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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
December 31, 1999.
or
/ / Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required) for the
transition period from to .
Commission File Number 333-20095
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ATRIUM COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 75-2642488
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1341 W. MOCKINGBIRD LANE, SUITE 1200W
DALLAS, TEXAS 75247
(Address of executive offices, including zip code)
(214) 630-5757
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) and (g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
State the aggregate market value of the voting stock held by non-affiliates of
the registrant--NONE
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 30, 2000, the registrant had 100 shares of Common Stock, par
value $.01 per share outstanding.
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ATRIUM COMPANIES, INC. AND SUBSIDIARIES
1999 FORM 10-K
TABLE OF CONTENTS
ITEM NO. DESCRIPTION PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 22
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 23
Item 11. Executive Compensation...................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 32
Item 13. Certain Relationships and Related Transactions.............. 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 36
Signatures.............................................................. 37
2
PART I
ITEM 1. BUSINESS
THE TERM "COMPANY" REFERS TO ATRIUM COMPANIES, INC. (THE REGISTRANT) AFTER
THE RECAPITALIZATION DESCRIBED ON PAGE 10 AND THE REVERSE ACQUISITION OF WING
INDUSTRIES, INC. AND ITS PARENT, WING INDUSTRIES HOLDINGS, INC. (TOGETHER
"WING"). D AND W HOLDINGS, INC. ("D AND W") IS THE DIRECT PARENT OF ATRIUM
CORPORATION ("CORP"), THE DIRECT PARENT OF THE COMPANY. THE TERM "ATRIUM" REFERS
TO ATRIUM COMPANIES, INC. (THE PREVIOUS REGISTRANT) PRIOR TO THE
RECAPITALIZATION AND REVERSE ACQUISITION OF WING. THE TERM DARBY REFERS TO R.G.
DARBY COMPANY, INC., TOTAL TRIM, INC. AND THEIR DIRECT PARENT DOOR
HOLDINGS, INC., AS A COMBINED ENTITY, WHICH ENTITIES WERE CONTRIBUTED TO THE
COMPANY AND BECAME SUBSIDIARIES IN CONNECTION WITH THE RECAPITALIZATION.
ALL REFERENCES TO PRO FORMA ASSUME THAT THE ACQUISITIONS EFFECTED DURING
1999 OF DELTA MILLWORK, INC. ("DARBY-SOUTH"), HEAT, INC. ("HEAT") AND CHAMPAGNE
INDUSTRIES, INC. ("CHAMPAGNE") DESCRIBED IN "RECENT DEVELOPMENTS" AND THE
"RECAPITALIZATION" EFFECTED IN 1998 DESCRIBED IN "SELECTED FINANCIAL DATA" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" OCCURRED ON JANUARY 1, 1998 AND THE FINANCIAL DATA IS THAT OF THE
COMPANY, DARBY-SOUTH, HEAT AND CHAMPAGNE FOR THE YEARS ENDED DECEMBER 31, 1999
AND 1998.
THE COMPANY
We are one of the largest manufacturers and distributors of residential
windows and doors in the United States based on 1999 pro forma net sales. We
offer a complete product line including aluminum, vinyl and wood windows and
doors to our customers, which include leading national homebuilders and home
center retailers such as Del Webb, Centex, The Home Depot and Lowe's. We have
grown rapidly through a combination of internal growth and by making
complementary acquisitions.
We were founded in 1948 and have become one of the two largest manufacturers
and suppliers of residential non-wood windows and the third largest manufacturer
and supplier of residential doors in the United States based on 1999 pro forma
net sales. Our portfolio of products includes some of the industry's most
recognized brand names including ATRIUM-Registered Trademark- and
WING-Registered Trademark-.
We have 58 manufacturing facilities and distribution centers strategically
located in 24 states to service customers on a nationwide basis. We distribute
through multiple channels including direct distribution to large homebuilders
and independent contractors, one-step distribution through home centers and
lumberyards and two-step distribution to wholesalers and dealers who
subsequently resell to lumberyards, contractors and retailers. We believe that
our multi-channel distribution network allows us to reach the greatest number of
end customers and provide nationwide service to those customers.
Our company is vertically integrated with operations that include:
- The extrusion of aluminum and vinyl, which is utilized internally in our
fabrication operations or sold to third parties;
- The manufacture and assembly of window and door units, including
pre-hanging of doors, and sale of such units to wholesalers, lumberyards,
home centers and homebuilders;
- A turn-key installation program in which we supply and install many of our
products, including windows and interior and exterior doors; and
- The sale of finished products to homebuilders, remodelers and contractors
through company-owned distribution centers located across the country.
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PRODUCTS
We are one of a few window and door manufacturers that offer a diversified
product line that consists of a full range of aluminum and vinyl windows and
wood interior, exterior and patio doors. Our full product line allows us to
differentiate ourselves from our competition, leverage our distribution system
and be well-positioned to benefit from shifts in product preference. As
significant regional product preferences exist among aluminum, vinyl and wood, a
full product line is important to serve a national customer base effectively. We
estimate that approximately 60% of our 1999 pro forma sales were derived from
the sale of windows, approximately 37% from the sale of doors, and approximately
3% from the sale of other products and services.
WINDOWS. Our window products include sliders, double hung, and casement
products and are sold under the ATRIUM-Registered Trademark-,
CHAMPAGNE-REGISTERED TRADEMARK-, THERMAL-REGISTERED TRADEMARK-, BEST
BUILT-REGISTERED TRADEMARK-, KEL-STAR-Registered Trademark- and HR brand names.
We sell our windows primarily to building contractors and lumberyards through
direct and one-step distribution.
The demand for our aluminum and vinyl products vary by region:
- ALUMINUM--Aluminum windows are the product of choice in the southern
United States due to the region's warmer weather and more value-conscious
customers. Aluminum is the most appropriate fenestration material for the
region because it provides less thermal efficiency at a lower cost than
either vinyl or wood.
- VINYL--Demand for vinyl windows, particularly in colder climates, has
significantly increased over the last five years as vinyl windows have
gained acceptance as a substitute for wood windows. This trend has been
strengthened as prices for vinyl windows have become more competitive with
wood products and durability and energy efficiency have improved. We
entered the vinyl window market in mid-1995 and have increased sales of
vinyl windows by leveraging the ATRIUM brand name and our distribution
channels and through acquisitions.
