PGT Innovations
PGT, Inc. (Form: 10-Q, Received: 08/13/2010 11:10:21)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended July 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 000-52059

PGT, Inc.
1070 Technology Drive
North Venice, FL 34275

Registrant’s telephone number: 941-480-1600

State of Incorporation
 
IRS Employer Identification No.
Delaware
 
20-0634715

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 R             No £

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 the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o
   
(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 R

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $0.01 par value – 53,654,496 shares, as of July 29, 2010.

* Registrant is not subject to the requirements of Rule 405 of Regulation S-T at this time.


 
 

 
PGT, INC .
TABLE OF CONTENTS

   
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PART I — FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PGT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

 
 

                         
   
Three Months Ended
   
Six Months Ended
 
   
July 3,
   
July 4,
   
July 3,
   
July 4,
 
   
2010
   
2009
   
2010
   
2009
 
   
(unaudited)
 
(unaudited)
 
Net sales
  $ 49,006     $ 46,867     $ 89,522     $ 88,381  
Cost of sales
    33,760       32,247       62,953       63,866  
                                 
     Gross margin
    15,246       14,620       26,569       24,515  
                                 
Selling, general and administrative expenses
    13,904       12,541       25,833       27,552  
                                 
     Income (loss) from operations
    1,342       2,079       736       (3,037 )
                                 
Interest expense, net
    1,264       1,737       2,738       3,315  
Other (income) expense, net
    -       -       (20 )     6  
                                 
     Income (loss) before income taxes
    78       342       (1,982 )     (6,358 )
                                 
Income tax expense
    77       -       77       -  
                                 
     Net income (loss)
  $ 1     $ 342     $ (2,059 )   $ (6,358 )
                                 
Net income (loss) per common share:
                         
Basic
  $ 0.00     $ 0.01     $ (0.04 )   $ (0.18 )
                                 
Diluted
  $ 0.00     $ 0.01     $ (0.04 )   $ (0.18 )
                                 
Weighted average shares outstanding:
                         
Basic
    53,649       36,220       46,694       36,199  
                                 
Diluted
    54,334       36,601       46,694       36,199  

 
 


The accompanying notes are an integral part of these condensed consolidated financial statements.


PGT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except per share amounts)


 
 

             
   
July 3,
   
January 2,
 
   
2010
   
2010
 
   
(unaudited)
       
ASSETS
           
Current assets:
           
     Cash and cash equivalents
  $ 22,018     $ 7,417  
     Accounts receivable, net
    17,882       14,213  
     Inventories
    11,513       9,874  
     Deferred income taxes, net
    622       622  
     Assets held for sale
    700       -  
     Prepaid and other current assets
    5,166       7,860  
                 
          Total current assets
    57,901       39,986  
                 
     Property, plant and equipment, net
    60,552       65,104  
     Intangible assets, net
    64,530       67,522  
     Other assets, net
    971       1,018  
                 
          Total assets
  $ 183,954     $ 173,630  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
  Accounts payable and accrued liabilities
  $ 16,773     $ 16,607  
     Current portion of long-term debt and capital lease obligations
    247       105  
                 
          Total current liabilities
    17,020       16,712  
                 
     Long-term debt and capital lease obligations
    52,969       68,163  
     Deferred income taxes
    17,937       17,937  
     Other liabilities
    2,367       2,609  
                 
          Total liabilities
    90,293       105,421  
                 
     Commitments and contingencies (Note 11)
    -       -  
                 
Shareholders' equity:
               
     Preferred stock; par value $.01 per share; 10,000 shares authorized; none outstanding
    -       -  
Common stock; par value $.01 per share; 200,000 shares authorized; 53,690 and
         
       35,672 shares issued and 53,654 and 35,303 shares outstanding at
               
       July 3, 2010 and January 2, 2010, respectively
    537       353  
     Additional paid-in-capital, net of treasury stock
    269,724       241,682  
     Accumulated other comprehensive loss
    (1,746 )     (1,031 )
     Accumulated deficit
    (174,854 )     (172,795 )
                 
          Total shareholders' equity
    93,661       68,209  
                 
          Total liabilities and shareholders' equity
  $ 183,954     $ 173,630  

 
 


 
The accompanying notes are an integral part of these condensed consolidated financial statements.


PGT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
\
     
 
 

             
   
Six Months Ended
 
   
July 3,
   
July 4,
 
   
2010
   
2009
 
   
    (unaudited)
             
Cash flows from operating activities:
           
     Net loss
  $ (2,059 )   $ (6,358 )
     Adjustments to reconcile net loss to net cash
               
       used in operating activities:
               
          Depreciation
    4,895       5,247  
          Amortization
    2,992       2,785  
          Provision for allowances of doubtful accounts
    603       1,107  
          Amortization of deferred financing costs
    360       272  
          Stock-based compensation
    973       385  
          Derivative financial instruments
    -       6  
          (Gain) loss on disposal of assets
    (2 )     90  
          Change in operating assets and liabilities:
               
               Accounts receivable
    (5,083 )     (1,123 )
               Inventories
    (1,639 )     70  
               Prepaid and other assets
    3,406       861  
               Accounts payable, accrued and other liabilities
    263       (1,127 )
                 
Net cash provided by operating activities
    4,709       2,215  
                 
Cash flows from investing activities:
               
     Purchases of property, plant and equipment
    (1,049 )     (1,403 )
     Proceeds from sales of equipment
    8       32  
     Net change in margin account for derivative financial instruments
    (371 )     2,197  
                 
Net cash (used in) provided by investing activities
    (1,412 )     826  
                 
Cash flows from financing activities:
               
 Net proceeds from issuance of common stock
    27,257       -  
 Payments of long-term debt
    (15,000 )     (8,000 )
 Payments of financing costs
    (897 )     -  
 Acquisition of treasury stock
    (4 )     (6 )
 Adjustment to proceeds from issuance of common stock
    -       (6 )
    Payments of capital leases
    (52 )     (48 )
                 
Net cash provided by (used in) financing activities
    11,304       (8,060 )
                 
Net increase (decrease) in cash and cash equivalents
    14,601       (5,019 )
Cash and cash equivalents at beginning of period
    7,417       19,628  
Cash and cash equivalents at end of period
  $ 22,018     $ 14,609  

 
 


The accompanying notes are an integral part of these condensed consolidated financial statements.


PGT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1.  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements include the accounts of PGT, Inc. and its wholly-owned subsidiary (collectively the “Company”) after elimination of intercompany accounts and transactions. These statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by United States Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the remainder of the current year or for any future periods.  Each of our Company’s fiscal quarters ended July 3, 2010 and July 4, 2009 consisted of 13 weeks.

