addition, under the stock purchase agreement governing the MWM Holding acquisition, the sellers agreed to indemnify us for the first $250,000 in certain costs of compliance with the New Jersey Industrial Site Recovery Act at a facility of MW in Hammonton, New Jersey and for 75% of any such costs between $250,000 and $5.5 million. Our ability to seek indemnification or enforce other obligations is, however, limited by the strength of the financial condition of the indemnitor or responsible party, which could change in the future, as well as by limits to any such indemnities or obligations.

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 the previous owners of our subsidiaries could result in significant environmental liabilities that could adversely impact our operating performance. In addition, we might incur significant capital and other costs to comply with increasingly stringent United States or Canadian environmental laws or enforcement policies that would decrease our cash flow.

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 realignment, cost savings programs, and labor ramp-up costs could result in a decrease in our short-term earnings until the expected cost reductions are achieved and/or production volumes stabilize. 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 also have issued patents and rely on trade secret and 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.

Increases in fuel costs could cause our cost of products sold to increase and net income to decrease.

Increases in fuel costs can negatively impact our cost to deliver our products to our customers and thus increase our cost of products sold. If we are unable to increase the selling price of our products to our customers to cover any increases in fuel costs, net income may be adversely affected.

 

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Declines in our business conditions may result in an impairment of our tangible and intangible assets which could result in a material non-cash charge.

A negative long-term performance outlook could result in a decrease in net sales, which could result in a decrease in operating cash flows. These declines could result in an impairment of our tangible and intangible assets which results when the carrying value of the assets exceed their fair value.

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

As of December 31, 2012, on an adjusted basis after giving effect to the Reorganization Transactions and this offering, we would have had approximately $        million of indebtedness outstanding, including no outstanding borrowings and $128.4 million of borrowing base availability under the ABL Facility.

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

 

 

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, the industry in which we operate and the general economy;

 

 

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.

Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our obligations under our indebtedness.

The terms of our debt covenants could limit how we conduct our business and our ability to raise additional funds.

The agreements that govern the terms of our debt, including the indentures that govern the 8.25% Senior Secured Notes due 2018 and the 9.375% Senior Notes and the credit agreement that governs the ABL Facility, contain covenants that restrict our ability and the ability of our subsidiaries to:

 

 

incur and guarantee indebtedness or issue equity interests of restricted subsidiaries;

 

 

repay subordinated indebtedness prior to its stated maturity;

 

 

pay dividends or make other distributions on or redeem or repurchase our stock;

 

 

issue capital stock;

 

 

make certain investments or acquisitions;

 

 

create liens;

 

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sell certain assets or merge with or into other companies;

 

 

enter into certain transactions with stockholders and affiliates;

 

 

make capital expenditures; and

 

 

pay dividends, distributions or other payments from our subsidiaries.

These restrictions may affect our ability to grow our business and take advantage of market and business opportunities or to raise additional debt or equity capital.

In addition, under the ABL Facility, if our excess availability is less than the greater of (a) 12.5% of the lesser of the revolving credit commitments and the borrowing base and (b) $17.5 million, we will be required to comply with a minimum fixed charge coverage ratio test. Our ability to meet the required fixed charge coverage ratio can be affected by events beyond our control, and we cannot assure that we will meet this ratio. A breach of any of these covenants under the ABL Facility or the indentures governing the 8.25% Senior Secured Notes or the 9.375% Senior Notes could result in an event of default under the ABL Facility or the indentures. An event of default under any of our debt agreements would permit some of our lenders to declare all amounts borrowed from them to be due and payable and, in some cases, proceed against the collateral securing such indebtedness.

Moreover, the ABL Facility provides the lenders considerable discretion to impose reserves or availability blocks, which could materially impair the amount of borrowings that would otherwise be available to us. There can be no assurance that the lenders under the ABL Facility will not impose such actions during the term of the ABL Facility and further, were they to do so, the resulting impact of this action could materially and adversely impair our liquidity.

We may be unable to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful. We may also be unable to generate sufficient cash to make required capital expenditures.

Our ability to make scheduled payments on or to refinance our debt obligations and to make capital expenditures depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to financial, business 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. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay or refinance our indebtedness, including the 8.25% Senior Secured Notes, the 9.375% Senior Notes or indebtedness under the ABL Facility, or make required capital expenditures. If our cash flows and capital resources are insufficient to fund our debt service obligations, we and our subsidiaries could face substantial liquidity problems and may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness.

In addition, 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 offerings may become dated, our productivity may decrease and the quality of our products may decline, which, in turn, could reduce our sales and profitability.

 

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Our income tax net operating loss carryovers may be limited and our results of operations may be adversely impacted.

We have substantial deferred tax assets related to net operating loss carryforwards (“NOLs”) for United States federal and state income tax purposes, which are available to offset future taxable income. As a result, we project that the U.S. cash tax rate will be reduced from the federal statutory rate and state rate as a result of approximately $229.3 million of gross NOLs for federal purposes and $245.8 million of gross state NOLs. Our ability to utilize the NOLs may be limited as a result of certain events, such as insufficient future taxable income prior to expiration of the NOLs or annual limits imposed under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), or by state law, as a result of a change in control. A change in control is generally defined as a cumulative change of more than 50 percentage points in the ownership positions of certain stockholders during a rolling three-year period. Changes in the ownership positions of certain stockholders could occur as the result of stock transactions by such stockholders and/or by the issuance of stock by us. Such limitations may cause us to pay income taxes earlier and in greater amounts than would be the case if the NOLs were not subject to such limitations. Should we determine that it is likely that our recorded NOL benefits are not realizable, we would be required to reduce the NOL tax benefits reflected on our consolidated financial statements to the net realizable amount by establishing a valuation reserve and recording a corresponding charge to earnings. Conversely, if we are required to reverse any portion of the accounting valuation allowance against our U.S. deferred tax assets related to our NOLs, such reversal could have a positive effect on our financial condition and results of operations in the period in which it is recorded.

We will be required to pay an affiliate of our current stockholders for certain tax benefits, including net operating loss carryovers, we may claim, and the amounts we may pay could be significant.

Upon the closing of this offering, we intend to enter into a tax receivable agreement with an entity controlled by our current stockholders (the “Tax Receivable Entity”). This tax receivable agreement will generally provide for the payment by us to the Tax Receivable Entity of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize in periods after this offering as a result of (i) NOL carryovers from periods (or portions thereof) ending before January 1, 2013, (ii) deductible expenses attributable to the transactions related to this offering and (iii) deductions related to imputed interest deemed to be paid by us as a result of this tax receivable agreement. See “ Certain relationships and related party transactions—Tax receivable agreement.

The amount and timing of any payments under the tax receivable agreement will vary depending upon a number of factors, including the amount and timing of the taxable income we generate in the future and the tax rate then applicable, our use of NOL carryovers and the portion of our payments under the tax receivable agreement constituting imputed interest.

The payments we will be required to make under the tax receivable agreement could be substantial. We expect that, as a result of the amount of the NOL carryovers from prior periods (or portions thereof) and the deductible expenses attributable to the transactions related to this offering, assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize in full the potential tax benefit described above, future payments under the tax receivable agreement, in respect of the federal and state NOL carryovers, will be approximately $        million and will be paid within the next five years, assuming that utilization

 

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of such tax attributes is not subject to limitation under Section 382 of the Code as the result of an “ownership change” (within the meaning of Section 382 of the Code) of Ply Gem Holdings. These amounts reflect only the cash savings attributable to current tax attributes resulting from the NOL carryovers. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding tax receivable agreement payments from these tax attributes.

In addition, although we are not aware of any issue that would cause the U.S. Internal Revenue Service (“IRS”) to challenge the benefits arising under the tax receivable agreement, the Tax Receivable Entity will not reimburse us for any payments previously made if such benefits are subsequently disallowed, however, any excess payments made to the Tax Receivable Entity will be netted against payments otherwise to be made, if any, after our determination of such excess. As a result, in such circumstances, we could make payments under the tax receivable agreement that are greater than our actual cash tax savings and may not be able to recoup those payments, which could adversely affect our liquidity.

Finally, because we are a holding company with no operations of our own, our ability to make payments under the tax receivable agreement is dependent on the ability of our subsidiaries to make distributions to us. The ABL Facility and the indentures governing the 8.25% Senior Secured Notes and the 9.375% Senior Notes may restrict the ability of our subsidiaries to make distributions to us, which could affect our ability to make payments under the tax receivable agreement. To the extent that we are unable to make payments under the tax receivable agreement for any reason, such payments will be deferred and will accrue interest until paid, which could adversely affect our results of operations and could also affect our liquidity in periods in which such payments are made.

In addition, the tax receivable agreement provides that, upon certain mergers, asset sales, or other forms of business combinations or certain other changes of control, our or our successor’s obligations with respect to tax benefits would be based on certain assumptions, including that we or our successor would have sufficient taxable income to fully utilize the NOL carryovers covered by the tax receivable agreement. As a result, upon a change of control, we may be required to make payments under the tax receivable agreement that are greater than or less than the specified percentage of our actual cash tax savings.

Our ability to effectively integrate future acquisitions, if any, will be critical to maintaining and improving our operating performance.

We will continue to pursue strategic acquisitions into our business if they provide future financial and operational benefits. However, our ability to effectively integrate these acquisitions into our existing business and culture may not be successful which could jeopardize future operational performance for the combined businesses.

Actual or perceived security vulnerabilities or cyberattacks on our networks could have a material adverse impact on our business and results of operations.

Purchase of our products may involve the transmission and/or storage of data, including in certain instances customers’ business and personally identifiable information. Thus, maintaining the security of computers, computer networks and data storage resources is a critical issue for us and our customers, as security breaches could result in vulnerabilities and loss of and/or unauthorized access to confidential information. We devote significant resources to address

 

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security vulnerabilities through enhancing security and reliability features in our computer networks, deploying security updates to address security vulnerabilities and seeking to respond to known security incidents in sufficient time to minimize any potential adverse impact. Experienced hackers, cybercriminals and perpetrators of advanced persistent threats may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions, product or service vulnerabilities or cause shutdowns. These perpetrators of cyberattacks also may be able to develop and deploy viruses, worms, malware and other malicious software programs that attack our products and services, our networks or otherwise exploit any security vulnerabilities of our products, services and networks. However, because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not recognized until long after being launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. A breach of our security measures as a result of third-party action, malware, employee error, malfeasance or otherwise could result in:

 

 

harm to our reputation or brand, which could lead some customers to stop purchasing our products and reduce or delay future purchases of our products or use competing products;

 

 

state or federal enforcement action, which could result in fines and/or penalties and which would cause us to incur legal fees and costs; and/or

 

 

additional costs associated with responding to the cyberattack, such as the costs of providing individuals and/or data owners with notice of the breach, legal fees, the costs of any additional fraud detection activities required by credit card associates, and costs incurred by credit card issuers associated with the compromise and additional monitoring of systems for further fraudulent activity.

Any of these actions could materially adversely impact our business and results of operations.

Risks related to this offering and our common stock

We are controlled by the CI Partnerships whose interest in our business may be different than yours, and certain statutory provisions afforded to stockholders are not applicable to us.

After giving effect to the Reorganization Transactions and this offering, the CI Partnerships will own approximately         % of our outstanding common stock (or         % if the underwriters exercise their over-allotment in full) based on an assumed public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus). Prior to the consummation of this offering, we will enter into an amended and restated stockholders agreement with the CI Partnerships and certain of our current and former members of management and their related parties. Under the stockholders agreement, the CI Partnerships will be initially entitled to nominate a majority of the members of our board of directors and all of the parties to the stockholders agreement have agreed to vote their shares of our common stock as directed by the CI Partnerships. See “ Management—Board structure ” and “ Certain relationships and related party transactions—Stockholders agreement ” for additional details on the composition of our board of directors and the rights of the CI Partnerships under the stockholders agreement.

Accordingly, the CI Partnerships will be able to exercise significant influence over our business policies and affairs. In addition, the CI Partnerships can control any action requiring the general approval of our stockholders, including the election of directors, the adoption of amendments to

 

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our certificate of incorporation and by-laws and the approval of mergers or sales of substantially all of our assets. The concentration of ownership and voting power of the CI Partnerships may also delay, defer or even prevent an acquisition by a third party or other change of control of our Company and may make some transactions more difficult or impossible without the support of the CI Partnerships, even if such events are in the best interests of minority stockholders. The concentration of voting power among the CI Partnerships may have an adverse effect on the price of our common stock.

In addition, we have opted out of section 203 of the General Corporation Law of the State of Delaware, which we refer to as the “Delaware General Corporation Law,” which, subject to certain exceptions, prohibits a publicly held Delaware corporation from engaging in a business combination transaction with an interested stockholder for a period of three years after the interested stockholder became such unless the transaction fits within an applicable exemption, such as board approval of the business combination or the transaction which resulted in such stockholder becoming an interested stockholder. However, our amended and restated certificate of incorporation will contain provisions that have the same effect as section 203 of the Delaware General Corporation Law, except that they will provide that the CI Partnerships and their respective affiliates and successors and certain of their transferees as a result of private sales will not be subject to such restrictions. Therefore, after the lock-up period expires, the CI Partnerships are able to transfer control of our Company to a third party by transferring their common stock, which would not require the approval of our board of directors or our other stockholders.

For additional information regarding the share ownership of, and our relationship with, the CI Partnerships, you should read the information under the headings “ Principal and selling stockholders ” and “ Certain relationships and related party transactions .”

As a “controlled company” within the meaning of the NYSE’s corporate governance rules, we will qualify for, and intend to rely on, exemptions from certain NYSE corporate governance requirements. As a result, our stockholders may not have the same degree of protection as that afforded to stockholders of companies that are subject to all of the NYSE’s corporate governance requirements.

Following this offering, we will be a “controlled company” within the meaning of the NYSE’s corporate governance rules as a result of the ownership position and voting rights of the CI Partnerships upon completion of this offering. A “controlled company” is a company of which more than 50% of the voting power is held by an individual, group or another company. As a controlled company we may elect not to comply with certain NYSE corporate governance rules that would otherwise require our board of directors to have a majority of independent directors and our Compensation and Nominating and Governance Committees to be comprised entirely of independent directors. Accordingly, our stockholders will not have the same protection afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements and the ability of our independent directors to influence our business policies and affairs may be reduced. See “Management—Controlled company .”

Our directors who have relationships with the CI Partnerships may have conflicts of interest with respect to matters involving our Company.

Following this offering, three of our eight directors will be affiliated with the CI Partnerships. These persons will have fiduciary duties to both us and the CI Partnerships. As a result, they may have real or apparent conflicts of interest on matters affecting both us and the CI Partnerships,

 

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which in some circumstances may have interests adverse to ours. In addition, as a result of the CI Partnerships’ ownership interest, conflicts of interest could arise with respect to transactions involving business dealings between us and the CI Partnerships including potential acquisitions of businesses or properties, the issuance of additional securities, the payment of dividends by us and other matters.

In addition, our amended and restated certificate of incorporation will provide that the doctrine of “corporate opportunity” will not apply with respect to the Company, to any of the CI Partnerships or certain related parties or any directors of the Company who are employees of the CI Partnerships or their affiliates in a manner that would prohibit them from investing in competing businesses or doing business with our customers. To the extent they invest in such other businesses, the CI Partnerships may have differing interests than our other stockholders.

There has been no prior public market for our common stock and the trading price of our common stock may be adversely affected if an active trading market in our common stock does not develop. Our stock price may be volatile, and you may be unable to resell your shares at or above the offering price or at all.

Prior to this offering, there has been no public market for our common stock, and an active trading market may not develop or be sustained upon the completion of this offering. We cannot predict the extent to which investor interest will lead to the development of an active trading market in shares of our common stock or whether such a market will be sustained. The initial public offering price of the common stock offered in this prospectus was determined through our negotiations with the representatives of the underwriters specified under “ Underwriting ” (the “Representatives”) as further described under “ Underwriting ” and may not be indicative of the market price of the common stock after this offering. The market price of our common stock after this offering will be subject to significant fluctuations in response to, among other factors, variations in our operating results and market conditions specific to our industry.

Future sales of shares of our common stock in the public market could cause our stock price to fall significantly even if our business is profitable.

Upon the completion of this offering, after giving effect to the Reorganization Transactions (assuming a public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus)), we will have                 outstanding shares of common stock. Of these shares, the shares of common stock offered in this prospectus will be freely tradable without restriction in the public market, unless purchased by our affiliates. We expect that the remaining         shares of common stock will become available for resale in the public market as shown in the chart below. Our officers, directors and the holders of substantially all of our outstanding shares of common stock have signed lock-up agreements pursuant to which they have agreed, subject to certain exceptions, not to sell, transfer or otherwise dispose of any of their shares for a period of 180 days following the date of this prospectus, subject to extension in the case of an earnings release or material news or a material event relating to us. The underwriters may, in their sole discretion and without notice, release all or any portion of the common stock subject to lock-up agreements. The underwriters are entitled to waive the underwriter lock-up provisions at their discretion prior to the expiration dates of such lock-up agreements. For more information regarding the lock-up agreements, see “ Underwriting.”

 

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Immediately following the consummation of this offering, our shares of common stock will become available for resale in the public market as follows:

 

Number of shares    Percentage     Date of availability for resale into the public market
            Following the date of this prospectus
    
    

  180 days after the date of this prospectus, of which approximately                 are subject to holding period, volume and other restrictions under Rule 144

 

As restrictions on resale end, the market price of our common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our common stock or other securities. Following this offering, we intend to file a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), registering shares of our common stock reserved for issuance under our Equity Plans, and we will enter into a registration rights agreement under which we will grant demand and piggyback registration rights to the CI Partnerships and certain members of management, as further described under “ Certain relationships and related party transactions—Registration rights agreement .”