DOORS. We estimate that our revenues from the sale of doors in 1999,
represented approximately 6% of the total U.S. door market. We estimate that
approximately 90% of our door sales in 1999 were generated from interior doors
and 10% from exterior doors. Our door products are sold under the
ATRIUM-Registered Trademark-, WING-Registered Trademark- and SUPER
MILLWORK-Registered Trademark- brand names. We sell our doors primarily to home
center retailers through one-step distribution.
- INTERIOR DOORS--There are two broad categories of interior doors: bi-fold
doors and passage doors. Bi-fold doors are hinged folding doors and
passage doors are the traditional doors used to connect rooms. There are
also two types of interior wood bi-fold doors and passage doors: solid
wood doors and hollow core doors. Solid doors are made completely of wood
while hollow core doors consist of two door facings glued to a wood frame
and are hollow on the inside. Both solid wood and hollow core passage
doors are sold one of two ways, either as slabs or as pre-hung units.
Slabs refer to the door itself and pre-hung units refer to slab doors
already hinged to a door frame at the factory.
- EXTERIOR DOORS--Our exterior door product offering consists primarily of
patio doors and pre-hung wood and steel entry doors.
We estimate that approximately 45% of our 1999 door sales were generated
from the sale of pre-hung doors, 30% from solid wood doors, 10% from hollow core
doors and 15% from patio doors. We estimate that approximately 60% of all
passage doors sold through home center retailers are sold as pre-hung units,
mainly because of the ease of installation for the do-it-yourself consumer. We
are one of the few vertically-integrated companies that both manufactures and
pre-hangs the doors. We believe that sales of our pre-hung door line will
continue to grow and will represent a larger portion of our total door sales in
the future.
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OTHER PRODUCTS AND SERVICES. We also manufacture and distribute other
products, including cafe doors, shutters, columns, decking products and patio
enclosures. We manufacture two types of cafe doors as well as louvered shutters.
The shutters can be used both for interior and exterior applications. Columns
come in many styles and are purchased from domestic suppliers. The deck & dock
products are made of vinyl and serve as an alternative to the more traditional
wood counterpart. The enclosures are custom built to any size and are made from
aluminum and vinyl product.
We also offer a turnkey total installation program in which we supply and
install all interior doors, exterior doors, mouldings, locks, hardware, wire
shelving, bath accessories, plate glass mirrors, and toilet partitions. This
concept allows a developer to transfer the risk associated with retaining
reliable work crews and provides protection from cost overruns. We believe that
developers view this as a value added service and are willing to pay a premium
price for it.
SALES, MARKETING AND DISTRIBUTION
One of the key components of our marketing strategy is to capitalize on the
complementary nature of our distribution channels. Historically, the majority of
our revenues of window business have been derived from sales to remodelers,
homebuilders, lumberyards and wholesalers, while through our door business we
have targeted principally home center retailers. We continue to broaden our
product offerings principally by selling doors to our traditional window
customers and windows to our traditional door customers.
We have a multi-channel distribution network that includes direct, one-step
and two-step distribution as well as 32 company-owned distribution centers. Our
distribution strategy maximizes our market penetration and reduces reliance upon
any one distribution channel for the sale of our products. Furthermore, as a
manufacturer and distributor of windows and doors for more than four decades, we
have developed long-standing relationships with key distributors in each of our
markets. In each instance, we seek to secure the leading distributors in each
market. If we cannot secure a top-tier distributor in a desired geographic
market, we will consider an acquisition or start up of our own distribution
center in such market.
We also sell to major home center retailers and smaller regional-based
retail centers. Although these have become more important to us because they
target the repair and remodeling market, they still accounted for less than
one-third of our total sales in 1999. One of our goals is to continue to
increase our window business' market share in the repair and remodeling market
by capitalizing our door business' strong relationship with home center
retailers.
We utilize the following distribution channels:
- Direct Distribution: We sell our windows and doors directly to
contractors, remodelers and other homebuilders without the use of an
intermediary. By selling directly to builders, we are able to increase our
gross profits while at the same time offering builders more favorable
pricing.
- One-Step Distribution: We sell our finished windows directly to
lumberyards, building products distributors, home centers, and
company-owned distribution centers, which will then sell to contractors,
homebuilders or remodelers. While it is not required that lumberyards or
building products distributors carry our products on an exclusive basis,
it is not unusual for them to do so. In addition, they generally purchase
based on orders, keeping little or no inventory. One-step distribution
tends to be used most often in metropolitan areas.
- Two-Step Distribution: Two-step distribution is the selling of completed
doors and windows to a wholesaler or distributor who then sells the
products to lumberyards, building products retailers and home centers.
These intermediaries will in turn sell the windows and doors to the
homebuilders, homeowners or remodelers. The wholesalers and distributors
tend to maintain product inventory in order to service the needs of their
client base for small quantities. Essentially, these middlemen sell to
customers who do not guarantee sufficient volume to purchase directly from
us. Two-step
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distribution is more common in rural areas since urban areas are serviced
by home centers and large lumberyards.
- Company-Owned Distribution Centers: We maintain company-owned
distribution facilities in key markets where available independent
distributors are weak or where we have been unable to make adequate
arrangements with existing distributors. Company-owned distribution
centers essentially act as one-step distributors.
To enhance our market coverage and leverage our considerable brand equity,
we currently market our windows and patio doors under primarily four brand
names, ATRIUM-REGISTERED TRADEMARK-, KEL-STAR-REGISTERED TRADEMARK-,
THERMAL-REGISTERED TRADEMARK- and H-R WINDOWS. Due to the fact that we enjoy
such significant national name recognition at both the building trade and
consumer levels, we decided to bring the product lines of almost all our other
brands under the ATRIUM-REGISTERED TRADEMARK- name. We are currently in the
process of rolling our CHAMPAGNE-REGISTERED TRADEMARK- and BEST BUILT-REGISTERED
TRADEMARK- product lines into the ATRIUM-REGISTERED TRADEMARK- brand. We have
completed rolling our SKOTTY and BISHOP product lines, as well as those from the
Gentek and Masterview acquisitions in 1997 and 1999, respectively, into the
ATRIUM-REGISTERED TRADEMARK- brand. We expect to extend the ATRIUM-REGISTERED
TRADEMARK- brand to other products, as well as to appropriate product lines
acquired in the future.
WINDOWS. We market our window products through a sales force consisting of
approximately 100 company salaried and commissioned sales representatives and
approximately 125 independent commissioned sales representatives. Each of our
divisions is supported by a sales manager, direct sales representatives and
independent representatives. The sales managers coordinate marketing activities
among both company and independent representatives. Our sales representatives
focus primarily on direct sales to homebuilders, remodelers and contractors,
while independent sales representatives sell to home centers, lumberyards and
wholesalers. In general, independent sales representatives carry our window and
door products on an exclusive basis, although they may carry other building
products from other manufacturers.