The condensed consolidated balance sheet as of January 2, 2010 is derived from the audited consolidated financial statements but does not include all disclosures required by GAAP. The condensed consolidated balance sheet as of January 2, 2010 and the unaudited condensed consolidated financial statements as of July 3, 2010, should be read in conjunction with the more detailed audited consolidated financial statements for the year ended January 2, 2010 included in the Company’s most recent annual report on Form 10-K.  Accounting policies used in the preparation of these unaudited condensed consolidated financial statements are consistent with the accounting policies described in the Notes to Consolidated Financial Statements included in the Company’s Form 10-K.


NOTE 2.   RESTRUCTURINGS

On January 13, 2009, and March 10, 2009, we announced restructurings based on results of our continued analysis of target markets, internal structure, projected run-rate, and efficiency.  As a result of the restructurings, we recorded charges of $3.0 million in the condensed consolidated statement of operations for the six months ended July 4, 2009.  Of this amount $1.4 million is classified within cost of goods sold and $1.6 million is classified within selling, general and administrative expenses.  The charges related primarily to employee separation costs and were disbursed prior to the end of 2009.

We also announced restructurings on September 24, 2009 and November 12, 2009,  which were also a result of the continued analysis of our target markets, internal structure, projected run-rate, and efficiency.  The charges from these restructurings totaled $2.4 million, of which $0.1 million and $0.9 million was unpaid as of July 3, 2010, and January 2, 2010, respectively, and classified within accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets. The unpaid amount as of July 3, 2010 is expected to be disbursed in 2010.

The impact of all 2009 restructurings resulted in a decrease in our workforce of approximately 480 employees, and a total amount of restructuring charges of $5.4 million.


The following table provides information with respect to our accrual for restructuring costs:


 
 

Accrued Restructuring Costs
 
Beginning of Period
   
Charged to Expense
   
Disbursed in Cash
   
End of Period
 
(in thousands)
                       
                         
     Three months ended July 3, 2010:
                       
2009 Restructurings
  $ 238     $ -     $ (128 )   $ 110  
     For the three months ended July 3, 2010
  $ 238     $ -     $ (128 )   $ 110  
                                 
     Three months ended July 4, 2009:
                               
2009 Restructurings
  $ 403     $ -     $ (322 )   $ 81  
     For the three months ended July 4, 2009
  $ 403     $ -     $ (322 )   $ 81  
                                 
     Six months ended July 3, 2010:
                               
2009 Restructurings
  $ 898     $ -     $ (788 )   $ 110  
     For the six months ended July 3, 2010
  $ 898     $ -     $ (788 )   $ 110  
                                 
     Six months ended July 4, 2009:
                               
2009 Restructurings
  $ -     $ 3,002     $ (2,921 )   $ 81  
     For the six months ended July 4, 2009
  $ -     $ 3,002     $ (2,921 )   $ 81  

 
 

NOTE 3.   WARRANTY

Most of our manufactured products are sold with warranties. Warranty periods, which vary by product component, generally range from 1 to 10 years. However, the majority of the products sold have warranties on components which range from 1 to 3 years. The reserve for warranties is based on management’s assessment of the cost per service call and the number of service calls expected to be incurred to satisfy warranty obligations on recorded net sales. The reserve is determined after assessing our warranty history and estimating our future warranty obligations.

The following table provides information with respect to our warranty accrual:
 

 
 

                               
   
Beginning
   
  Charged to
     
End of
 
Accrued Warranty
 
of Period
   
Expense
   
Adjustments
   
Settlements
   
Period
 
(in thousands)
                             
Three months ended July 3, 2010
  $ 3,844     $ 734     $ 108     $ (621 )   $ 4,065  
                                         
Three months ended July 4, 2009
  $ 4,214     $ 584     $ (75 )   $ (637 )   $ 4,086  
                                         
Six months ended July 3, 2010
  $ 4,041     $ 1,343     $ (42 )   $ (1,277 )   $ 4,065  
                                         
Six months ended July 4, 2009
  $ 4,224     $ 1,414     $ (125 )   $ (1,427 )   $ 4,086  
                                         

 
 

 
NOTE 4.   INVENTORIES

Inventories consist principally of raw materials purchased for the manufacture of our products. We have limited finished goods inventory since all products are custom, made-to-order products and usually ship upon completion. Finished goods inventory costs include direct materials, direct labor, and overhead. All inventories are stated at the lower of cost (first-in, first-out method) or market value.  Inventories consisted of the following:
 
 

 
 

             
   
July 3,
   
January 2,
 
   
2010
   
2010
 
   
(in thousands)
 
             
Finished goods
  $ 1,587     $ 954  
Work in progress
    301       259  
Raw materials
    9,625       8,661  
                 
    $ 11,513     $ 9,874  

 
 


NOTE 5.   STOCK COMPENSATION EXPENSE

We record compensation expense over an award’s vesting period based on the award’s fair value at the date of grant.  We recorded compensation expense for stock based awards of  $0.9 million for the second quarter of 2010 and $0.2 million for the second quarter of 2009.   We recorded compensation expense for stock based awards of $1.0 million for the first half of 2010 and $0.4 million for the first half of 2009.  As of July 3, 2010, there was $4.6 million and $0.2 million of total unrecognized compensation cost related to non-vested stock option agreements and non-vested restricted share awards, respectively. These costs are expected to be recognized in earnings on a straight-line basis over the weighted average remaining vesting period of slightly less than three years.

On April 6, 2010, our stockholders approved, among other things, three items approved and recommended by our Board of Directors in March 2010 as follows:  the PGT, Inc. Amended and Restated 2006 Equity Incentive Plan (the “Amended and Restated 2006 Equity Incentive Plan”);  an Equity Exchange; and a stock option exchange to eligible employees (“Issuer Tender Offer”).  The Board of Directors of the Company determined that, as a result of economic conditions which adversely affected the Company and the industry in which it competes, the options held by certain employees had exercise prices that were significantly above the current market price of the Company’s common stock and that the grants of replacement options would help retain and provide additional incentive to certain employees and better align their interests with those of the Company’s stockholders.

Amended and Restated 2006 Equity Incentive Plan

The Amended and Restated 2006 Equity Incentive Plan amends the plan to, among other things:
 
 
·
increase the number of shares of common stock available for grant thereunder, from 3,000,000 to 7,000,000,
 
 
·
set forth 1,500,000 as the maximum number of shares that may be made subject to awards in any calendar year to any “covered employee” (within the meaning of Section 162(m) of the Internal Revenue Code), and
 
     
 
·
allows the Company to offer to its employees the opportunity to tender certain outstanding equity awards for cancellation in exchange for the issuance of replacement stock options.
     

