UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





[X]        QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended April 3, 2010


or


[  ]        TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from _____________ to _____________.





Commission File Number:   333-114041





PLY GEM HOLDINGS, INC.


(Exact name of registrant as specified in its charter)





Delaware
3089
20-0645710(State or other jurisdiction of

incorporation or organization)
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer

Identification No.)


5020 Weston Parkway, Suite 400


Cary, North Carolina 27513





Registrant's telephone number, including area code: 919-677-3900




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ]        No [X ] *




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes [  ]        No [  ]




Indicate by check mark whether 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.




Large accelerated filer   [  ]                                                                   Accelerated filer  [  ]


Non-accelerated filer    [X]                                                                 Smaller reporting company [  ]


(Do not check if a smaller reporting company)




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









As of May 17, 2010, there were 100 shares of common stock, $0.01 par value, outstanding.









* The registrant is not required to file this Quarterly Report on Form 10-Q or other reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, but has filed all reports during the preceding 12 months that would have been required pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  The filing is required, however, pursuant to the terms of the indentures governing Ply Gem Industries, Inc.’s 11.75% senior secured notes due 2013 and 13.125% senior subordinated notes due 2014.







PLY GEM HOLDINGS, INC. AND SUBSIDIARIES


FORM 10-Q


QUARTERLY PERIOD ENDED APRIL 3, 2010





CONTENTS





PART I – FINANCIAL INFORMATION


Item 1.
Condensed Consolidated Financial StatementsCondensed Consolidated Statements of Operations - Three months ended April 3, 2010 and April 4, 2009
2Condensed Consolidated Balance Sheets - April 3, 2010 and December 31, 2009
3Condensed Consolidated Statements of Cash Flows - Three months ended April 3, 2010 and April 4, 2009
4Notes to Condensed Consolidated Financial Statements
5Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27Item 3.
Quantitative and Qualitative Disclosures about Market Risk
37Item 4.
Controls and Procedures
37
 
 
 PART II – OTHER INFORMATION
  Item 6.
Exhibits
38Signatures

39


1





PART I - FINANCIAL INFORMATION





Item 1.                 FINANCIAL STATEMENTS











PLY GEM HOLDINGS, INC. AND SUBSIDIARIES,


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)





For the three months ended(Amounts in thousands)

April 3, 2010


April 4, 2009Net sales

$
204,205


$
182,751Costs and expenses:Cost of products sold


167,308



169,691Selling, general and administrative expenses


33,806



40,962Amortization of intangible assets


6,794



4,906Total costs and expenses


207,908



215,559Operating loss


(3,703
)


(32,808
)Foreign currency gain (loss)


104



(88
)Interest expense


(34,007
)


(33,756
)Interest income


53



65Gain on extinguishment of debt


98,187



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


60,634



(66,587
)Provision (benefit) for income taxes


6,532



(11,049
)Net income (loss)

$
54,102


$
(55,538
)







See accompanying notes to condensed consolidated financial statements.


2


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(UNAUDITED)








(Amounts in thousands, except share amounts)

April 3, 2010


December 31, 2009ASSETSCurrent Assets:Cash and cash equivalents

$
31,659


$
17,063Accounts receivable, less allowances of $5,470 and $5,467, respectively


114,960



94,428Inventories:Raw materials


41,731



39,787Work in process


25,597



23,343Finished goods


42,117



34,950Total inventory


109,445



98,080Prepaid expenses and other current assets


21,913



19,448Deferred income taxes


-



5,762Total current assets


277,977



234,781Property and Equipment, at cost:Land


3,739



3,732Buildings and improvements


35,763



35,687Machinery and equipment


264,537



261,319Total property and equipment


304,039



300,738Less accumulated depreciation


(167,789
)


(159,036
)Total property and equipment, net


136,250



141,702Other Assets:Intangible assets, net


167,270



174,064Goodwill


393,281



392,838Deferred income taxes


3,605



2,716Other


32,918



35,932Total other assets


597,074



605,550$
1,011,301


$
982,033LIABILITIES AND STOCKHOLDER'S DEFICITCurrent Liabilities:Accounts payable

$
68,099


$
52,833Accrued expenses and taxes


92,231



72,423Total current liabilities


160,330



125,256Deferred income taxes


2,940



4,211Other long term liabilities


65,084



65,651Long-term debt due to related parties


-



281,376Long-term debt


926,778



819,021Commitments and contingenciesStockholder's Deficit:Preferred stock $0.01 par, 100 shares authorized, none issued and outstanding


-



-Common stock $0.01 par, 100 shares authorized, issued and outstanding


-



-Additional paid-in-capital


324,174



209,939Accumulated deficit


(469,643
)


(523,745
)Accumulated other comprehensive income


1,638



324Total stockholder's deficit


(143,831
)


(313,482
)$
1,011,301


$
982,033








See accompanying notes to condensed consolidated financial statements.


3


PLY GEM HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)






For the three months ended(Amounts in thousands)

April 3, 2010


April 4, 2009Cash flows from operating activities:Net income (loss)

$
54,102


$
(55,538
)Adjustments to reconcile net income (loss) to cashused in operating activities:Depreciation and amortization expense


15,454



13,896Non-cash interest expense, net


2,730



2,044(Gain) loss on foreign currency transactions


(104
)


88Gain on extinguishment of debt


(98,187
)


-Deferred income taxes


3,746



(15,096
)Changes in operating assets and liabilities:Accounts receivable, net


(20,160
)


(15,926
)Inventories


(11,086
)


17,044Prepaid expenses and other current assets


(2,476
)


(2,817
)Accounts payable


15,109



(11,514
)Accrued expenses and taxes


20,429



21,405Cash payments on restructuring liabilities


(1,094
)


(1,926
)Other


121



(376
)Net cash used in operating activities


(21,416
)


(48,716
)Cash flows from investing activities:Capital expenditures


(3,029
)


(2,446
)Proceeds from sale of assets


1



21Net cash used in investing activities


(3,028
)


(2,425
)Cash flows from financing activities:Proceeds from long-term debt


145,709



-Net revolver borrowings


40,000



10,000Payments on long-term debt


(141,191
)


-Debt issuance costs paid


(4,868
)


(26
)Equity contributions


1,200



-Equity repurchases


(1,900
)


-Net cash provided by financing activities


38,950



9,974Impact of exchange rate movements on cash


90



93Net increase (decrease) in cash and cash equivalents


14,596



(41,074
)Cash and cash equivalents at the beginning of the period


17,063



58,289Cash and cash equivalents at the end of the period

$
31,659


$
17,215







See accompanying notes to condensed consolidated financial statements.


4


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Basis of Presentation





The accompanying unaudited condensed consolidated financial statements of Ply Gem Holdings, Inc. and its subsidiaries (referred to herein as “Ply Gem Holdings”, “Ply Gem”, the “Company”, “we”, “us”, or “our”) have been prepared in accordance with U.S. generally accepted accounting principles as described in the consolidated financial statements and related notes included in our 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2010.  These statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles and should be read in conjunction with our 2009 Annual Report on Form 10-K.  In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation have been included.  Operating results for the period from January 1, 2010 through April 3, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.





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 wholly owned by Ply Gem Prime Holdings, Inc. (“Ply Gem Prime”).   Ply Gem Investment Holdings was incorporated on January 23, 2004 for the purpose of acquiring Ply Gem Industries, Inc. (“Ply Gem Industries”) from Nortek, Inc. (“Nortek”).  The Ply Gem acquisition was completed on February 12, 2004, when Nortek sold Ply Gem Industries to Ply Gem Holdings, an affiliate of CI Capital Partners LLC pursuant to the terms of the stock purchase agreement among Ply Gem Investment Holdings, Nortek, and WDS LLC, dated as of December 19, 2003, as amended.  Prior to February 12, 2004, the date of the Ply Gem acquisition, Ply Gem Holdings had no operations and Ply Gem Industries was wholly owned by a subsidiary of WDS LLC, which was a wholly owned subsidiary of Nortek.  On February 24, 2006, in connection with the acquisition of Alenco, a new holding company, Ply Gem Prime Holdings, was formed pursuant to a merger involving Ply Gem Investment Holdings.  As a result, Ply Gem Prime Holdings became the sole shareholder of Ply Gem Investment Holdings. On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime, with Ply Gem Prime as the surviving corporation.  As a result, Ply Gem Holdings is a wholly owned subsidiary of Ply Gem Prime.





The condensed consolidated balance sheet at December 31, 2009 has been derived from the audited consolidated financial statements of Ply Gem Holdings at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.





The Company’s fiscal quarters are based on periods ending on the last Saturday of the last week in the quarter.  Therefore, the financial results of certain fiscal quarters will not be comparable to the prior and subsequent fiscal quarters.  The accompanying financial statements include the Company’s condensed consolidated statements of operations for the three month periods ended April 3, 2010 and April 4, 2009, the condensed consolidated statements of cash flows for the three month periods ended April 3, 2010 and April 4, 2009, and the condensed consolidated balance sheets for the Company as of April 3, 2010 and December 31, 2009.





Ply Gem is a diversified manufacturer of residential and commercial building products, which are sold primarily in the United States and Canada, and include a wide variety of products for the residential and commercial construction, the do-it-yourself and the professional remodeling and renovation markets.  The demand for our products is seasonal, particularly in the Northeast and Midwest regions of the United States and western Canada where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home repair and remodeling and new home construction sectors.  The Company’s sales are usually lower during the first and fourth quarters.





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





Principles of Consolidation





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


5





Reclassifications





Certain amounts in the prior fiscal year have been reclassified to conform to the presentation adopted in the current fiscal year with no effect on net income (loss) or accumulated deficit.





Accounting Policies and Use of Estimates





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





Inventories





Inventories in the accompanying condensed consolidated balance sheets are valued at the lower of cost or market. The Company records provisions, as appropriate, to write-down obsolete and excess inventory to estimated net realizable value.  The process for evaluating obsolete and excess inventory often requires the Company to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be sold in the normal course of business.  Accelerating the disposal process or incorrect estimates of future sales may cause actual results to differ from estimates at the time such inventory is disposed or sold.   As of April 3, 2010, the Company had inventory purchase commitments of approximately $65.0 million.  Inventory reserves were approximately $7.1 million at April 3, 2010, increasing approximately $0.4 million compared to the December 31, 2009 reserve balance of approximately $6.7 million.





Goodwill and other Long-lived Assets





Long-lived assets





The Company reviews long-lived assets for impairment annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable.  The Company performs undiscounted operating cash flow analyses to determine if impairment exists.  If impairment is determined to exist, any related impairment loss is calculated based on the asset’s fair value and the discounted cash flow.





As of December 31, 2009, the Company determined that the continued decline in the US housing market required a re-evaluation of the Company’s forecasts.  The Company tested for impairment using the “Step One” test for asset groups held and used, and determined that further impairment testing of the fair value of the asset groups (under “Step Two”) was not necessary at December 31, 2009 because the undiscounted cash flows exceeded the carrying values of the long-lived asset groups.  There were no indications of impairment during the quarter ended April 3, 2010.





The Company tests for long-lived asset impairment at the following asset group levels: i) Siding, Fencing, and Stone (“Siding”), ii) the combined US Windows companies in the Windows and Doors segment (“US Windows”), and iii) Ply Gem Canada (formerly known as CWD Windows and Doors, Inc.) in the Windows and Doors segment.  For purposes of recognition and measurement of an impairment loss, a long-lived asset or asset group should represent the lowest level for which an entity can separately identify cash flows that are largely independent of the cash flows of other assets and liabilities.  Ply Gem concluded that the lowest level for identifiable cash flows is Siding, US Windows and Ply Gem Canada.   This is one level below the segment reporting unit of “Windows and Doors” and reflects the lowest level of identifiable cash flows.  Management believes that the US Windows unit cannot be further broken down as a result of the 2008 US Windows reorganization.  As a result, Ply Gem now markets themselves to US Windows customers as one company rather than separate companies.  In addition, certain manufacturing facilities provide inventory to multiple window divisions for assembling the final products.  Therefore, from an economic standpoint, the Company evaluates the cash flows as a group rather than at the divisional levels.  The US Windows and Ply Gem Canada financial data is the lowest level of reliable information that is prepared and reviewed by management on a consistent basis.  The Company made a similar conclusion for Siding as its product lines are grouped at a Siding level as there are interdependencies between products.