Our full product line has also been an asset to our sales force, especially
when we are exploring a new distribution channel opportunity. Window
distributors have come to recognize us as a WINDOW supplier, as opposed to an
ALUMINUM window supplier or a VINYL window supplier. The distributors frequently
do not buy the whole range of products since regional tastes vary and
distributors tend to work according to regions. However, these distributors
value our ability to provide these products should they ever demand them.
We believe that customer service plays a key role in the marketing process.
On-time delivery of products, order fill rate, consistency of service and
flexibility in meeting changing customer requirements have made it possible for
us to build a large and loyal customer base that includes companies such as
Centex Homes, one of the nation's largest home-builders, and The Home Depot, the
nation's largest home center retailer.
DOORS. Our marketing strategy centers primarily on the fact that we can
supply home center retailers with our own complete line of wood doors. We are
the only company in the industry that is able to provide this convenience. The
"one-stop shopping" we provide enables retailers to reduce their transaction
costs, as they have to pay only one invoice, work with one sales representative,
and schedule the receipt of goods with only one company. Our goal is to be the
"preferred supplier" for the door aisle of home center retailers.
Our pricing/product offering strategy focuses on offering the end consumer
lower price points without sacrificing profit margins. We have executed this
strategy in two steps. First, we have consolidated the current product offerings
in order to simplify the overall offering and reduce inventory levels. Second,
on the remaining product offerings, we offer good, better and best products to
the market. Certain of the products in the offering have been redesigned (with
particular emphasis on taking costs out of the products) in order to have an
offering with three distinct price points. This promotes more "trading up" to
our higher quality products by the customer and displays a complete product
line.
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For door sales we use an internal sales force. In addition, senior
executives are actively involved with both sales and customer service. This
group is segregated between national and regional accounts. Approximately 82% of
our door business sales are made to national retail home center chains.
To assist the sales force and provide better service to its customers, we
have over 35 merchandising managers. The merchandising managers provide home
center retailers with in-store services such as product knowledge seminars,
store product resets (to straighten stock and fix displays), sales analysis and
in-store merchandising. They also work with the retailers to resolve claims
issues and to handle product returns. This is a significant advantage to us, as
it is a level of service very few suppliers can offer.
Our promotional efforts are focused on the home center industry and its
customers. We offer cooperative advertising programs to certain of our major
customers, which gives us exposure in our customers' local media (e.g.,
newspaper, radio, television) and thus enabling us to generate sales at
individual locations. We also invest in in-store displays showing operating door
units and photographs of in-room settings in order to generate sales once
customers are in the stores. Product knowledge classes are frequently held to
inform store employees about the features and benefits of each product. Award
winning packaging and in-store signage are used to further general awareness
within the stores. We also offer retailers a video showing how quickly a
homeowner can install a bi-fold door using only basic hand tools.
OPERATIONS
We manufacture and sell our windows through a vertically integrated process
that includes extrusion, fabrication and distribution. We realize many
operational and cost benefits from our vertically integrated window operations.
By extruding aluminum and vinyl components in-house, we are able to secure a
low-cost, reliable source of extrusions, control product quality and reduce
inventory levels. The integration of extrusion and fabrication operations gives
us significantly more control over our manufacturing costs. We continually work
to achieve cost savings through increased capacity utilization at our efficient
facilities, adoption of best practices, reduction of cost of materials,
rationalization of product lines and reduction of inventory.
We continue to build on what we believe is our position as one of the
industry's lowest cost manufacturers. Because of the scale of our operations, we
are able to negotiate price concessions for our raw materials, including glass
and vinyl. This is an important consideration since total cost of new materials
typically comprises 45% to 50% of revenue.
We have been manufacturing products in Texas since 1953 and today have seven
primary manufacturing facilities in the state. As home centers, such as The Home
Depot and Lowe's, have expanded throughout the country, we have strategically
established or acquired twelve new manufacturing operations in Alabama, Ohio,
New York, North Carolina, Pennsylvania, Illinois, Colorado, Washington, Florida
and Texas in order to serve these customers more efficiently. We believe we are
one of the only door suppliers which can service the home centers on a national
basis. As the home centers continue to expand into new markets, we expect to
open new facilities to serve these regions.
As part of the integration of Wing and Atrium, the Atrium Wood patio door
division has merged its manufacturing, distribution and sales functions with
Wing. Due to the fact that both divisions sell over 80% of their products to the
Home Centers, significant benefits have been realized from the combination
between the sales and distribution functions of Atrium Wood and Wing. Both
service the same customers and distribute to the same retail locations.
INDUSTRY OVERVIEW
In 1999, new construction spending in the United States totaled over $547
billion, of which residential and commercial spending totaled approximately $322
billion and $225 billion, respectively. Within the residential construction
market, new construction spending and remodeling and replacement spending
totaled approximately $240 billion and approximately $82 billion, respectively.
The residential construction market consists of single-family and multi-family
housing construction. In 1999, housing starts in the
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United States totaled approximately 1.8 million, of which approximately
1.4 million were single-family homes and approximately 0.4 million were
multi-family homes. During 1999, approximately 90% of Atrium's window and door
sales were to the single-family housing construction market, and the remaining
10% of sales were to the multi-family housing construction market.
We believe that, in 1999, United States residential window and door
expenditures were approximately $13.5 billion, of which new construction and
remodel and replacement expenditures represented approximately $5.7 billion and
$7.8 billion, respectively.
The domestic window market has grown to more than approximately
60.6 million in unit sales in 1999, and has generally outpaced the growth in the
domestic building materials industry. The residential door market has grown more
than approximately 20% in sales over the last five years. According to F.W.
Dodge, the U.S. residential door market represents more than 60.4 million units
annually.
WINDOWS. The residential window industry can be divided into two end-use
segments: new construction (an estimated 20.6 million windows shipped in 1999)
and repair and remodeling (approximately 41.2 million windows sold in 1999). We
believe that the repair and remodeling segment will continue to experience
strong growth due to the strength of sales of existing homes and the increase in
the average age of homes from 23 years to 28 years in the last decade. We
believe the expected growth in this segment represents an especially attractive
opportunity to leverage existing relationships with the home center retailers.
The home center industry is one of the fastest growing retail sectors in the
United States. According to the National Home Center News, the U.S. retail home
improvement market is expected to grow from $150.0 billion in 1998 to over $170
billion by the year 2000.