See “ Shares available for future sale ” for a more detailed description of the shares that will be available for future sale upon completion of this offering.

Because the initial public offering price per common share is substantially higher than our book value per common share, purchasers in this offering will immediately experience a substantial dilution in net tangible book value.

Purchasers of our common stock will experience immediate and substantial dilution in net tangible book value per share from the initial public offering price per share. After giving effect to the Reorganization Transactions, the sale of the             shares of common stock we have offered under this prospectus and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds therefrom, our pro forma as adjusted net tangible book value as of December 31, 2012, would have been $        million, or $        per share of common stock. This represents an immediate dilution in pro forma as adjusted net tangible book value of $        per share to new investors purchasing shares of our common stock in this offering. See “ Dilution ” for a calculation of the dilution that purchasers will incur.

We do not intend to pay dividends in the foreseeable future, and, because we are a holding company, we may be unable to pay dividends.

For the foreseeable future, we intend to retain any earnings to finance our business, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent on then-existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions, business prospects and other factors that our board of directors considers relevant. Furthermore, because we are a holding company with no operations of our own, any dividend payments would depend on the cash flow of our subsidiaries. The ABL Facility and the indentures governing the 8.25% Senior Secured Notes and the 9.375% Senior

 

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Notes limit the amount of distributions our subsidiaries can make to us and the purposes for which distributions can be made. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends to holders of our common stock. Accordingly, we may not be able to pay dividends even if our board of directors would otherwise deem it appropriate. See “ Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources ” and “ Description of capital stock—Capital stock—Common stock .” For the foregoing reasons, you will not be able to rely on dividends to receive a return on your investment.

Provisions in our charter and by-laws may delay or prevent our acquisition by a third party.

Our amended and restated certificate of incorporation and by-laws, which we intend to adopt prior to the completion of this offering, will contain several provisions that may make it more difficult or expensive for a third party to acquire control of us without the approval of our board of directors. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. The provisions, some of which may only become effective when the CI Partnerships and their affiliates no longer beneficially own shares representing 50% or more of our outstanding shares of common stock (the “Triggering Event”), include, among others:

 

 

provisions relating to creating a board of directors that is divided into three classes with staggered terms;

 

 

provisions relating to the number and election of directors, the appointment of directors upon an increase in the number of directors or vacancy and the removal of directors;

 

 

provisions requiring a 75% stockholder vote for the amendment of certain provisions of our certificate of incorporation and for the adoption, amendment or repeal of our by-laws following the Triggering Event;

 

 

provisions barring stockholders from calling a special meeting of stockholders or requiring one to be called following the Triggering Event;

 

 

elimination of the right of our stockholders to act by written consent following the Triggering Event;

 

 

provisions restricting business combinations with interested stockholders;

 

 

provisions that set forth advance notice procedures for stockholders’ nominations of directors and proposals for consideration at meetings of stockholders; and

 

 

the ability of our board of directors to designate one or more series of preferred stock and issue shares of preferred stock without stockholder approval.

For more information, see “ Description of capital stock .” The provisions of our amended and restated certificate of incorporation and by-laws and the ability of our board of directors to create and issue a new series of preferred stock or a stockholder rights plan could discourage potential takeover attempts and reduce the price that investors might be willing to pay for shares of our common stock in the future which could reduce the market price of our stock.

 

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Failure to maintain effective internal controls over financial reporting could have an adverse effect on our business, operating results and stock price.

Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important in helping to prevent financial fraud. If we are unable to maintain adequate internal controls, our business and operating results could be harmed. The requirements of Section 404 of Sarbanes-Oxley and the related rules of the Securities and Exchange Commission (“SEC”) require, among other things, our management to assess annually the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm will be required to issue a report on our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ending December 31, 2014. In the future, we may identify deficiencies that we may be unable to remedy before the requisite deadline for those reports. Also, our auditors have not yet conducted an audit of our internal control over financial reporting. Any failure to remediate material weaknesses noted by us or our independent registered public accounting firm or to implement required new or improved controls or difficulties encountered in their implementation could cause us to fail to meet our reporting obligation or result in material misstatements in our financial statements. If our management or our independent registered public accounting firm were to conclude in their reports that our internal control over financial reporting was not effective, investors could lose confidence in our reported financial information, and the trading price of our common stock could decrease significantly. Failure to comply with Section 404 of Sarbanes-Oxley could potentially subject us to sanctions or investigations by the SEC, the Financial Industry Regulatory Authority, Inc. (“FINRA”) or other regulatory authorities.

 

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Cautionary note regarding forward-looking statements

This prospectus contains “forward-looking statements.” 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 prospectus that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the “ Risk factors ” and other cautionary statements included in this prospectus. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform such statements to actual results or to changes in our expectations, except as required by federal securities laws.

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, the following:

 

 

downturns in the home repair and remodeling or the new construction end markets, or the economy or the availability of consumer credit;

 

 

competition from other exterior building products manufacturers and alternative building materials;

 

 

changes in the costs and availability of raw materials;

 

 

consolidation and further growth of our customers;

 

 

loss of, or a reduction in orders from, any of our significant customers;

 

 

inclement weather conditions;

 

 

increases in union organizing activity and work stoppages at our facilities or the facilities of our suppliers;

 

 

our ability to employ, train and retain qualified personnel at a competitive cost;

 

 

claims arising from the operations of our various businesses prior to our acquisitions;

 

 

products liability claims, including class action claims, relating to the products we manufacture;

 

 

loss of certain key personnel;

 

 

interruptions in deliveries of raw materials or finished goods;

 

 

environmental costs and liabilities;

 

 

manufacturing or assembly realignments;

 

 

threats to, or impairments of, our intellectual property rights;

 

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increases in fuel costs;

 

 

material non-cash impairment charges;

 

 

our significant amount of indebtedness;

 

 

covenants in the ABL Facility and the indentures governing the 8.25% Senior Secured Notes and the 9.375% Senior Notes;

 

 

failure to effectively manage labor inefficiencies associated with increased productions and new employees added to the company;

 

 

failure to generate sufficient cash to service all of our indebtedness and make capital expenditures;

 

 

limitations on our NOLs and payments under the tax receivable agreement to our current stockholders;

 

 

failure to successfully integrate future acquisitions;

 

 

actual or perceived security vulnerabilities or cyberattacks on our networks;

 

 

control by the CI Partnerships;

 

 

compliance with certain corporate governance requirements;

 

 

certain of our directors’ relationships with the CI Partnerships;

 

 

lack of a prior public market for our common stock and volatility of our stock price;

 

 

future sales of our common stock in the public market;

 

 

substantial dilution in net tangible book value;

 

 

our dividend policy;

 

 

provisions in our charter and by-laws; and

 

 

failure to maintain internal controls over financial reporting.

These and other factors are more fully discussed in the “ Risk factors ” and “ Management’s discussion and analysis of financial condition and results of operations ” sections and elsewhere in this prospectus. These risks could cause actual results to differ materially from those implied by forward-looking statements in this prospectus.

 

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Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $        million, after deducting the underwriting discount and estimated offering expenses payable by us. This estimate is based on an assumed offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover of this prospectus).

The following table sets forth the estimated sources and uses of funds in connection with this offering and the other transactions described below as if they had occurred on December 31, 2012. Actual amounts may vary. See also “ Unaudited pro forma financial information .”

 

Sources of funds (in millions)           Uses of funds (in millions)        

Common stock offered hereby, net of underwriting discount

  $                      

Redeem or repurchase 8.25% Senior Secured Notes(1)

  $                    
   

Redeem or repurchase 9.375% Senior Notes(2)

 
    Repay ABL Facility(3)  
            Transaction fees and expenses(4)        

    Total sources

  $                           Total uses   $                    

 

 

 

(1)   We intend to use a portion of the proceeds from this offering to redeem or repurchase a portion of our 8.25% Senior Secured Notes. The 8.25% Senior Secured Notes bear interest at a rate of 8.25% per annum and mature on February 15, 2018. For a description of the terms of the 8.25% Senior Secured Notes, see “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources—8.25% Senior Secured Notes due 2018.

 

(2)   We intend to use a portion of the proceeds from this offering to redeem or repurchase a portion of our 9.375% Senior Notes. The 9.375% Senior Notes bear interest at a rate of 9.375% per annum and mature on April 15, 2017. The 9.375% Senior Notes were issued on September 27, 2012 and the proceeds from the issuance of such notes were used to redeem all of our outstanding 13.125% Senior Subordinated Notes and to pay related costs and expenses. For a description of the terms of the 9.375% Senior Notes, see “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources—9.375% Senior Notes due 2017.

 

(3)   We intend to use a portion of the proceeds from this offering to repay approximately $             million of our indebtedness outstanding under the ABL Facility. Borrowings under the ABL Facility bear interest at a rate per annum at December 31, 2012 equal to 2.5% and are due and payable in full on January 26, 2016. For a description of the terms of the ABL Facility, see “Management’s discussion and analysis of financial condition and results of operations—Senior Secured Asset-Based Revolving Credit Facility due 2016 .”

 

(4)   This amount includes (i) $         million of estimated expenses associated with this offering and (ii) a termination fee equal to $         million payable to an affiliate of the CI Partnerships in connection with the termination of an advisory agreement.

A $1.00 increase (decrease) in the assumed public offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover of this prospectus) would increase (decrease) the amount of net proceeds from this offering available to us by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us.

Prior to their final application, we may hold any net proceeds in cash or invest them in liquid short- and medium-term securities.

We will not receive any proceeds from the sale of our common stock by the selling stockholders if the underwriters exercise their option to purchase up to              additional shares from the selling stockholders to cover over-allotments.

 

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Dividend policy

We have not paid any dividends since our inception in 2004. For the foreseeable future, we intend to retain any earnings to finance our business and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon then-existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions (including restrictions contained in the ABL Facility and the indentures governing the 8.25% Senior Secured Notes and the 9.375% Senior Notes), business prospects and other factors that our board of directors considers relevant.

 

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Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2012:

 

 

on an actual basis, and

 

 

on a pro forma basis, giving effect to the following transactions as if they occurred on December 31, 2012:

 

  (i)   the Reorganization Transactions;

 

  (ii)   the creation of liabilities in connection with entering into the tax receivable agreement;

 

  (iii)   the sale of shares of our common stock in this offering at an assumed public offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) after deducting the underwriting discount and estimated offering expenses payable by us; and

 

  (iv)   the application of the net proceeds of this offering as described in “ Use of proceeds .”

You should read the following table in conjunction with “ Unaudited pro forma financial information ,” “ Selected historical consolidated financial data ,” “ Management’s discussion and analysis of financial condition and results of operations ” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

 

(amounts in thousands)    As of December 31, 2012  
   Actual     Pro forma(4)  

 

 
           (unaudited)  

Cash and cash equivalents

   $ 27,194      $                         
  

 

 

 

Long-term debt:

    

ABL Facility(1)

   $ 15,000      $                        

8.25% Senior Secured Notes due 2018(2)

     799,130     

9.375% Senior Notes due 2017(3)

     150,254     
  

 

 

 

Total long-term debt

   $ 964,384      $     
  

 

 

 

Stockholder’s deficit:

    

Common stock

   $      $                        

Additional paid-in capital

     311,034     

Accumulated deficit

     (619,640  

Accumulated other comprehensive loss

     (6,336  
  

 

 

 

Total stockholder’s deficit

   $ (314,942   $     
  

 

 

 

Total capitalization

   $ 649,442      $                        

 

 

 

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(1)   Borrowings under the ABL Facility are limited to the lesser of the borrowing base, as defined therein, or $212.5 million. As of December 31, 2012, we had approximately $191.2 million of contractual availability under the ABL Facility, which was limited by the borrowing base availability to approximately $113.4 million, after giving effect to $15.0 million of borrowings outstanding and approximately $6.3 million of letters of credit and priority payables reserves.

 

(2)   Consists of $800.0 million of 8.25% Senior Secured Notes issued in February 2011 and $40.0 million of 8.25% Senior Secured Notes issued in February 2012 (the “Senior Tack-on Notes”), less an unamortized tender premium and discount from the purchase and redemption of the 11.75% Senior Secured Notes of approximately $35.6 million and an unamortized discount of approximately $5.3 million related to the $40.0 million of the Senior Tack-on Notes.

 

(3)   Consists of $160.0 million of 9.375% Senior Notes, less an unamortized discount of $9.7 million related to this issuance and the satisfaction, discharge and early redemption of the 13.125% Senior Subordinated Notes.

 

(4)   A $1.00 increase (decrease) in the assumed public offering price of $              per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) would increase (decrease) each of additional paid-in capital, total stockholder’s deficit and total capitalization by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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Dilution

If you invest in our common stock, you will be diluted to the extent the initial public offering price per share of our common stock exceeds the pro forma net tangible book value per share of our common stock immediately after this offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the shares of common stock held by existing equity holders.

Our pro forma net tangible book value as of December 31, 2012 was approximately $        million, or $        per share of common stock. Pro forma net tangible book value per share represents the amount of our pro forma tangible net worth, or total tangible assets less total liabilities, divided by                 shares of our common stock outstanding as of that date, after giving effect to the Reorganization Transactions, and the creation of liabilities in connection with entering into the tax receivable agreement.

After giving effect to (i) the issuance and sale of                 shares of our common stock sold by us in this offering and our receipt of approximately $        million in net proceeds from such sale, based on an assumed public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) after deducting the underwriting discount and estimated offering expenses payable by us and (ii) the application of such net proceeds as discussed under “ Use of proceeds ,” our pro forma as adjusted net tangible book value per share as of December 31, 2012 would have been approximately $        million, or $        per share. This amount represents an immediate increase in pro forma net tangible book value of $        to existing stockholders and an immediate dilution in pro forma net tangible book value of $        per share to new investors purchasing shares of our common stock in this offering. Dilution per share is determined by subtracting the pro forma net tangible book value per share as adjusted for this offering from the amount of cash paid by a new investor for a share of our common stock. Pro forma net tangible book value is not affected by the sale of shares of our common stock offered by the selling stockholders if the underwriters exercise their over-allotment option. The following table illustrates the per share dilution:

 

Assumed initial public offering price per share

   $                

Pro forma net tangible book value per share as of December 31, 2012 before giving effect to the tax receivable agreement

   $                

Effect of the tax receivable agreement

   $                
  

 

 

 

Pro forma net tangible book value per share before the change attributable to new investors

   $                

Increase in net tangible book value per share attributable to new investors

   $                
  

 

 

 

Pro forma as adjusted net tangible book value per share after this offering

   $                
  

 

 

 

Dilution per share to new investors

   $                

 

 

A $1.00 increase (decrease) in the assumed public offering price of $        per share (the midpoint of the estimated public offering price range set forth in the cover page of this prospectus) would increase (decrease) our pro forma as adjusted net tangible book value by $        , the pro forma as adjusted net tangible book value per share after this offering by $        and the dilution per share to new investors by $        , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The following table presents on the same pro forma basis as of December 31, 2012 the differences between the total consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering, before deducting the underwriting discount and estimated offering expenses payable by us:

 

Number  

Shares purchased

    Total consideration    

Average

price

per share

 
  Number    Percent     Amount      Percent    

 

   

 

 

    

 

 

   

 

 

 

Existing stockholders

              $                         $            

New investors

           
 

 

 

Total

       100.0   $           100.0   $            

 

 

The foregoing tables do not include outstanding options to purchase an aggregate of              shares of common stock under our 2004 Option Plan or shares of common stock issuable upon the vesting of approximately $2.8 million of awards under our LTIP, which number of shares will be determined based on the value of our shares on the relevant vesting date. See “ Shares available for future sale—Options/equity awards .” As of December 31, 2012, after giving effect to the Reorganization Transactions, there were                 options outstanding at a weighted average exercise price of $        per share pursuant to the 2004 Option Plan. To the extent that any of these options are exercised, there would be further dilution to new investors. If all of these options had been exercised as of December 31, 2012, pro forma net tangible book value per share would have been $        and total dilution per share to new investors, on a pro forma basis, would have been $        or        %.

 

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Unaudited pro forma consolidated financial information

The historical financial information of Ply Gem Holdings as of and for the year ended December 31, 2012 was derived from our audited consolidated financial statements and accompanying notes included elsewhere in this prospectus. The historical financial information of Ply Gem Prime as of and for the year ended December 31, 2012 is unaudited. There are no historical operating results for Ply Gem Prime since it is a holding company with no independent operating assets or liabilities. For financial reporting purposes, the consolidated operating assets and liabilities of Ply Gem Prime were the same as Ply Gem Holdings as of December 31, 2012 and for all previous years since inception.

The Reorganization Transactions include the merger of Ply Gem Holdings with its parent company, Ply Gem Prime, which will ultimately result in the conversion of Ply Gem Prime’s common stock, preferred stock and subordinated debt due to related parties into shares of Ply Gem Holdings’ common stock. See “Certain relationships and related party transactions— Reorganization transactions” for further details of the Reorganization Transactions. The pro forma consolidated financial information reflects the consolidation of Ply Gem Prime and Ply Gem Holdings and also gives effect to the Reorganization Transactions and certain transactions that will occur in connection with this offering.