6





Goodwill





The Company evaluates goodwill for impairment on an annual basis and whenever events or business conditions warrant.  All other intangible assets are amortized over their estimated useful lives.  The Company assesses goodwill for impairment during the fourth quarter of each year and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value.  To evaluate goodwill for impairment, the Company estimates the fair value of reporting units considering such factors as discounted cash flows and valuation multiples for comparable publicly traded companies.  A significant reduction in projected sales and earnings which would lead to a reduction in future cash flows could indicate potential impairment.  There were no indications of impairment during the quarter ended April 3, 2010 that would trigger an interim impairment test.




Debt Issuance Costs




Debt issuance costs, composed of facility, agency, and certain legal fees associated with acquiring new debt financing, are amortized over the contractual term of the related agreement using the effective interest method.  Debt issuance costs, net of accumulated amortization, were approximately $24.4 million and $27.3 million at April 3, 2010 and December 31, 2009, respectively, and have been recorded in other long term assets in the accompanying condensed consolidated balance sheets.




Income Taxes




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





Estimates are required with respect to, among other things, the appropriate state income tax rates used in the various states that the Company and its subsidiaries are required to file, the potential utilization of operating and capital loss carry-forwards for both federal and state income tax purposes and valuation allowances required, if any, for tax assets that may not be realized in the future.  The Company establishes reserves when, despite our belief that our tax return positions are fully supportable, certain positions could be challenged, and the positions may not be fully sustained.  Subsequent to February 12, 2004, U.S. federal income tax returns are prepared and filed by Ply Gem Investment Holdings, Inc. on behalf of itself, Ply Gem Holdings, and Ply Gem Industries and its subsidiaries.  The tax sharing agreement between Ply Gem Holdings and Ply Gem Investment Holdings under which tax liabilities for each respective party are computed on a stand-alone basis, was amended during 2006 to include Ply Gem Prime.  On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime, with Ply Gem Prime as the surviving corporation.  As a result, each outstanding share of senior preferred stock of Ply Gem Investment Holdings was converted into a share of a corresponding class of shares of the capital stock of Ply Gem Prime.





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.




Foreign Currency




The Company’s Canadian subsidiary, Ply Gem Canada, utilizes the Canadian dollar as its functional currency.  For reporting purposes, the Company translates the assets and liabilities of its foreign subsidiary at the exchange rates in effect at the end of the reporting periods.  Net sales and expenses are translated using average exchange rates in effect during the reporting periods.  Gains and losses from foreign currency translation are credited or charged to accumulated other comprehensive income (loss) in the accompanying condensed consolidated balance sheets.





For the three month periods ended April 3, 2010 and April 4, 2009, the Company recorded a gain from foreign currency transactions of approximately $0.1 million and a loss from foreign currency transactions of approximately $0.1 million, respectively.  As of April 3, 2010, and December 31, 2009, accumulated other comprehensive income  included a currency translation adjustment of approximately $5.4 million and $4.1 million, respectively.




Concentration of Credit Risk




The accounts receivable balance related to one customer of the Siding, Fencing and Stone segment was approximately $9.8 million and $5.5 million at April 3, 2010 and December 31, 2009, respectively.  This customer accounted for approximately 8.6% of net sales for the three month period ended April 3, 2010 and 10.2% of net sales for the three months ended April 4, 2009.


7




Fair Value Measurement




The Company adopted the fair value accounting standard during the first quarter of 2008.  The accounting standard for fair value provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This standard does not apply measurements related to share-based payments, nor does it apply to measurements related to inventory.





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


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


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


Quoted Prices


Significant(Amounts in thousands)







in Active Markets


Other


SignificantFair


for identical


Observable


UnobservableCarrying


Value


Assets


Inputs


InputsValue


Total


(Level 1)


(Level 2)


(Level 3)As of April 3, 2010:Assets:Certificates of deposit

$
600


$
600


$
600


$
-


$
-Liabilities:Senior Subordinated Notes-13.125%

$
150,000


$
156,000


$
156,000


$
-


$
-Senior Secured Notes-11.75%


725,000



766,688



766,688



-



-$
875,000


$
922,688


$
922,688


$
-


$
-As of December 31, 2009:Assets:Certificates of deposit

$
600


$
600


$
600


$
-


$
-Liabilities:Senior Subordinated Notes-9%

$
360,000


$
302,400


$
302,400


$
-


$
-Senior Secured Notes-11.75%


725,000



725,000



725,000



-



-$
1,085,000


$
1,027,400


$
1,027,400


$
-


$
-





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





In accordance with the fair value accounting standard, certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test.  Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.


8





New Accounting Pronouncements





In June 2009, the Financial Accounting Standards Board (“FASB”) revised the authoritative guidance for accounting for transfers of financial assets, which requires enhanced disclosures regarding transfers of financial assets, including securitization transactions, and continuing exposure to the related risks. The guidance eliminates the concept of a qualifying special-purpose entity and changes the requirements for derecognizing financial assets and  is effective for the Company beginning October 3, 2010. The Company is currently evaluating the impact of adopting this guidance; however, it is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.





In June 2009, the FASB revised the authoritative guidance for consolidating variable interest entities, which changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance and is effective for the Company beginning October 3, 2010. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.





In January 2010, the FASB issued authoritative guidance which requires additional disclosures about transfers between Levels 1 and 2 of the fair value hierarchy and disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. This guidance was effective for the Company in the current quarter, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010. The adoption of this guidance, which impacts any fair value disclosures, is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.










2.  GOODWILL





The Company records the excess of purchase price over the fair value of the net assets of acquired companies as goodwill or other identifiable intangible assets.  The Company performs an annual test for goodwill impairment during the fourth quarter of each year and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value.  The Company has defined its reporting units and performs the impairment testing of goodwill at the operating segment level.  The Company has aggregated US Windows and Ply Gem Canada into a single reporting unit since they have similar economic characteristics.  Thus, the Company has two reporting units: 1) Siding, Fencing, and Stone and 2) Windows and Doors.  Separate valuations are performed for each of these reporting units in order to test for impairment.





The Company uses the two-step method to determine goodwill impairment.  If the carrying amount of a reporting unit exceeds its fair value (Step One), the Company measures the possible goodwill impairment based upon a hypothetical allocation of the fair value estimate of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including previously unrecognized intangible assets (Step Two).  The excess of the reporting unit’s fair value over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  An impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds the implied fair value of goodwill.  There was no goodwill impairment at December 31, 2009 and no impairment indicators which would trigger an interim impairment test during the quarter ended April 3, 2010.





To determine the fair value of its reporting units, the Company equally considers both the income and market valuation methodologies.  The income valuation methodology uses the fair value of the cash flows that the reporting unit can be expected to generate in the future. This method requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multi-year period as well as determine the weighted average cost of capital to be used as the discount rate.  The Company also utilizes the market valuation method to estimate the fair value of the reporting units by utilizing comparable public company multiples.  These comparable public company multiples are then applied to the reporting unit’s financial performance.  During the year ended December 31, 2009, the Company utilized forward looking market multiples for its reporting units.  The forward multiples were used since each reporting unit incurred various restructuring activities during 2009.  The market approach is more volatile as an indicator of fair value as compared to the income approach as internal forecasts and projections have historically been more stable.  Since each approach has its merits, the Company equally weights the approaches to balance the internal and external factors affecting the Company’s fair value, which is consistent with prior years.





The Company’s fair value estimates of its reporting units and goodwill are sensitive to a number of assumptions including discount rates, cash flow projections, operating margins, and comparable market multiples.  In order to accurately forecast future cash flows, the Company estimates single family housing starts and the repair and remodeling market’s growth rates. However, there is no assurance that: 1) valuation multiples will not decline further , 2) discount rates will not increase, or 3) the earnings, book values or projected earnings and cash flows of the Company’s reporting units will not decline. The Company will continue to analyze changes to these assumptions in future periods. The Company will continue to evaluate goodwill during future periods and further declines in the residential housing and remodeling markets could result in additional goodwill impairments.





The reporting unit goodwill balances were as follows as of April 3, 2010 and December 31, 2009:




(Amounts in thousands)April 3, 2010


December 31, 2009Windows and Doors

$
73,174


$
72,731Siding, Fencing and Stone


320,107



320,107$
393,281


$
392,838





The increase in goodwill during the three months ended April 3, 2010 was due to currency translation adjustments of approximately $0.4 million.




9





3.  INTANGIBLE ASSETS





The following table presents the components of intangible assets as of April 3, 2010 and December 31, 2009:





AverageAmortization(Amounts in thousands)

Period





Accumulated


Net Carrying(in Years)


Cost


Amortization


ValueAs of April 3, 2010Patents


14


$
12,770


$
(5,713
)

$
7,057Trademarks/tradenames


11



85,644



(24,827
)


60,817Customer relationships


13



158,158



(59,348
)


98,810Other


4



1,631



(1,045
)


586Total intangible assets





$
258,203


$
(90,933
)

$
167,270As of December 31, 2009Patents


14


$
12,770


$
(5,477
)

$
7,293Trademarks/tradenames


15



85,644



(21,475
)


64,169Customer relationships


13



158,158



(56,249
)


101,909Other


4



1,631



(938
)


693Total intangible assets





$
258,203


$
(84,139
)

$
174,064





Amortization expense for the remainder of 2010 and for fiscal years 2011, 2012, 2013, and 2014 is estimated to be approximately $20.3 million, $26.7 million, $26.6 million, $16.5 million, and $15.1 million, respectively.  During the quarter ended April 3, 2010, the Company decreased the remaining useful life of certain trademarks in the Windows and Doors segment to 3 years (applied prospectively) as a result of future marketing plans regarding the use of certain trademarks.  The Company determined that the trademarks’ undiscounted cash flows over the abbreviated 3 year period exceeded the carrying value of these trademarks.  As a result, there was no further impairment test conducted for these trademarks.  For the quarter ended April 3, 2010, the Company incurred approximately $1.9 million of increased amortization expense compared to the quarter ended April 4, 2009.










4.  COMPREHENSIVE INCOME (LOSS)





Comprehensive income (loss) is comprised of the following:





For the three months ended(Amounts in thousands)

April 3, 2010


April 4, 2009Net income (loss)

$
54,102


$
(55,538
)Foreign currency translation adjustment


1,314



(407
)Comprehensive income (loss)

$
55,416


$
(55,945
)










5.  LONG-TERM DEBT





Long-term debt in the accompanying condensed consolidated balance sheets at April 3, 2010 and December 31, 2009 consists of the following:




(Amounts in thousands)

April 3, 2010


December 31, 2009Senior secured asset based revolving credit facility

$
65,000


$
25,0009% Senior subordinated notes due 2012, net ofunamortized premium of $0 and $105


-



360,10511.75% Senior secured notes due 2013, net ofunamortized discount of $9,132 and $9,708


715,868



715,29213.125% Senior subordinated notes due 2014, net ofunamortized discount of $4,090


145,910



-$
926,778


$
1,100,397Less:9% Senior subordinated notes due to related partiesincluding unamortized premium of $0 and $82


-



281,376$
926,778


$
819,021





10




11.75% Senior Secured Notes due 2013





On June 9, 2008, Ply Gem Industries issued $700.0 million of 11.75% senior secured notes due 2013 (the “Senior Secured Notes”) at an approximate 1.0% discount, yielding proceeds of approximately $693.5 million.  Ply Gem Industries used the proceeds to repay all of the outstanding indebtedness under the then existing senior secured credit facility of approximately $676.2 million of term loan borrowings and approximately $15.0 million of revolver borrowings.  The Senior Secured Notes will mature on June 15, 2013 and bear interest at the rate of 11.75% per annum.  Interest will be paid semi-annually on June 15 and December 15 of each year.  On October 23, 2009, Ply Gem Industries issued an additional $25.0 million of its Senior Secured Notes in a private placement transaction.  The net proceeds of $20.0 million were utilized for general corporate purposes.  The additional $25.0 million of Senior Secured Notes has the same terms and covenants as the initial $700.0 million of Senior Secured Notes.