DOORS. Demand for doors is derived from three principal segments: new
residential construction, repair and remodeling and commercial construction. We
are primarily affected by repair and remodeling expenditures as our products are
predominantly sold at home centers that cater to the "do-it-yourself" market and
to the smaller builders who principally do remodeling work. We estimate that
interior doors sold to the repair and remodeling segment constitute at least
one-third of all interior doors sold in the United States. We believe that the
repair and remodeling segment will continue to experience strong growth since
approximately three-quarters of total housing transactions are sales of existing
homes.
COMPETITION
The residential window and door industry is highly fragmented. With few
exceptions, competitors are privately-owned, regional companies with sales under
$100 million. On a national basis we compete with a few national companies in
different regions, products, distribution channels and price points, but do not
compete against any single company across all of these areas. We compete with
various other companies in specific regions within each market.
- - WINDOWS--ALUMINUM AND VINYL. Our major competitors for the sale of aluminum
windows are Reliant Building Products, Inc. and MI Home Products, Inc. In the
vinyl window and door segment, there is no dominant manufacturer that operates
on a national basis. Regional manufacturers that compete on a local and
regional basis characterize the segment. Historically, demand for vinyl
windows and doors has been concentrated in the cooler regions of the United
States. Our major competitors for the sale of vinyl windows are SilverLine
Building Products, Simonton Windows and Milgard Manufacturing Inc. In
addition, we compete with a number of regional manufacturers that sell
directly to repair and remodeling contractors.
- - PATIO DOORS--WOOD. In the wood patio door segment of the industry, two large
manufacturers, Andersen Corporation and Pella Corporation, sell premium
products on a national basis. Our wood patio doors are sold at a medium price
point and primarily through home centers throughout the United States and
direct to builders. We have many competitors at our price point in the wood
window and door segment, including Kolbe & Kolbe Millwork Co. Inc. and Hurd
Millwork Co. Inc.
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DOORS. We estimate that approximately 60% of all interior passage doors
sold through home centers are pre-hung. We expect this percentage to grow due to
the convenience and ease of installation of pre-hung doors. The pre-hung door
industry is very fragmented and consists primarily of hundreds of small
companies that do not manufacture doors and who have annual sales of $10.0 to
$30.0 million each. These companies are finding it increasingly difficult to
compete due to their lack of manufacturing capability. Our key competitors are
Premdor, Inc. and Jeld Wen, both of which manufacture and pre-hang doors. Other
competitors include Steves and Sons and Haley Bros.
INFLATION AND RAW MATERIALS
During the past several years, the rate of general inflation has been
relatively low and has not had a significant impact on our results of
operations. We purchase raw materials, including aluminum, glass, wood and
vinyl, that are subject to fluctuations in price that may not reflect the rate
of general inflation. These materials fluctuate in price based on supply and
demand. Historically, there have been periods of significant and rapid aluminum
and wood price changes, both upward and downward, with a concurrent short-term
impact on our operating margins. We historically mitigated the effects of these
fluctuations over the long-term by passing through price increases to our
customers and through other means. For example, we enter into forward
commitments for aluminum billet to hedge against price changes, see the
footnotes to our consolidated financial statements for the year ended
December 31, 1999. The primary raw materials used in the production of our
windows and doors are readily available and are procured from numerous
suppliers. Currently, wood is purchased through multiple sources from around the
world, with little dependence on one company or one country.
SEASONALITY
The new home construction market and the market for external repairs and
remodeling in northern climates are seasonal, with increased related product
sales in the second and third quarters. The market for interior repairs and
remodeling in northern climates tends to grow in the first and fourth quarters.
Although this results in seasonal fluctuations in the sales of certain of our
products, the complementary nature of our window and door business' selling
seasons helps mitigate this seasonality.
CYCLICALITY
Demand in the window and door manufacturing and distribution industry is
influenced by new home construction activity and the demand for repair and
remodeling. For the year ended December 31, 1999, we believe that approximately
42% of our pro forma sales were related to new home construction. Trends in the
housing sector directly impact our financial performance. Accordingly, the
strength of the U.S. economy, the age of existing home stock, job growth,
interest rates, consumer confidence and the availability of consumer credit, as
well as demographic factors, such as inter/intra-state migration of the U.S.
population have a direct impact on us. Cyclical declines in new housing starts
may adversely impact our business.
EMPLOYEES
We employ approximately 4,200 persons, of whom approximately 4,120 are
employed at our manufacturing facilities and distribution centers and
approximately 80 are employed at corporate headquarters. Approximately 1,300 of
our hourly employees are covered by collective bargaining agreements. We entered
into collective bargaining agreements in 1998 with the United Needle and
Industrial Trade Employee Union, SWRJB, ACTWU, AFL-CIO-CLC, covering certain
employees at the Atrium Aluminum, H-R Windows, Atrium Wood and Extruders
manufacturing facilities. All of these collective bargaining agreements expire
in May, 2001. In addition, we have collective bargaining agreements with The
Sheet Metal International Association Local Union No. 54, due to expire on
September 30, 2001, for our Kel-Star operations and Local Union 2743, Southern
Council of Industrial Workers, Chartered By United Brotherhood of Carpenters and
Joiners of America, AFL/CIO, due to expire on October 6, 2001, for our
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Woodville Extruders operations. There are no union affiliations in connection
with any of our other divisions. We believe that our relationship with our
employees is good.
BACKLOG AND MATERIAL CUSTOMERS
We have no material long-term contracts. Orders are generally filled within
5 to 7 days of receipt. Our backlog is subject to fluctuation due to various
factors, including the size and timing of orders for our products and is not
necessarily indicative of the level of future revenue.
Our sales to The Home Depot, Inc., a leading home center retailer
represented 26% and 42% of our net sales for the years ended December 31, 1999
and 1998, respectively.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
We are subject to numerous federal, state, local and foreign environment
statutes and regulations relating to, among other things, air and water quality,
the discharge of materials into the environment, the handling and disposal of
wastes or otherwise relating to safety, health and protection of the environment
issues. We do not expect ongoing compliance with such provisions to have a
material impact on our earnings or competitive position in the foreseeable
future. Additionally, no significant capital expenditures are anticipated
related to ongoing compliance with such provisions. However, the applicable
requirements under the law are subject to amendment, and to the imposition of
new, other, or additional requirements and to changing interpretations of
agencies or courts. We cannot assure that new, other or additional requirements
would not be imposed or that expenditures, including material expenditures,
would not be required to comply.
We are involved in various stages of investigation and cleanup relative to
environmental protection matters, some of which relate to waste disposal sites.