The unaudited pro forma consolidated balance sheet data as of December 31, 2012 gives effect to the following transactions as if they occurred on December 31, 2012: (i) the Reorganization Transactions; (ii) the creation of liabilities in connection with entering into the tax receivable agreement; (iii) the sale of                 shares of our common stock in this offering at an assumed initial public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) after deducting the underwriting discounts and commissions and estimated offering expenses payable by us; (iv) the application of the net proceeds of this offering as described in “Use of proceeds ; (v) the write-off of approximately $        million of debt issuance costs and debt discounts and the related tax benefit, net of valuation allowances, of approximately $        million attributable to the 9.375% Senior Notes and the 8.25% Senior Secured Notes redeemed and/or repurchased with the proceeds from this offering; and (vi) a $         write-off related to call and tender premiums, if applicable, associated with the redemption and/or repurchase of a portion of the 9.375% Senior Notes and a portion of the 8.25% Senior Secured Notes as described under “ Use of proceeds.”

The unaudited pro forma consolidated statement of operations data for the year ended December 31, 2012 gives effect to the following transactions as if they occurred on January 1, 2012: (i) the Reorganization Transactions; (ii) the sale of          shares of our common stock in this offering at an assumed initial public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) after deducting the underwriting discounts and commissions and estimated offering expenses payable by us; and (iii) the application of the net proceeds of this offering as described under “ Use of proceeds.”

In connection with this offering and the related transactions, we will record as one-time charges in our consolidated statement of operations at the time of the respective transactions the write-off of approximately $        million of unamortized debt issuance costs, $        million of debt discounts, $        million of tender premiums and $        million of call premiums, if applicable, net of tax impact of $        million, attributable to the redemption and/or repurchase of a portion of the 9.375% Senior Notes and a portion of the 8.25% Senior Secured Notes with a portion of the proceeds from this offering. Because these charges are non-recurring in nature, we have not

 

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given effect to these transactions in the pro forma consolidated statement of operations. However, these items are reflected as pro forma adjustments to accumulated deficit in the consolidated balance sheet as of December 31, 2012.

The presentation of the unaudited pro forma consolidated financial information is prepared in conformity with Article 11 of Regulation S-X. The unaudited pro forma consolidated financial information has been prepared by our management and is based on our historical financial statements and the assumptions and adjustments described in the notes to the unaudited pro forma consolidated financial information below.

We based the pro forma adjustments on available information and on assumptions that we believe are reasonable under the circumstances. See “ —Notes to unaudited pro forma consolidated financial information ” for a discussion of assumptions made. The unaudited pro forma consolidated financial information is presented for informational purposes and is based on management’s estimates. The unaudited pro forma consolidated statement of operations does not purport to represent what our results of operations actually would have been if the transactions set forth above had occurred on the dates indicated or what our results of operations will be for future periods.

 

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Ply Gem Holdings, Inc.

Unaudited pro forma consolidated balance sheet

as of December 31, 2012

 

      Historical             Consolidated
pro forma
adjustments
after
reorganization
    Offering
pro forma
adjustments
    Consolidated
pro forma
 
(amounts in thousands (except per share data))   Ply Gem
Holdings
    Ply Gem
Prime
Holdings
    Eliminations     Consolidated     Reorganization
pro forma
adjustments
       

 

 

ASSETS

               

Current Assets:

               

Cash and cash equivalents

  $ 27,194      $      $      $ 27,194      $                               $                               $                               $                    

Accounts receivable

    115,052                      115,052           

Inventories:

               

Raw materials

    39,952                      39,952           

Work in process

    20,931                      20,931           

Finished goods

    39,409                      39,409           
 

 

 

 

Total inventory

    100,292                      100,292           

Prepaid expenses and other current assets

    15,384                      15,384           

Deferred income taxes

    5,172                      5,172            (a)     
 

 

 

 

Total current assets

    263,094                      263,094           

Property and Equipment, at cost:

               

Land

    3,737                      3,737           

Buildings and improvements

    37,941                      37,941           

Machinery and equipment

    293,275                      293,275           
 

 

 

 

Total property and equipment

    334,953                      334,953           

Less accumulated depreciation

    (235,848                   (235,848        
 

 

 

 

Total property and equipment, net

    99,105                      99,105           

Other Assets:

               

Intangible assets, net

    94,356                      94,356           

Goodwill

    392,455                      392,455           

Deferred income taxes

    2,981                      2,981            (a)     

Investment in Ply Gem Holdings

           (314,942     314,942                  

Other

    29,859                      29,859            (b)     
 

 

 

 

Total other assets

    519,651        (314,942     314,942        519,651           
 

 

 

 
  $ 881,850      $ (314,942   $ 314,942      $ 881,850      $                               $        $                               $                    
 

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

               

Current Liabilities:

               

Accounts payable

  $ 67,797      $      $      $ 67,797      $          $                              $                               $                    

Accrued expenses

    93,918                      93,918            (a), (c)     
 

 

 

 

Total current liabilities

    161,715                      161,715           

Deferred income taxes

    10,049                      10,049            (a)     

Other long-term liabilities

    60,644                      60,644            (c)     

Long-term debt due to related parties

           161,151               161,151        (e      

Long-term debt

    964,384                      964,384            (d)     

Commitments and contingencies

               

Stockholder’s Deficit:

               

Preferred stock

           133,357               133,357        (e      

Common stock

           44               44        (e       (g)     

Additional paid-in-capital

    311,034        102,517        (311,034     102,517        (e               (c), (g)     

Accumulated deficit

    (619,640     (705,675     619,640        (705,675     (e       (f)     

Accumulated other comprehensive loss

    (6,336     (6,336     6,336        (6,336        
 

 

 

 

Total stockholder’s deficit

    (314,942     (476,093     314,942        (476,093        
 

 

 

 
  $ 881,850      $ (314,942   $ 314,942      $ 881,850      $        $        $        $     

 

 

See accompanying notes to the unaudited pro forma financial information.

 

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Ply Gem Holdings, Inc.

Unaudited pro forma consolidated statement of operations

for the year ended December 31, 2012

 

      Historical    

Reorganization

pro forma
adjustments

   

Offering

pro forma
adjustments

   

Consolidated

pro forma

 
(amounts in thousands (except per share data))   Ply Gem
Holdings
   

Ply Gem

Prime

Holdings

    Eliminations     Consolidated        

 

 

Net sales

  $ 1,121,301      $      $      $ 1,121,301      $                               $                               $                            

Cost of products sold

    877,102                      877,102         
 

 

 

 

Gross profit

    244,199                      244,199         

Operating expenses:

             

Selling, general and administrative expenses

    147,242                      147,242         

Amortization of intangible assets

    26,937                      26,937         
 

 

 

 

Total operating expenses

    174,179                      174,179         
 

 

 

 

Operating earnings

    70,020                      70,020         

Foreign currency gain

    409                      409         

Interest expense

    (103,133     (14,951 )(1)             (118,084       (2  

Interest income

    91                      91         

Loss on modification or extinguishment of debt

    (3,607                   (3,607      
 

 

 

 

Loss before equity in loss of subsidiary

    (36,220     (14,951            (51,171      

Equity in loss of subsidiary

           (39,055     39,055                
 

 

 

 

Loss before provision for income taxes

    (36,220     (54,006     39,055        (51,171      

Provision for income taxes

    2,835                      2,835          (3  
 

 

 

 

Net loss

  $ (39,055   $ (54,006   $ 39,055      $ (54,006   $        $        $     
 

 

 

 

Earnings per share:

             

Basic earnings per share

              $     
             

 

 

 

Diluted earnings per share

              $     
             

 

 

 

Weighted average shares outstanding:

             

Basic weighted average shares

                     (4) 
             

 

 

 

Diluted weighted average shares

                                                         (5) 

See accompanying notes to the unaudited pro forma financial information.

 

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Notes to unaudited pro forma consolidated financial information

Pro forma adjustments

Balance sheet as of December 31, 2012

(a) Reflects the income tax benefit, net of valuation allowances, resulting from the write-off of debt issuance costs, debt discounts, tender premiums and call premiums paid in connection with the debt repayment with the proceeds from this offering.

(b) Reflects the write-off of approximately $             million of debt issuance costs attributable to the outstanding 8.25% Senior Secured Notes and 9.375% Senior Notes redeemed and/or repurchased with the proceeds from this offering.

(c) Reflects adjustments to record a liability related to our tax receivable agreement with the Tax Receivable Entity. Under this tax receivable agreement, we are required to pay the Tax Receivable Entity 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize in periods after this offering as a result of (i) net operating loss carryovers from periods (or portions thereof) ending before January 1, 2013, (ii) deductible expenses attributable to the transactions related to this offering and (iii) deductions related to imputed interest deemed to be paid by us as a result of this tax receivable agreement.

(d) Reflects the application of a portion of the proceeds from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses, to repay, redeem and/or repurchase a portion of the 8.25% Senior Secured Notes, a portion of the 9.375% Senior Notes and approximately $             million of the indebtedness outstanding under the ABL Facility as described under “ Use of proceeds.”

(e) Reflects the Reorganization Transactions, including the conversion of preferred stock and long-term debt due to related parties of Ply Gem Prime into shares of common stock of Ply Gem Holdings and the exchange of common stock of Ply Gem Prime for common stock of Ply Gem Holdings. The Reorganization Transactions will create one class of stock outstanding, which will be the common stock of Ply Gem Holdings.

(f) Reflects the recognition of a charge attributable to the write-off of approximately $             million of unamortized debt issuance costs, $             million of debt discounts, $             million of tender premiums, and $             million of call premiums, if applicable, net of tax impact of $             million, attributable to the redemption and/or repurchase of a portion of the 8.25% Senior Secured Notes and a portion of the 9.375% Senior Notes with a portion of the proceeds from this offering.

(g) Reflects the offering of              shares of common stock in exchange for net proceeds of $             million, a portion of which will be utilized to repurchase and/or redeem a portion of the 8.25% Senior Secured Notes and a portion of the 9.375% Senior Notes and repay approximately $             million of the indebtedness outstanding under the ABL Facility as described under “ Use of proceeds.”

 

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For the year ended December 31, 2012

(1) The interest expense for long-term debt due to related parties of Ply Gem Prime reflected on Ply Gem Prime’s financial statements will not be recurring in the future as the debt to which this interest relates will be converted into outstanding common stock of Ply Gem Holdings in the Reorganization Transactions eliminating any future interest expense for Ply Gem Prime.

(2) Reflects the reduction of interest expense and amortization of debt issuance costs as a result of the redemption and/or repurchase of a portion of the 8.25% Senior Secured Notes and a portion of the 9.375% Senior Notes and the repayment of approximately $        million of the indebtedness outstanding under the ABL Facility as described under “ Use of proceeds.”

(3) Reflects the incremental provision for federal and state income taxes as a result of the pro forma adjustments.

(4) The pro forma basic weighted average common shares outstanding reflect the issuance of shares of common stock issued in connection with the following transactions as if such shares had been issued on January 1, 2012:

(i) The Reorganization Transactions;

(ii) The sale of                 shares of our common stock in this offering at an assumed initial public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) after deducting the underwriting discount and estimated offering expenses payable by us; and

(iii) The application of the net proceeds of this offering as described in “Use of proceeds .”

 

     

Year ended

December 31, 2012

 

Reorganization Transactions

 

Shares of common stock issued in this offering

 

Pro forma basic weighted average shares outstanding

 

 

  
(5)   The pro forma diluted weighted average common shares outstanding reflect the treasury stock effect of the outstanding stock options. In connection with the Reorganization Transactions, options to purchase shares of common stock of Ply Gem Prime will be converted into options to purchase shares of common stock of Ply Gem Holdings with adjustments to the number of shares and per share exercise prices.

 

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Selected historical consolidated financial data

You should read the information set forth below in conjunction with “Capitalization,” “Unaudited pro forma financial information,” “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

The selected historical data presented below under the captions “Selected statements of operations data,” “Selected statements of cash flows data” and “Selected balance sheet data” as of December 31, 2012 and 2011, and for each of the years in the three year period ended December 31, 2012, are derived from the consolidated financial statements of Ply Gem Holdings and subsidiaries, which financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm. The consolidated financial statements as of December 31, 2012 and 2011, and for each of the years in the three year period ended December 31, 2012, and the report thereon, are included elsewhere in the prospectus. The consolidated balance sheets as of December 31, 2010, 2009 and 2008, and the consolidated financial statements for each of the years in the two year period ended December 31, 2009, have been derived from our audited financial statements that are not included in this prospectus.

 

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The selected historical consolidated financial data set forth below is not necessarily indicative of the results of future operations.

 

(amounts in thousands (except per share data))    Year ended December 31,  
   2012     2011     2010     2009     2008  

 

   

 

 

 

Selected statements of operations data:(1)

          

Net sales

   $ 1,121,301      $ 1,034,857      $ 995,906      $ 951,374      $ 1,175,019   

Cost of products sold

     877,102        824,325        779,946        749,841        980,098   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     244,199        210,532        215,960        201,533        194,921   

Operating expenses:

          

Selling, general and administrative expenses

     147,242        138,912        130,460        141,772        155,388   

Amortization of intangible assets

     26,937        26,689        27,099        19,651        19,650   

Write-off of previously capitalized offering costs

                   1,571                 

Goodwill impairment

                                 450,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     174,179        165,601        159,130        161,423        625,038   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings (loss)

     70,020        44,931        56,830        40,110        (430,117

Foreign currency gain (loss)

     409        492        510        475        (911

Interest expense(2)

     (103,133     (101,488     (122,992     (135,514     (138,015

Interest income

     91        104        159        211        617   

Gain (loss) on modification or extinguishment of debt(2)

     (3,607     (27,863     98,187                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision (benefit) for income taxes

     (36,220     (83,824     32,694        (94,718     (568,426

Provision (benefit) for income taxes

     2,835        683        5,027        (17,966     (69,951
  

 

 

 

Net income (loss)

   $ (39,055   $ (84,507   $ 27,667      $ (76,752   $ (498,475
  

 

 

 

Dividends

                                   

Basic and diluted earnings (loss) attributable to common stockholders per common share

   $ (390.55   $ (845.07   $ 276.67      $ (767.52   $ (4,984.75

Pro forma earnings per share:(3)(4)

          

Basic earnings per share

   $             
  

 

 

         

Diluted earnings per share

   $             
  

 

 

         

Pro forma weighted average shares outstanding:

          

Basic weighted average shares outstanding

          
  

 

 

         

Diluted weighted average shares outstanding

          
  

 

 

         

Other data:

          

Adjusted EBITDA(5)

   $ 127,262      $ 114,501      $ 123,054      $ 116,215      $ 96,095   

Capital expenditures

     24,646        11,490        11,105        7,807        16,569   

Depreciation and amortization

     52,277        54,020        60,718        56,271        61,765   

Annual single family housing starts(6)

     535        434        471        442        616   

Selected statements of cash flows data:

          

Net cash provided by (used in):

          

Operating activities

   $ 48,704      $ (3,459   $ 6,748      $ (16,882   $ (58,865

Investing activities

     (24,553     (11,388     (9,073     (7,835     (11,487

Financing activities

     (8,813     9,198        2,407        (17,528     78,233   

Selected balance sheet data (at period end):

          

Cash and cash equivalents

   $ 27,194      $ 11,700      $ 17,498      $ 17,063      $ 58,289   

Total assets

     881,850        892,912        922,237        982,033        1,104,053   

Total long-term debt

     964,384        961,670        894,163        1,100,397        1,114,186   

Stockholder’s deficit

     (314,942     (277,322     (173,088     (313,482     (242,628

 

   

 

 

 

 

(1)   In April 2012, we adopted the financial presentation provision of Accounting Standard Update 2011-05, Presentation of Comprehensive Income. We adopted the measurement provisions in 2008 of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R) (now included in Accounting Standards Codification (ASC) 715, Compensation—Retirement Benefits). In addition, we elected to change our method of accounting for a portion of our inventory in 2008 from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.

 

(2)  

During the year ended December 31, 2012, we incurred a loss on modification or extinguishment of debt of approximately $3.6 million consisting of $1.5 million in call premiums, $0.4 million expense of unamortized debt issuance costs associated with the 13.125% Senior Subordinated Notes, $0.3 million expense of unamortized discount for the 13.125% Senior Subordinated Notes, and $1.4 million expense of third party fees for the 13.125% Senior Subordinated Notes. During the year ended December 31, 2011, we incurred a loss on modification or extinguishment of debt of approximately $27.9 million consisting of $10.9 million in tender premiums, $2.8 million expense of unamortized debt issuance costs associated with the 11.75% Senior Secured Notes, $0.8 million expense of unamortized discounts for the 11.75% Senior Secured Notes, $12.3 million expense of third party fees for the 8.25% Senior Secured Notes, and $1.2 million for the expense of unamortized debt issuance costs for the previous senior secured asset-based revolving credit facility. During the year ended December 31, 2010, we recorded a non-cash gain on extinguishment on debt of approximately $98.2 million in connection with the redemption

 

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of the 9% Senior Subordinated Notes arising from a net reacquisition price of approximately $261.8 million versus the carrying value of the 9% Senior Subordinated Notes of $360.0 million. During the year ended December 31, 2008, we classified extinguishment losses arising from $14.0 million of non-cash deferred financing costs associated with previous term debt, $6.8 million for a prepayment premium and $6.8 million of bank amendment fees as interest expense.

 

(3)   Reflects the Reorganization Transactions and the change in the Company’s capital structure prior to the completion of this offering.