Prior to April 1, 2011, Ply Gem Industries may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 111.75% of the aggregate principal amount of the Senior Secured Notes, plus accrued and unpaid interest, if any, provided that at least 65% of the original aggregate principal amount of the Senior Secured Notes remains outstanding after the redemption.  In addition, not more than once during any twelve-month period, Ply Gem Industries may redeem up to $70.0 million of the Senior Secured Notes at a redemption price equal to 103% of the aggregate amount of the Senior Secured Notes, plus accrued and unpaid interest, if any.  At any time on or after April 1, 2011, Ply Gem Industries may redeem the Senior Secured Notes, in whole or in part, at declining redemption prices set forth in the indenture governing the Senior Secured Notes, plus, in each case, accrued and unpaid interest, if any, to the redemption date.





The Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis by Ply Gem Holdings and all of the domestic subsidiaries of Ply Gem Industries (the “Guarantors”).  The indenture governing the Senior Secured Notes contains certain covenants that limit the ability of Ply Gem Industries and its subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into agreements restricting their ability to pay dividends, enter into transactions with affiliates, and consolidate, merge or sell Ply Gem Industries’ assets. On November 3, 2008, Ply Gem Industries completed its exchange offer with respect to the Senior Secured Notes by exchanging $700.0 million Senior Secured Notes, which were registered under the Securities Act of 1933, as amended (the "Securities Act"), for $700.0 million of the issued and outstanding Senior Secured Notes.  Upon completion of the exchange offer, all issued and outstanding Senior Secured Notes were registered under the Securities Act.  However, the issuance of $25.0 million of Senior Secured Notes in October 2009 was not registered under the Securities Act and there is no contractual requirement to register these Senior Secured Notes.





The Senior Secured Notes and the related guarantees are secured on a first-priority lien basis by substantially all of the assets (other than the assets securing the Company’s obligations under the senior secured asset based revolving credit facility, which consist primarily of accounts receivable and inventory) of Ply Gem Industries and the Guarantors and on a second-priority lien basis by the assets that secure the asset based revolving credit facility.





In addition, the Company’s stock ownership in its subsidiaries collateralizes the Senior Secured Notes to the extent that such equity interests and other securities can secure the notes without Rule 3-16 of Regulation S-X under the Securities Act requiring separate financial statements of such subsidiary to be filed with the Securities and Exchange Commission.  As of April 3, 2010, no subsidiary’s stock has been excluded from the collateral arrangement due to the Rule 3-16 requirement.





Senior Secured Asset Based Revolving Credit Facility due 2013





Concurrently with the Senior Secured Notes offering on June 9, 2008, Ply Gem Industries, the Company and the subsidiaries of Ply Gem Industries entered into a new senior secured asset-based revolving credit facility (the “ABL Facility”).  The ABL Facility 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 United States dollars by Ply Gem Canada.





The ABL Facility provides that the revolving commitments may be increased to $200.0 million, subject to certain terms and conditions.  The Company had borrowings of $65.0 million and $25.0 million outstanding under the ABL Facility as of April 3, 2010 and December 31, 2009, respectively.  As of April 3, 2010, Ply Gem Industries had approximately $103.3 million of contractual availability and approximately $63.5 million of borrowing base availability under the ABL Facility, reflecting $65.0 million of borrowings outstanding and approximately $6.7 million of letters of credit issued.





The interest rates applicable to loans under the ABL Facility are, at the Company’s option, equal to either a base rate plus an applicable interest margin, or an adjusted LIBOR rate plus an applicable interest margin, as defined in the ABL Facility credit agreement.  As of April 3, 2010, the Company’s interest rate on the ABL Facility was approximately 6.0%.  The ABL Facility contains a requirement to maintain a fixed charge coverage ratio of 1.1:1.0 if the Company’s borrowings under the ABL Facility exceed certain levels.  The fixed charge coverage was not applicable at any point during 2009 or the first quarter of 2010.





11





In July 2009, the Company amended the ABL Facility to increase the available commitments by $25.0 million from $150.0 million to $175.0 million, and change both the availability threshold for certain cash dominion events and compliance with the fixed charge and other covenants from 15% of revolving credit commitments to 15% of the lower of the revolving credit commitments or the borrowing base but not less than $20.0 million. The Company must maintain excess availability, as defined, of at least $20.0 million to avoid being subject to the fixed charge covenant ratio.  As a condition to this availability increase, the applicable margins payable on the loans were increased and made subject to certain minimums.  In October 2009, the Company amended the ABL Facility to allow for the issuance of $25.0 million of additional Senior Secured Notes and to permit certain refinancing transactions with respect to the 9% senior subordinated notes due 2012 (the "9% Senior Subordinated Notes").  The October amendment also permits Ply Gem Industries to issue equity securities to Ply Gem Holdings, its parent.  The October 2009 amendment did not affect the $175.0 million availability amount or the applicable interest rate margins under the ABL Facility.





All obligations under the ABL Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of Ply Gem Industries and the Guarantors, including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, deposit accounts, and certain related assets and proceeds of the foregoing and a second-priority security interest in, and mortgages on, substantially all of Ply Gem Industries’ material owned real property and equipment and all assets that secure the Senior Secured Notes on a first-priority basis.  In addition to being secured by the collateral securing the obligations of Ply Gem Industries under the domestic collateral package, the obligations of Ply Gem Canada, which is a borrower under the Canadian sub-facility under the ABL Facility, are also secured by a first-priority security interest in substantially all of the assets of such Canadian subsidiary, plus additional mortgages in Canada, and a pledge by Ply Gem Industries of the remaining 35% of the equity interests of Ply Gem Canada pledged only to secure the Canadian sub-facility.





9.00% Senior Subordinated Notes due 2012





Concurrently with the acquisition of Ply Gem Industries on February 12, 2004, Ply Gem Industries issued $225.0 million aggregate principal amount of its 9% Senior Subordinated Notes due 2012, which are guaranteed by Ply Gem Holdings and the domestic subsidiaries of Ply Gem Industries.  Subsequently, in August 2004, in connection with the MW acquisiton, Ply Gem Industries issued an additional $135.0 million of 9% Senior Subordinated Notes, which are guaranteed by Ply Gem Holdings and the domestic subsidiaries of Ply Gem Industries, including MWM Holding and its subsidiaries.  Ply Gem Industries pays interest semi-annually on February 15 and August 15 of each year.  As of December 31, 2009, certain affiliates of the Company’s controlling stockholder owned approximately $281.4 million of the outstanding 9% Senior Subordinated Notes.





In connection with the issuance of $150.0 million aggregate principal amount of 13.125% Senior Subordinated Notes due 2014 on January 11, 2010 (see description in corresponding section below), Ply Gem Industries redeemed approximately $141.2 million aggregate principal amount of the 9% Senior Subordinated Notes on February 16, 2010 at a redemption price of 100% of the principal amount thereof plus accrued interest.  The Company accounted for this transaction as a debt extinguishment.  In addition to this debt extinguishment, approximately $218.8 million aggregate principal amount of the 9% Senior Subordinated Notes held by certain affiliates of the Company’s controlling stockholder were transferred to the Company’s indirect stockholders and ultimately to Ply Gem Prime Holdings, the Company’s indirect parent company.  Such notes were then transferred to Ply Gem Holdings and then to Ply Gem Industries as a capital contribution and cancelled on February 12, 2010.  As such, these 9% Senior Subordinated Notes were not outstanding as of April 3, 2010.





Gain on extinguishment of debt





As a result of the $141.2 million redemption of the 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 an affiliate of the Company’s controlling stockholder 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 net gain on debt extinguishment was recorded within other income (expense) separately in the condensed consolidated statement of operations for the period ended April 3, 2010.





13.125% Senior Subordinated Notes due 2014





On January 11, 2010, Ply Gem Industries issued $150.0 million of 13.125% Senior Subordinated Notes due 2014 (the “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 9% Senior Subordinated Notes due 2012 and to pay certain related costs and expenses.  The $150.0 million Senior Subordinated Notes will mature on July 15, 2014 and bear interest at the rate of 13.125% per annum.  Interest will be paid semi-annually on January 15 and July 15 of each year.





Prior to January 15, 2012, Ply Gem Industries may redeem up to 40% of the aggregate principal amount of the 13.125% Senior Subordinated Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 113.125% of the aggregate principal amount of the 13.125% Senior Subordinated Notes, plus accrued and unpaid interest, if any, provided that at least 60% of the original aggregate principal amount of the 13.125% Senior Subordinated Notes remains outstanding after the redemption.  On or after January 15, 2012, and prior to January 15, 2013, Ply Gem Industries may redeem up to 100% of the aggregate principal amount of the 13.125% Senior Subordinated Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 103% of the aggregate principal amount of the 13.125% Senior Subordinated Notes, plus accrued and unpaid interest, if any.  On or after January 15, 2013, Ply Gem Industries may redeem up to 100% of the aggregate principal amount of the 13.125% Senior Subordinated Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 100% of the aggregate principal amount of the 13.125% Senior Subordinated Notes, plus accrued and unpaid interest, if any, to the redemption date.





12





The 13.125% Senior Subordinated Notes are unsecured and subordinated in right of payment to all existing and future debt of the Company, including the ABL Facility and the Senior Secured Notes.  The 13.125% Senior Subordinated Notes are unconditionally guaranteed on a joint and several basis by Ply Gem Holdings and all of the domestic subsidiaries of Ply Gem Industries (other than certain unrestricted subsidiaries) on a senior subordinated basis.  The guarantees are general unsecured obligations and are subordinated in right of payment to all existing senior debt of the guarantors, including their guarantees of the Senior Secured Notes and the ABL Facility.





The indenture governing the 13.125% Senior Subordinated 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 repurchases 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.







6.  PENSION PLANS





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




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





For the three months ended(Amounts in thousands)

April 3, 2010


April 4, 2009Service cost

$
40


$
44Interest cost


506



500Expected return on plan assets


(453
)


(366
)Amortization of loss


78



126Net periodic expense

$
171


$
304










7.  COMMITMENTS AND CONTINGENCIES





Indemnifications





In connection with the Ply Gem acquisition, in which Ply Gem Industries was acquired from Nortek in February 2004, Nortek has agreed to indemnify the Company for certain liabilities as set forth in the stock purchase agreement governing the Ply Gem acquisition.  In the event Nortek is unable to satisfy amounts due under these indemnifications, the Company would be liable.  The Company believes that Nortek has the financial capacity to honor its indemnification obligations and therefore does not anticipate incurring any losses related to liabilities indemnified by Nortek under the stock purchase agreement.  A receivable related to this indemnification has been recorded in other long-term assets in the approximate amount of $7.2 million and $7.4 million at April 3, 2010 and December 31, 2009, respectively.  As of April 3, 2010 and December 31, 2009, the Company has recorded liabilities in relation to these indemnifications of approximately $2.7 million and $2.8 million, respectively, in current liabilities and $4.5 million and $4.6 million, respectively, in long-term liabilities, consisting of the following:





(Amounts in thousands)

April 3, 2010


December 31, 2009Product claim liabilities

$
3,422


$
3,505Multiemployer pension plan withdrawal liability


3,239



3,292Other


585



599$
7,246


$
7,396








13





Warranty claims





The Company sells a number of products and offers a number of warranties on these products.  The specific terms and conditions of these warranties vary depending on the product sold and the country in which the product is sold.  The Company estimates the costs expected to be incurred under its warranties and records a liability for such costs at the time of sale, which is recorded in both accrued expenses and other long-term liabilities in the accompanying condensed consolidated balance sheets.  Factors that affect the Company’s warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction.  The Company periodically assesses the adequacy of the recorded warranty claims and adjusts the amounts as necessary.  As of April 3, 2010 and December 31, 2009, warranty liabilities of approximately $10.3 million and $10.4 million, respectively, have been recorded in current liabilities and approximately $32.9 million and $33.0 million, respectively, have been recorded in long-term liabilities.





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





For the three months ended(Amounts in thousands)

April 3, 2010


April 4, 2009Balance, beginning of period

$
43,398


$
45,653Warranty expense provided during period


2,851



2,915Settlements made during period


(3,025
)


(4,070
)Balance, end of period

$
43,224


$
44,498








14





Other contingencies





The Company is subject to other contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, product liability, warranty and modification, adjustment or replacement of component parts of units sold, which may include product recalls.  Product liability, environmental and other legal proceedings also include matters with respect to businesses previously owned.  The Company has used various substances in their products and manufacturing operations, which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers’ compensation statutes, rules, regulations and case law is unclear. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated.  Also, it is not possible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, and therefore no such estimate has been made.  However, the Company is not aware of any contingencies for which a material loss is reasonably possible.