The potential costs related to such matters and the possible impact thereof on
future operations have been assessed, and we believe that we have made adequate
provision for these costs such that they will have no material adverse effect
upon our financial condition or our operations. We cannot be certain that
significant capital expenditures will not become necessary for investigation and
cleanup of environmental conditions which are currently unknown.
Prior to 1993, we received correspondence in which we were named as a
potentially responsible party of two Superfund sites, pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or
comparable state service. In one instance, we have entered into a settlement and
in the other instance, the group of potentially responsible parties negotiated a
proposed redemption price which was approved by the relevent state agency and is
being reviewed by the United States Environmental Protection Agency. Based on
the actions to date, and our current insurance coverage, we believe that any
liability associated with the Superfund sites does not currently have or will
not have a material adverse effect on our financial condition, results of
operations or liquidity. However, because CERCLA provides for strict and
sometimes joint and several liability, we cannot determine with certainty that
the liabilities in question will not result in material expenditures in the
future.
THE (RECAPITALIZATION)
On August 3, 1998, D and W Holdings, Inc. ("Parent or "D and W"), entered
into an Agreement and Plan of Merger (the "Merger Agreement") with Atrium
Corporation ("Corp"), the parent of the Company and securityholders revised
therein to acquire all of the outstanding capital stock of Corp for
$225.0 million, through a series of transactions (such transactions are referred
to as the "Recapitalization") described below. Corp owned 100% of the
outstanding capital stock of Atrium prior to the merger. In connection with the
merger, GE Investment Private Placement Partners II, a Limited Partnership
("GEIPPPII"), and Ardatrium L.L.C. ("Ardatrium") formed Parent by acquiring all
of its outstanding common stock for an aggregate purchase price of $50.0
million. GEIPPPII is a private equity partnership affiliated with GE
Investments, a wholly-owned investment management subsidiary of the General
Electric Company. Ardatrium is an affiliate of Ardshiel, Inc. ("Ardshiel"), a
private equity investment firm based in New York.
10
The acquisition of Corp by Parent was effected through the merger on
October 2, 1998 of a merger sub, a wholly owned subsidiary of Parent, with and
into Corp (the "Merger") pursuant to the terms of the Merger Agreement. Prior to
the Merger, Parent contributed $50.0 million to Atrium Corp. in exchange for all
of its outstanding common stock. As a result of the Merger, Corp became a direct
wholly-owned subsidiary of Parent, and the Company became an indirect
wholly-owned subsidiary of Parent.
In connection with the merger, GEIPPPII and an affiliate of Ardshiel
recapitalized Wing and Darby and contributed them to the Company. As a part of
the Recapitalization, GEIPPPII and Ardshiel contributed to the Company
$50.0 million from the sale of common stock of the Company's ultimate parent and
approximately $52.0 million in the implied asset value of the Wing and Darby
businesses.
RECENT DEVELOPMENTS
DELTA ACQUISITION
On January 27, 1999, the Company acquired certain assets of Delta Millwork,
Inc. (subsequently renamed as R.G. Darby Company-South and Total
Trim, Inc.-South, together Darby-South), a privately held door pre-hanger
located in Orlando, Florida, for approximately $1,755, including fees and
transaction expenses of $155 and $200 to be paid upon the achievement of certain
financial targets. The Company financed the acquisition through its revolving
credit facility. The results of operations for the acquired business are
included in the Company's consolidated financial statements beginning
January 27, 1999.
HEAT ACQUISITION
On May 17, 1999, the Company acquired Heat, Inc. ("Heat"), a privately held
vinyl and door company, and its subsidiaries with operations located in Yakima,
Washington (Best Built, Inc.) and Pittsburgh, Pennsylvania (Thermal Industries,
Inc.) for approximately $85,000, which included $679 of assumed indebtedness.
Additionally, a post closing adjustment of $4,095 was paid on May 17, 1999
related to the working capital and cash delivered in excess of the target
defined in the purchase agreement. The Company financed the acquisition with a
portion of the proceeds raised from the issuance of $175,000 Senior Subordinated
Notes due 2009 offering (see financial statement Note 4). The results of
operations for the acquired business are included in the Company's consolidated
financial statements beginning May 17, 1999.
CHAMPAGNE ACQUISITION
On May 17, 1999, the Company acquired Champagne Industries, Inc., a
privately held vinyl and door company located in Denver, Colorado for
approximately $4,426, including assumed indebtedness, transaction fees and $500
to be paid upon achievement of certain financial targets. The Company financed
the acquisition with a portion of the proceeds raised in the $175,000 Senior
Subordinated Notes due 2009 offering (see financial statement Note 4). The
results of operations for the acquired business are included in the Company's
consolidated financial statements beginning May 17, 1999.
ELLISON ACQUISITION
On March 29, 2000, the Company announced the signing of a definitive
purchase and sale agreement to acquire the assets of Ellison Window and Door and
the stock of Ellison Extrusion Systems, Inc. (collectively "Ellison") for a
combined purchase price of $125,000. The acquisition proceeds include
approximately $101,500 of cash, $500 of assumed indebtedness and $23,000 of
D and W stock. The cash portion of the acquisition will be funded through a
combination of approximately $78,500 of new equity from D and W in the form of
common equity and/or preferred stock with the remainder coming from an
additional borrowing on the Company's existing Credit Agreement.
11
TRADEMARKS AND PATENTS
The Company has registered and nonregistered trade names and trademarks
covering the principal brand names and product lines under which its products
are marketed.