 

       The following details the computation of the pro forma earnings per common share and is unaudited:

 

(amounts in thousands (except per share data))   

For the year ended

December 31, 2012

 

 

 

Net loss

   $ (39,055

Unaudited pro forma weighted average common share calculation:

  

Conversion of Ply Gem Prime Holdings common stock

  

Conversion of Ply Gem Prime Holdings preferred stock

  

Unaudited basic pro forma weighted average shares outstanding

  

Treasury stock effect of outstanding stock options

  

Unaudited diluted pro forma weighted average shares outstanding

  

Pro forma earnings per common share:

  

Pro forma basic earnings per common share

  

Pro forma diluted earnings per common share

  

 

 

 

(4)   The summary unaudited pro forma financial data are based upon available information and certain assumptions as discussed in the notes to the unaudited pro forma financial information presented under “Unaudited pro forma financial information.” The summary unaudited pro forma financial data are for informational purposes only and do not purport to represent what our results of operations or financial position actually would have been if each such transaction had occurred on the dates specified, nor does this data purport to represent the results of operations for any future period.

 

(5)   Adjusted EBITDA means net income (loss) plus interest expense (net of interest income), provision (benefit) for income taxes, depreciation and amortization, non-cash foreign currency transactions gain/(loss), non-cash loss (gain) on modification or extinguishment of debt, amortization of non-cash write-off of the portion of excess purchase price from acquisitions allocated to inventories, write-off of previously capitalized offering costs, environmental remediation, restructuring and integration expenses, customer inventory buybacks, impairment charges and management fees paid under our advisory agreement with an affiliate of the CI Partnerships. Other companies may define adjusted EBITDA differently and, as a result, our measure of adjusted EBITDA may not be directly comparable to adjusted EBITDA of other companies. Management believes that the presentation of adjusted EBITDA included in this prospectus provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business. We have included adjusted EBITDA because it is a key financial measure used by management to (i) assess our ability to service our debt and/or incur debt and meet our capital expenditure requirements; (ii) internally measure our operating performance; and (iii) determine our incentive compensation programs. In addition, our ABL Facility has certain covenants that apply ratios utilizing this measure of adjusted EBITDA.

 

       Despite the importance of this measure in analyzing our business, measuring and determining incentive compensation and evaluating our operating performance, as well as the use of adjusted EBITDA measures by securities analysts, lenders and others in their evaluation of companies, adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP; nor is adjusted EBITDA intended to be a measure of liquidity or free cash flow for our discretionary use. Some of the limitations of adjusted EBITDA are:

 

   

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures;

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense or the cash requirements to service interest or principal payments under the 9.375% Senior Notes, the 8.25% Senior Secured Notes, the 11.75% Senior Secured Notes, the 13.125% Senior Subordinated Notes or the ABL Facility;

 

   

Adjusted EBITDA does not reflect income tax payments we are required to make; and

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements.

 

       Adjusted EBITDA included in this prospectus should be considered in addition to, and not as a substitute for, net earnings or operating earnings in accordance with U.S. GAAP as a measure of performance in accordance with U.S. GAAP. You are cautioned not to place undue reliance on adjusted EBITDA. The adjusted EBITDA amounts are unaudited.

 

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       The following table presents our calculation of adjusted EBITDA reconciled to net income (loss) and is unaudited:

 

       Year ended December 31,  
(amounts in thousands)    2012     2011     2010     2009     2008  

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     $ (39,055     $ (84,507     $ 27,667        $ (76,752   $ (498,475

Interest expense, net(2)

     103,042        101,384        122,833        135,303        137,398   

Provision (benefit) for income taxes

     2,835        683        5,027        (17,966     (69,951

Depreciation and amortization

     52,277        54,020        60,718        56,271        61,765   

Non-cash (gain) loss on foreign currency transactions

     (409     (492     (510     (475     911   

Non-cash (gain) loss on modification or extinguishment of debt(2)

     3,607        27,863        (98,187              

Non-cash charge of purchase price allocated to inventories

                                 19   

Write-off of previously capitalized offering costs

                   1,571                 

Restructuring and integration expenses

     1,677        1,616        910        8,992        10,859   

Customer inventory buybacks

     768        10,087        574        8,345        1,890   

Goodwill impairment

                                 450,000   

Environmental remediation

            1,580                        

Management fees(7)

     2,520        2,267        2,451        2,497        1,679   
  

 

 

 

Adjusted EBITDA

   $ 127,262      $ 114,501      $ 123,054      $ 116,215      $ 96,095   

 

 

 

(6)   Single family housing starts data furnished by NAHB forecast (as of February 2, 2013). These amounts are unaudited.

 

(7)   After the completion of this offering, the advisory agreement with an affiliate of the CI Partnerships will be terminated and management fees will no longer be paid.

 

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Management’s discussion and analysis of financial

condition and results of operations

You should read the following discussion and analysis of our consolidated financial condition and results of operations in conjunction with our historical financial statements and the related notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that involve certain risks and uncertainties. Actual results and the timing of events may differ materially from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth under “Risk factors” and elsewhere in this prospectus. This historical discussion and analysis of our consolidated financial condition and results of operations does not give effect to the Reorganization Transactions, the entry into the tax receivable agreement, this offering and the application of the net proceeds of this offering as described under “Use of proceeds.”

General

We are a leading manufacturer of exterior building products in North America, operating in two reportable segments: (i) Siding, Fencing and Stone and (ii) Windows and Doors, which comprised approximately 59% and 41% of our sales, respectively, for the fiscal year ended December 31, 2012. These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl and composite railing, stone veneer and vinyl windows and doors used in both the new construction market and the home repair and remodeling market in the United States and Western Canada. Vinyl building products have the leading share of sales volume in siding and windows in the United States. We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core products. We believe that our comprehensive product portfolio and geographically diverse, low cost manufacturing platform allow us to better serve our customers and provide us with a competitive advantage over other exterior building products suppliers.

Ply Gem Holdings was incorporated on January 23, 2004 by affiliates of CI Capital Partners for the purpose of acquiring Ply Gem Industries from Nortek. The Ply Gem acquisition was completed on February 12, 2004. Prior to the Ply Gem acquisition, our business was known as the Windows, Doors and Siding division of Nortek, where the business operated as a holding company with a broad set of brands. Since the Ply Gem acquisition, we have acquired six additional businesses to complement and expand our product portfolio and geographical diversity. Gary E. Robinette, our President and Chief Executive Officer, joined Ply Gem in October 2006, and has employed the strategy of transitioning Ply Gem to an integrated and consolidated business model under the Ply Gem brand.

The following is a summary of Ply Gem’s acquisition history:

 

 

On August 27, 2004, Ply Gem acquired MWM Holding, a manufacturer of vinyl, wood, wood-clad, composite, impact and aluminum windows.

 

 

On February 24, 2006, Ply Gem acquired Alenco, a manufacturer of aluminum and vinyl windows products. This acquisition supported our 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 MHE, a leading manufacturer of vinyl siding, aluminum siding, injection molded shutters and vinyl, aluminum and injection molded accessories. MHE became part of our Siding, Fencing and Stone segment and operates under common leadership with our existing siding business.

 

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On September 30, 2007, Ply Gem completed the acquisition of CertainTeed Corporation’s vinyl window and patio door business, which we have named Ply Gem Pacific Windows Corporation, a leading manufacturer of premium vinyl windows and patio doors.

 

 

On October 31, 2008, Ply Gem acquired substantially all of the assets of Ply Gem Stone (formerly United Stone Veneer), a manufacturer of stone veneer products.

 

 

On July 30, 2012, Ply Gem acquired substantially all of the assets of Greendeck, a composite products development company.

Prior to January 11, 2010, Ply Gem Holdings was a wholly owned subsidiary of Ply Gem Investment Holdings, Inc. (“Ply Gem Investment Holdings”), which was a wholly owned subsidiary of Ply Gem Prime. On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime, with Ply Gem Prime being the surviving corporation. As a result, Ply Gem Holdings is now a wholly owned subsidiary of Ply Gem Prime. Immediately prior to the closing of this offering, Ply Gem Prime will merge with and into Ply Gem Holdings, with Ply Gem Holdings being the surviving entity.

We are a holding company with no operations or assets of our own other than the capital stock of our subsidiaries. The terms of the ABL Facility place restrictions on the ability of Ply Gem Industries and our other subsidiaries to pay dividends and otherwise transfer assets to us. Further, the terms of the indentures governing Ply Gem Industries’ 8.25% Senior Secured Notes and 9.375% Senior 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 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, restructuring, and other general and administrative expenses.

Operating earnings (loss).   Operating earnings (loss) represents net sales less cost of products sold, SG&A expense, amortization of intangible assets and write-off of previously capitalized offering costs.

Impact of commodity pricing

PVC resin and aluminum are major components in the production of our 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 a substantial portion of significant price increases to our customers. The results of operations for individual quarters can be negatively impacted by a delay between

 

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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.

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 and fourth quarters of each calendar year historically result in these quarters producing significantly less sales revenue than in any other period of the year. As a result, we have historically had lower profits or higher losses in the first quarter of each calendar year 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. In addition, favorable or unfavorable weather conditions may influence the comparability of our results from year to year or from quarter to quarter.

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. GAAP. 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. Management also believes that the nine 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, (4) warranty reserves, (5) insurance reserves, (6) income taxes, (7) rebates, (8) pensions and (9) environmental accruals and other contingencies. 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, 2012 would result in an approximate $0.4 million, $0.7 million, and $3.8 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:

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, it is industry standard that customers take title to products upon delivery, at which time revenue is then recognized by the Company. Revenue includes the 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

 

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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 was 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. We record provisions, as appropriate, to write-down obsolete and excess inventory to estimated net realizable value. The process for evaluating obsolete and excess inventory often requires subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be sold in the normal course of business. Accelerating the disposal process or incorrect estimates of future sales potential may cause actual results to differ from the estimates at the time such inventory is disposed or sold.

Goodwill Impairment.   We perform an annual test for goodwill impairment during the fourth quarter of each year (November 24th for 2012) 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. We use the two-step method to determine goodwill impairment. If the carrying amount of a reporting unit exceeds its fair value (“Step One”), we measure the possible goodwill impairment based upon a hypothetical allocation of the fair value estimate of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including previously unrecognized intangible assets (“Step Two”). The excess of the reporting unit’s fair value over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds the implied fair value of goodwill.

To evaluate goodwill impairment, we estimate 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.

 

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A summary of the key assumptions utilized in the goodwill impairment analysis at November 24, 2012, November 26, 2011, and November 27, 2010, as it relates to the Step One fair values and the sensitivities for these assumptions follows:

 

       Windows and Doors  
    

As of

November 24,

2012

    

As of

November 26,

2011

    

As of

November 27,

2010

 

 

 

Assumptions:

        

Income approach:

        

Estimated housing starts in terminal year

     1,050,000         1,050,000         1,150,000   

Terminal growth rate

     3.5%         3.5%         3.5%   

Discount rates

     18.0%         20.0%         19.0%   

Market approach:

        

Control premiums

     20.0%         20.0%         20.0%   

Sensitivities:

        

(amounts in thousands)

        

Estimated fair value decrease in the event of a 1% decrease in the terminal year growth

   $ 8,000       $ 7,768       $ 10,679   

Estimated fair value decrease in the event of a 1% increase in the discount rate

     22,000         16,170         16,859   

Estimated fair value decrease in the event of a 1% decrease in the control premium

     3,000         2,143         2,330   

 

 

 

       Siding, Fencing and Stone  
    

As of

November 24,

2012

    

As of

November 26,

2011

    

As of

November 27,

2010

 

 

 

Assumptions:

        

Income approach:

        

Estimated housing starts in terminal year

     1,050,000         1,050,000         1,150,000   

Terminal growth rate

     3.0%         3.0%         3.0%   

Discount rates

     13.0%         17.0%         16.0%   

Market approach:

        

Control premiums

     10.0%         10.0%         10.0%   

Sensitivities:

        

(amounts in thousands)

        

Estimated fair value decrease in the event of a 1% decrease in the terminal year growth

   $ 62,000       $ 32,974       $ 47,251   

Estimated fair value decrease in the event of a 1% increase in the discount rate

     135,000         64,112         71,220   

Estimated fair value decrease in the event of a 1% decrease in the control premium

     14,000         8,930         8,865   

 

 

 

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(amounts in thousands)  

As of

November 24,

2012

   

As of

November 26,

2011

   

As of

November 27,

2010

 

 

 

Estimated Windows and Doors reporting unit fair value increase in the event of a 10% increase in the weighting of the market multiples method

  $      $ 4,000      $ 5,600   

Estimated Siding, Fencing and Stone reporting unit fair value increase in the event of a 10% increase in the weighting of the market multiples method

    30,000        10,300        2,700   

 

 

We provide no assurance that: (1) valuation multiples will not decline, (2) discount rates will not increase or (3) the earnings, book values or projected earnings and cash flows of our reporting units will not decline. We will continue to analyze changes to these assumptions in future periods. We will continue to evaluate goodwill during future periods and further declines in the residential housing and remodeling markets could result in future goodwill impairments.

Income Taxes.   We utilize the asset and liability method in accounting for income taxes, which requires that the deferred tax consequences of temporary differences between the amounts recorded in our consolidated financial statements and the amounts included in our federal and state income tax returns be recognized in the consolidated balance sheet. The amount recorded in our consolidated financial statements reflects estimates of final amounts due to timing of completion and filing of actual income tax returns. Estimates are required with respect to, among other things, the appropriate state income tax rates used 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 (during 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime, with Ply Gem Prime being the surviving corporation) pursuant to which tax liabilities for each respective party are computed on a stand-alone basis. Our U.S. subsidiaries file unitary, combined federal income tax returns and separate state income tax returns. Ply Gem Canada files separate Canadian income tax returns.

At December 31, 2011, we were in a full federal valuation allowance position as we were no longer in a net deferred liability tax position and continued to incur losses for income tax purposes. Additionally, at December 31, 2011, we were in a partial state valuation allowance position for certain legal entities primarily related to losses for income tax purposes. At December 31, 2012, we remained in a full federal valuation allowance position and a partial state valuation allowance position as we continued to incur cumulative losses for income tax purposes. As of December 31, 2012 and 2011, we did not have a valuation allowance for our profitable foreign operations. Refer to Note 10 to our audited consolidated financial statements included elsewhere in this prospectus for additional information regarding income taxes.

 

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Results of operations

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

 

(amounts in thousands)    Year ended December 31,  
       2012     2011     2010  

Net Sales

      

Siding, Fencing and Stone

   $ 658,045      $ 639,290      $ 604,406   

Windows and Doors

     463,256        395,567        391,500   

Operating earnings (loss)

      

Siding, Fencing and Stone

     110,456        90,849        92,612   

Windows and Doors

     (20,565     (31,134     (19,410

Unallocated

     (19,871     (14,784     (16,372

Foreign currency gain

      

Windows and Doors

     409        492        510   

Interest income (expense), net

      

Siding, Fencing and Stone

     47        83        121   

Windows and Doors

     18        13        (90

Unallocated

     (103,107     (101,480     (122,864

Provision for income taxes

      

Unallocated

     (2,835     (683     (5,027

Gain (loss) on modification or extinguishment of debt

      

Unallocated

     (3,607     (27,863     98,187   

Net income (loss)

   $ (39,055   $ (84,507   $ 27,667   

 

 

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. However, our results of operations set forth in the tables below may not necessarily be representative of our future operating results.

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 (loss). 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 December 31,  
(amounts in thousands)    2012      2011      2010  

 

 

Statement of operations data:

                 

Net sales

   $ 658,045         100.0%       $ 639,290         100.0%       $ 604,406         100.0%   

Gross profit

     180,244         27.4%         158,798         24.8%         155,535         25.7%   

SG&A expenses

     61,201         9.3%         59,646         9.3%         54,410         9.0%   

Amortization of intangible assets

     8,587         1.3%         8,303         1.3%         8,513         1.4%   

Operating earnings

     110,456         16.8%         90,849         14.2%         92,612         15.3%   

 

 

 

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Net sales

Net sales for the year ended December 31, 2012 increased $18.8 million or 2.9% compared to the year ended December 31, 2011. During the year ended December 31, 2011, our net sales were reduced by a $10.4 million sales credit related to an inventory buyback for the lift-out of competitors’ inventory related to a significant new customer win. However, the $10.4 million inventory buyback was offset by the initial stocking sales and inventory build to this same new customer. Overall, our 2.9% net sales increase was driven by higher unit volumes which resulted from improved conditions in the U.S. new construction housing market including, but not limited to, the declining number of foreclosures, rising home prices, and improving general economic conditions for the year ended December 31, 2012. According to the NAHB, 2012 single family housing starts are estimated to have increased approximately 23.2% relative to 2011. Historically, we have believed there is a 90 day lag between a new housing start with ground being broken and the time when our products are utilized on the exterior of a home. During 2012, we believe that this lag period may have expanded as a result of labor shortages in the homebuilding industry.

While new construction experienced significant growth, market demand for repair and remodeling products continued to lag the new construction sector in 2012. According to the Leading Indicator of Remodeling Activity index, the four-quarter moving growth rate at December 31, 2012 was 8.8% compared to 2.2% at December 31, 2011. Combining the strength of demand in the new construction market with the softer market conditions for repair and remodeling products, the Vinyl Siding Institute reported that vinyl siding industry shipments increased 3.2% for the year ended December 31, 2012 compared to the year ended December 31, 2011. After giving effect to the aforementioned initial stocking sales and inventory build, the Company believes that its vinyl siding unit volume shipments would have increased 5.3%. The Company’s vinyl siding market position remained consistent in 2012 at approximately 36.0% compared to 2011. During the 2012 fourth quarter, the Company’s vinyl siding industry shipments increased 5.7% compared to the same period in 2011, while industry shipments increased 2.7%.