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





Accrued expenses and taxes consist of the following:




(Amounts in thousands)

April 3, 2010


December 31, 2009Insurance

$
5,157


$
5,210Employee compensation and benefits


4,857



3,259Sales and marketing


18,465



18,585Product warranty


10,330



10,408Short-term product claim liability


2,320



2,320Accrued freight


1,034



466Interest


30,838



16,844Accrued pension


1,650



1,650Accrued deferred compensation


2,081



2,081Accrued taxes


4,815



1,993Other


10,684



9,607$
92,231


$
72,423





Other long-term liabilities consist of the following:




(Amounts in thousands)

April 3, 2010


December 31, 2009Insurance

$
2,651


$
2,714Pension liabilities


8,637



8,802Multi-employer pension withdrawal liability


3,239



3,292Product warranty


32,894



32,990Long-term product claim liability


1,102



1,185Long-term deferred compensation


1,919



1,821Liabilities for tax uncertainties


9,813



9,735Other


4,829



5,112$
65,084


$
65,651








15




9.   RESTRUCTURING




In November 2008, the Company announced the closure of its Hammonton, New Jersey and Phoenix, Arizona window and door manufacturing facilities.  During December 2008, production began to shift to other locations and production ceased at Hammonton and Phoenix during 2009.  By shifting production to other facilities within the Company, the closures reduced costs and increased operating efficiencies.  Total costs are expected to be approximately $5.4 million, including approximately $1.0 million for personnel-related costs and approximately $4.4 million in other facilities-related costs, which include approximately $4.0 million in lease costs.





On April 2, 2009, the Company announced that it would consolidate production across several of its manufacturing facilities improving the Company’s overall operating efficiency.  The Company’s plans included shifting the majority of the production from its Kearney, Missouri facility to its other three vinyl siding manufacturing facilities.  The Company continues to operate the Kearney, Missouri facility on a limited basis until the housing market recovers.  The Company also closed its Tupelo, Mississippi window and door manufacturing facility.  In addition, the Company consolidated certain of the vinyl lineal production to its Rocky Mount, Virginia facility and realigned production of its west coast window and door facilities at Sacramento, California and Auburn, Washington to better serve customers and improve overall operating efficiency. In connection with the April 2, 2009 announcement, the Company expects to incur pre-tax exit and restructuring costs, all of which will be cash charges, of approximately $2.0 million, including approximately $0.9 million for personnel-related costs, approximately $0.1 million for contract termination costs, and approximately $1.0 million in other facilities-related costs.





The following table summarizes the Company’s restructuring activity for the three months ended April 3, 2010:





(Amounts in thousands)

Accrued as of


Adjustments


Cash payments


Expensed


Accrued as ofDecember 31, 2009


during 2010


during 2010


during 2010


April 3, 2010Hammonton, NJSeverance costs

$
-


$
-


$
-


$
-


$
-Other termination benefits


-



-



-



-



-Contract terminations


1,873



-



(732
)


32



1,173Equipment removal and other


-



-



-



-



-$
1,873


$
-


$
(732
)

$
32


$
1,173Phoenix, AZSeverance costs

$
-


$
-


$
-


$
-


$
-Other termination benefits


-



-



-



-



-Contract terminations


766



-



(184
)


14



596Equipment removal and other


-



-



-



-



-$
766


$
-


$
(184
)

$
14


$
596Kearney, MOSeverance costs

$
-


$
-


$
-


$
-


$
-Equipment removal and other


-



-



(105
)


105



-$
-


$
-


$
(105
)

$
105


$
-Tupelo, MSSeverance costs

$
-


$
-


$
-


$
-


$
-Contract terminations


109



-



(73
)


1



37Equipment removal and other


-



-



-



-



-$
109


$
-


$
(73
)

$
1


$
37


For the three month periods ended April 3, 2010 and April 4, 2009, the Company expensed approximately $0.2 million and $3.3 million, respectively, related to this restructuring.  For the three months ended April 3, 2010, approximately $0.1 million was recorded in selling, general and administrative expenses in the Siding, Fencing and Stone segment and approximately $0.1 million was recorded in selling, general and administrative expenses in the Windows and Doors  segment.  For the three months ended April 4, 2009, approximately $0.7 million was recorded in selling, general and administrative expenses in the Siding, Fencing and Stone segment and approximately $2.6 million were recorded in selling, general and administrative expenses in the Windows and Doors segment.


16




10.   INCOME TAXES




Effective tax rate and debt transactions




Income taxes for interim periods have been included in the accompanying condensed consolidated financial statements on the basis of an estimated annual effective tax rate. In addition to the amount of tax resulting from applying the estimated annual effective tax rate to pre-tax income (loss), the Company includes certain items treated as discrete events to arrive at an estimated overall tax amount.  For the period ended April 3, 2010, the Company’s estimated effective income tax rate for the full year was approximately 11.4%, which varied from the statutory rate primarily due to state tax expense, a decrease in the valuation allowance, and to cancellation of debt income offset by a repurchase premium and original issue discount.




During February 2010, certain affiliates of the Company’s controlling stockholder contributed approximately $218.8 million aggregate principal amount of 9% Senior Subordinated Notes to Ply Gem Holdings in exchange for equity of Ply Gem Prime valued at approximately $114.9 million.  Prior to this $218.8 million contribution to Ply Gem Holdings, the affiliates of the Company’s controlling stockholder initially transferred the notes to Ply Gem Prime, the Company’s ultimate parent, which then contributed the notes to Ply Gem Holdings.  As a result of these debt transactions, the Company recognized $35.3 million of additional cancellation of indebtedness income (“CODI”) for income tax purposes during the quarter ended April 3, 2010.  During the quarter ended April 4, 2009, affiliates of the Company’s controlling stockholder purchased a majority of the 9% Senior Subordinated Notes.  The Company determined that approximately $95.7 million would be considered CODI for the quarter ended April 4, 2009 as the acquiring party was deemed a related party for tax purposes.




On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “Act”).  Among its provisions, the Act permits certain taxpayers to elect to defer the taxation of CODI arising from certain repurchases, exchanges or modifications of their outstanding debt that occur during 2009 and 2010.  For debt acquired in 2009, the CODI can be deferred for five years and then included in taxable income ratably over the next five years.  The CODI deferral and inclusion periods for debt acquired during 2010 would be four years.  If this election is made by September 2010 for debt acquired in 2009 or September 2011 for debt acquired during 2010, the Company would be required to defer the deduction of all or a substantial portion of any “original issue discount” (“OID”) expenses as well as the CODI.  These OID deductions also would be deferred until 2014 and the Company would be allowed to deduct these costs ratably over the same four or five-year period.  The Company does not currently plan to defer the 2009 or 2010 CODI.




In addition to the $35.3 million of 2010 CODI income recognized for income tax purposes, the Company recognized a repurchase premium deduction of approximately $10.3 million and an OID deduction of approximately $17.8 million in conjunction with the debt transactions occurring during the quarter ended April 3, 2010.  These deductions partially offset the CODI that was recognized for income tax purposes in the quarter ended April 3, 2010.  The remaining $7.2 million of CODI was offset during the quarter ended April 3, 2010 by net operating losses.




Valuation allowance




As of April 3, 2010, 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 currently has book goodwill of approximately $13.4 million that is not amortized and results in a deferred tax liability of approximately $2.9 million at April 3, 2010.  Therefore, the reversal of deferred tax liabilities related to this goodwill is not considered a source of future taxable income in assessing the realization of its deferred tax assets.  The Company continues to evaluate the realizability of its net deferred tax assets and its estimates are subject to change.


17




Other tax considerations




During the quarter ended April 4, 2009, the Company filed an amended federal income tax return for the year ended December 31, 2005 in order to adjust its net operating loss limitations.  The Company recorded the resulting income tax benefit as an income tax receivable of approximately $4.1 million.  As of April 3, 2010 and December 31, 2009, this amount has been recorded in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets.




The Worker, Homeownership, and Business Assistance Act of 2009 provided for a five year carryback of net operating losses for either 2008 or 2009 losses.  Additionally, the ninety percent limitation on the usage of alternative minimum tax net operating loss deductions was suspended during this extended carryback period.  The Company has prepared an amended 2008 carryback claim in order to receive a refund of the alternative minimum tax paid for tax years 2005 through 2007 totaling approximately $1.1 million, which has been recorded in prepaid expenses and other current assets in the consolidated balance sheets as of April 3, 2010 and December 31, 2009.




Tax uncertainties




Despite our belief that our tax return positions are consistent with applicable tax laws, the Company believes that certain positions could be challenged by taxing authorities.  Our tax reserves reflect the difference between the tax benefit claimed on tax returns and the amount recognized in the financial statements. These reserves have been established based on management’s assessment as to potential exposure attributable to permanent differences and interest applicable to both permanent and temporary differences.  The tax reserves are reviewed periodically and adjusted in light of changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations and changes in tax law.  During the three months ended April 3, 2010, the Company increased the tax contingency reserve by $0.1 million for interest related to previously recorded tax uncertainties.  The Company’s federal income tax returns for the tax years ended December 31, 2006, 2007 and 2008 are currently under examination by the Internal Revenue Service as well as the 2005 amended net operating loss limitation.








11.  STOCK-BASED COMPENSATION





Stock Option Plan





A rollforward of stock options outstanding during the three months ended April 3, 2010 is as follows:





Stock Options


Weighted-Average Exercise

Price


Weighted-Average Remaining Contractual Term (Years)Balance at January 1, 2010


334,044


$
51.33



6.98Granted


-



-



-Forfeited or expired


-



-



-Balance at April 3, 2010


334,044


$
51.33



6.73





As of April 3, 2010, 105,094 options have vested.  At April 3, 2010, the Company had approximately $0.1 million of total unrecognized compensation expense that will be recognized over a weighted average period of 1.65 years.





Other Share-Based Compensation





Upon completion of the acquisition of Ply Gem, the acquisition of MW and the acquisition of AWC Holding Company and its subsidiaries (collectively, “Alenco”), certain members of management made a cash contribution to Ply Gem Prime in exchange for shares of Ply Gem Prime’s common stock.   Ply Gem Prime is the sole shareholder of Ply Gem Holdings.





A rollforward of Ply Gem Prime’s common stock shares during the three months ended April 3, 2010 is as follows.





Common Stock

Shares Owned by

ManagementBalance at January 1, 2010


642,895Shares issued


7,512Shares repurchased


(38,000
)Balance at April 3, 2010


612,407





18





Phantom stock





Upon the completion of the Ply Gem Acquisition and the MW Acquisition, certain members of management contributed their investment in predecessor companies in exchange for phantom common stock units and phantom preferred stock units which were governed by a phantom stock plan.  Under the phantom stock plan, each participant’s interest in the plan was recorded in a bookkeeping account; however, no stock was initially issued under the phantom stock plan.  Each account recorded a number of units so that, any “phantom common stock units” were deemed to be invested in common stock and any “phantom preferred stock units” were deemed invested in senior preferred stock.  Under the plan, upon liquidation and payment of a participant’s account, the value of the account generally was to be paid to the participant either in cash or in shares of Ply Gem Prime’s stock having a fair market value equal to the account balance, in the discretion of Ply Gem Prime.





In 2006, the Company converted all phantom common and preferred stock units into a cash account payable on a fixed schedule in years 2007 and beyond.  The value of the portion of each cash account that represented phantom common units equaled the number of phantom common stock units credited to the phantom plan account on September 25, 2006 multiplied by $10.00.  From September 25, 2006 through January 31, 2007, the value of the cash account was updated as if interest was credited on such value and compounded at December 31, 2006 at a rate equal to the applicable federal rate for short-term loans.  This portion of the account was paid to each party in a single lump-sum cash payment on January 31, 2007.  The value of the portion of the cash account that represented the value of the phantom preferred stock units equaled the face amount of the number of shares of senior preferred stock represented by such units.  This portion of the account is credited with deemed earnings, as if with interest, at an annual rate of 10% compounded semi-annually as of each June 30 and December 31, from the date of issuance of the phantom preferred stock unit through the date of payment.  This portion of the account is payable on each of August 31, 2009, 2010, and 2011, such that one third of the original face amount, plus deemed earnings, is paid on each such date, or, if earlier, the officer’s death, disability or a change of control.  During the year ended December 31, 2009, the Company made cash phantom stock payments of approximately $1.8 million.  As of April 3, 2010  and December 31, 2009, the Company accrued on its consolidated balance sheet approximately $2.1 million and $2.1 million, respectively, in accrued expenses and taxes and approximately $1.9 million and $1.8 million, respectively in other long term liabilities for the phantom stock.