ITEM 2. PROPERTIES
Our operations are conducted at the owned or leased facilities described
below:
CAPACITY
(SQUARE) OWN/
LOCATION PRINCIPAL USE FEET LEASE
- -------- ----------------------------------------------- --------- -----
Dallas, Texas............ Fabrication of aluminum windows 186,000 Lease
Fabrication of vinyl windows 90,000 Lease
Fabrication of aluminum windows 266,000 Lease
Irving, Texas............ Fabrication of aluminum windows 148,600 Own
Fabrication of aluminum patio doors 110,000 Own
Greenville, Texas........ Manufacture of solid wood, patio doors, hollow
core bi-fold and passage doors and custom
doors; pre-hanging 300,000 Lease
Manufacture of solid wood and hollow bi-fold
and passage doors; pre-hanging 180,000 Lease
Warehouse facility 30,000 Lease
Carrollton, Texas........ Extrusion of vinyl 25,200 Lease
Woodville, Texas......... Extrusion of aluminum 120,000 Lease
Fabrication of aluminum windows and storm doors 180,000 Lease
Wylie, Texas............. Extrusion of aluminum 100,000 Lease
Mt.Pleasant, Texas....... Door component manufacturing 110,000 Lease
New Braunfels, Texas..... Distribution of aluminum windows 10,000 Lease
Allentown, Manufacture of hollow core bi-fold and passage
Pennsylvania........... doors; pre-hanging warehouse 105,000 Lease
Las Vegas, Nevada........ Distribution of aluminum windows 30,400 Lease
Phoenix, Arizona......... Fabrication of aluminum windows and storm doors 220,000 Lease
Bridgeport, Fabrication of vinyl windows
Connecticut............ 75,000 Lease
Clinton, Massachusetts... Fabrication of vinyl windows 31,000 Own
Farmingdale, New York.... Distribution of vinyl windows 6,000 Lease
Anaheim, California...... Fabrication of vinyl windows 80,000 Lease
Salt Lake City, Utah..... Distribution of vinyl windows 10,000 Lease
Union City, California... Distribution of vinyl windows 10,000 Lease
Portland, Oregon......... Distribution of vinyl windows 10,000 Lease
Arlington, Washington.... Distribution of vinyl windows 3,000 Lease
Yakima, Washington....... Fabrication of vinyl windows 58,000 Lease
Colorado Springs, Distribution of vinyl windows
Colorado............... 15,000 Lease
Denver, Colorado......... Fabrication of vinyl windows 108,000 Lease
Florence, Alabama........ Door pre-hanging; warehouse 60,000 Lease
Orlando, Florida......... Door pre-hanging; warehouse 50,000 Lease
Charlotte, North Door pre-hanging; warehouse
Carolina............... 40,000 Lease
Hanover Park, Illinois... Door pre-hanging; warehouse 73,000 Lease
Solon, Ohio.............. Door pre-hanging; warehouse 30,000 Lease
Alsip, Illinois.......... Distribution of vinyl windows 17,337 Lease
Altoona, Pennsylvania.... Distribution of vinyl windows 5,000 Lease
Arlington Heights, Distribution of vinyl windows
Illinois............... 15,660 Lease
Baltimore, Maryland...... Distribution of vinyl windows 16,400 Lease
12
CAPACITY
(SQUARE) OWN/
LOCATION PRINCIPAL USE FEET LEASE
- -------- ----------------------------------------------- --------- -----
Beltsville, Maryland..... Distribution of vinyl windows 5,685 Lease
Distribution of vinyl windows 7,540 Lease
Cheektowaga, New York.... Distribution of vinyl windows 10,000 Lease
Cincinnati, Ohio......... Distribution of vinyl windows 10,000 Lease
Distribution of vinyl windows 10,830 Lease
Columbus, Ohio........... Distribution of vinyl windows 11,250 Lease
Detroit, Michigan........ Distribution of vinyl windows 4,800 Lease
East Hartford, Distribution of vinyl windows
Connecticut............ 5,000 Lease
East Syracuse, New Distribution of vinyl windows
York................... 8,250 Lease
Marietta, Georgia........ Distribution of vinyl windows 7,000 Lease
Mechanicsburg,
Pennsylvania........... Distribution of vinyl windows 3,988 Lease
Murrysville, Fabrication of vinyl windows
Pennsylvania........... 166,000 Own
Nashville, Tennessee..... Distribution of vinyl windows 5,500 Lease
Philadelphia, Distribution of vinyl windows
Pennsylvania........... 17,000 Own
Pittsburgh, Extrusion of vinyl
Pennsylvania........... 65,000 Lease
Pittsburgh, Fabrication of deck/dock product
Pennsylvania........... 30,000 Lease
Pittsburgh, Enclosure assembly, showroom, and distribution
Pennsylvania........... of vinyl windows 33,788 Lease
Richmond, Virginia....... Distribution of vinyl windows 5,000 Lease
Spring Hill, Florida..... Distribution of vinyl windows 10,000 Lease
St. Louis, Missouri...... Distribution of vinyl windows 10,100 Lease
Wilmington, Distribution of vinyl windows
Massachusetts.......... 5,688 Lease
We maintain our corporate headquarters in Dallas, Texas. The facility
provides approximately 17,500 square feet and is leased for a seven-year term
expiring in 2004.
We believe that our manufacturing plants are generally in good operating
condition and are adequate to meet future anticipated requirements.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in litigation arising in the ordinary
course of our business, none of which is expected to individually have a
material adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's outstanding
equity securities.
ITEM 6. SELECTED FINANCIAL DATA
The selected income statement data set forth below for the year ended
December 31, 1995, the periods ended October 25, 1996 and December 31, 1996 and
the years ended December 31, 1997, 1998 and 1999, and the selected balance sheet
data at December 31, 1995, 1996, 1997, 1998 and 1999 were derived from the
audited consolidated financial statements of Atrium as described further below.
The selected historical financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements, related notes and other financial
information included elsewhere in this 10-K.
Prior to October 2, 1998, Atrium's historical financial statements as filed
with the Securities and Exchange Commission included its operations and the
operations of its subsidiaries. On October 2, 1998, pursuant to the
Recapitalization, D and W contributed the assets of Wing and Darby to the
Company.
As Wing was determined to be the acquiror in the reverse acquisition, the
historical financial statements of "Atrium" (the previous registrant) were
replaced with the historical financial statements of Wing. As a result, the
statement of operations for 1998 only includes the operations of the Company and
Darby from October 3, 1998. The statements of operations for the year ended
December 31, 1997, only include the operations and accounts of Wing and its
predecessor, Wing was acquired by the current controlling shareholders on
October 25, 1996. Additionally, the operations of Delta Millwork, Inc. (renamed
R.G. Darby Company-South and Total Trim, Inc.-South, together, "Darby-South")
are included since the date of acquisition, January 27, 1999 and the operations
of Heat, Inc. ("Heat") and Champagne Industries, Inc. ("Champagne") are included
since their date of acquisition, May 17, 1999. The December 31, 1999 balance
sheet includes the accounts of the Company, Wing, Darby, Darby-South, Heat,
Champagne and each of their respective subsidiaries, while the December 31, 1998
balance sheet includes the accounts of the Company, Wing, Darby and each of
their respective subsidiaries.