Equity Exchange

The Equity Exchange offered to exchange certain outstanding equity awards granted under our equity plans to eight employees of the Company, including each of our named executive officers (the “designated employees”), for options to be granted under the Amended and Restated Equity Incentive 2006 Plan with a new term, new vesting schedule, and new exercise price.  All eight employees accepted this offer.
 
The equity awards that the designated employees submitted for cancellation in the Equity Exchange included 621,778 options to purchase common stock with exercise prices that ranged from $3.09 to $8.64, and 314,175 shares of unvested restricted stock.  As of April 6, 2010, the options subject to the Equity Exchange had an aggregate value of $0.3 million, calculated using the Black-Scholes Method of option pricing.  The total amount of new stock options issued on April 6, 2010, under this exchange was 3,692,433.  These options vest over five years with one-fifth vesting on each of the anniversary dates beginning April 6, 2011, and have an exercise price of $2.00, based on the NASDAQ market price of the underlying common stock on the close of business on April 5, 2010.


 
-8-

 
Issuer Tender Offer

The Issuer Tender Offer provided an opportunity to exchange certain outstanding equity awards granted under our equity plans to seventeen employees of the Company for options to be granted under the Amended and Restated 2006 Plan with a new term, new vesting schedule, and new exercise price.  All eligible employees accepted this offer.

The options subject to the Issuer Tender Offer covered an aggregate of 409,143 shares of common stock of the Company and had an aggregate value of $0.2 million calculated using the Black-Scholes option pricing model.  The total amount of new stock options issued on April 6, 2010, pursuant to the Issuer Tender Offer was 409,143.  These options vest over five years with one-fifth vesting on each of the anniversary dates beginning April 6, 2011, and have an exercise price of $2.00, based on the NASDAQ market price of the underlying common stock on the close of business on April 5, 2010.

New Issuances

In April 2010,  we issued 1,401,376 options to certain directors and non-executive employees of the Company.  These options vest at various time periods through April 2015 and have a weighted average exercise price of $1.99 based on the NASDAQ market price of the underlying common stock on the close of business on the day the options were granted.

NOTE 6.  2010 RIGHTS OFFERING

On January 29, 2010, the Company filed Amendment No. 1 to the Registration Statement on Form S-1 filed on December 24, 2009 relating to a previously announced offering of rights to purchase 20,382,326 shares of the Company’s common stock with an aggregate value of approximately $30.6 million.  The registration statement relating to the rights offering was declared effective by the United States Securities and Exchange Commission on February 10, 2010, and the Company distributed to each holder of record of the Company’s common stock as of close of business on February 8, 2010, at no charge, one (1) non-transferable subscription right for every one and three-quarters (1.75) shares of common stock held by such holder under the basic subscription privilege.  Each whole subscription right entitled its holder to purchase one share of PGT’s common stock at the subscription price of $1.50 per share.  The rights offering also contained an over-subscription privilege that permitted all basic subscribers to purchase additional shares of the Company’s common stock up to an amount equal to the amount available to each such holder under the basic subscription privilege.  Shares issued to each participant in the over-subscription were determined by calculating each subscriber’s percentage of the total shares over-subscribed, multiplied by the number of shares available in the over-subscription privilege.  The rights offering expired on March 12, 2010.

The rights offering was 90.0% subscribed resulting in the Company distributing 18,336,368 shares of its common stock, including 15,210,184 shares under the basic subscription privilege and 3,126,184 under the over-subscription privilege.  There were requests for 3,126,184 shares under the over-subscription privilege representing an allocation rate of 100% to each over-subscriber.  Of the 18,336,368 shares issued, 13,333,332 shares were issued to JLL Partners Fund IV (“JLL”) the Company’s majority shareholder, including 10,719,389 shares issued under the basic subscription privilege and 2,613,943 shares issued under the over-subscription privilege.  Prior to the rights offering, JLL held 18,758,934 shares, or 52.6%, of the Company’s outstanding common stock.  With the completion of the rights offering, JLL holds 59.4% of the outstanding common stock.

Proceeds of $27.3 million from the rights offering were used to repay a portion of the outstanding indebtedness under our amended credit agreement in the amount of $15.0 million, and for general corporate purposes in the amount of $12.3 million.


NOTE 7.   NET INCOME (LOSS) PER COMMON SHARE

Basic earnings per share (“EPS”) is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of common stock equivalents.

Due to the net losses in the six month periods presented herein, the dilutive effect of stock-based compensation plans is anti-dilutive.  There were 4,140,798 and 1,409,181 shares of common stock for the second quarter of 2010 and 2009  relating to stock option agreements excluded from the computation of diluted EPS in each period as their effect would have been anti-dilutive.

The table below presents the calculation of EPS and a reconciliation of weighted average common shares used in the calculation of basic and diluted EPS for our Company (weighted average common shares for 2009 have been restated to give effect to the 2010 rights offering):


                         
   
Three Months Ended
   
Six Months Ended
 
   
July 3,
   
July 4,
   
July 3,
   
July 4,
 
   
2010
   
2009
   
2010
   
2009
 
   
(in thousands, except per share amounts)
   
(in thousands, except per share amounts)
 
                         
Net income/(loss)
  $ 1     $ 342     $ (2,059 )   $ (6,358 )
                                 
Weighted-average common shares - Basic
    53,649       36,220       46,694       36,199  
Add:  Dilutive effect of stock compensation plans
    685       381       -       -  
                                 
Weighted-average common shares - Diluted
    54,334       36,601       46,694       36,199  
                                 
Net income/(loss) per common share:
                         
Basic
  $ 0.00     $ 0.01     $ (0.04 )   $ (0.18 )
                                 
Diluted
  $ 0.00     $ 0.01     $ (0.04 )   $ (0.18 )

 
 


The 2010 rights offering closed with shares of stock being issued at a price lower than the fair value of the stock, which created a bonus element similar in nature to a stock dividend.  Accordingly, basic and diluted shares outstanding prior to the 2010 rights offering were restated to adjust the number of common shares outstanding immediately prior to the rights offering by the following factor: (fair value per share immediately prior to the exercise of the rights)/(theoretical ex-rights fair value per share). Theoretical ex-rights fair value per share was computed by adding the aggregate fair value of the shares immediately prior to the exercise of the rights to the proceeds expected from the exercise of the rights and dividing by the number of shares outstanding after the exercise of the rights.