12.  SEGMENT INFORMATION





The Company’s operating segments are components of the business for which separate financial information is available and are evaluated regularly by management in deciding how to allocate resources and in assessing performance.




The Company has two reportable segments: 1) Siding, Fencing, and Stone, and 2) Windows and Doors.  The operating earnings (loss) of each segment includes the revenue generated on transactions involving products within that segment less identifiable expenses.  Corporate unallocated income and expenses include items which are not directly attributed to or allocated to either of the reporting segments.  Such items include interest, legal costs, corporate payroll, and unallocated finance and accounting expenses. Corporate unallocated assets include debt issuance costs, cash and certain non-operating receivables.





The following is a summary of the Company’s segment information:





For the three months ended(Amounts in thousands)

April 3, 2010


April 4, 2009Net salesSiding, Fencing, and Stone

$
117,668


$
108,460Windows and Doors


86,537



74,291$
204,205


$
182,751Operating earnings (loss)Siding, Fencing, and Stone

$
10,514


$
(7,517
)Windows and Doors


(10,756
)


(21,682
)Unallocated


(3,461
)


(3,609
)$
(3,703
)

$
(32,808
)Total assets as ofApril 3, 2010


December 31, 2009Siding, Fencing, and Stone

$
623,136


$
604,753Windows and Doors


327,952



333,876Unallocated


60,213



43,404$
1,011,301


$
982,033





19




13.  RELATED PARTY TRANSACTIONS





The Company has entered into two advisory agreements with an affiliate of CI Capital Partners LLC, formerly Caxton-Iseman Capital, LLC (the “Caxton-Iseman Party”), which we refer to as the “Debt Financing Advisory Agreement” and the “General Advisory Agreement”.  The Caxton-Iseman Party provides the Company with acquisition and financial advisory services as the Board of Directors shall reasonably request.  Under the General Advisory Agreement, the Company expensed management fees to the Caxton-Iseman Party of approximately $0.2 million and $0.7 million within selling, general, and administrative expenses for the three month periods ended April 3, 2010 and April 4, 2009, respectively.





During February 2010, certain affiliates of the Company’s controlling stockholder contributed approximately $218.8 million aggregate principal amount of 9% Senior Subordinated Notes to Ply Gem Holdings in exchange for equity of Ply Gem Prime valued at approximately $114.9 million.  Prior to this $218.8 million contribution, the affiliates of the Company’s controlling stockholder initially transferred the notes to Ply Gem Prime, the Company’s ultimate parent, which then contributed the notes to Ply Gem Holdings.  As a result of these debt transactions, the Company paid interest to related parties of approximately $9.8 million during the quarter ended April 3, 2010.  These interest payments have been recorded within interest expense in the Company’s condensed consolidated statement of operations.




During the quarter ended April 3, 2010, the Company received equity contributions of approximately $1.2 million from certain members of management.  In addition, the Company repurchased equity of approximately $1.9 million from certain former members of management.








20




14.  GUARANTOR / NON-GUARANTOR FINANCIAL INFORMATION





The Senior Secured Notes and 13.125% Senior Subordinated Notes were both issued by our direct subsidiary, Ply Gem Industries, and the Senior Secured Notes and the 13.125% Senior Subordinated Notes are fully and unconditionally guaranteed on a joint and several basis by the Company and certain of Ply Gem Industries’ wholly owned subsidiaries.  Accordingly, the following guarantor and non-guarantor information is presented as of April 3, 2010 and December 31, 2009, and for the three month periods ended April 3, 2010 and April 4, 2009.  The non-guarantor information presented represents our Canadian subsidiary.








PLY GEM HOLDINGS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSFor the three months ended April 3, 2010Guarantor

Issuer



Non-Ply Gem

Ply Gem

Guarantor

Guarantor

Consolidating(Amounts in thousands)

Holdings, Inc.

Industries, Inc.

Subsidiaries

Subsidiary

Adjustments

ConsolidatedNet sales

$
-

$
-

$
188,785

$
15,420

$
-

$
204,205Costs and expenses:Cost of products sold


-


-


156,224


11,084


-


167,308Selling, general andadministrative expenses


-


3,452


26,915


3,439


-


33,806Intercompany administrativecharges


-


-


2,823


177


(3,000
)

-Amortization of intangible assets


-


9


6,785


-


-


6,794Total costs and expenses


-


3,461


192,747


14,700


(3,000
)

207,908Operating earnings (loss)


-


(3,461
)

(3,962
)

720


3,000


(3,703
)Foreign currency gain


-


-


-


104


-


104Intercompany interest


-


29,344


(29,039
)

(305
)

-


-Interest expense


-


(33,960
)

(47
)

-


-


(34,007
)Interest income





9


43


1





53Gain on extinguishment of debt


-


98,187


-


-


-


98,187Intercompany administrative income


-


3,000


-


-


(3,000
)

-Income (loss) before equity insubsidiaries' income (loss)


-


93,119


(33,005
)

520


-


60,634Equity in subsidiaries' income (loss)


54,102


(28,985
)

-


-


(25,117
)

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


54,102


64,134


(33,005
)

520


(25,117
)

60,634Provision (benefit) for income taxes


-


10,032


(3,662
)

162


-


6,532Net income (loss)

$
54,102

$
54,102

$
(29,343
)
$
358

$
(25,117
)
$
54,102Other comprehensive income (loss):Foreign currency translation adjustments


-


-


-


1,314


-


1,314Total comprehensive income (loss)

$
54,102

$
54,102

$
(29,343
)
$
1,672

$
(25,117
)
$
55,416


21





PLY GEM HOLDINGS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSFor the three months ended April 4, 2009Guarantor

Issuer



Non-Ply Gem

Ply Gem

Guarantor

Guarantor

Consolidating(Amounts in thousands)

Holdings, Inc.

Industries, Inc.

Subsidiaries

Subsidiary

Adjustments

ConsolidatedNet sales

$
-

$
-

$
173,623

$
9,128

$
-

$
182,751Costs and expenses:Cost of products sold


-


-


162,592


7,099


-


169,691Selling, general andadministrative expenses


-


3,609


34,747


2,606


-


40,962Intercompany administrativecharges


-


-


1,737


-


(1,737
)

-Amortization of intangible assets


-


-


4,906


-


-


4,906Total costs and expenses


-


3,609


203,982


9,705


(1,737
)

215,559Operating loss


-


(3,609
)

(30,359
)

(577
)

1,737


(32,808
)Foreign currency loss


-


-


-


(88
)

-


(88
)Intercompany interest


-


30,351


(29,842
)

(509
)

-


-Interest expense


-


(33,756
)

-


-


-


(33,756
)Interest income


-


9


55


1


-


65Intercompany administrative income


-


1,737


-


-


(1,737
)

-Loss before equity insubsidiaries' loss


-


(5,268
)

(60,146
)

(1,173
)

-


(66,587
)Equity in subsidiaries' loss


(55,538
)

(51,144
)

-


-


106,682


-Loss before benefit forincome taxes


(55,538
)

(56,412
)

(60,146
)

(1,173
)

106,682


(66,587
)Benefit for income taxes


-


(874
)

(9,854
)

(321
)

-


(11,049
)Net loss

$
(55,538
)
$
(55,538
)
$
(50,292
)
$
(852
)
$
106,682

$
(55,538
)Other comprehensive income (loss):Foreign currency translation adjustments


-


-


-


(407
)

-


(407
)Total comprehensive loss

$
(55,538
)
$
(55,538
)
$
(50,292
)
$
(1,259
)
$
106,682

$
(55,945
)








22





PLY GEM HOLDINGS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEETAs of April 3, 2010(Amounts in thousands)

Guarantor


Issuer





Non-Ply Gem


Ply Gem


Guarantor


Guarantor


ConsolidatingASSETS

Holdings, Inc.


Industries, Inc.


Subsidiaries


Subsidiary


Adjustments


ConsolidatedCurrent Assets:Cash and cash equivalents

$
-


$
27,240


$
828


$
3,591


$
-


$
31,659Accounts receivable, net


-



-



106,083



8,877



-



114,960Inventories:Raw materials


-



-



37,421



4,310



-



41,731Work in process


-



-



24,862



735



-



25,597Finished goods


-



-



39,961



2,156



-



42,117Total inventory


-



-



102,244



7,201



-



109,445Prepaid expenses and othercurrent assets


-



498



17,453



3,962



-



21,913Total current assets


-



27,738



226,608



23,631



-



277,977Investments in subsidiaries


(143,831
)


(325,098
)


-



-



468,929



-Property and Equipment, at cost:Land


-



-



3,565



174



-



3,739Buildings and improvements


-



-



34,652



1,111



-



35,763Machinery and equipment


-



1,272



256,149



7,116



-



264,537-



1,272



294,366



8,401



-



304,039Less accumulated depreciation


-



(467
)


(163,392
)


(3,930
)


-



(167,789
)Total property and equipment, net


-



805



130,974



4,471



-



136,250Other Assets:Intangible assets, net


-



-



167,270



-



-



167,270Goodwill


-



-



382,472



10,809



-



393,281Deferred income taxes


-



-



761



2,844



-



3,605Intercompany note receivable


-



1,097,761



-



-



(1,097,761
)


-Other


-



31,670



1,248



-



-



32,918Total other assets


-



1,129,431



551,751



13,653



(1,097,761
)


597,074$
(143,831
)

$
832,876


$
909,333


$
41,755


$
(628,832
)

$
1,011,301LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)Current Liabilities:Accounts payable

$
-


$
3,472


$
60,909


$
3,718


$
-


$
68,099Accrued expenses and taxes


-



37,378



52,062



2,791



-



92,231Total current liabilities


-



40,850



112,971



6,509



-



160,330Deferred income taxes


-



-



2,940



-



-



2,940Intercompany note payable


-



-



1,088,999



8,762



(1,097,761
)


-Other long term liabilities


-



9,079



55,026



979



-



65,084Long-term debt due to related parties


-



-



-



-



-



-Long-term debt


-



926,778



-



-



-



926,778Commitments and contingenciesStockholder's Equity (Deficit):Preferred stock


-



-



-



-



-



-Common stock


-



-



-



-



-



-Additional paid-in-capital


324,174



324,174



178,106



10,070



(512,350
)


324,174(Accumulated deficit) retained earnings


(469,643
)


(469,643
)


(528,709
)


13,797



984,555



(469,643
)Accumulated othercomprehensive income


1,638



1,638



-



1,638



(3,276
)


1,638Total stockholder's (deficit) equity


(143,831
)


(143,831
)


(350,603
)


25,505



468,929



(143,831
)$
(143,831
)

$
832,876


$
909,333


$
41,755


$
(628,832
)

$
1,011,301





23





PLY GEM HOLDINGS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEETAs of December 31, 2009(Amounts in thousands)

Guarantor


Issuer





Non-Ply Gem


Ply Gem


Guarantor


Guarantor


ConsolidatingASSETS

Holdings, Inc.


Industries, Inc.