Net sales for the year ended December 31, 2011 increased from the year ended December 31, 2010 by approximately $34.9 million, or 5.8%. Net sales increased despite continued low industry unit volume that resulted from the challenging market conditions that persisted in the U.S. housing market. These negative general market conditions were offset by sales to new customers and higher selling prices that were increased in response to higher raw material and freight costs. According to the NAHB, 2011 single family housing starts decreased approximately 7.9% from 2010. This decrease was attributable in part to the poor general economic conditions that existed in the United States including, among other things, high unemployment, the number of foreclosures and falling home prices that negatively impacted demand for the U.S. housing market.

The Company’s sales to new customers and higher selling prices related to increased material costs offset the general housing market conditions. In addition, favorable weather conditions during the fourth quarter of 2011 also contributed to the sales growth year over year. During the 2011 fourth quarter, the Company’s vinyl siding unit shipments increased 10.8% compared to the same period in 2010. According to the Vinyl Siding Institute, the vinyl siding industry shipments decreased 3.9% for 2011 compared to 2010 while the Company’s shipments increased approximately 7.1% driven by sales to new customers. The Company’s vinyl siding market position for 2011 increased to approximately 36.0% from 32.3% for 2010. Included as a reduction

 

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of net sales for the year ended December 31, 2011 were inventory buybacks for the lift-out of competitors’ inventory of approximately $11.2 million related to these new customers. Excluding the impact of these buybacks, 2011 net sales would have increased 7.6% compared to 2010.

Gross profit

Gross profit for the year ended December 31, 2012 increased $21.4 million, or 13.5%, compared to the year ended December 31, 2011. Gross profit as a percentage of sales increased from 24.8% for the year ended December 31, 2011 to 27.4% for the year ended December 31, 2012. Included in 2011 gross profit was a net inventory buyback of approximately $9.9 million resulting from the buyback, or lift-out, of our competitor’s product on initial stocking orders, partially offset by the scrap value of inventory received. Our gross profit as a percentage of sales for the year ended December 31, 2011 would have been 25.9% excluding these buybacks. The remaining increase from 25.9% to 27.4% was primarily attributable to increases in unit volume shipments specifically related to new construction and the 23.2% volume increase from 2011.

As it relates to our two primary raw material cost components, aluminum and PVC resin, there has been movement relative to prior years. According to the London Metal Exchange, the price of aluminum decreased approximately 15.8% for the year ended December 31, 2012 compared to the year ended December 31, 2011. Conversely, the average market price for PVC resin was estimated to have increased approximately 5.5% for 2012 compared to 2011.

Gross profit for the year ended December 31, 2011 increased from the year ended December 31, 2010 by approximately $3.3 million, or 2.1%. Gross profit as a percentage of sales decreased from 25.7% for the year ended December 31, 2010 to 24.8% for the year ended December 31, 2011. Included in 2011 gross profit was a net inventory buyback of approximately $9.9 million resulting from the buyback, or lift-out, of our competitor’s product on initial stocking orders, partially offset by the scrap value of inventory received. Our gross profit as a percentage of sales for the year ended December 31, 2011 would have been 25.9% excluding these buybacks, which is consistent with the prior year. According to the London Metal Exchange, the price of aluminum increased approximately 13.9% for the year ended December 31, 2011 compared to the year ended December 31, 2010. In addition, the average market price for PVC resin was estimated to have increased 14.1% for 2011 compared to 2010. As discussed above, the Company initiated selling price increases in response to these rising material and freight costs.

SG&A expense

SG&A expenses for the year ended December 31, 2012 increased $1.6 million, or 2.6%, relative to the year ended December 31, 2011. As a percentage of sales, SG&A expenses were consistent between 2012 and 2011 at approximately 9.3%. The SG&A expense dollar increase resulted primarily from higher management incentive compensation expense related to improved business performance.

SG&A expense for the year ended December 31, 2011 increased from the year ended December 31, 2010 by approximately $5.2 million, or 9.6%. The increase in SG&A expense was attributed to higher employee related expenses of approximately $2.7 million as well as increased selling and marketing expenses of approximately $2.2 million related to increased sales. As a percentage of sales, SG&A expense increased slightly to 9.3% for the year ended December 31, 2011 from 9.0% for the year ended December 31, 2010 due to higher employee related expenses.

 

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Amortization of intangible assets

Amortization expense for the year ended December 31, 2012 was consistent with the years ended December 31, 2011 and December 31, 2010.

Windows and Doors segment

 

       Year ended December 31,  
(amounts in thousands)          2012           2011           2010  

 

  

 

 

 

Statement of operations data:

            

Net sales

   $ 463,256        100.0   $ 395,567        100.0   $ 391,500        100.0

Gross profit

     63,955        13.8     51,734        13.1     60,425        15.4

SG&A expenses

     66,170        14.3     64,518        16.3     61,285        15.7

Amortization of intangible assets

     18,350        4.0     18,350        4.6     18,550        4.7

Operating loss

     (20,565     (4.4 )%      (31,134     (7.9 )%      (19,410     (5.0 )% 

Currency transaction gain

     409        0.1     492        0.1     510        0.1

 

   

 

 

   

 

 

 

Net sales

Net sales for the year ended December 31, 2012 increased compared to the year ended December 31, 2011 by approximately $67.7 million, or 17.1%. The net sales increase is primarily attributable to the aforementioned 23.2% increase in single family housing starts for the year ended December 31, 2012 as compared to the year ended December 31, 2011. Since the majority of our current Windows and Doors business is related to new construction demand versus repair and remodeling, current market conditions for new construction have driven the net sales increase as well as certain strategic market share gains. In addition, the net sales increase resulted from improving end market conditions in Western Canada. According to the Canadian Mortgage and Housing Corporation, estimates that single family housing starts in Alberta, Canada have increased approximately 15.1% for the year ended December 31, 2012.

Net sales for the year ended December 31, 2011 increased compared to the year ended December 31, 2010 by approximately $4.1 million, or 1.0%. Despite the aforementioned 7.9% decrease in U.S. single family housing starts for the year ended December 31, 2011 compared to the year ended December 31, 2010, the Windows and Doors segment demonstrated an ability to offset this general market decrease by gaining sales with new customers in both the new construction and repair and remodeling markets specifically expanding our multi-family opportunities. The sales gains to new customers were partially offset by a declining end user market in Western Canada resulting from decreased housing starts in Alberta, Canada which the Company believes were impacted in part by unusually poor weather conditions in the first half of 2011. According to the Canadian Mortgage and Housing Corporation, housing starts in Alberta, Canada were estimated to have decreased by 2.1% in 2011 as compared to 2010.

Gross profit

Gross profit for the year ended December 31, 2012 increased compared to the year ended December 31, 2011 by approximately $12.2 million or 23.6%. Gross profit as a percentage of sales increased from 13.1% for the year ended December 31, 2011 to 13.8% for the year ended December 31, 2012. The increase in gross profit and gross profit percentage can be attributed to the net sales increase of 17.1% and the corresponding improved operating leverage, specifically in the domestic United States, on fixed costs resulting from the net sales increase during the year

 

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ended December 31, 2012. The favorable volume impact on gross profit was partially offset by unfavorable labor inefficiencies due to production ramp-up costs related to the 2012 market position gains.

Gross profit for the year ended December 31, 2011 decreased compared to the year ended December 31, 2010 by approximately $8.7 million, or 14.4%. Gross profit as a percentage of sales decreased from 15.4% in 2010 to 13.1% in 2011. The decrease in gross profit and gross profit percentage was caused by higher raw material costs, specifically PVC resin and aluminum, and freight costs that were not fully offset by selling price increases. In addition, the Company experienced short-term inefficiencies related to increased production volumes associated with the sales to new customers as discussed above, which also increased our sales mix of our value priced window products that generally carry lower gross profit margins, partially offset by favorable warranty experience for the year ended December 31, 2011.

SG&A expense

SG&A expenses for the year ended December 31, 2012 increased $1.7 million or 2.6% relative to the year ended December 31, 2011. The 2011 SG&A expense included a $1.6 million expense related to an incremental environmental liability that was nonrecurring in 2012 adjusting the actual increase relative to 2012 to approximately $3.3 million. This increase was primarily driven by higher employee related costs specifically higher management incentive compensation expense of $1.6 million based on improved operating performance. In addition, we also incurred increased selling and marketing expenses of approximately $1.7 million related primarily to increased sales in the year ended December 31, 2012 compared to the year ended December 31, 2011. As a percentage of net sales, SG&A expenses decreased to 14.3% for the year ended December 31, 2012 from 16.3% for the year ended December 31, 2011 as we supported the higher net sales with better leverage on our SG&A expenses.

SG&A expense for the year ended December 31, 2011 increased compared to the year ended December 31, 2010 by approximately $3.2 million, or 5.3%. The increase can be predominantly attributed to higher selling and marketing expenses of approximately $1.1 million as well as higher legal and professional fees of approximately $0.4 million. In addition, we recognized an incremental environmental liability of approximately $1.6 million within SG&A expenses during the fourth quarter of 2011 related to a preliminary cost estimate provided to the EPA, as discussed in the “Business—Environmental” section of this prospectus. Excluding the $1.6 million, SG&A expense as a percentage of net sales would have been 15.9% for the year ended December 31, 2011 consistent with the 15.7% for the year ended December 31, 2010.

Amortization of intangible assets

Amortization expense for the year ended December 31, 2012 was consistent with the years ended December 31, 2011 and 2010.

Currency transaction gain (loss)

Currency transaction gain was substantially the same for the years ended December 31, 2012, 2011 and 2010.

 

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Unallocated operating earnings, interest and provision for income taxes

 

       Year ended December 31,  
(amounts in thousands)    2012     2011     2010  

 

 

Statement of operations data:

      

SG&A expenses

   $ (19,871   $ (14,748   $ (14,765

Amortization of intangible assets

            (36     (36

Write-off of previously capitalized offering costs

                   (1,571
  

 

 

   

 

 

   

 

 

 

Operating loss

     (19,871     (14,784     (16,372

Interest expense

     (103,112     (101,486     (122,881

Interest income

     5        6        17   

Gain (loss) on modification or extinguishment of debt

     (3,607     (27,863     98,187   

Provision for income taxes

     (2,835     (683     (5,027

 

 

SG&A expense

Unallocated SG&A expense includes 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 SG&A expense for the year ended December 31, 2012 increased by $5.1 million compared with the year ended December 31, 2011. This SG&A expense increase in 2012 is primarily due to the timing of certain employee related costs, including stock compensation ($1.3 million), long-term incentive plan expenses ($0.9 million), insurance expenses ($0.3 million) and management incentive compensation expenses ($2.1 million). The SG&A expense for the year ended December 31, 2011 was consistent with the year ended December 31, 2010.

Amortization of intangible assets

Amortization expense for the year ended December 31, 2012 was consistent with the years ended December 31, 2011 and 2010.

Write-off of previously capitalized offering costs

We incurred approximately $1.6 million of costs associated with a proposed public equity offering during 2010. Since the offering was postponed for a period greater than 90 days, the costs, which were initially capitalized, were written off during the fourth quarter of 2010.

Interest expense

Interest expense for the year ended December 31, 2012 increased by approximately $1.6 million compared to the same period in 2011. The net increase was primarily due to the $40 million of the Senior Tack-on Notes.

Interest expense for the year ended December 31, 2011 decreased by approximately $21.4 million, or 17.4%, over the same period in 2010. The decrease was primarily due to the deleveraging event that occurred in February 2010 and the debt refinancings that were completed during 2011. Specifically, the net decrease was due to the following:

 

 

a decrease of approximately $3.9 million of interest on the 9.0% Senior Subordinated Notes, which were redeemed on February 16, 2010;

 

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a decrease of approximately $75.9 million of interest on the 11.75% Senior Secured Notes, which were purchased and redeemed in February and March 2011;

 

 

an increase of approximately $58.7 million of interest paid on the 8.25% Senior Secured Notes, which were issued in February 2011;

 

 

a decrease of approximately $1.1 million of interest on our ABL Facility borrowings, primarily due to a decrease in the interest rate;

 

 

an increase of approximately $2.5 million due to the amortization of the discount and tender premium on the 8.25% Senior Secured Notes, which were issued in February 2011; and

 

 

a decrease of approximately $1.7 million due to the write-off of a portion of the capitalized financing costs related to the 11.75% Senior Secured Notes purchased and redeemed in February and March 2011, partially offset by additional amortization related to the financing costs for the new 8.25% Senior Secured Notes.

Interest income

Interest income for the year ended December 31, 2012 was consistent with the year ended December 31, 2011. Interest income for the year ended December 31, 2011 decreased by $11,000 due to lower interest rates in 2011 as compared to 2010.

Gain (loss) on modification or extinguishment of debt

As a result of the 9.375% Senior Notes issuance and the transactions relating to the 13.125% Senior Subordinated Notes in September 2012, as further described in the “ Liquidity and capital resources ” section below, we recognized a loss on modification/extinguishment of debt of approximately $3.6 million for the year ended December 31, 2012. The loss consisted of an early call premium of approximately $9.8 million, of which approximately $8.3 million was recorded as a discount on the 9.375% Senior Notes, and approximately $1.5 million was expensed as a loss on extinguishment of debt in the consolidated statement of operations. We also expensed approximately $0.3 million for the unamortized discount and $0.4 million for the unamortized debt issuance costs for the 13.125% Senior Subordinated Notes in this transaction. We also incurred approximately $2.5 million of costs associated with this transaction, of which approximately $1.1 million was recorded as debt issuance costs and approximately $1.4 million was expensed as loss on modification or extinguishment of debt in the consolidated statement of operations. The loss was recorded separately in the consolidated statement of operations for the year ended December 31, 2012.

As a result of the debt refinancings during January and February 2011, as further described in the “ Liquidity and capital resources ” section below, we recognized a loss on modification or extinguishment of debt of approximately $27.9 million for the year ended December 31, 2011. The loss consisted of the write-off of a portion of the tender premium paid with the redemption of the 11.75% Senior Secured Notes of approximately $10.9 million, the write-off of a portion of the capitalized bond discount related to the 11.75% Senior Secured Notes of approximately $0.8 million, the write-off of a portion of the capitalized financing costs related to the 11.75% Senior Secured Notes of approximately $2.8 million, the write-off of the capitalized financing costs related to the previous ABL Facility of approximately $1.2 million and the expense of certain third-party financing costs related to the 8.25% Senior Secured Notes of approximately $12.3 million. The loss was recorded separately in the consolidated statement of operations for the year ended December 31, 2011.

 

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For the year ended December 31, 2010, we reported a gain on extinguishment of debt of approximately $98.2 million. As a result of the $141.2 million redemption of the 9% Senior Subordinated Notes on February 16, 2010, we recognized a loss on extinguishment of debt of approximately $2.2 million related predominantly to the write off of unamortized debt issuance costs. As a result of the $218.8 million contribution of the 9% Senior Subordinated Notes by an affiliate of our controlling stockholder in exchange for equity of Ply Gem Prime valued at approximately $114.9 million on February 12, 2010, we recognized a gain on extinguishment of debt of approximately $100.4 million including the write-off of unamortized debt issuance costs of approximately $3.5 million. The net $98.2 million gain on debt extinguishment was recorded within other income (expense) separately in the consolidated statement of operations for the year ended December 31, 2010.

Income taxes

Income tax expense for the year ended December 31, 2012 increased to approximately $2.8 million tax expense from approximately $0.7 million tax expense for the year ended December 31, 2011. The income tax expense of approximately $2.8 million was comprised of approximately $0.8 million of federal tax expense, approximately $2.3 million of state tax expense, and approximately $0.3 million of foreign income tax benefit. The increase in tax expense is primarily due to the impact of the full federal valuation allowance and a partial state valuation allowance in addition to state income tax expense as operating performance has improved offset by the foreign income benefit caused primarily by a reversal of certain tax uncertainties.

As of December 31, 2012, a full valuation allowance has been provided against certain deferred tax assets as it is presently deemed more likely than not that the benefit of such net tax assets will not be utilized. Due to recent cumulative losses accumulated by the Company, management did not rely upon projections of future taxable income in assessing the recoverability of deferred tax assets. The Company’s effective tax rate for the year ended December 31, 2012 was approximately 7.8%. For the year ended December 31, 2012, our estimated effective tax rate varied from the statutory rate primarily due to state income tax expense, changes in the valuation allowance, changes in tax contingencies and foreign income tax benefit.

Income tax expense for the year ended December 31, 2011 decreased to approximately $0.7 million tax expense from approximately $5.0 million tax expense for the year ended December 31, 2010. The income tax expense of approximately $0.7 million was comprised of approximately $0.2 million of state tax benefit and approximately $0.9 million of foreign income tax expense. The decrease in tax expense is primarily due to the increase in the taxable loss for the year ended December 31, 2011. As of December 31, 2011, a full valuation allowance has been provided against certain deferred tax assets as it is presently deemed more likely than not that the benefit of such net tax assets will not be utilized. Due to recent cumulative losses accumulated by the Company, management did not rely upon the projections of future taxable income in assessing the recoverability of deferred tax assets. The Company’s effective tax rate for the year ended December 31, 2011 was approximately 0.8%.