Weighted average common shares were increased by approximately 1.0 million shares for the three and six months ended July 4, 2009 as a result of the bonus element in the 2010 rights offering.  However, rounded basic and diluted net loss per common share for the three and six months ended July 4, 2009, were unchanged.


NOTE 8.   INTANGIBLE ASSETS

Intangible assets are as follows:
                   
               
Original
 
   
July 3,
   
January 2,
   
Useful Life
 
   
2010
   
2010
   
(in years)
 
   
(in thousands)
       
     Intangible assets:
                 
Trademarks
  $ 44,400     $ 44,400    
indefinite
 
                       
Customer relationships
    55,700       55,700       10  
Less:  Accumulated amortization
    (35,777 )     (32,992 )        
                         
          Subtotal
    19,923       22,708          
                         
Hurricane Technology
    575       575       1.4  
Less:  Accumulated amortization
    (368 )     (161 )        
          Subtotal
    207       414          
                         
          Intangible assets, net
  $ 64,530     $ 67,522       9.9  

 
 


Indefinite Lived Intangible Asset

The impairment evaluation of the carrying amount of intangible assets with indefinite lives is conducted annually, or more frequently, if events or changes in circumstances indicate that an asset might be impaired. The evaluation is performed by comparing the carrying amounts of these assets to their estimated fair values. If the estimated fair value is less than the carrying amount of the intangible assets, then an impairment charge is recorded to reduce the asset to its estimated fair value. The estimated fair value is determined using the relief from royalty method that is based upon the discounted projected cost savings (value) attributable to ownership of our trademarks, our only indefinite lived intangible assets.
 
In estimating fair value, the method we use requires us to make assumptions, the most material of which are net sales projections attributable to products sold with these trademarks, the anticipated royalty rate we would pay if the trademarks were not owned (as a percent of net sales), and a weighted average discount rate.  These assumptions are subject to change based on changes in the markets in which these products are sold, which impact our projections of future net sales and the assumed royalty rate.  Factors affecting the weighted average discount rate include assumed debt to equity ratios, risk-free interest rates and equity returns, each for market participants in our industry.

No impairment test was conducted as of July 3, 2010.  Our annual test of trademarks, performed as of January 2, 2010, utilized a weighted average royalty rate of 4.0% and a discount rate of 17.0%.  Projected net sales used in the analysis were based on historical experience and a continuance of the recent decline in sales in the near future, followed by modest growth beginning in 2013.  As of January 2, 2010, the estimated fair value of the trademarks exceeded book value by approximately 3%, or $1.4 million.  We believe our projected sales are reasonable based on, among other things, reports from certain third-party agencies which project increases in single family housing starts in our target markets in 2010.  We also believe the royalty rate is appropriate and could improve over time based on market trends and information, including that which is set forth above.  The weighted average discount rate was based on current financial market trends and will remain dependent on such trends in the future.  Absent offsetting changes in other factors, a 1% increase in the discount rate will result in an impairment of $2.2 million.

Amortizable Intangible Assets

We perform an impairment test on our amortizable intangible assets anytime that impairment indicators exist.  Such assets include  our customer relationships asset and the intangible assets acquired in the Hurricane Window and Door acquisition on August 14, 2009.  We will continue to monitor and evaluate potential impairment indicators, including further decline in the housing market, which could result in impairment. No impairment has been taken during the first six months of 2010, or 2009.

The Hurricane Window and Door amortizable intangible assets consist of the right to use Hurricane’s design technology through the end of 2010 and the option to purchase the technology at any time through the end of 2010.


NOTE 9.   LONG-TERM DEBT

On February 14, 2006, we entered into a second amended and restated $235 million senior secured credit facility and a $115 million second lien term loan due August 14, 2012, with a syndicate of banks. The senior secured credit facility is composed of a $25 million revolving credit facility, having been reduced from $30 million as a result of the third amendment discussed below, and initially, a $205 million first lien term loan.  The second lien term loan was fully repaid with proceeds from our IPO in 2006.  The outstanding balance of the first lien term loan on July 3, 2010 was $53.0 million, a decrease of $15.0 million since the beginning of 2010 due to the prepayment discussed below.  During 2009, we prepaid $22.0 million of long-term debt with cash generated from operations and cash on hand.  As of July 3, 2010, there was $21.5 million available under our $25 million revolving credit facility.

On December 24, 2009, we announced that we entered into a third amendment to the credit agreement.  The amendment, among other things, provides a leverage covenant holiday for 2010, increases the maximum leverage amount for the first quarter of 2011 to 6.25 times (then dropping 0.25X per quarter starting the second quarter until the end of the term), extends the due date on the revolver loan until the end of 2011, increases the applicable rate on any outstanding revolver loan by 25 basis points, and sets a base rate floor of 4.25%.  The effectiveness of the amendment was conditioned, among other things, on the repayment of at least $17 million of the term loan under the credit agreement no later than March 31, 2010, of which no more than $2 million was permitted to come from cash on hand.  In December 2009, the Company used cash generated from operations to prepay $2 million of outstanding borrowings under the credit agreement.  Using proceeds from the 2010 rights offering, the Company made an additional prepayment of $15.0 million on March 17, 2010, bringing total prepayments of debt at that time to $17.0 million.  Fees paid to the administrative agent and lenders totaled $1.0 million.  Such fees are being amortized using the effective interest method over the remaining term of the credit agreement.  Having made the total required prepayment and having satisfied all other conditions to bring the amendment into effect, the amendment became effective on March 17, 2010.
 

Under the third amendment, the first lien term loan bears interest at a rate equal to an adjusted LIBOR rate plus a margin ranging from 3.5% per annum to 5% per annum or a base rate plus a margin ranging from 2.5% per annum to 4.0% per annum, at our option, which is equivalent to the rates in the second amendment.  The margin in either case is dependent on our leverage ratio.  The loans under the revolving credit facility bear interest at a rate equal to an adjusted LIBOR rate plus a margin depending on our leverage ratio ranging from 3.00% per annum to 5.00% per annum or a base rate plus a margin ranging from 2.00% per annum to 4.00% per annum, at our option.  The amendment established a floor of 4.25% for base rate loans, and continued the 3.25% floor for adjusted LIBOR established in the previous amendment.