Subsidiaries


Subsidiary


Adjustments


ConsolidatedCurrent Assets:Cash and cash equivalents

$
-


$
7,341


$
2,592


$
7,130


$
-


$
17,063Accounts receivable, net


-



-



86,657



7,771



-



94,428Inventories:Raw materials


-



-



35,151



4,636



-



39,787Work in process


-



-



22,632



711



-



23,343Finished goods


-



-



32,505



2,445



-



34,950Total inventory


-



-



90,288



7,792



-



98,080Prepaid expenses and othercurrent assets


-



512



15,793



3,143



-



19,448Deferred income taxes


-



-



5,748



14



-



5,762Total current assets


-



7,853



201,078



25,850



-



234,781Investments in subsidiaries


(313,482
)


(320,928
)


-



-



634,410



-Property and Equipment, at cost:Land


-



-



3,565



167



-



3,732Buildings and improvements


-



-



34,639



1,048



-



35,687Machinery and equipment


-



1,272



253,233



6,814



-



261,319-



1,272



291,437



8,029



-



300,738Less accumulated depreciation


-



(425
)


(155,023
)


(3,588
)


-



(159,036
)Total property and equipment, net


-



847



136,414



4,441



-



141,702Other Assets:Intangible assets, net


-



-



174,064



-



-



174,064Goodwill


-



-



382,472



10,366



-



392,838Deferred income taxes


-



-



-



2,716



-



2,716Intercompany note receivable


-



1,101,260



-



-



(1,101,260
)


-Other


-



34,704



1,228



-



-



35,932Total other assets


-



1,135,964



557,764



13,082



(1,101,260
)


605,550$
(313,482
)

$
823,736


$
895,256


$
43,373


$
(466,850
)

$
982,033LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)Current Liabilities:Accounts payable

$
-


$
4,354


$
45,352


$
3,127


$
-


$
52,833Accrued expenses and taxes


-



22,745



47,424



2,254



-



72,423Total current liabilities


-



27,099



92,776



5,381



-



125,256Deferred income taxes


-



-



4,211



-



-



4,211Intercompany note payable


-



-



1,088,999



12,261



(1,101,260
)


-Other long term liabilities


-



9,722



54,990



939



-



65,651Long-term debt due to related parties


-



281,376



-



-



-



281,376Long-term debt


-



819,021



-



-



-



819,021Commitments and contingenciesStockholder's Equity (Deficit):Preferred stock


-



-



-



-



-



-Common stock


-



-



-



-



-



-Additional paid-in-capital


209,939



209,939



153,646



7,246



(370,831
)


209,939(Accumulated deficit) retained earnings


(523,745
)


(523,745
)


(499,366
)


13,439



1,009,672



(523,745
)Accumulated othercomprehensive income (loss)


324



324



-



4,107



(4,431
)


324Total stockholder's (deficit) equity


(313,482
)


(313,482
)


(345,720
)


24,792



634,410



(313,482
)$
(313,482
)

$
823,736


$
895,256


$
43,373


$
(466,850
)

$
982,033







24


PLY GEM HOLDINGS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFor the three months ended April 3, 2010(Amounts in thousands)

Guarantor


Issuer





Non-Ply Gem


Ply Gem


Guarantor


Guarantor


ConsolidatingHoldings, Inc.


Industries, Inc.


Subsidiaries


Subsidiary


Adjustments


ConsolidatedCash flows from operatingactivities:Net income (loss)

$
54,102


$
54,102


$
(29,343
)

$
358


$
(25,117
)

$
54,102Adjustments to reconcile netincome (loss) to cash provided by(used in) operating activities:Depreciation and amortizationexpense


-



42



15,217



195



-



15,454Non-cash interest expense, net


-



2,730



-



-



-



2,730Gain on foreign currency transactions


-



-



-



(104
)


-



(104
)Gain on extinguishment of debt


-



(98,187
)


-



-



-



(98,187
)Deferred income taxes


-



-



3,716



30



-



3,746Equity in subsidiaries' net income (loss)


(54,102
)


28,985



-



-



25,117



-Changes in operating assets andliabilities:Accounts receivable, net


-



-



(19,426
)


(734
)


-



(20,160
)Inventories


-



-



(11,956
)


870



-



(11,086
)Prepaid expenses and othercurrent assets


-



13



(1,679
)


(810
)


-



(2,476
)Accounts payable


-



(882
)


15,553



438



-



15,109Accrued expenses and taxes


-



14,142



5,771



516



-



20,429Cash payments on restructuring liabilities


-



-



(1,094
)


-



-



(1,094
)Other


-



5



1



115



-



121Net cash provided by (used in)operating activities


-



950



(23,240
)


874



-



(21,416
)Cash flows from investingactivities:Capital expenditures


-



-



(2,987
)


(42
)


-



(3,029
)Proceeds from sale of assets


-



-



1



-



-



1Net cash used ininvesting activities


-



-



(2,986
)


(42
)


-



(3,028
)Cash flows from financingactivities:Proceeds from long-term debt


-



145,709



-



-



-



145,709Net revolver borrowings


-



40,000



-



-



-



40,000Payments on long-term debt


-



(141,191
)


-



-



-



(141,191
)Proceeds from intercompany






















-investment


-



(20,001
)


24,462



(4,461
)


-



-Debt issuance costs paid


-



(4,868
)


-



-



-



(4,868
)Equity contributions


-



1,200



-



-



-



1,200Equity repurchases


-



(1,900
)


-



-



-



(1,900
)Net cash provided by (used in)financing activities


-



18,949



24,462



(4,461
)


-



38,950Impact of exchange rate movementon cash


-



-



-



90



-



90Net increase (decrease) in cashand cash equivalents


-



19,899



(1,764
)


(3,539
)


-



14,596Cash and cash equivalents at thebeginning of the period


-



7,341



2,592



7,130



-



17,063Cash and cash equivalents at the endof the period

$
-


$
27,240


$
828


$
3,591


$
-


$
31,659





25





PLY GEM HOLDINGS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFor the three months ended April 4, 2009(Amounts in thousands)

Guarantor


Issuer





Non-Ply Gem


Ply Gem


Guarantor


Guarantor


ConsolidatingHoldings, Inc.


Industries, Inc.


Subsidiaries


Subsidiary


Adjustments


ConsolidatedCash flows from operatingactivities:Net loss

$
(55,538
)

$
(55,538
)

$
(50,292
)

$
(852
)

$
106,682


$
(55,538
)Adjustments to reconcile netloss to cash provided by(used in) operating activities:Depreciation and amortizationexpense


-



43



13,683



170



-



13,896Non-cash interest expense, net


-



2,044



-



-



-



2,044Loss on foreign currency transactions


-



-



-



88



-



88Deferred income taxes


-



-



(15,133
)


37



-



(15,096
)Equity in subsidiaries' net income (loss)


55,538



51,144



-



-



(106,682
)


-Changes in operating assets andliabilities:Accounts receivable, net


-



-



(18,124
)


2,198



-



(15,926
)Inventories


-



-



16,519



525



-



17,044Prepaid expenses and othercurrent assets


-



184



(1,800
)


(1,201
)


-



(2,817
)Accounts payable


-



256



(10,696
)


(1,074
)


-



(11,514
)Accrued expenses and taxes


-



13,979



2,301



5,125



-



21,405Cash payments on restructuring liabilities


-



-



(1,926
)


-



-



(1,926
)Other


-



11



(32
)


(355
)


-



(376
)Net cash provided by (used in)operating activities


-



12,123



(65,500
)


4,661



-



(48,716
)Cash flows from investingactivities:Capital expenditures


-



(109
)


(2,301
)


(36
)


-



(2,446
)Proceeds from sale of assets


-



-



21



-



-



21Net cash used ininvesting activities


-



(109
)


(2,280
)


(36
)


-



(2,425
)Cash flows from financingactivities:Proceeds from revolver borrowings


-



10,000



-



-



-



10,000Proceeds from intercompany






















-investment


-



(54,465
)


64,073



(9,608
)


-



-Debt issuance costs paid


-



(26
)


-



-



-



(26
)Net cash provided by (used in)financing activities


-



(44,491
)


64,073



(9,608
)


-



9,974Impact of exchange rate movementon cash


-



-



-



93



-



93Net decrease in cashand cash equivalents


-



(32,477
)


(3,707
)


(4,890
)


-



(41,074
)Cash and cash equivalents at thebeginning of the period


-



46,181



4,490



7,618



-



58,289Cash and cash equivalents at the endof the period

$
-


$
13,704


$
783


$
2,728


$
-


$
17,215








26




Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AN D RESULTS OF OPERATIONS





The information contained in this discussion and in the unaudited Condensed Consolidated Financial Statements and Accompanying Notes presented in this Form 10-Q should be read in conjunction with information set forth in Ply Gem Holdings’ Annual Report on Form 10-K.  Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements”.  See “Special Note Regarding Forward-Looking Statements.”  As used in this Quarterly Report on Form 10-Q, the “Company”, “we”, “us”, and “our” refer to Ply Gem Holdings and its subsidiaries, except where the context otherwise requires or as otherwise indicated.





Overview





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




We are a holding company with no operations or assets of our own other than the capital stock of our subsidiaries. The terms of Ply Gem Industries’ ABL Facility place restrictions on its ability to pay dividends and otherwise transfer assets to us.  Further, the terms of the indenture governing Ply Gem Industries' Senior Secured Notes and 13.125% Senior Subordinated Notes places restrictions on the ability of Ply Gem Industries and our other subsidiaries to pay dividends and otherwise transfer assets to us.





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 the price increases to our customers.  The results of operations for individual quarters can be negatively impacted by a delay between the time of raw material cost increases and price increases that we implement in our products, or conversely can be positively impacted by a delay between the time of a raw material price decrease and competitive pricing moves that we implement accordingly.





Financial statement presentation





Net Sales.  Net sales represent the 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 expenses.  Selling, general and administrative expenses, (“SG&A expenses”), 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 expenses and amortization of intangible assets.





Impact of commodity pricing





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


27





Impact of weather





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





Critical Accounting Policies





Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. For more information regarding our critical accounting policies and estimates please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” contained in our Annual Report on Form 10-K for the year ended December 31, 2009 and Note 1 to our condensed consolidated financial statements. There have been no material changes to the critical accounting policies previously disclosed in that report.




Results of Operations





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





For the three months ended(Amounts in thousands)

April 3, 2010


April 4, 2009(unaudited)


(unaudited)Net SalesSiding, Fencing, and Stone

$
117,668


$
108,460Windows and Doors


86,537



74,291Operating earnings (loss)Siding, Fencing, and Stone


10,514



(7,517
)Windows and Doors


(10,756
)


(21,682
)Unallocated


(3,461
)


(3,609
)Foreign currency gain (loss)Windows and Doors


104



(88
)Interest expense, netSiding, Fencing, and Stone


43



55Windows and Doors


(46
)


1Unallocated


(33,951
)


(33,747
)Income tax (provision) benefitUnallocated


(6,532
)


11,049Gain on extinguishment of debtUnallocated


98,187



-Net income (loss)

$
54,102


$
(55,538
)





28





The Company’s business is seasonal and the results of operations for the periods presented are not necessarily indicative of the results for a full fiscal year.




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





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.






Siding, Fencing and Stone Segment




(Amounts in thousands)

For the three months endedApril 3, 2010


April 4, 2009(unaudited)


(unaudited)Statement of operations data:Net sales

$
117,668



100
%

$
108,460



100
%Cost of products sold


90,294



76.7
%


95,475



88.0
%Gross profit


27,374



23.3
%


12,985



12.0
%SG&A expense


14,729



12.5
%


18,372



16.9
%Amortization of intangible assets


2,131



1.8
%


2,130



2.0
%Operating earnings (loss)

$
10,514



8.9
%

$
(7,517
)


-6.9
%





Net Sales





Net sales for the three months ended April 3, 2010 increased compared to the same period in 2009 by approximately $9.2 million, or 8.5%.  The increase in net sales was driven by improved industry wide market conditions in new construction as single family housing starts increased favorably impacting demand for our products.  According to the U.S. Census Bureau, fourth quarter 2009 and first quarter 2010 single family housing starts were estimated to increase by approximately 1.5% and 46.0% respectively from actual levels achieved in the fourth quarter of 2008 and the first quarter of 2009.  The increase in net sales that resulted from improved market conditions in new construction were partially offset by overall market softness in repair and remodeling expenditures.  According to the Joint Center for Housing Studies of Harvard University’s leading indicator of remodeling activity (LIRA) index, repair and remodeling activity declined in the first quarter of 2010 as compared to the first quarter of 2009.





Cost of Products Sold





Cost of products sold for the three months ended April 3, 2010 decreased compared to the same period in 2009 by approximately $5.2 million, or 5.4%.  The decrease in cost of products sold was driven by lower material cost due to the termination of an aluminum supply agreement in early 2009, which resulted in abnormally high aluminum material cost charged to cost of products sold in the first quarter of 2009. The decrease in cost of products sold was partially offset by increased sales as discussed above.  In addition, we incurred $1.3 million less expense associated with new customers that resulted from the buy-back, or lift-out, of our competitor’s product on initial stocking orders for the three months ended April 3, 2010 as compared to the same period in 2009.  Gross profit percentage for the three months ended April 3, 2010 increased from the same period in 2009 from 12.0% to 23.3%.  The improvement in gross profit percentage resulted from lower aluminum material cost and new customer buy-back expense as previously discussed. In addition, our gross profit percentage improved as a result of management’s initiatives to reduce fixed expenses including the consolidation of the majority of the production from the Company’s vinyl siding plant in Kearney, Missouri, into its other three remaining vinyl siding plants which was completed in the second quarter of 2009.