Liquidity and capital resources

During the year ended December 31, 2012, cash and cash equivalents increased to approximately $27.2 million compared to approximately $11.7 million as of December 31, 2011. During the year ended December 31, 2011, cash and cash equivalents decreased from approximately $17.5 million to $11.7 million as of December 31, 2011.

 

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Our business is seasonal because inclement weather during the winter months reduces the level of building and remodeling activity in both the home repair and remodeling and the new home construction sectors, especially in the Northeast and Midwest regions of the United States and Western Canada. As a result, our liquidity typically increases during the second and third quarters as our borrowing base increases under the ABL Facility reaching a peak early in the fourth quarter, and decreases late in the fourth quarter and throughout the first quarter.

Our primary cash needs are for working capital, capital expenditures and debt service. As of December 31, 2012, our annual interest charges for debt service, including the ABL Facility, were estimated to be approximately $86.3 million. As of December 31, 2012, we did not have any scheduled debt maturities until 2016. On a pro forma basis, after giving effect to this offering and the application of net proceeds from this offering as described under “ Use of proceeds ,” our annual cash interest charges for debt service are estimated to be $ million. The specific debt instruments and their corresponding terms and due dates are described in the following sections. Our capital expenditures have historically averaged approximately 1.5% of net sales on an annual basis. We finance these cash requirements through internally generated cash flow and funds borrowed under Ply Gem Industries’ ABL Facility.

We intend to use the net proceeds to us from this offering (i) to redeem, repurchase or repay a portion of our outstanding indebtedness and (ii) to pay transaction fees and other expenses. See “Use of proceeds.” As of December 31, 2012, on an adjusted basis after giving effect to the Reorganization Transactions and this offering, we would have had approximately $            million of indebtedness outstanding, including no outstanding borrowings and $128.4 million of borrowing base availability under our ABL Facility.

Our specific cash flow movement for the years ended December 31, 2012, 2011 and 2010 is summarized below:

Cash provided by (used in) operating activities

Net cash provided by operating activities for the year ended December 31, 2012 was approximately $48.7 million. Net cash used in operating activities for the year ended December 31, 2011 was approximately $3.5 million, and net cash provided by operating activities for the year ended December 31, 2010 was approximately $6.7 million.

The increase in cash provided by operating activities was primarily caused by higher operating earnings of $25.1 million reflecting the recovering U.S. residential housing market which improved our operating leverage in the year ended December 31, 2012 as compared to the prior year. The higher operating earnings were supplemented by improved working capital metrics primarily achieved by monitoring inventory levels more effectively ($11.1 million), more favorable collection on receivables ($7.9 million) and management of accounts payable ($22.4 million) offset by negative movement in accrued expenses ($10.7 million) attributed to the refinancing of the 13.125% Senior Subordinated Notes with the 9.375% Senior Notes where accrued interest of approximately $5.8 million was paid during 2012.

The increase in cash used in operating activities during 2011 as compared to 2010 was due to an approximate $11.9 million decrease in operating earnings driven by commodity cost increases that were not fully offset with selling price increases and increased SG&A expense. In addition, the increase in cash used in operating activities was caused by a negative working capital change of approximately $14.6 million compared to 2010. This working capital change was driven by an increase in fourth quarter activity as the Company’s net sales increased 9.9% during the quarter

 

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ended December 31, 2011 compared to the quarter ended December 31, 2010. This sales activity drove the corresponding receivable and inventory increases comparing December 31, 2011 to December 31, 2010. These increases were partially offset by a favorable change within accrued expenses which was primarily caused by an increase in accrued interest of approximately $20.6 million. This increase in accrued interest resulted from the debt refinancing activity in which $725.0 million of 11.75% Senior Secured Notes (June and December interest payments) were refinanced through the $800.0 million of 8.25% Senior Secured Notes (February and August interest payments). The change in the coupon rate saved the Company approximately $19.2 million in annual cash interest, while the new interest dates caused the 2011 favorable change within accrued interest.

Cash used in investing activities

Net cash used in investing activities for the years ended December 31, 2012, 2011, and 2010 was approximately $24.6 million, $11.4 million and $9.1 million, respectively. The cash used in investing activities for the years ended December 31, 2012, 2011, and 2010 was for capital expenditures. Capital expenditures for 2012 were higher at approximately 2.2% of net sales compared to our historical average of 1.5% due to the Company’s entrance into the cellular PVC trim market in our Siding, Fencing and Stone segment officially during 2013, which required equipment purchases in 2012. In addition, our Windows and Door segment incurred increased capital expenditures in 2012 related to tooling and equipment purchases for a product streamlining initiative aimed at optimizing our SKUs while improving certain functionalities across multiple window products. By streamlining product offerings, the Company will be able to capitalize on operating efficiencies in a recovering U.S. housing market allowing the Company to produce identical product at multiple facilities throughout the United States.

Cash provided by (used in) financing activities

Net cash used in financing activities for the year ended December 31, 2012 was approximately $8.8 million. The cash provided by financing activities was primarily from net proceeds of $34.0 million from the Senior Tack-on Notes issued in February 2012, $10.0 million in net proceeds from the issuance of the 9.375% Senior Notes in September 2012 used for the $9.8 million call premium partially offset by debt issuance costs of $3.0 million incurred for the Senior Tack-on Notes as well as the 9.375% Senior Notes. These financing activities were offset by $40.0 million in net revolver payments under the ABL Facility during 2012 reflective of improved operating performance for 2012.

Net cash provided by financing activities for the year ended December 31, 2011 was approximately $9.2 million, primarily from net revolver borrowings of $25.0 million under the ABL Facility, net proceeds of $75.0 million from the debt refinancing for the 8.25% Senior Secured Notes, offset by early tender premium payments of approximately $49.8 million, equity repurchases of $14.0 million, and debt issuance costs of approximately $27.0 million.

Net cash provided by financing activities for the year ended December 31, 2010 was approximately $2.4 million, and consisted of approximately $4.5 million net cash provided as a result of the $210.0 million deleveraging event that occurred during February 2010 of the 9.0% Senior Subordinated Notes, approximately $5.0 million cash provided from net ABL borrowings, approximately $5.0 million cash used for debt issuance costs, approximately $1.5 million cash used for a tax payment on behalf of our parent, and approximately $0.6 million net cash used in equity contributions/repurchases.

 

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Our specific debt instruments and terms are described below:

2012 Developments

On September 27, 2012, Ply Gem Industries completed an offering for $160.0 million aggregate principal amount of 9.375% Senior Notes. The net proceeds of this offering, together with cash on hand, were deposited with the trustee for Ply Gem Industries’ 13.125% Senior Subordinated Notes to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. The 9.375% Senior Notes will mature on April 15, 2017.

On February 16, 2012, Ply Gem Industries issued an additional $40.0 million aggregate principal amount of its 8.25% Senior Secured Notes in a private placement transaction. The net proceeds of approximately $32.7 million, after deducting $6.0 million for the debt discount and $1.3 million in transaction costs, have been and will continue to be utilized for general corporate purposes. The additional $40.0 million of 8.25% Senior Secured Notes have the same terms and covenants as the original $800.0 million of 8.25% Senior Secured Notes due 2018.

8.25% Senior Secured Notes due 2018

On February 11, 2011, Ply Gem Industries issued $800.0 million of 8.25% Senior Secured Notes due 2018 at par. Ply Gem Industries used the proceeds to purchase approximately $724.6 million principal amount of its outstanding 11.75% Senior Secured Notes in a tender offer, to redeem the remaining approximate $0.4 million principal amount of outstanding 11.75% Senior Secured Notes, and to pay related fees and expenses. A portion of the early tender premiums and the original unamortized discount on the 11.75% Senior Secured Notes was recorded as a discount on the $800.0 million of 8.25% Senior Secured Notes given that the 2011 transaction was predominately accounted for as a loan modification. The 8.25% Senior Secured Notes originally issued in February 2011 and the Senior Tack-on Notes issued in February 2012 will mature on February 15, 2018 and bear interest at the rate of 8.25% per annum. Interest will be paid semi-annually on February 15 and August 15 of each year.

Prior to February 15, 2014, Ply Gem Industries may redeem the 8.25% Senior Secured Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make-whole” premium. Prior to February 15, 2014, Ply Gem Industries may redeem up to 35% of the aggregate principal amount of the 8.25% Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 108.25% of the aggregate principal amount of the 8.25% Senior Secured Notes, plus accrued and unpaid interest, if any, provided that at least 55% of the aggregate principal amount of the 8.25% 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 10% of the principal amount of the 8.25% Senior Secured Notes issued pursuant to the indenture governing the 8.25% Senior Secured Notes (including additional notes) at a redemption price equal to 103% of the principal amount of the 8.25% Senior Secured Notes, plus accrued and unpaid interest, if any. At any time on or after February 15, 2014, Ply Gem Industries may redeem the 8.25% Senior Secured Notes, in whole or in part, at declining redemption prices set forth in the indenture governing the 8.25% Senior Secured Notes, plus, in each case, accrued and unpaid interest, if any, to the redemption date.

The 8.25% 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 8.25% Senior Secured Notes contains certain

 

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covenants that limit the ability of Ply Gem Industries and its restricted 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 assets. In particular, Ply Gem Industries and its restricted subsidiaries may not incur additional debt (other than permitted indebtedness as defined in the indenture in limited circumstances) unless, after giving effect to such incurrence, the consolidated interest coverage ratio of Ply Gem Industries would be at least 2.00 to 1.00. In the absence of satisfying the consolidated interest coverage ratio test, Ply Gem Industries and its restricted subsidiaries may only incur additional debt in limited circumstances, including, but not limited to, debt under our credit facilities not to exceed the greater of (x) $250 million less the amounts of certain prepayments or commitment reductions as a result of repayments from asset sales and (y) the borrowing base; purchase money indebtedness in an aggregate amount not to exceed $25.0 million at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed $30.0 million at any one time outstanding; debt pursuant to a general debt basket in an aggregate amount not to exceed $50.0 million at any one time outstanding; and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries and its restricted subsidiaries are limited in their ability to make certain payments, pay dividends or make other distributions to Ply Gem Holdings. Permitted payments, dividends and distributions include, but are not limited to, those used to redeem equity of officers, directors or employees under certain circumstances, to pay taxes and to pay customary and reasonable costs and expenses of an offering of securities that is not consummated.

The 8.25% Senior Secured Notes and the related guarantees are secured on a first-priority lien basis by substantially all of the assets (other than the assets securing the Company’s obligations under the ABL Facility, which consist of accounts receivable, inventory, cash, deposit accounts, securities accounts, chattel paper and proceeds of the foregoing and certain assets such as contract rights, instruments and documents related thereto) 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 the Company’s subsidiaries collateralizes the 8.25% Senior Secured Notes to the extent that such equity interests and other securities can secure the 8.25% Senior Secured Notes without Rule 3-16 of Regulation S-X under the Securities Act requiring separate financial statements of such subsidiary to be filed with the SEC. As of December 31, 2012, no subsidiary’s stock has been excluded from the collateral arrangement due to the Rule 3-16 requirement.

On August 4, 2011, Ply Gem Industries completed its exchange offer with respect to the 8.25% Senior Secured Notes issued in February 2011 by exchanging $800.0 million 8.25% Senior Secured Notes, which were registered under the Securities Act, for $800.0 million of the issued and outstanding 8.25% Senior Secured Notes. Upon completion of the exchange offer, all $800.0 million of issued and outstanding 8.25% Senior Secured Notes were registered under the Securities Act. However, the $40.0 million of Senior Tack-on Notes issued in February 2012 have not been registered under the Securities Act and there is no contractual requirement to register these instruments.

11.75% Senior Secured Notes due 2013

On June 9, 2008, Ply Gem Industries issued $700.0 million of 11.75% Senior Secured Notes at an approximate 1.0% discount, yielding proceeds of approximately $693.5 million. Interest was paid

 

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semi-annually on June 15 and December 15 of each year. On October 23, 2009, Ply Gem Industries issued an additional $25.0 million of its 11.75% Senior Secured Notes in a private placement transaction. The additional $25.0 million of 11.75% Senior Secured Notes had the same terms and covenants as the initial $700.0 million of 11.75% Senior Secured Notes.

On February 11, 2011, we purchased approximately $718.6 million principal amount of the 11.75% Senior Secured Notes in a tender offer at a price of $1,069.00 per $1,000 principal amount, which included an early tender payment of $40.00 per $1,000 principal amount, plus accrued and unpaid interest, and on February 28, 2011, we purchased $6.0 million principal amount of the 11.75% Senior Secured Notes in the tender offer at a price of $1,029.00 per $1,000 principal amount, plus accrued and unpaid interest. On March 13, 2011, pursuant to the terms of the indenture governing the 11.75% Senior Secured Notes, we redeemed the remaining approximate $0.4 million at a redemption price of 103% of the principal amount thereof, plus accrued and unpaid interest. As a result of these transactions, we paid cumulative early tender premiums of approximately $49.8 million during the year ended December 31, 2011. Following the redemption on March 13, 2011, there were no longer any 11.75% Senior Secured Notes outstanding. The 11.75% Senior Secured Notes would have matured on June 15, 2013 and bore interest at the rate of 11.75% per annum. The loss recorded as a result of this purchase is discussed in detail in the section “ Gain (loss) on debt modification or extinguishment ” below.

Senior Secured Asset-Based Revolving Credit Facility due 2016

On January 26, 2011, Ply Gem Industries, Ply Gem Holdings and the subsidiaries of Ply Gem Industries entered into a new ABL Facility. Ply Gem Industries and Ply Gem Canada used the initial borrowing under the new ABL Facility to repay all of the outstanding indebtedness (including all accrued interest) under the Senior Secured Asset-Based Revolving Credit Facility due 2013. The new ABL Facility initially provided for revolving credit financing of up to $175.0 million, subject to borrowing base availability, including sub-facilities for letters of credit, swingline loans, and borrowings in Canadian dollars and U.S. dollars by Ply Gem Canada. In August 2011, the Company exercised a portion of the accordion feature under the new ABL Facility for $37.5 million, or 50% of the eligible accordion, increasing the new ABL Facility from $175.0 million to $212.5 million. Under the terms of the new ABL Facility, the Company has the ability to further increase the revolving commitments up to another $37.5 million to $250.0 million. Under the new ABL Facility, $197.5 million is available to Ply Gem Industries and $15.0 million is available to Ply Gem Canada. All outstanding loans under the new ABL Facility are due and payable in full on January 26, 2016.

Borrowings under the new ABL Facility bear interest at a rate per annum equal to, at Ply Gem Industries’ option, either (a) a base rate determined by reference to the higher of (1) the corporate base rate of the administrative agent and (2) the federal funds effective rate plus 0.5% or (b) a Eurodollar rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. The initial applicable margin for borrowings under the new ABL Facility was 1.50% for base rate loans and 2.50% for Eurodollar rate loans. The applicable margin for borrowings under the new ABL Facility is subject to step ups and step downs based on average excess availability under that facility. Swingline loans bear interest at a rate per annum equal to the base rate plus the applicable margin.

In addition to paying interest on outstanding principal under the new ABL Facility, Ply Gem Industries is required to pay a commitment fee, in respect of the unutilized commitments

 

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thereunder, which fee will be determined based on utilization of the new ABL Facility (increasing when utilization is low and decreasing when utilization is high). Ply Gem Industries must also pay customary letter of credit fees equal to the applicable margin on Eurodollar loans and agency fees. The new ABL Facility eliminated the interest rate floor that existed in the prior ABL Facility. As of December 31, 2012, the Company’s interest rate on the new ABL Facility was approximately 2.5%. The new ABL Facility contains a requirement to maintain a fixed charge coverage ratio of 1.0 to 1.0 if the Company’s excess availability is less than the greater of (a) 12.5% of the lesser of (i) the commitments and (ii) the borrowing base and (b) $17.5 million. The new ABL Facility also contains a cash dominion requirement if the Company’s excess availability is less than the greater of (a) 15.0% of the lesser of (i) the commitments and (ii) the borrowing base and (b) $20.0 million (or $17.5 million for the months of January, February and March).

All obligations under the ABL Facility are unconditionally guaranteed by Ply Gem Holdings and substantially all of Ply Gem Industries’ existing and future, direct and indirect, wholly owned domestic subsidiaries. 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’ and the Guarantors’ material owned real property and equipment and all assets that secure the 8.25% Senior Secured Notes on a first-priority basis. In addition to being secured by the collateral securing the obligations of Ply Gem Industries under the domestic collateral package, the obligations of Ply Gem Canada, which is a borrower under the Canadian sub-facility under the new ABL Facility, are also secured by a first-priority security interest in substantially all of the assets of such Canadian subsidiary, plus additional mortgages in Canada, and a pledge by Ply Gem Industries of the remaining 35% of the equity interests of Ply Gem Canada pledged only to secure the Canadian sub-facility.