The first lien term loan is secured by a perfected first priority pledge of all of the equity interests of our subsidiary and perfected first priority security interests in and mortgages on substantially all of our tangible and intangible assets subject to such exceptions as are agreed. The senior secured credit facility contains a number of covenants that, among other things, restrict our ability and the ability of our subsidiary to (i) dispose of assets; (ii) change our business; (iii) engage in mergers or consolidations; (iv) make certain acquisitions; (v) pay dividends; (vi) incur indebtedness or guarantee obligations and issue preferred and other disqualified stock; (vii) make investments and loans; (viii) incur liens; (ix) engage in certain transactions with affiliates; (x) enter into sale and leaseback transactions; (xi) issue stock or stock options under certain conditions; (xii) amend or prepay subordinated indebtedness and loans under the second lien secured credit facility; (xiii) modify or waive material documents; or (xiv) change our fiscal year. In addition, under the senior secured credit facility, we are required to comply with specified financial ratios and tests, modified by the third amendment discussed above, including a minimum interest coverage ratio, a maximum leverage ratio (none for 2010), and maximum capital expenditures.  On an annual basis, our Company is required to compute excess cash flow, as defined in our credit and security agreement with the bank. In periods where there is excess cash flow, our Company is required to make prepayments in an aggregate principal amount determined through reference to a grid based on the leverage ratio. No such prepayments were required for the year ended January 2, 2010.

Contractual future maturities of long-term debt and capital leases as of July 3, 2010 are as follows (in thousands):

 
 

Remainder of 2010
  $ 53  
2011
    529  
2012
    52,634  
         
     Total
  $ 53,216  



NOTE 10.   COMPREHENSIVE LOSS AND ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The following table shows the components of comprehensive (loss) income for the three and six month periods ended July 3, 2010 and July 4, 2009:
 

     Three Months Ended      Six Months Ended  
     July 3,       July 4,      July 3,      July 4,  
   
2010
   
2009
   
2010
   
2009
 
   
(in thousands)
   
(in thousands)
 
Net income (loss)
  $ 1     $ 342     $ (2,059 )   $ (6,358 )
                                 
Other comprehensive (loss) income, net of taxes:
                 
Change related to forward contracts for
                         
aluminum, net of tax expense of $0 and $0
                         
for the three month periods ended July 3, 2010
                       
and July 4, 2009, respectively, and net of tax
                         
expense of $0 and $0 for the six month periods
                       
 ended July 3, 2010 and July 4, 2009, respectively
    (702 )     1,478       (715 )     1,897  
                                 
     Total comprehensive (loss) income
  $ (701 )   $ 1,820     $ (2,774 )   $ (4,461 )

The following table shows the components of accumulated other comprehensive loss for the three and six month periods ended July 3, 2010 and July 4, 2009:


                         
         
Aluminum
           
         
Forward
   
Valuation
     
(in thousands)
       
Contracts
 
Allowance
 
Total
 
Balance at April 3, 2010
          $ (1,509 )   $ 465     $ (1,044 )
Changes in fair value
            (572 )     -       (572 )
Reclassification to earnings
            (130 )     -       (130 )
Tax effect
            274       (274 )     -  
Balance at July 3, 2010
          $ (1,937 )   $ 191     $ (1,746 )
                                 
           
   Aluminum
         
           
Forward
   
Valuation
       
(in thousands)
         
Contracts
 
Allowance
 
Total
 
Balance at April 4, 2009
          $ (2,508 )   $ (1,039 )   $ (3,547 )
Changes in fair value
            380       -       380  
Reclassification to earnings
            1,098       -       1,098  
Tax effect
            (541 )     541       -  
Balance at July 4, 2009
          $ (1,571 )   $ (498 )   $ (2,069 )
                                 
           
   Aluminum
         
           
Forward
   
Valuation
       
(in thousands)
         
Contracts
 
Allowance
 
Total
 
Balance at January 2, 2010
          $ (1,501 )   $ 470     $ (1,031 )
Changes in fair value
            (504 )           (504 )
Reclassification to earnings
            (211 )           (211 )
Tax effect
            279       (279 )     -  
Balance at July 3, 2010
          $ (1,937 )   $ 191     $ (1,746 )
                                 
           
   Aluminum
         
           
Forward
   
Valuation
       
(in thousands)
         
Contracts
 
Allowance
 
Total
 
Balance at January 3, 2009
          $ (2,584 )   $ (1,382 )   $ (3,966 )
Changes in fair value
            (597 )     -       (597 )
Reclassification to earnings
            2,494       -       2,494  
Tax effect
            (884 )     884       -  
Balance at July 4, 2009
          $ (1,571 )   $ (498 )   $ (2,069 )

 
 

NOTE 11.  COMMITMENTS AND CONTINGENCIES

Litigation

Our Company is a party to various legal proceedings in the ordinary course of business. Although the ultimate disposition of those proceedings cannot be predicted with certainty, management believes the outcome of any claim that is pending or threatened, either individually or in the aggregate, will not have a materially adverse effect on our operations, financial position or cash flows.


NOTE 12.  FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS

Financial Instruments

Our financial instruments, not including derivative financial instruments discussed below, include cash, accounts receivable and accounts payable whose carrying amounts approximate their fair values due to their short-term nature.  Our financial instruments also include long-term debt.  Based on bid prices for our debt, the fair value of our long-term debt was approximately $48 million at July 3, 2010 and $51 million at January 2, 2010.

Derivative Financial Instruments

We enter into aluminum forward contracts to hedge the fluctuations in the purchase price of aluminum extrusion we use in production. Our contracts are designated as cash flow hedges since they are highly effective in offsetting changes in the cash flows attributable to forecasted purchases of aluminum.

Guidance under the Financial Instruments topic of the Codification requires us to record our hedge contracts at fair value and consider our credit risk for contracts in a liability position, and our counter-parties’ credit risk for contracts in an asset position, in determining fair value.  We assess our counter-parties’ risk of non-performance when measuring the fair value of financial instruments in an asset position by evaluating their financial position, including cash on hand, as well as their credit ratings.  We assess our risk of non-performance when measuring the fair value of our financial instruments in a liability position by evaluating our credit ratings, our current liquidity including cash on hand and availability under our revolving credit facility as compared to the maturities of the financial liabilities.  In addition, we entered into an arrangement with our commodities broker that provides for, among other things, the close-out netting of exchange-traded transactions in the event of the insolvency of either party.

In 2009 we maintained a line of credit with our commodities broker. Beginning in 2010, we no longer maintain a line of credit to cover the liability position of open contracts for the purchase of aluminum in the event that the price of aluminum falls.  Should the price of aluminum fall to a level which causes us to switch to a liability position for open aluminum contracts, we would be required to fund daily margin calls to cover the excess.