29




Selling, general and administrative expenses





SG&A expenses for the three months ended April 3, 2010 decreased compared to the same period in 2009 by approximately $3.6 million, or 19.8%.  The decrease in SG&A expense was primarily caused by lower marketing expenses related to our brand conversion from Alcoa Home Exteriors to Mastic Home Exteriors during the first quarter of 2009.  The Company reduced administrative and other fixed expenses in light of current market conditions and incurred lower restructuring and integration expense which totaled approximately $0.1 million for the first quarter of 2010 as compared to approximately $1.2 million for the same period in 2009.





Amortization of intangible assets





Amortization expense for the three months ended April 3, 2010 was consistent with the same period in 2009.








Windows and Doors Segment




(Amounts in thousands)

For the three months endedApril 3, 2010


April 4, 2009(unaudited)


(unaudited)Statement of operations data:Net sales

$
86,537



100
%

$
74,291



100
%Cost of products sold


77,014



89.0
%


74,216



99.9
%Gross profit


9,523



11.0
%


75



0.1
%SG&A expense


15,625



18.1
%


18,981



25.5
%Amortization of intangible assets


4,654



5.4
%


2,776



3.7
%Operating loss


(10,756
)


-12.4
%


(21,682
)


-29.2
%Currency transaction gain (loss)

$
104



0.1
%

$
(88
)


-0.1
%





Net Sales





Net sales for the three months ended April 3, 2010 increased compared to the same period in 2009 by approximately $12.2 million, or 16.5%.  The increase in net sales resulted from higher demand for our window and door products due to higher sales of our new construction window and door products resulting from U.S. single family housing starts increases as previously discussed.  In addition, sales of our window and door products in western Canada were favorably impacted by market wide increased demand that resulted from increased housing starts in Alberta, Canada.  According to the Canadian Mortgage and Housing Corporation (CMHC) housing starts in Alberta, Canada were estimated to have increased by 126.9% in the first quarter of 2010 as compared to the same period in 2009. Our unit shipments of windows and doors in the U.S. increased 7.8% in the first three months of 2010 as compared to the same period in 2009, while our unit shipments of windows and doors in western Canada increased by 48.9% in the first three months of 2010 as compared to the same period in 2009.





Cost of Products Sold





Cost of products sold for the three months ended April 3, 2010 increased compared to the same period in 2009 by approximately $2.8 million, or 3.8%.  The increase in cost of products sold was due to increased sales as discussed above. Gross profit as a percentage of sales increased from 0.1% in 2009 to 11.0% in 2010.  The improvement in gross profit percentage resulted from lower fixed manufacturing costs due to the closure of the Company’s Hammonton, New Jersey, Phoenix, Arizona and Tupelo, Mississippi window plants during 2009 and realigned production within its three west coast window plants, including the realignment of window lineal production during 2009.  Also, impacting our gross profit were the initial costs that were incurred with new customers that resulted from the buy-back, or lift-out, of our competitor’s product on the initial stocking orders with our new customers which were $0.0 million in 2010 as compared to $0.2 million for 2009.


30





Selling, general and administrative expenses





SG&A expenses for the three months ended April 3, 2010 decreased compared to the same period in 2009 by approximately $3.4 million, or 17.7%.  The decrease in SG&A expense was due to lower administrative and other fixed expenses that have been reduced in light of current market conditions. In addition, the Company incurred $2.7 million lower restructuring and integration expense for the first quarter of 2010 as compared to the same period in 2009.





Amortization of intangible assets





Amortization expense for the three months ended April 3, 2010 increased compared to the same period in 2009 by approximately $1.9 million due to the change in the estimated lives of certain tradenames.  During the quarter ended April 3, 2010, the Company decreased the life of certain trademarks to 3 years (applied prospectively) as a result of future marketing plans regarding the use of the trademarks.











Unallocated Operating Earnings, Interest, and (Provision) Benefit for Income Taxes




For the three months ended(Amounts in thousands)

April 3, 2010


April 4, 2009(unaudited)


(unaudited)Statement of operations data:SG&A expense

$
(3,452
)

$
(3,609
)Amortization of intangible assets


(9
)


-Operating loss


(3,461
)


(3,609
)Interest expense


(33,960
)


(33,756
)Interest income


9



9Gain on extinguishment of debt


98,187



-(Provision) benefit for income taxes

$
(6,532
)

$
11,049





Operating loss





Unallocated losses include items which are not directly attributed to or allocated to either of our reporting segments.  Such items include legal costs, corporate payroll, and unallocated finance and accounting expenses.  The unallocated operating loss for the three months ended April 3, 2010 decreased by approximately $0.2 million compared to the same period in 2009 primarily due to lower professional fees.





Interest expense





Interest expense for the three months ended April 3, 2010 increased by approximately $0.2 million over the same period in 2009 due to interest of approximately $0.5 million on the additional $25.0 million of 11.75% Senior Secured Notes issued in October 2009, interest of approximately $0.2 million due to the amortization of the bond discount associated with the additional $25.0 million of 11.75% Senior Secured Notes, and an increase of approximately $0.5 million due to a higher interest rate on ABL borrowings, partially offset by approximately $1.0 million of financing costs expensed as interest in 2009.





Gain on extinguishment of debt





As a result of the $141.2 million redemption of the 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.  As a result of the $218.8 million contribution of the 9% Senior Subordinated Notes by an affiliate of the Company’s controlling stockhoder in exchange for equity valued at approximately $114.9 million on February 12, 2010, 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 net $98.2 million gain on debt extinguishment was recorded within other income (expense) separately in the condensed consolidated statement of operations for the period ended April 3, 2010.


31





Income taxes




The income tax provision for the three months ended April 3, 2010 increased by approximately $17.6 million over the same period in 2009.  The Company's pre-tax income for the quarter ended April 3, 2010, included a $98.2 million gain on extinguishment of debt in which the majority of this gain was recognized during 2009 for income tax purposes.   The Company’s pre-tax loss for the quarter ended April 3, 2010 adjusting for the extinguishment gain was $37.6 million compared to a pre-tax loss of $66.6 million for the quarter ended April 4, 2009.  Therefore, the reason for the increase in the tax provision relates to the favorable operating performance during the first quarter of 2010 in which pre-tax loss improved $29.0 million.  The reason for an income tax expense despite the pre-tax loss relates to state income taxes as well as income taxes for Ply Gem Canada.  For the quarter ended April 3, 2010, the Company’s estimated effective income tax rate for the full year was approximately 11.4%, which varied from the statutory rate primarily due to state tax expense, a decrease in the valuation allowance, and for cancellation of debt income offset by a repurchase premium and original issue discount.  During the quarter ended April 4, 2009, the Company’s effective tax rate was 16.5% which was consistent with the Company’s expectations for the full 2009 fiscal year.




During February 2010, certain affiliates of the Company’s controlling stockholder contributed approximately $218.8 million aggregate principal amount of 9% Senior Subordinated Notes to Ply Gem Holdings in exchange for equity of Ply Gem Prime valued at approximately $114.9 million.  Prior to this $218.8 million contribution to Ply Gem Holdings, the affiliates of the Company’s controlling stockholder initially transferred the notes to Ply Gem Prime, the Company’s ultimate parent, which then contributed the notes to Ply Gem Holdings.  As a result of these debt transactions, the Company recognized $35.3 million of additional cancellation of indebtedness income (“CODI”) for income tax purposes during the quarter ended April 3, 2010.  During the quarter ended April 4, 2009, affiliates of the Company’s controlling stockholder purchased a majority of the 9% Senior Subordinated Notes.  The Company determined that approximately $95.7 million would be considered CODI for the quarter ended April 4, 2009 as the acquiring party was deemed a related party for income tax purposes.




On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “Act”).  Among its provisions, the Act permits certain taxpayers to elect to defer the taxation of CODI arising from certain repurchases, exchanges or modifications of their outstanding debt that occur during 2009 and 2010.  For debt acquired in 2009, the CODI can be deferred for five years and then included in taxable income ratably over the next five years.  The CODI deferral and inclusion periods for debt acquired during 2010 would be four years.  If this election is made by September 2010 for debt acquired in 2009 or September 2011 for debt acquired during 2010, the Company would be required to defer the deduction of all or a substantial portion of any “original issue discount” (“OID”) expenses as well as the CODI.  These OID deductions also would be deferred until 2014 and the Company would be allowed to deduct these costs ratably over the same four or five-year period.  The Company does not currently plan to defer the 2009 or 2010 CODI.




In addition to the $35.3 million of 2010 CODI income recognized for income tax purposes, the Company recognized a repurchase premium deduction of approximately $10.3 million and an OID deduction of approximately $17.8 million in conjunction with the debt transactions occurring during the quarter ended April 3, 2010.  These deductions partially offset the CODI that was recognized for income tax purposes in the quarter ended April 3, 2010.  The remaining $7.2 million of CODI was offset during the quarter ended April 3, 2010 by net operating losses.








32





Liquidity and Capital Resources





During the three months ended April 3, 2010, cash and cash equivalents increased approximately $14.6 million compared to $31.7 million as of April 3, 2010, reflecting increased borrowings on the ABL Facility due to our seasonal working capital needs.





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 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 April 3, 2010, our annual interest charges for debt service, including the ABL Facility, are estimated to be approximately $108.5 million.  We do not have any scheduled debt maturities until 2013.  The specific debt instruments and their corresponding terms and due dates are described in the following sections.  Our capital expenditures are estimated to be approximately 1.4% to 1.6% of net sales on an annual basis.  As of April 3, 2010, our purchase commitments for inventory are approximately $65.0 million.  We finance these cash requirements through internally generated cash flow and funds borrowed under the ABL Facility.





The Company’s specific cash flow movement for the three months ended April 3, 2010 is summarized below:





Cash used in operating activities





Net cash used in operating activities for the three months ended April 3, 2010 was approximately $21.4 million.  Net cash used in operating activities for the three months ended April 4, 2009 was approximately $48.7 million.  The decrease in cash used in operating activities for the first quarter of 2010 as compared to 2009 first quarter was primarily caused by favorable working capital changes for accounts payable.  Throughout the past twelve months, the Company has closely monitored their payment terms to maintain and improve liquidity especially during the fourth and first quarters when weather impacts the Company’s business.





Cash used in investing activities





Net cash used in investing activities for the three months ended April 3, 2010 was approximately $3.0 million.  Net cash used in investing activities for the three months ended April 4, 2009 was approximately $2.4 million.  The cash used in investing activities for both periods was primarily used for capital expenditures.





Cash provided by financing activities





Net cash provided by financing activities for the three months ended April 3, 2010 was approximately $39.0 million, primarily from revolver borrowings of $40.0 million and proceeds from long-term debt of approximately $145.7 million, offset by the approximate $141.2 redemption of 9% Senior Subordinated Notes, and debt issuance costs of approximately $4.9 million. Net cash provided by financing activities for the three months ended April 4, 2009 was approximately $10.0 million and consisted primarily of proceeds from ABL borrowings.





The Company’s specific debt instruments and terms are described below:





11.75% Senior Secured Notes due 2013





On June 9, 2008, Ply Gem Industries issued $700.0 million of 11.75% senior secured notes due 2013 (the “Senior Secured Notes”) at an approximate 1.0% discount, yielding proceeds of approximately $693.5 million.  Ply Gem Industries used the proceeds to repay all of the outstanding indebtedness under the then existing senior secured credit facility of approximately $676.2 million of term loan borrowings and approximately $15.0 million of revolver borrowings.  The Senior Secured Notes will mature on June 15, 2013 and bear interest at the rate of 11.75% per annum.  Interest will be paid semi-annually on June 15 and December 15 of each year.  On October 23, 2009, Ply Gem Industries issued an additional $25.0 million of its Senior Secured Notes in a private placement transaction.  The net proceeds of $20.0 million were utilized for general corporate purposes.  The additional $25.0 million of Senior Secured Notes has the same terms and covenants as the initial $700.0 million of Senior Secured Notes.