The ABL Facility contains certain covenants that limit the ability of the Company 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 transactions with affiliates, and consolidate, merge or sell assets. In particular, the Company is permitted to incur additional debt in limited circumstances, including senior secured notes in an aggregate principal amount not to exceed $875.0 million, permitted subordinated indebtedness in an aggregate principal amount not to exceed $75.0 million at any time outstanding (subject to the ability to incur additional permitted subordinated debt provided that immediately after giving effect to such incurrence excess availability is more than 25% of the lesser of the total borrowing base and the aggregate commitments and Ply Gem Industries is in pro forma compliance with the fixed charge coverage ratio), purchase money indebtedness in an aggregate amount not to exceed $15.0 million at any one time outstanding, debt of foreign subsidiaries (other than Canadian subsidiaries) in an aggregate amount not to exceed $2.5 million at any one time outstanding, and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries is limited in its ability to pay dividends or make other distributions to Ply Gem Holdings. Permitted dividends and distributions include those used to redeem equity of its officers (including approximately $12.6 million of repurchases from certain executive officers), directors or employees under certain circumstances, to pay taxes, to pay operating and other corporate overhead costs and expenses in the ordinary course of business in an aggregate amount not to exceed $2.0 million in any calendar year plus reasonable and customary indemnification claims of its directors and executive officers and to pay fees and

 

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expenses related to any unsuccessful debt or equity offering. Ply Gem Industries may also make additional payments to Ply Gem Holdings that may be used by Ply Gem Holdings to pay dividends or other distributions on its stock under the new ABL Facility so long as before and after giving effect to such dividend or other distribution excess availability is greater than 25% of the lesser of the total borrowing base and the aggregate commitments and Ply Gem Industries is in pro forma compliance with the consolidated fixed charge coverage ratio.

On September 21, 2012, Ply Gem Industries completed an amendment to its ABL Facility to permit the refinancing of its 13.125% Senior Subordinated Notes with unsecured notes rather than subordinated notes. No other terms or provisions were modified or changed in conjunction with this amendment.

As of December 31, 2012, Ply Gem Industries had approximately $191.2 million of contractual availability and approximately $113.4 million of borrowing base availability under the new ABL Facility, reflecting $15.0 million of borrowings outstanding and approximately $6.3 million of letters of credit and priority payables reserves.

On April 3, 2013, Ply Gem Industries amended its ABL Facility. Among other things, the amendment to the ABL Facility: (i) increased the amount of debt that Ply Gem Holdings is permitted to incur under the tax receivables agreement from $65.0 million to $100.0 million, subject to the satisfaction of certain conditions, including Ply Gem Industries maintaining excess availability levels greater than the lesser of (x) 25% of the lesser of the borrowing base and aggregate commitments and (y) $17.5 million, and (ii) modified the change of control definition.

Senior Secured Asset-Based Revolving Credit Facility due 2013

Concurrently with the 11.75% Senior Secured Notes offering on June 9, 2008, Ply Gem Industries, Ply Gem Holdings and the subsidiaries of Ply Gem Industries entered into an ABL Facility. The prior ABL Facility initially provided for revolving credit financing of up to $150.0 million, subject to borrowing base availability, with a maturity of five years (June 2013) including sub-facilities for letters of credit, swingline loans, and borrowings in Canadian dollars and U.S. dollars by Ply Gem Canada. In July 2009, we amended the prior ABL Facility to increase the available commitments by $25.0 million from $150.0 million to $175.0 million. As of December 31, 2011, there were no outstanding borrowings under the prior ABL Facility, as it was replaced with the new ABL Facility on January 26, 2011.

9.375% Senior Notes due 2017

On September 27, 2012, Ply Gem Industries issued $160.0 million of 9.375% Senior Notes at par. Ply Gem Industries used the proceeds of the offering, together with cash on hand, to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. The 9.375% Senior Notes will mature on April 15, 2017 and bear interest at the rate of 9.375% per annum. Interest will be paid semi-annually on April 15 and October 15 of each year. A portion of the early call premium and the original unamortized discount on the 13.125% Senior Subordinated Notes was recorded as a discount on the $160.0 million of 9.375% Senior Notes, given that the transaction was predominately accounted for as a loan modification.

Prior to October 15, 2014, Ply Gem Industries may redeem the 9.375% Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make-whole” premium. Prior to October 15, 2014, Ply Gem Industries may redeem up to 40% of the aggregate

 

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principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 109.375% of the principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any, to the redemption date, provided that at least 60% of the aggregate principal amount of the 9.375% Senior Notes remains outstanding after the redemption and the redemption occurs within 90 days of the date of the closing of such equity offerings. On or after October 15, 2014, and prior to October 15, 2015, Ply Gem Industries may redeem up to 100% of the principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 103% of the principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any, to the redemption date. On or after October 15, 2015, and prior to October 15, 2016, Ply Gem Industries may redeem up to 100% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 100% of the principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any to the redemption date. At any time on or after October 15, 2014, Ply Gem Industries may redeem the 9.375% Senior Notes, in whole or in part, at the declining redemption prices set forth in the indenture governing the 9.375% Senior Notes, plus accrued and unpaid interest, if any, to the redemption date.

The 9.375% Senior Notes are unsecured and equal in right of payment to all of our existing and future senior debt, including the ABL Facility and the 8.25% Senior Secured Notes. The 9.375% Senior Notes are unconditionally guaranteed on a joint and several basis by the Guarantors (other than certain unrestricted subsidiaries) on a senior unsecured basis. The guarantees are general unsecured obligations and are equal in right of payment to all existing senior debt of the Guarantors, including their guarantees of the 8.25% Senior Secured Notes and the ABL Facility. The 9.375% Senior Notes and guarantees are effectively subordinated to all of Ply Gem Industries’ and the Guarantors’ existing and future secured indebtedness, including the 8.25% Senior Secured Notes and the ABL Facility, to the extent of the value of the assets securing such indebtedness.

The indenture governing the 9.375% Senior 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 transactions with affiliates and consolidate, merge or sell Ply Gem Industries’ assets. In particular, Ply Gem Industries may not incur additional debt (other than permitted debt in limited circumstances) unless, after giving effect to such incurrence, the consolidated interest coverage ratio would be at least 2.00 to 1.00. In the absence of satisfying the consolidated interest coverage ratio, Ply Gem Industries may only incur additional debt in limited circumstances, including, but not limited to, debt not to exceed the sum of (a) the greater of (i) $250.0 million and (ii) the borrowing base as of date of such incurrence; purchase money indebtedness in an aggregate amount not to exceed the greater of $35.0 million and 20% of consolidated net tangible assets at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed $30.0 million at any one time outstanding; debt pursuant to a general debt basket in an aggregate amount not to exceed $50.0 million at any one time outstanding; and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries is limited in its ability to pay dividends or make other distributions to Ply Gem Holdings. Permitted dividends and distributions include those used to redeem equity of officers, directors or employees under certain circumstances, to pay taxes, to pay out-of-pocket costs and expenses in an aggregate amount not to exceed $2.0 million in any calendar year, to pay customary and reasonable costs and expenses of an offering of securities that is not consummated and other dividends or distributions of up to $20.0 million.

 

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On January 24, 2013, Ply Gem Industries completed its exchange offer with respect to the 9.375% Senior Notes by exchanging $160.0 million 9.375% Senior Notes, which were registered under the Securities Act, for $160.0 million of the issued and outstanding 9.375% Senior Notes. Upon completion of the exchange offer, all $160.0 million of issued and outstanding 9.375% Senior Notes were registered under the Securities Act.

13.125% Senior Subordinated Notes due 2014

On January 11, 2010, Ply Gem Industries issued $150.0 million of 13.125% Senior Subordinated Notes at an approximate 3.0% discount, yielding proceeds of approximately $145.7 million. Ply Gem Industries used the proceeds of the offering to redeem approximately $141.2 million aggregate principal amount of its previous 9% Senior Subordinated Notes due 2012 and to pay certain related costs and expenses. The interest rate on these Notes was 13.125% and was paid semi-annually on January 15 and July 15 of each year.

On September 27, 2012, Ply Gem Industries used the net proceeds from the issuance of the 9.375% Senior Notes, together with cash on hand, aggregating $165.4 million, to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. In addition, on September 27, 2012, Ply Gem Industries issued a notice of redemption to redeem all of the outstanding 13.125% Senior Subordinated Notes on October 27, 2012 at a redemption price equal to 106.5625% plus accrued and unpaid interest to the redemption date. The $165.4 million deposited with the trustee for the 13.125% Senior Subordinated Notes included a $9.8 million call premium and $5.7 million of accrued interest.

On October 27, 2012, the Company completed the redemption of all $150.0 million principal amount of the 13.125% Senior Subordinated Notes. The loss recorded as a result of the debt transactions is discussed in the section “ Gain (loss) on debt modification or extinguishment ” below.

Gain (loss) on debt modification or extinguishment

As a result of the 9.375% Senior Notes issuance and the transactions relating to the 13.125% Senior Subordinated Notes during the year ended December 31, 2012, the Company performed an analysis to determine the proper accounting treatment for this transaction. Specifically, the Company evaluated each creditor with ownership in both the 13.125% Senior Subordinated Notes and the 9.375% Senior Notes to determine whether the transaction should be accounted for as a modification or an extinguishment of debt as it relates to each individual holder. The Company incurred an early call premium of approximately $9.8 million in connection with this transaction, of which approximately $8.3 million was recorded as a discount on the 9.375% Senior Notes and approximately $1.5 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2012. The Company also expensed approximately $0.3 million for the unamortized discount and $0.4 million for the unamortized debt issuance costs for the 13.125% Senior Subordinated Notes as a result of this transaction for the year ended December 31, 2012. The Company also incurred approximately $2.5 million of costs associated with this transaction, of which approximately $1.1 million was recorded as debt issuance costs and approximately $1.4 million was expensed as loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2012.

 

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As a result of the 8.25% Senior Secured Notes issuance and purchase and redemption of the 11.75% Senior Secured Notes during the year ended December 31, 2011, the Company performed an analysis to determine the proper accounting treatment for this transaction. Specifically, the Company evaluated each creditor with ownership in both the 11.75% Senior Secured Notes and 8.25% Senior Secured Notes to determine whether the transaction was to be accounted for as a modification or an extinguishment of debt. The Company determined that this transaction resulted predominantly in a modification but in some instances as an extinguishment as some creditors did not participate in both the 11.75% Senior Secured Notes and 8.25% Senior Secured Notes. The Company incurred an early tender premium of approximately $49.8 million in conjunction with this transaction, of which approximately $38.9 million was recorded as a discount on the 8.25% Senior Secured Notes and approximately $10.9 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2011. The Company also expensed approximately $0.8 million for the unamortized discount and $2.8 million for the unamortized debt issuance costs for the 11.75% Senior Secured Notes in this transaction for the year ended December 31, 2011. The Company also incurred approximately $25.9 million of costs associated with this transaction, of which approximately $13.6 million was recorded as debt issuance costs and approximately $12.3 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2011.

As a result of the ABL Facility refinancing during the first quarter of 2011, the Company evaluated the proper accounting treatment for the debt issuance costs associated with the prior ABL Facility and the new ABL Facility as there were certain members of the loan syndication that existed in both facilities and other members who were not participants in the new ABL Facility. Based on this evaluation, the Company expensed approximately $1.2 million of debt issuance costs as a loss on modification or extinguishment of debt and recorded approximately $2.1 million of debt issuance costs.

As a result of the $141.2 million redemption of the previous 9% Senior Subordinated Notes on February 16, 2010, the Company recognized a loss on extinguishment of debt of approximately $2.2 million related predominantly to the write-off of unamortized debt issuance costs. On February 12, 2010, as a result of the $218.8 million contribution of the 9% Senior Subordinated Notes by affiliates of the Company’s controlling stockholders in exchange for equity of Ply Gem Prime valued at approximately $114.9 million, the Company recognized a gain on extinguishment of approximately $100.4 million, including the write-off of unamortized debt issuance costs of approximately $3.5 million. The $98.2 million gain on debt extinguishment was recorded separately in the accompanying consolidated statement of operations for the year ended December 31, 2010.

 

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Based on these financing transactions, the Company recognized a loss on debt modification or extinguishment of approximately $3.6 million and $27.9 million and a gain on debt extinguishment of approximately $98.2 million for the years ended December 31, 2012, December 31, 2011, and December 31, 2010, respectively, as summarized in the table below.

 

      Year ended December 31,  
(amounts in thousands)   2012     2011     2010  

 

 

Gain (loss) on extinguishment of debt:

     

Tender premium

  $      $ (10,883   $   

11.75% Senior Secured Notes unamortized discount

           (775       

11.75% Senior Secured Notes unamortized debt issuance costs

           (2,757       

13.125% Senior Subordinated Notes call premium

    (1,487              

13.125% Senior Subordinated Notes unamortized discount

    (299              

13.125% Senior Subordinated Notes unamortized debt issuance costs

    (372              
 

 

 

 
    (2,158     (14,415       

Carrying value of 9% Senior Subordinated Notes

                  360,000   

9% Senior Subordinated Notes unamortized debt issuance costs

                  (5,780

9% Senior Subordinated Notes unamortized premium

                  100   

Reacquisition price of 9% Senior Subordinated Notes

                  (256,133
 

 

 

 
                  98,187   

Loss on modification of debt:

     

Third party fees for 8.25% Senior Secured Notes

           (12,261       

Unamortized debt issuance costs for prior ABL Facility

           (1,187       

Third party fees for 9.375% Senior Notes

    (1,449              
 

 

 

 
    (1,449     (13,448       
 

 

 

 

Total gain (loss) on modification or extinguishment of debt

  $ (3,607   $ (27,863   $ 98,187   

 

 

Liquidity requirements

We intend to fund our ongoing capital and working capital requirements, including our internal growth, through a combination of cash flows from operations and, if necessary, from borrowings under our ABL Facility. We believe that we will continue to meet our liquidity requirements over the next 12 months. We believe that our operating units are positive cash flow generating units and will continue to sustain their operations without any significant liquidity concerns. The performance of these operating units is significantly impacted by the performance of the housing industry, specifically single family housing starts and the repair and remodeling activity. Any unforeseen or unanticipated downturn in the housing industry could have a negative impact on our liquidity position.

Management anticipates that our current liquidity position, as well as expected cash flows from our operations should be sufficient to meet ongoing operational cash flow needs, capital expenditures, debt service obligations, and other fees payable under other contractual obligations for the foreseeable future. As of December 31, 2012, we had cash and cash equivalents of approximately $27.2 million, $191.2 million of contractual availability under the ABL Facility and approximately $113.4 million of borrowing base availability.

In order to further supplement the Company’s operating cash flow, the Company has from time to time opportunistically accessed capital markets based on prevailing economic and financial conditions. Based on market conditions, the Company may elect to pursue additional financing alternatives in the future.

 

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Contractual obligations

The following table summarizes our contractual cash obligations under financing arrangements and lease commitments, including interest amounts, as of December 31, 2012. Interest on the 8.25% Senior Secured Notes and the 9.375% Senior Notes is fixed. Interest on the ABL Facility is variable and has been presented at the average rate of approximately 2.9%. Actual interest rates for future periods may differ from those presented here.

 

(amounts in thousands)  

Total

Amount

   

Less than

1 year

    1 - 3 Years     3 - 5 Years    

More than

5 years

 

 

   

 

 

 

Long-term debt(1)

  $ 1,071,000      $      $      $ 231,000      $ 840,000   

Interest payments(2)

    455,857        86,359        172,718        162,130        34,650   

Non-cancelable lease commitments(3)

    112,698        18,861        32,225        22,768        38,844   

Purchase obligations(4)

    78,660        78,660                        

Other long-term liabilities(5)

    11,319        1,131        2,264        2,264        5,660   
 

 

 

   

 

 

 
  $ 1,729,534      $ 185,011      $ 207,207      $ 418,162      $ 919,154   

 

   

 

 

 

 

(1)   Long-term debt is shown before discount, and consists of the 9.375% Senior Notes, 8.25% Senior Secured Notes, and the 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.

 

(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 under a 2013 contract that was finalized during 2012.

 

(5)   Other long term liabilities include pension obligations which are estimated based on our 2012 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 $3.5 million, including interest of approximately $0.9 million, have been excluded from the table above.

The following table summarizes our contractual cash obligations under financing arrangements and lease commitments, including interest amounts, as of December 31, 2012, on a pro forma basis after giving effect to the Reorganization Transactions, this offering and the application of the net proceeds of this offering. Interest on the 8.25% Senior Secured Notes and the 9.375% Senior Notes is fixed. Interest on the ABL Facility is variable and has been presented at the average rate of approximately 2.9%. Actual interest rates for future periods may differ from those presented here.

 

(amounts in thousands)   

Total

Amount

    

Less than

1 year

     1 - 3 years      3 - 5 years     

More than

5 years

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt(1)

   $                $                $                $                $            

Interest payments(2)

              

Non-cancelable lease commitments(3)

              

Purchase obligations(4)

              

Other long-term liabilities(5)

              
  

 

 

 
   $         $         $         $         $     

 

 

 

(1)   Long-term debt is shown before discount, and consists of our 9.375% Senior Notes, 8.25% Senior Secured Notes, and the 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.

 

(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 under a 2013 contract that was finalized during 2012.

 

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(5)   Other long term liabilities include pension obligations which are estimated based on our 2012 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 $3.5 million, including interest of approximately $0.9 million, have been excluded from the table above.

In addition to the items listed in the tables presented above, we have a potential obligation related to certain tax issues of approximately $3.5 million, including interest of approximately $0.9 million. The timing of the potential tax payments is unknown.

As discussed in “ Certain relationships and related party transactions ,” under an advisory agreement we will pay an annual fee to an affiliate of CI Capital Partners each year based on 2% of EBITDA. In addition, a termination fee equal to $ million will be payable to an affiliate of CI Capital Partners upon the consummation of this offering in connection with the termination of such advisory agreement. Neither of these fees have been included in the above tables.