At July 3, 2010, the fair value of our aluminum forward contracts was in a liability position of $0.2 million, however we had cash on hand with our brokers of $0.4 million, resulting in a net asset of $0.2 million.  We had 16 outstanding forward contracts for the purchase of 3.3 million pounds of aluminum at an average price of $0.95 per pound with maturity dates of between  one month and 12 months through June 2011.  We assessed the risk of non-performance of the counter-party to these contracts and recorded an immaterial adjustment to fair value as of July 3, 2010.  When margins calls are required, we net cash collateral from payments of margin calls on deposit with our commodities broker against the liability position of open contracts for the purchase of aluminum on a first-in, first-out basis.  For statement of cash flows presentation, we present net cash receipts from and payments to the margin account as investing activities.


The fair value of our aluminum hedges is classified in the accompanying consolidated balance sheets as follows (in thousands):

 
 

     
July 3,
   
January 2,
 
Derivatives in a net asset position
Balance Sheet Location
 
 2010
   
2010
 
Hedging instruments:
             
     Aluminum forward contracts
Other Current Assets
  $ (175 )   $ 512  
     Cash on deposit related to payments of margin calls
Other Current Assets
    371       -  
                   
     Total hedging instruments
    $ 196     $ 512  



Aluminum forward contracts identical to those held by us trade on the London Metal Exchange (“LME”).  The LME provides a transparent forum and is the world's largest center for the trading of futures contracts for non-ferrous metals and plastics.  The prices are used by the metals industry worldwide as the basis for contracts for the movement of physical material throughout the production cycle.  Based on this high degree of volume and liquidity in the LME, the valuation price at any measurement date for contracts with identical terms as to prompt date, trade date and trade price as those we hold at any time we believe represents a contract's exit price to be used for purposes of determining fair value.  We categorize these aluminum forward contracts as being valued using Level 2 inputs as follows:


                         
   
Fair Value Measurements at Reporting Date
 
   
of Net Asset Using:
 
         
 
   
 
   
         
Quoted
   
Significant
 
 
   
July 3,
   
Prices in Active Markets
 
Other Observable Inputs
   
Significant Unobservable Inputs
 
Description
 
2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                                               (in thousands)
                         
Aluminum forward contracts
  $ (175 )   $ -     $ (175 )   $ -  
Cash on deposit related to payments of margin calls
    371                          
Aluminum forward contracts, net asset
  $ 196                          
                                 
           
 
   
 
   
 
 
           
Quoted
   
Significant 
 
 
   
January 2,
 
Prices in Active Markets
 
Other Observable Inputs
   
Significnt Unobservable Inputs
 
Description
  2010  
(Level 1)
   
(Level 2)
   
(Level 3)
 
                                              (in thousands)  
                                 
Aluminum forward contracts
  $ 512     $ -     $ 512     $ -  
Cash on deposit related to payments of margin calls
    -                          
Aluminum forward contracts, net asset
  $ 512                          

 
 
Our aluminum hedges qualify as highly effective for reporting purposes.  For the three and six month periods ended July 3, 2010, and July 4, 2009,  the ineffective portion of the hedging instruments was not significant. Effectiveness of aluminum forward contracts is determined by comparing the change in the fair value of the forward contract to the change in the expected cash to be paid for the hedged item.  At July 3, 2010, these contracts were designated as effective. The effective portion of the gain or loss on our aluminum forward contracts is reported as a component of other comprehensive income and is reclassified into earnings in the same line item in the income statement as the hedged item in the same period or periods during which the transaction affects earnings. For the three and six month periods ended July 3, 2010, and July 4, 2009, no amounts were reclassified to earnings because of the discontinuance of a cash flow hedge because it was probable that the original forecasted transaction would not occur. The ending accumulated balance related to the fair value of the aluminum forward contracts included in accumulated other comprehensive income, net of tax, is $0.2 million as of July 3, 2010 all of which is expected to be reclassified into earnings over the next twelve months.

The following represents the gains (losses) on derivative financial instruments for the three and six month periods ended July 3, 2010 and July 4, 2009,  and their classifications within the accompanying condensed consolidated financial statements (in thousands):




                           
   
Derivatives in Cash Flow Hedging Relationships
           
   
Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
                           
   
Three Months Ended
     
Three Months Ended
 
   
Jul 3,
   
Jul 4,
     
Jul 3,
   
Jul 4,
 
   
2010
   
2009
     
2010
   
2009
 
                           
Aluminum contracts
  $ (572 )   $ 380  
Cost of sales
  $ 130     $ (1,098 )
                                   
   
Derivatives in Cash Flow Hedging Relationships
               
                 
Location of Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion)
 
Amount of Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion)
                                   
                     
Three Months Ended
 
                     
Jul 3,
   
Jul 4,
 
                        2010       2009  
                                   
Aluminum contracts
         
Other income or other expense
  $ -     $ -  
                                   
   
Derivatives in Cash Flow Hedging Relationships
               
   
Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
                                   
   
Six Months Ended
     
Six Months Ended
 
   
Jul 3,
   
Jul 4,
     
Jul 3,
   
Jul 4,
 
      2010       2009         2010       2009  
                                   
Aluminum contracts
  $ (504 )   $ (597 )
Cost of sales
  $ 191     $ (2,494 )
                                   
   
Derivatives in Cash Flow Hedging Relationships
               
                 
Location of Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion)
 
Amount of Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion)
                                   
                     
Six Months Ended
 
                     
Jul 3,
   
Jul 4,
 
                        2010       2009  
                                   
Aluminum contracts
         
Other income or other expense
  $ 20     $ (6 )


NOTE 13.  COLLABORATIVE ARRANGEMENT

In view of the risks and costs associated with developing new products and our desire to expand our markets by providing quality unitized curtain wall solutions to the commercial building industry, we entered into a collaborative arrangement with another company with extensive experience in sales, marketing, engineering and project management of unitized curtain wall solutions and in which costs, revenues and risks are shared. During the third quarter of 2009, this arrangement was terminated.  We were not the principal participant in this arrangement. Our obligation under this arrangement was to provide manufacturing expertise, including providing the operating entity with labor for assembly and fabrication of the unitized curtain wall units.  We earned revenues and incurred costs of sales and expenses from this activity based on the number of hours of labor provided in the production of materials used in the arrangement.  We also recorded a percentage of the joint operating activity’s profit or loss into revenue based on our percentage interest in the arrangement, which was insignificant.  Each collaborator’s interest was 50 percent.