PREDECESSOR
---------------------------
PERIOD PERIOD
YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, OCTOBER 25, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1996 1997 1998 1999
------------- ----------- ------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Net sales......................... $68,481 $62,880 $ 13,200 $ 99,059 $ 211,059 $ 498,456
Income (loss) before income taxes
and extraordinary charge........ 491 1,789 532 1,391 (2,329) 10,795
Net income (loss)................. 279 1,119 303 696 (2,819) 2,218
BALANCE SHEET DATA (END OF PERIOD):
Total assets...................... $18,515 $19,966 $ 36,404 $ 55,383 $ 359,869 $ 484,136
Total debt........................ 8,522 8,154 20,489 32,238 179,227 316,711
OTHER DATA:
EBITDA(1)......................... $ 2,374 $ 3,014 $ 1,166 $ 5,836 $ 14,732 $ 55,394
Depreciation and
amortization(2)................. 844 716 260 1,492 7,980 14,189
Interest expense.................. 1,039 509 374 2,953 9,081 28,524
CASH FLOWS PROVIDED BY (USED IN):
Operating activities.............. $ 3,409 $ 664 $ 1,112 $ 1,148 $ (10,253) 8,835
Investing activities.............. (1,667) (934) (29,265) (11,763) (125,184) (108,480)
Financing activities.............. (1,876) 69 28,193 10,609 135,403 100,939
- ------------------------------
(1) EBITDA represents income before interest, income taxes, extraordinary
charge, depreciation and amortization, special charges, stock option
compensation expense and certain non-recurring expenses related to one-time
expenses. While EBITDA is not intended to represent cash flow from
operations as defined by GAAP and should not be considered as an indicator
of operating performance or an alternative to cash flow or operating income
(as measured by GAAP) or as a measure of liquidity, it is included herein to
provide additional information with respect to the ability of Atrium to meet
its future debt service, capital expenditures and working capital
requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Atrium believes EBITDA provides
investors and analysts in the building materials industry the necessary
information to analyze and compare historical results of Atrium on a
comparable basis with other companies on the basis of operating performance,
leverage and liquidity. However, as EBITDA is not defined by GAAP, it may
not be calculated or comparable to other similarly titled measures within
the building materials industry.
(2) Includes expense related to non cash stock option compensation expense.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements of the Company (after the Recapitalization)
which appears elsewhere in this 10-K.
CERTAIN FORWARD-LOOKING STATEMENTS
This 10-K contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties relating to the Company that are based on
the beliefs of the management. When used in this 10-K, the words "anticipate",
"believe", "estimate", "expect", "intend", and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to the risks and uncertainties regarding the operations and results of
operations of the Company as well as its customers and suppliers, including as a
result of the availability of consumer credit, interest rates, employment
trends, changes in levels of consumer confidence, changes in consumer
preferences, national and regional trends in new housing starts, raw material
costs, pricing pressures, shifts in market demand, and general economic
conditions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions or estimates prove incorrect, actual results may
vary materially from those described herein as anticipated, believed, estimated,
expected or intended.
ATRIUM (AFTER THE RECAPITALIZATION)
Prior to October 2, 1998, Atrium's historical financial statements as filed
with the Securities and Exchange Commission included its operations and the
operations of its subsidiaries. On October 2, 1998, pursuant to the
Recapitalization, D and W contributed the assets of Wing and Darby to the
Company.
As Wing was determined to be the acquiror in the reverse acquisition, the
historical financial statements of "Atrium" (the previous registrant) were
replaced with the historical financial statements of Wing. As a result, the
statement of operations for 1998 only includes the operations of the Company and
Darby from October 3, 1998. The statements of operations for the year ended
December 31, 1997, only include the operations and accounts of Wing and its
predecessor. Wing was acquired by the current controlling shareholders on
October 25, 1996. Additionally, the operations of Delta Millwork, Inc. (renamed
R.G. Darby Company-South and Total Trim, Inc.-South, collectively,
"Darby-South") are included since the date of acquisition, January 27, 1999 and
the operations of Heat, Inc. ("Heat") and Champagne Industries, Inc.
("Champagne") are included since their date of acquisition, May 17, 1999. The
December 31, 1999 balance sheet includes the accounts of the Company, Wing,
Darby, Darby-South, Heat, Champagne and each of their respective subsidiaries,
while the December 31, 1998 balance sheet includes the accounts of the Company,
Wing, Darby and each of their respective subsidiaries.
15
RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PERCENTAGES)
The following table sets forth for the periods indicated, information
derived from the Company's consolidated statements of operations expressed as
percentage of net sales.
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 68.4 75.4 79.0
----- ----- -----
Gross profit................................................ 31.6 24.6 21.0
Selling, delivery, general and administrative expenses...... 21.7 18.8 15.8
Amortization expense........................................ 1.7 1.0 0.8
Non cash stock option compensation expense.................. 0.1 1.8 --
Special charges............................................. 0.4 -- --
----- ----- -----
Income from operations...................................... 7.8 2.9 4.4
Interest expense............................................ 5.7 4.3 3.0
Other income, net........................................... 0.1 0.3 --
----- ----- -----
Income (loss) before income taxes and extraordinary
charge.................................................... 2.2 (1.1) 1.4
Provision (benefit) for income taxes........................ 1.3 (0.1) 0.7
----- ----- -----
Income (loss) before extraordinary charge................... 0.8 (1.0) 0.7
Extraordinary charge, net of income tax benefit............. 0.4 0.3 --
----- ----- -----
Net income (loss)........................................... 0.4% (1.3)% 0.7%
===== ===== =====
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES. Net sales increased by $287,397 from $211,059 in 1998 to
$498,456 in 1999, or approximately 136.2%. Net sales in 1999, increased
principally as a result of the Recapitalization and the acquisitions of Darby
South, Heat and Champagne, as well as higher sales volume. The Recapitalization
contributed an increase of $204,296 from Atrium (previous registrant) and Darby
due to increased sales volumes and inclusion for the entire year of 1999, as
opposed to the inclusion since the Recapitalization on October 2, 1998. Atrium's
(previous registrant) sales volume grew approximately $13,622, or 5.8%. This
increase included approximately $18,374 from its aluminum and vinyl window
operations, or a 8.7% growth rate, offset by a decline of $4,752, or 22.7% from
its wood patio door operations due to the Company's efforts to eliminate
less-profitable sales territories. Darby grew $1,782, or 8.4% in 1999.
Additionally, the acquisitions of Darby-South, Heat and Champagne increased net
sales by $77,628 during 1999. These acquisitions grew $13,021, or 14.1% in 1999.
Net sales at Wing increased 3.7% over prior year due to increased sales to the
large home center retail chains. Excluding the loss of sales of $4,680 from the
bankruptcy of a significant customer (Hechinger), sales would have increased
$10,118, or 7.4%.