We also have a potential liability in connection with the tax receivable agreement which we will enter into upon the closing of this offering. The tax receivable agreement will obligate us to make payments to the Tax Receivable Entity generally equal to 85% of the applicable cash savings that we actually realize as a result of NOL carryovers. We will retain the benefit of the remaining 15% of these tax savings. The amounts we may be required to pay could be significant and are not reflected in the above tables. See “ Risk factors—Risks associated with our business—We will be required to pay an affiliate of our current stockholders for certain tax benefits, including net operating loss carryovers, we may claim, and the amounts we may pay could be significant ” and “ Certain relationships and related party transactions—Tax receivable agreement .”

Off-balance sheet arrangements

We have no off-balance sheet arrangements.

Inflation; seasonality

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

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

See Note 1 to our audited consolidated financial statements for recent accounting pronouncements, which are included in this prospectus.

 

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Interest rate risk

Our principal interest rate exposure relates to the loans outstanding under our ABL Facility, which provides for borrowings of up to $212.5 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 $0.5 million per year. At December 31, 2012, 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 2012, the net impact of foreign currency changes to our results of operations was a gain of $0.4 million. The impact of foreign currency changes related to translation resulted in an increase in stockholder’s equity of approximately $0.8 million at December 31, 2012. 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. For the year ended December 31, 2012, 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. According to the London Metal Exchange, the price of aluminum decreased approximately 15.8% for the year ended December 31, 2012 compared to the year ended December 31, 2011. Conversely, the average market price for PVC resin was estimated to have increased approximately 5.5% for 2012 compared to 2011.

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 (“CPI”), which could expose us to potential higher costs in years with high inflation. The CPI increase for 2012 was approximately 1.6%.

Consumer and commercial credit

As general economic conditions in the United States continue to be challenging for the Company and its customers, we have increased our 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 to ensure that issues, if any, are identified in a timely manner to reduce

 

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risk and minimize our bad debt exposure. If general economic conditions continue to worsen, additional reserves may be necessary. For the years ended December 31, 2012, 2011, and 2010, the Company’s bad debt expense was $0.8 million, $1.5 million and $3.2 million, respectively.

Labor force risk

Our manufacturing process is highly engineered but involves manual assembly, fabrication, and manufacturing processes. We believe that our success depends upon our ability to employ, train, and retain qualified personnel with the ability to design, utilize and enhance these services and products. In addition, our ability to expand our operations depends in part on our ability to increase our labor force as the U.S. housing market recovers and minimize labor inefficiencies. A significant increase in the wages paid by competing employers could result in a reduction of our labor force, increases in the wage rates that we must pay, or both. If either of these events were to occur, our cost structure could increase, our margins could decrease and any growth potential could be impaired. Historically, the Company has believed that the lag period between breaking ground on a new housing start and the utilization of our products on the exterior of a home was 90 days. The Company believes that this labor force risk could expand the historical 90 day lag period to 120 days or more, potentially.

 

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Business

Company overview

We are a leading manufacturer of exterior building products in North America, operating in two reportable segments: (i) Siding, Fencing and Stone and (ii) Windows and Doors, which comprised approximately 59% and 41% of our sales, respectively, for the fiscal year ended December 31, 2012. These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl and composite railing, stone veneer and vinyl windows and doors used in both the new construction market and the home repair and remodeling market in the United States and Western Canada. Vinyl building products have the leading share of sales volume in siding and windows in the United States. We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core products. We believe that our comprehensive product portfolio and geographically diverse, low cost manufacturing platform allow us to better serve our customers and provide us with a competitive advantage over other exterior building products suppliers. For the year ended December 31, 2012, we had net sales of $1,121.3 million, adjusted EBITDA of $127.3 million and a net loss of $39.1 million.

Additional information concerning our business is set forth in “ Management’s discussion and analysis of financial condition and results of operations .”

History

Ply Gem Holdings was incorporated as a wholly owned subsidiary of Ply Gem Investment Holdings, on January 23, 2004 by affiliates of CI Capital Partners for the purpose of acquiring Ply Gem Industries from Nortek. The Ply Gem acquisition was completed on February 12, 2004. Prior to the Ply Gem acquisition, our business was known as the Windows, Doors and Siding division of Nortek, where the business operated as a holding company with a broad set of brands. Since the Ply Gem acquisition, we have acquired six additional businesses to complement and expand our product portfolio and geographical diversity. Gary E. Robinette, our President and Chief Executive Officer, joined Ply Gem in October 2006, and has employed the strategy of transitioning Ply Gem to an integrated and consolidated business model under the Ply Gem brand. On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime, with Ply Gem Prime being the surviving corporation. As a result, Ply Gem Holdings is now a wholly owned subsidiary of Ply Gem Prime. Immediately prior to the closing of this offering, Ply Gem Prime will merge with and into Ply Gem Holdings, with Ply Gem Holdings being the surviving entity.

The following is a summary of Ply Gem’s acquisition history:

 

 

On August 27, 2004, Ply Gem acquired MWM Holding, a manufacturer of vinyl, wood, wood-clad, composite, impact and aluminum windows.

 

 

On February 24, 2006, Ply Gem acquired AWC, a manufacturer of aluminum and vinyl windows products. This acquisition supported our 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 MHE, a leading manufacturer of vinyl siding, aluminum siding, injection molded shutters and vinyl, aluminum and injection

 

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molded accessories. MHE is part of our Siding, Fencing and Stone segment and operates under common leadership with our siding business.

 

 

On September 30, 2007, Ply Gem completed the acquisition of CertainTeed Corporation’s vinyl window and patio door business, which we have named Pacific Windows, a leading manufacturer of premium vinyl windows and patio doors.

 

 

On October 31, 2008, Ply Gem acquired substantially all of the assets of Ply Gem Stone (formerly United Stone Veneer), a manufacturer of stone veneer products. Ply Gem Stone is part of our Siding, Fencing and Stone segment and operates under common leadership with our siding business.

 

 

On July 30, 2012, Ply Gem acquired substantially all of the assets of Greendeck, a composite products development company.

Our competitive strengths

We believe the following competitive strengths differentiate us from our competitors and are critical to our continued success:

 

 

Leading Manufacturer of Exterior Building Products .  Based on our internal estimates and industry experience, we believe we have established leading positions in many of our core product categories including: No. 1 in vinyl siding in the U.S.; No. 1 in aluminum accessories in the U.S.; No. 2 in vinyl and aluminum windows in the U.S.; and No. 2 in windows and doors in Western Canada. We achieved this success by developing a broad offering of high quality products and providing superior service to our customers. We are one of the few companies in our industry that operate a geographically diverse manufacturing platform capable of servicing our customers across the entire United States and Western Canada. The scale of our operations also positions us well as customers look to consolidate their supplier base. We believe our broad offering of leading products, geographically diverse manufacturing platform and long-term customer relationships make us the manufacturer of choice for our customers’ exterior building products needs.

 

 

Comprehensive Product Portfolio with Strong Brand Recognition .  We offer a comprehensive portfolio of over twenty exterior building product categories covering a full range of price points. Our broad product line gives us a competitive advantage over other exterior building product suppliers who provide a narrower range of products by enabling us to provide our customers with a differentiated value proposition to meet their own customers’ needs. Our leading brands, such as Ply Gem ® , Mastic ® Home Exteriors, Variform ® , Napco ® , Georgia-Pacific (which we license) and Great Lakes ® Window, are well recognized in the industry. Many of our customers actively support our brands and typically become closely tied to our brands through joint marketing and training, fostering long-term relationships under the common goal of delivering a quality product.

We believe a distinguishing factor in our customers’ selection of Ply Gem as a supplier is our innovation and quality for which our brands are known. As a result, our customers’ positive experiences with one product or brand affords us the opportunity to cross-sell additional products and effectively introduce new products. Since 2007, we have successfully implemented a more unified brand strategy to expand our cross-selling opportunities between our siding and window product offerings. For instance, we consolidated certain window product offerings under the Ply Gem brand to offer a national window platform to our customers,

 

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which we believe represents a comprehensive line of new construction and home repair and remodeling windows. Our unified branding and cross-selling strategy has produced market share gains across all product categories since 2011 with a significant retail home center, a large building products distributor, a large national builder, and several regional home builders. With our extensive product line breadth, industry-leading brands and national platform, we believe we can provide our current and future customers with a more cost-effective, single source from which to purchase their exterior building products.

 

 

Multi-Channel Distribution Network Servicing a Broad Customer Base .  We have a multi-channel distribution network that serves both the new construction and home repair and remodeling end markets through our broad customer base of specialty and wholesale distributors, retail home centers, lumberyards, remodeling dealers and builders. Our multi-channel distribution strategy has increased our sales and penetration within these end markets, while limiting our exposure to any one customer or channel, such that our top ten customers only accounted for approximately 45.9% of our net sales in 2012. We believe our strategy enables us to minimize channel conflict, reduce our reliance on any one channel and reach the greatest number of end customers while providing us with the ability to increase our sales and to sustain our financial performance through economic fluctuations.

 

 

Balanced Exposure to New Construction and Home Repair and Remodeling .  Our products are used in new construction and home repair and remodeling, with our diversified product mix reducing our overall exposure to any single sector. We operate in two reportable segments: (i) Siding, Fencing and Stone, which has been weighted towards home repair and remodeling, and (ii) Windows and Doors, which has historically focused on new construction. We have begun to expand our presence in the home repair and remodel window sector through the launch of a new series of repair and remodel window products, focusing on the unique requirements of this sector while leveraging our existing customer relationships. This is one of several initiatives that have been well received by our customers and that complement our established product offerings by utilizing our national sales force to sell multiple products in our portfolio. For example, our Mastic Window product, which launched in 2011, has produced favorable results with rapid net sales growth in the repair and remodeling market by leveraging our existing relationships within this sector. We believe the diversity of our end markets and products provides us with a unique opportunity to capitalize on the overall housing market recovery.

 

 

Highly Efficient, Low Cost Operating Platform . Since mid-2006,  we have closed or consolidated eight plants, generating savings of over $30 million annually, and significantly reduced our workforce. Since 2006, we also invested approximately $91.6 million in capital expenditures, including new product introductions and upgrades to equipment, facilities and technology, to continue improving our vertically integrated manufacturing platform. For example, our multi-plant window manufacturing platform allows us to service our customers with minimal lead times across a broad geographic coverage area, providing us a competitive advantage with the ability to operate in just-in-time fashion. This capability provides a unique service proposition to our customers while allowing us to maintain minimal inventory levels in our window product offerings. In addition, as a result of our PVC resin purchasing scale (we are one of the largest purchasers in North America based on industry estimates), we are able to secure favorable prices, terms and input availability through various cycles. Furthermore, since 2008, we have centralized numerous back office functions to our corporate office that previously resided in our business segments. This enabled us to maximize our efficiencies and minimize selling, general, and administrative expenses during the U.S. housing downturn.

 

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Through our strong cost controls, vertically-integrated manufacturing platform, continued investment in technology, focus on safety and significant purchasing scale, we have improved efficiency in our manufacturing facilities while maintaining a low fixed cost structure of approximately 21% of our total cost structure, which provides significant operating leverage as the housing market recovers. Furthermore, our manufacturing facilities are among the safest in all of North America with four of them having received the highest federal, state and/or provincial safety award and rating. We believe that we have one of the most efficient and safest operating platforms in the exterior building products industry, helping to drive our profitability.

 

 

Proven Track Record of Acquisition Integration and Cost Savings Realization .  Our six acquisitions since early 2004 have enhanced our geographic diversity, expanded our product offerings and enabled us to enter new product categories. Our acquisition of United Stone Veneer (now branded Ply Gem Stone) in 2008 enabled us to enter the stone veneer product category, which is one of the fastest growing categories of exterior cladding products. We have maintained a disciplined focus on integrating new businesses, rather than operating them separately, and have realized meaningful synergies as a result. Through facility and headcount rationalizations, strategic sourcing and other manufacturing improvements, we have permanently eliminated over $50 million in aggregate costs. We view our ability to identify, execute and integrate acquisitions as one of our core strengths and expect that this offering will significantly improve our financial position and flexibility, enabling us to lead the continued consolidation of the exterior building products industry.

 

 

Strong Management Team with Significant Ownership .  We are led by a committed senior management team that has an average of over 20 years of relevant industry experience. Our current senior management, with financial and advisory support from affiliates of CI Capital Partners LLC, has successfully transformed Ply Gem from operating as a holding company with a broad set of brand offerings to an integrated business model under the Ply Gem brand, positioning our Company to grow profitably and rapidly as the housing market recovers. As of December 31, 2012, after giving effect to the Reorganization Transactions (assuming a public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus)), members of our management team held common stock and stock awards representing approximately         % of the shares of our Company, which will decline to         % upon completion of this offering.

Our business strategy

We are pursuing the following business and growth strategies:

 

 

Capture Growth Related to Housing Market Recovery .  As a leading manufacturer of exterior building products, we intend to capitalize on the continued recovery in the new construction market and the anticipated recovery in the home repair and remodeling market. The NAHB 2012 estimate of single family housing starts was 535,000, which was approximately 49% below the 50-year average, representing a significant opportunity for growth as activity improves to rates that are more consistent with historical levels. Furthermore, we believe that the underinvestment in homes during the recent recession and the overall age of the U.S. housing stock will drive significant future spending for home repair and remodeling.

We expect homeowners’ purchases to focus on items that provide the highest return on investment, have positive energy efficiency attributes and provide potential cost savings. Our broad product offering addresses expected demand growth from all of these key trends

 

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through our exposure to the new construction and the home repair and remodeling end markets, diverse price points, the high recovery value for home improvements derived from our core product categories and the ability to provide products that qualify for energy efficiency rebate and tax programs currently in effect or under consideration.

 

 

Continue to Increase Market Penetration .  We intend to increase the market penetration of our siding, fencing and stone products and our window and door products by leveraging the breadth of our product offering and broad geographical footprint to serve customers across North America and by pursuing cross-selling opportunities. Additionally, our continued investments in product innovation and quality, coupled with strong customer service, further enhance our ability to capture increased sales in each of our core product categories. In 2012, we maintained our U.S. vinyl siding leading market position at approximately 36.0%. We increased our market position to 36.0% in 2011 from 32.3% in 2010 due in part to a significant customer win in the retail sales channel as well as with a top national builder. In 2012, we also continued to achieve strategic market share gains obtaining new regional window business with a large home center.

The national builder win by our siding business in 2011 was an existing top ten customer in our window business. We believe that this demonstrates the substantial opportunity across our product categories to cross-sell and bundle products, thereby increasing revenues from our existing channel partners and industry relationships. Another example of this cross-selling opportunity is our 2010 introduction of a new vinyl windows line under our Ply Gem brand as well as under our Mastic Home Exteriors brand, historically associated with vinyl siding products. We expect to build upon our market positions as the housing market recovers from its current levels and to further enhance our leading positions.

 

 

Expand Brand Coverage and Product Innovation .  Ply Gem’s brand building efforts extend across multiple media, including national trade journals, website marketing, social media, and national consumer magazines and broadcast outlets, both in the United States and Canada, resulting in over 10 million trade impressions and more than 200 million consumer impressions in 2012. Significant brand recognition in 2012 included Fox News “Fox and Friends” morning program, Better Homes and Gardens Magazine and The New York Times, each focusing on Ply Gem’s ability to deliver a complete exterior as a single manufacturer, something we call “The Designed Exterior by Ply Gem.” Our products also frequently receive industry recognition. For example, Consumer Reports placed The Designed Exterior at the top of their list for “Five Trends you can take home from the International Builders Show” in 2012.

We will continue to increase the value of the Ply Gem brands by introducing new product categories for our customers and by developing innovative new products within our existing product categories. For example, we have developed a complete series of window products under the Ply Gem brand to target the higher margin home repair and remodeling window end market. Furthermore, our 2008 addition of stone veneer to our product offering in the Siding, Fencing and Stone segment provides existing siding customers with access to the fastest growing category of exterior cladding products. In 2013, we announced that we will be manufacturing and selling cellular PVC trim and mouldings, a low-maintenance alternative to traditional wood trim designed to work well with siding, within the estimated $1.4 billion residential trim market.

During 2012, we continued our focus on innovation by establishing a new entity under Ply Gem Industries, Foundation Labs, whose mission and purpose is to house product development from idea creation to product commercialization. By having dedicated resources committed to product development, we are investing in our future. The result of our commitment to product

 

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development and innovation has been demonstrated in the approximately $441.7 million of incremental annualized sales that we recognized for new products introduced from 2009 to 2012.

 

 

Drive Operational Leverage and Further Improvements .  While we reduced our production capacity during the past several years, we have retained the flexibility to bring back idled lines, facilities and production shifts in order to increase our production as market conditions improve. This incremental capacity can be selectively restarted, providing us with the ability to match increasing customer demand levels as the housing market returns to historical levels of approximately one million or more single family housing starts without the need for significant capital investment. In our Windows and Doors segment, where we have historically focused on new construction, we believe that our new window products for home repair and remodeling will be able to drive increased volumes through these manufacturing facilities and enhance operating margins.

Over the past several years, we have significantly improved our manufacturing cost structure; however, there are opportunities for further improvements. We believe that the continued expansion of lean manufacturing and vertical integration in our manufacturing facilities, along with the further consolidation of purchases of key raw materials, supplies and services will continue to provide us with cost advantages compared to our competitors. In addition, the integration of our sales and marketing efforts across our product categories provides an ongoing opportunity to significantly improve our customer penetration and leverage the strength of our brands. Furthermore, we have centralized many back office functions into our corporate office in Cary, North Carolina, and believe that additional opportunities remain. We believe all of these factors should drive continued growth in profitability while improving our cash flow and capital efficiency.

Building products end markets </