The following table illustrates the income statement classification and amounts attributable to transactions arising from the collaborative arrangements between participants for each period presented (in thousands):

 
 

                         
   
Three Months Ended
   
Six Months Ended
 
   
July 3,
   
July 4,
   
July 3,
   
July 4,
 
   
2010
   
2009
   
2010
   
2009
 
   
(unaudited)
   
(unaudited)
 
     Net sales
  $ -     $ 125     $ -     $ 1,449  
     Cost of sales
    -       (296 )     -       (1,093 )
     Selling, general and administrative
    -       (81 )     -       (215 )
 
 
 
NOTE 14. ASSETS HELD FOR SALE

In the first quarter of 2010, we entered into an agreement to list the Lexington, North Carolina facility for sale with an agent.  Due to current market conditions the expected time of disposal cannot be estimated. In December 2009, we recorded an impairment charge of $0.7 million to reflect a decline in the market value for this property.  We determined the fair value by obtaining recommendations of value from various local real estate agents and by reviewing data from comparable sales and leases executed in the recent past.

As of July 3, 2010, we reviewed the relevant factors affecting the value of this facility and determined that the value recorded at year end remains appropriate.  This facility’s fair value was determined using Level 2 inputs as follows:
 
 


                         
   
Fair Value Measurements at Reporting Date
 
   
of Asset Using:
 
         
 
   
 
   
         
Quoted
   
Significant
 
 
   
July 3,
   
Prices in Active Markets
 
Other  Observable Inputs
   
Significant Unobservable Inputs
 
Description
 
2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
   
(in thousands)
                         
Lexington Property
  $ 700     $ -     $ 700     $ -  
                                 




 
 
 
 
-17-


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the year ended January 2, 2010 included in our most recent annual report on Form 10-K.

Special Note Regarding Forward-Looking Statements

This document includes forward-looking statements regarding, among other things, our financial condition and business strategy. Forward-looking statements provide our current expectations and projections about future events. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions, and other statements that are not historical facts. As a result, all statements other than statements of historical facts included in this discussion and analysis and located elsewhere in this document regarding the prospects of our industry and our prospects, plans, financial position, and business strategy may constitute forward-looking statements within the meaning of Section 21E of the Exchange Act. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “could,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “foresee,” “believe,” or “continue,” or the negatives of these terms or variations of them or similar terminology, but the absence of these words does not necessarily mean that a statement is not forward-looking.

Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will occur as predicted. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this document. These forward-looking statements speak only as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement to reflect circumstances or events after the date of this report or to reflect the occurrence of unanticipated events, except as may be required by applicable securities laws.
 
 
Risks associated with our business, an investment in our securities, and with achieving the forward-looking statements contained in this report or in our news releases, Web sites, public filings, investor and analyst conferences or elsewhere, include, but are not limited to, the risk factors described in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. Any of the risk factors described therein could cause our actual results to differ materially from expectations and could have a material adverse effect on our business, financial condition or results of operations. We may not succeed in addressing these challenges and risks.

EXECUTIVE OVERVIEW

Sales and Operations

  On August 4, 2010, we issued a press release and held a conference call on August 5, 2010 to review the results of operations for our three months and six months ended July 3, 2010.  During the call, we also discussed current market conditions, and progress made regarding certain of our growth initiatives. The overview and estimates contained in this report are consistent with those given in our press release and our conference call remarks. We are neither updating nor confirming that information.


For the second straight quarter, total housing starts increased year over year in our core market of Florida.  In the quarter, total starts were up 41% compared to the second quarter of 2009 on the strength of an increase in single family starts of 47%.  Also, second quarter 2010 single family starts increased 7% when compared to the first quarter of 2010. We are encouraged by these starts though we feel they were inflated somewhat by the tax incentives which expired on April 30, 2010.  This is evidenced by the fact that starts in the month of April were the highest in the quarter.

Other positive signs suggesting the beginning of a long-term recovery include:

·  
A 25% increase in existing home sales compared to the second quarter of 2009 in our primary market of Florida, and
·  
A decrease in home inventory levels compared to the second quarter of 2009 in certain primary market cities, including 22% in Miami and 13% in Tampa.

 
 
 
Our second quarter sales were up 4.6 percent when compared to the second quarter of 2009, which represents the first year over year sales growth since 2006.  While we are still experiencing difficult market conditions, we took the actions necessary to increase sales in new markets and with new products.
 
Our growth was driven by out of state sales, up 28 percent compared to prior year, or $1.7 million, and growth in Florida sales of 3 percent, or $1.1 million. These increases were offset, somewhat, by a decrease in sales into international markets which are down 28 percent from a year ago, or $700 thousand.  These markets are experiencing similar trends experienced in the United States over the past couple years.

With regard to new products, our SpectraGuard lines, with sales growing $0.8 million, lead our out of state growth.  Additionally, two new products had a positive impact on our Florida sales.   First, our new PremierVue line of high end vinyl impact products, contributed $1.1 million in additional sales. Second, our new vinyl non-impact replacement product specifically designed for the Florida market contributed $600 thousand in additional sales for the quarter.  These new product increases were offset somewhat by lower WinGuard sales, which were down in all territories by $1.7 million.

Sales into the repair and remodeling market were up 6% compared to the second quarter of 2009, and represented 76% of total sales for the quarter.  Sales into the repair and remodeling market represented 74% of total sales for the second quarter of 2009.

Sales into the new construction market were essentially flat compared to the second quarter of 2009, and represented only 24% of total sales for the quarter, compared to 26% of total sales for the second quarter of 2009. Although total housing starts for the first half of the year increased 40% year-over-year, we have not yet begun to realize the benefit of the increase because: (i) a significant portion of the increased new construction activity is occurring outside markets in which impact protection is mandated; and (ii) the vast majority of the increased housing activity, even activity in markets which require impact protection, is not commanding a price point which warrants impact windows.  However, our sales into the repair and remodeling market, which we have historically dominated with our WinGuard branded products, remain strong, and we are confident that we continue to take market-share in the overall passive impact market.

Lastly, we previously announced in a press release that we developed an R-5 impact-resistant window, the first in our industry.  R-5 windows have a U-factor of less than 0.22 and satisfy the requirements of the Department of Energy (DOE) R-5 program.  In addition, we also just received the DOE’s Energy Saver award for achieving more than 7.5% total energy savings within our own manufacturing process.  We are committed to driving down energy consumption while helping consumers cut their energy cost.

Liquidity and Cash Flow

As we entered into 2010 we announced another rights offering which closed on March 12, 2010.  This rights offering was 90% subscribed and generated $26.4 million of additional capital for our Company after fees and financing costs.  We used $15.0 million of the proceeds to further pay down our term debt and make our third amendment to our credit facility, which we entered into on December 24, 2009, effective.  This amendment further secures our position and provides more flexibility to focus on long-term strategic goals.  As of July 3, 2010, our net debt was $31 million.