Prior to April 1, 2011, Ply Gem Industries may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 111.75% of the aggregate principal amount of the Senior Secured Notes, plus accrued and unpaid interest, if any, provided that at least 65% of the original aggregate principal amount of the Senior Secured Notes remains outstanding after the redemption.  In addition, not more than once during any twelve-month period, Ply Gem Industries may redeem up to $70.0 million of the Senior Secured Notes at a redemption price equal to 103% of the aggregate amount of the Senior Secured Notes, plus accrued and unpaid interest, if any.  At any time on or after April 1, 2011, Ply Gem Industries may redeem the Senior Secured Notes, in whole or in part, at declining redemption prices set forth in the indenture governing the Senior Secured Notes, plus, in each case, accrued and unpaid interest, if any, to the redemption date.





The Senior Secured Notes and the related guarantees are secured on a first-priority lien basis by substantially all of the assets (other than the assets securing our obligations under our ABL Facility on a first-lien basis, which consist primarily of accounts receivable and inventory) of Ply Gem Industries and the Guarantors and on a second-priority lien basis by the assets that secure the ABL Facility on a first-lien basis.


33





Senior Secured Asset-Based Revolving Credit Facility due 2013





Concurrently with the Senior Secured Notes offering on June 9, 2008, Ply Gem Industries, the Company and the subsidiaries of Ply Gem Industries entered into a new senior secured asset-based revolving credit facility (the “ABL Facility”).  The ABL Facility 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 United States dollars by Ply Gem Canada.





The ABL Facility provides that the revolving commitments may be increased to $200.0 million, subject to certain terms and conditions.  The Company had borrowings of $65.0 million and $25.0 million outstanding under the ABL Facility as of April 3, 2010 and December 31, 2009, respectively.  As of April 3, 2010, Ply Gem Industries had approximately $103.3 million of contractual availability and approximately $63.5 million of borrowing base availability under the ABL Facility, reflecting $65.0 million of borrowings outstanding and approximately $6.7 million of letters of credit issued.





The interest rates applicable to loans under the ABL Facility are, at the Company’s option, equal to either a base rate plus an applicable interest margin, or an adjusted LIBOR rate plus an applicable interest margin, as defined in the ABL Facility credit agreement.  As of April 3, 2010, the Company’s interest rate on the ABL Facility was approximately 6.0%.  The ABL Facility contains a requirement to maintain a fixed charge coverage ratio of 1.1:1.0 if the Company’s borrowings under the ABL Facility exceed certain levels.  The fixed charge coverage was not applicable at any point during 2009 or in the first quarter of 2010.





In July 2009, the Company amended the ABL Facility to increase the available commitments by $25.0 million from $150.0 million to $175.0 million, and change both the availability threshold for certain cash dominion events and compliance with the fixed charge and other covenants from 15% of revolving credit commitments to 15% of the lower of the revolving credit commitments or the borrowing base but not less than $20.0 million. The Company must maintain excess availability, as defined, of at least $20.0 million to avoid being subject to the fixed charge covenant ratio.  As a condition to this availability increase, the applicable margins payable on the loans were increased and made subject to certain minimums.  In October 2009, the Company amended the ABL Facility to allow for the issuance of the additional $25.0 million Senior Secured Notes and to permit certain refinancing transactions with respect to the 9% Senior Subordinated Notes.  The October amendment also permits Ply Gem Industries to issue equity securities to Ply Gem Holdings, its parent.  The October 2009 amendment did not affect the $175.0 million availability amount or the applicable interest rate margins under the ABL Facility.





All obligations under the ABL Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of Ply Gem Industries and the Guarantors, including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, deposit accounts, and certain related assets and proceeds of the foregoing and a second-priority security interest in, and mortgages on, substantially all of Ply Gem Industries’ material owned real property and equipment and all assets that secure the Senior Secured Notes on a first-priority basis.  In addition to being secured by the collateral securing the obligations of Ply Gem Industries under the domestic collateral package, the obligations of Ply Gem Canada, which is a borrower under the Canadian sub-facility under the ABL Facility, are also secured by a first-priority security interest in substantially all of the assets of such Canadian subsidiary, plus additional mortgages in Canada, and a pledge by Ply Gem Industries of the remaining 35% of the equity interests of Ply Gem Canada pledged only to secure the Canadian sub-facility.





9% Senior Subordinated Notes due 2012





Concurrently with the acquisition of Ply Gem Industries on February 12, 2004, Ply Gem Industries issued $225.0 million aggregate principal amount of its senior subordinated notes due 2012, which are guaranteed by Ply Gem Holdings and the domestic subsidiaries of Ply Gem Industries.  Subsequently, in August 2004, in connection with the MW acquisition, Ply Gem Industries issued an additional $135.0 million of 9% Senior Subordinated Notes, which are guaranteed by Ply Gem Holdings and the domestic subsidiaries of Ply Gem Industries, including MWM Holding and its subsidiaries.  Ply Gem Industries pays interest semi-annually on February 15 and August 15 of each year.  As of December 31, 2009, certain affiliates of the Company’s controlling stockholder owned approximately $281.4 million of the outstanding 9% Senior Subordinated Notes.





In connection with the issuance of $150.0 million aggregate principal amount of 13.125% Senior Subordinated Notes due 2014 on January 11, 2010, Ply Gem Industries redeemed approximately $141.2 million aggregate principal amount of the 9% Senior Subordinated Notes on February 16, 2010 at a redemption price of 100% of the principal amount thereof plus accrued interest.  The Company accounted for this transaction as a debt extinguishment.  In addition this debt extinguishment, approximately $218.8 million aggregate principal amount of the 9% Senior Subordinated Notes held by certain affiliates of the Company’s controlling stockholder were transferred to the Company’s indirect stockholders and ultimately to Ply Gem Prime Holdings, the Company’s indirect parent company.  Such notes were then transferred to Ply Gem Holdings and then to Ply Gem Industries as a capital contribution and cancelled on February 12, 2010.  As such, these 9% Senior Subordinated Notes were not outstanding as of April 3, 2010.


34





Gain on extinguishment of debt





As a result of the $141.2 million redemption of the 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 an affiliate of the Company’s controlling stockholder 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 net gain on debt extinguishment was recorded within other income (expense) separately in the condensed consolidated statement of operations for the period ended April 3, 2010.





13.125% Senior Subordinated Notes due 2014





On January 11, 2010, Ply Gem Industries issued $150.0 million of 13.125% Senior Subordinated Notes due 2014 (the “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 9% Senior Subordinated Notes due 2012 and to pay certain related costs and expenses.  The $150.0 million Senior Subordinated Notes will mature on July 15, 2014 and bear interest at the rate of 13.125% per annum.  Interest will be paid semi-annually on January 15 and July 15 of each year.





Prior to January 15, 2012, Ply Gem Industries may redeem up to 40% of the aggregate principal amount of the 13.125% Senior Subordinated Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 113.125% of the aggregate principal amount of the 13.125% Senior Subordinated Notes, plus accrued and unpaid interest, if any, provided that at least 60% of the original aggregate principal amount of the 13.125% Senior Subordinated Notes remains outstanding after the redemption.  On or after January 15, 2012, and prior to January 15, 2013, Ply Gem Industries may redeem up to 100% of the aggregate principal amount of the 13.125% Senior Subordinated Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 103% of the aggregate principal amount of the 13.125% Senior Subordinated Notes, plus accrued and unpaid interest, if any.  On or after January 15, 2013, Ply Gem Industries may redeem up to 100% of the aggregate principal amount of the 13.125% Senior Subordinated Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 100% of the aggregate principal amount of the 13.125% Senior Subordinated Notes, plus accrued and unpaid interest, if any, to the redemption date.





The 13.125% Senior Subordinated Notes are unsecured and subordinated in right of payment to all existing and future debt of the Company, including the ABL Facility and the Senior Secured Notes.  The 13.125% Senior Subordinated Notes are unconditionally guaranteed on a joint and several basis by Ply Gem Holdings and all of the domestic subsidiaries of Ply Gem Industries (other than certain unrestricted subsidiaries) on a senior subordinated basis.  The guarantees are general unsecured obligations and are subordinated in right of payment to all existing senior debt of the guarantors, including their guarantees of the Senior Secured Notes and the ABL Facility.





The indenture governing the 13.125% Senior Subordinated 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 repurchases 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.





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 markets.  Any unforeseen or unanticipated downturn in these markets could have a negative impact on the Company’s liquidity position.





In order to meet these liquidity requirements as well as other anticipated liquidity needs in the normal course of business, as of April 3, 2010 we had cash and cash equivalents of approximately $31.7 million, $103.3 million of contractual availability under the ABL Facility and approximately $63.5 million of borrowing base availability.  Management currently anticipates that these amounts, 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.


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Off Balance Sheet Arrangements





The Company has no off-balance sheet arrangements.





Contractual Obligations





In addition to the items listed in the Contractual Obligations table presented in the Company’s Annual Report on Form 10-K, the Company has a potential obligation related to certain tax issues of approximately $9.8 million, including interest of approximately $1.3 million.  The timing of the potential tax payments is unknown.





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 during the winter months usually reduces the level of building and remodeling activity in both the home repair and remodeling and new home construction sectors.  Our sales 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 – Summary of Significant Accounting Policies” to the condensed consolidated financial statements, regarding the impact of certain recent accounting pronouncements on our condensed consolidated financial statements.




Special Note Regarding Forward-Looking Statements




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





Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements.  All written and oral forward-looking statements made in connection with this Quarterly Report on Form 10-Q that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the “Risk Factors” set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and the “Risk Factors” and other cautionary statements included herein.




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




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




·
restrictions under the indentures governing the Senior Secured Notes and restrictions under our ABL Facility;




·
the competitive nature of our industry;




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




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




·
changes in our relationships with our significant customers.




Other factors that could cause actual results to differ from those implied by the forward-looking statements contained in this Quarterly Report include those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.  We undertake no obligation to update the forward-looking statements in this report.




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Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Interest Rate Risk





Our principal interest rate exposure relates to the loans outstanding under our ABL Facility, which provided for borrowings of up to $175.0 million as of April 3, 2010, 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 as of April 3, 2010, each quarter point increase or decrease in the interest rate would change our interest expense by approximately $0.4 million per year.  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.  For the three month period ended April 3, 2010, the net impact of foreign currency changes to the Company’s results of operations was a gain of $0.1 million.  The impact of foreign currency changes related to translation resulted in an increase in stockholder’s (deficit) of approximately $1.3 million for the three months ended April 3, 2010.  The revenue or expense reported by us as a result of currency fluctuations will be greater in times of U.S. dollar devaluation and less in times of U.S. dollar appreciation. We generally do not enter into derivative financial instruments to manage foreign currency exposure.  At April 3, 2010, we did not have any outstanding foreign currency hedging contracts.





Commodity pricing risk





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





Inflation





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





Consumer and Commercial Credit





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











Item 4.     CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures




Our management maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure.




Our management is responsible for establishing and maintaining our disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer participated with our management in evaluating the effectiveness of our disclosure controls and procedures as of April 3, 2010.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of April 3, 2010 were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exhange Commission's rules and forms.  There have been no changes in our internal control over financial reporting during the three month period ended April 3, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II - OTHER INFORMATION











Item 6.                                EXHIBITS





(a)      Exhibits




Exhibit No.
Description of Exhibits4.1
Indenture, dated as of January 11, 2010, among Ply Gem Industries, Inc., the Guarantors party thereto and U.S. Bank National Association, as trustee (incorporated by reference from Exhibit 4.19 to the Company's Form 10-K, dated March 19, 2010 (File No. 333-114041-07)).4.2
Registration Rights Agreement, dated January 11, 2010, among Ply Gem Industries, Inc., the Guarantors party thereto and the initial purchasers named in the purchase agreement (incorporated by reference from Exhibit 4.20 to the Company's Form 10-K, dated March 19, 2010 (File No. 333-114041-07)).10.1
Purchase Agreement, dated January 6, 2010, among Ply Gem Holdings, Inc., Ply Gem Industries, Inc., each of the direct and indirect domestic subsidiaries of Ply Gem Industries, Inc. and the initial purchasers named therein (incorporated by reference from Exhibit 10.24 to the Company's Form 10-K, dated March 19, 2010 (File No. 333-114041-07)).*  31.1
Certification by President and Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934*  31.2
Certification by Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934*  32.1
Certification by President and Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*  32.2
Certification by Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*  Filed herewith.




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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




PLY GEM HOLDINGS, INC.(Registrant)Date:  May 17, 2010By:  /s/ Gary E. RobinetteGary E. RobinettePresident and Chief Executive OfficerDate:  May 17, 2010By:  /s/ Shawn K. PoeShawn K. PoeVice President, Chief Financial Officer,Treasurer and Secretary


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