Restructurings

We took restructuring actions in 2009, described below, based on results of continued analysis of our target markets, internal structure, projected run-rate, and efficiency.  These actions generated approximately $15 million in annualized savings, which was in line with our expectations.  Many of these actions were taken in the beginning of 2009, and approximately $9 million of the benefit was realized in 2009.  Our 2010 results should benefit from the total expected savings.

On January 13, 2009, and March 10, 2009, we announced restructurings and recorded charges of $3.0 million in the condensed consolidated statement of operations for the six months ended July 4, 2009.  Of this amount, $1.4 million is classified within cost of goods sold and $1.6 million is classified within selling, general and administrative expenses.  The charges related primarily to employee separation costs and were disbursed prior to the end of 2009.

On September 24, 2009 and November 12, 2009,  we announced restructurings and recorded charges totaling $2.4 million, of which $0.1 million and $0.9 million was unpaid as of July 3, 2010, and January 2, 2010, respectively.  The remaining unpaid $0.1 million is classified within accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheet as of July 3, 2010 and is expected to be disbursed in 2010.

 
 
 
The impact of all 2009 restructurings resulted in a decrease in our workforce of approximately 480 employees, and a total amount of restructuring charges of $5.4 million.

The following table provides information with respect to our accrual for restructuring costs:


Accrued Restructuring Costs
 
Beginning of Period
   
Charged to Expense
   
Disbursed in Cash
   
End of Period
 
(in thousands)
                       
                         
     Three months ended July 3, 2010:
                       
2009 Restructurings
  $ 238     $ -     $ (128 )   $ 110  
     For the three months ended July 3, 2010
  $ 238     $ -     $ (128 )   $ 110  
                                 
     Three months ended July 4, 2009:
                               
2009 Restructurings
  $ 403     $ -     $ (322 )   $ 81  
     For the three months ended July 4, 2009
  $ 403     $ -     $ (322 )   $ 81  
                                 
     Six months ended July 3, 2010:
                               
2009 Restructurings
  $ 898     $ -     $ (788 )   $ 110  
     For the six months ended July 3, 2010
  $ 898     $ -     $ (788 )   $ 110  
                                 
     Six months ended July 4, 2009:
                               
2009 Restructurings
  $ -     $ 3,002     $ (2,921 )   $ 81  
     For the six months ended July 4, 2009
  $ -     $ 3,002     $ (2,921 )   $ 81  

 
 



Selected Financial Data

 
The following table presents financial data derived from our unaudited statements of operations as a percentage of total revenues for the periods indicated.


                         
   
Three Months Ended
   
Six Months Ended
 
   
July 3,
   
July 4,
   
July 3,
   
July 4,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales
    68.9 %     68.8 %     70.3 %     72.3 %
     Gross margin
    31.1 %     31.2 %     29.7 %     27.7 %
Selling, general and administrative expenses
    28.4 %     26.8 %     28.9 %     31.2 %
     Income (loss) from operations
    2.7 %     4.4 %     0.8 %     (3.5 %)
Interest expense, net
    2.5 %     3.7 %     3.0 %     3.8 %
Other expense (income), net
    0.0 %     0.0 %     0.0 %     0.0 %
     Income (loss) before income taxes
    0.2 %     0.7 %     (2.2 %)     (7.3 %)
Income tax expense
    0.2 %     0.0 %     0.1 %     0.0 %
     Net income (loss)
    0.0 %     0.7 %     (2.3 %)     (7.3 %)


RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 3, 2010 AND JULY 4, 2009

Net sales

Net sales were $49.0 million in the second quarter of 2010, which represented an increase of $2.1 million, or 4.6%, compared to the 2009 second quarter.  The following table shows net sales classified by major product category (sales in millions):



                               
   
Three Months Ended
       
   
July 3, 2010
   
July 4, 2009
       
   
Sales
   
% of sales
 
Sales
   
% of sales
 
% change
 
Product category:
                             
     WinGuard Windows and Doors
  $ 30.5       62.2 %   $ 32.2       68.7 %     (5.3 %)
     Other Window and Door Products
    18.5       37.8 %     14.7       31.3 %     25.9 %
                                         
     Total net sales
  $ 49.0       100.0 %   $ 46.9       100.0 %     4.6 %

 
 

Net sales of WinGuard branded products were $30.5 million for the second quarter of 2010, a decrease of $1.7 million, or 5.3%, from $32.2 million in net sales for the 2009 second quarter. The decrease in sales of our WinGuard products was driven mainly by a 5% decline in sales into both the new home and repair and remodeling markets.  WinGuard sales have also been affected, to some extent,  by the lack of storm activity during the three most recent hurricane seasons in the coastal markets of Florida served by the Company.

Net sales of Other Window and Door Products were $18.5 million for the second quarter of 2010, an increase of $3.8 million, or 25.9%, from $14.7 million in net sales for the 2009 second quarter.  This increase was due mainly to the success of new products.  Sales of our new non-impact vinyl products launched over the past two years, including SpectraGuard, are up $1.4 million.  Also, sales of our new PremierVue products introduced in the third quarter of 2009, were $1.1 million.  Lastly, sales of our Architectural Systems products, sold into commercial and high rise buildings, increased $1.1 million over prior year.
 
 
Gross margin

Gross margin was $15.2 million, or 31.1% of sales, for the second quarter of 2010, an increase of $0.6 million, or 4.3%, from $14.6 million, or 31.2% of sales, for the second quarter of 2009. The 0.1% decrease in gross margin as a percent of sales is mainly a result of  a change in mix towards non-impact products (2.3%) which carry a contribution margin of 21%.  In comparison, our various impact products, both aluminum and vinyl, have contribution margins that range from 40% to 55%.   This decrease was mostly offset by the savings generated from cost savings initiatives (1.8%) and the impact of volume (0.3%).

Selling, general and administrative expenses

Selling, general and administrative expenses were $13.9 million for the second quarter of 2010, an increase of $1.4 million, from $12.5 million for the 2009 second quarter.  The $1.4 million increase in SG&A was mainly due to a $0.7 million increase in non-cash stock compensation expense, $0.4 million related to a partial return of salary reduction each salaried employee took beginning in the second quarter of 2009, $0.2 million in increased fuel costs, and $0.1 million of overall higher spending in other categories.  As a percentage of sales, SG&A expenses were 28.4% for the second quarter of 2010, compared to 26.8% for the second quarter of 2009.

Interest expense, net