COST OF GOODS SOLD. Cost of goods sold decreased from 75.4% of net sales
during 1998 to 68.4% of net sales during 1999. The decrease was largely due to
the addition of Atrium (previous registrant) and Darby, which operate at higher
margins then Wing, since they were included in operations from October 2, 1998.
Additionally, the acquisitions of Darby-South, Heat and Champagne improved the
percentage as these divisions had a combined cost of goods sold as a percent of
net sales of 60.7% and 60.8% in 1999 and 1998, respectively. If Atrium (previous
registrant), Darby and the 1999 acquisitions were included for the entire years
of 1999 and 1998, cost of goods sold would have been 68.1% and 68.7%,
respectively. This improvement was primarily the result of favorable aluminum
prices from forward commitments partially offset by slightly higher vinyl and
wood prices. In the year 2000, the rising cost of vinyl resin (due to increasing
oil prices) and aluminum prices are expected to adversely impact cost of sales
percentages. This situation should be mitigated as price increases are
implemented over the next several quarters. Had all year-end inventory values
been stated on a FIFO basis, year-end inventory would have been approximately
$37 lower in 1999, $112 lower in 1998 and $97 higher in 1997. Overall, changes
in the cost of products sold
16
as a percentage of net sales for one period as compared to another period may
reflect a number of factors, including changes in the relative mix of products
sold and, the effects of changes in sales prices, material costs and changes in
productivity levels.
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, delivery,
general and administrative expenses increased $68,026 from $39,754 (18.8% of net
sales during 1998) to $107,780 (21.6% of net sales during 1999). The increase
was primarily due to the inclusion of Atrium (previous registrant), Darby,
Darby-South, Heat and Champagne for a full year during 1999, and an increase in
sales volume. If Atrium (previous registrant), Darby and the 1999 acquisitions
were included for the entire years of 1999 and 1998, selling, delivery, general
and administrative expenses would have been 22.3% of net sales during 1999 and
21.3% of net sales during 1998, with the increase being primarily contributed to
Wing.
Selling expenses increased from 4.4% of net sales during 1998 to 6.2% of net
sales during 1999. The increase was primarily due to a 0.8% point increase at
Wing and the acquisitions Heat and Champagne, which have higher selling
expenses. The increase was partially offset by a 0.3% point decrease in selling
expenses as a percent of net sales at the Atrium (previous registrant) due to
various cost saving measures which were implemented during 1999. If Atrium
(previous registrant), Darby and the 1999 acquisitions were included for the
entire years of 1999 and 1998, selling expenses would have been 7.0% and 6.7% of
net sales, respectively. The increase over prior year is primarily attributed to
increases in salaries of the new merchandising managers at Wing and cooperate
advertising allowances at Atrium Wood which are fixed at the beginning of the
year and do not vary with sales levels. Due to the elimination of certain sales
territories, sales volume declined and a corresponding increase as a percent of
sales occurred.
General and administrative expenses increased from 5.6% of net sales during
1998 to 7.9% of net sales during 1999. The increase was primarily due to a 2.4%
point increase at Wing and the acquisitions Darby-South, Heat and Champagne,
which have higher general and administrative expenses than Atrium (previous
registrant). The increase was partially offset by a 0.6% point decrease in
general and administrative expenses as a percent of net sales at Atrium
(previous registrant) due to sales volume increases without any incremental
fixed costs. If Atrium (previous registrant), Darby and the 1999 acquisitions
were included for the entire years of 1999 and 1998, general and administrative
expenses would have been 8.1% and 7.4% of net sales, respectively. This increase
was primarily attributable to a $750 charge to bad debt expense at Wing related
to the bankruptcy of a significant customer (Hechinger).
Delivery expenses decreased from 8.8% of net sales during 1998 to 7.5% of
net sales during 1999. The decrease was primarily due to a 0.8% point decrease
at the Atrium (previous registrant) and the acquisitions Darby-South, Heat and
Champagne, which have significantly lower delivery expenses than the Company and
Wing. If Atrium (previous registrant), Darby and the 1999 acquisitions were
included for the entire years of 1999 and 1998, delivery expenses would have
increased slightly to 7.3% of net sales during 1999, primarily due increases in
fuel cost, and 7.2% of net sales during 1998.
AMORTIZATION EXPENSE. Amortization expense increased $6,584 from $2,133
during 1998 to $8,717 during 1999. The increase was primarily due to the
continued amortization of the goodwill recorded in connection with the
Recapitalization and amortization of the new goodwill related to the
acquisitions of Darby-South, Heat and Champagne, which was $1,151 during 1999.
NON CASH STOCK OPTION COMPENSATION EXPENSE. Non cash stock option
compensation expense decreased $3,723from $3,851 in 1998 to $128 in 1999. In
1998, compensation expense was recorded for the options issued in connection
with the Recapitalization. In 1999, the Company recorded expense related to the
Company's variable options, under which expense is recorded as the value of the
options appreciate.
SPECIAL CHARGE. The company recorded a one-time charge of $1,886 for
severance benefits and related expenses incurred in connection with the
separation agreement entered into by the Company and the former President and
Chief Executive Officer.
17
INTEREST EXPENSE. Interest expense increased $19,443 from $9,081 during
1998 to $28,524 during 1999. The increase in interest expense was due primarily
to an increase in the average outstanding debt related to the $175 million
10 1/2 Senior Subordinated Notes due 2009 issued during the year. Additionally,
interest expense included the amortization of the deferred financing costs
recorded in connected with the Notes.
EXTRAORDINARY CHARGE. Extraordinary charge increased from $639 during 1998
to $1,936 during 1999. Extraordinary charge in 1999 consisted of the write-off
of deferred financing costs of $896 and the payment of a tender premium of
$2,182 in connection with the issuance of the Senior Subordinated Notes, the
paydown of Term Loan B and the retirement of the 10 1/2 Senior Subordinated
Notes due 2006. This amount is net of income tax benefit of $1,142.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES. Net sales increased by $112,000 from $99,059 in 1997 to $211,059
in 1998. The increase was due primarily to a combined increase in net sales of
$87,909 from the addition of the Company and Darby in connection with the
Recapitalization in October 1998 and the acquisition of Super Millwork in
November 1997. Additionally, net sales at Wing increased 24.3% due to the
increase in sales to the large home center retail chains.
COST OF GOODS SOLD. Cost of goods sold decreased from 79.0% of net sales
during 1997 to 75.4% of net sales during 1998. The decrease was due largely to
the addition of the Company and Darby in the fourth quarter of 1998, as these
divisions operate at higher margins than Wing. Excluding the effects of the
change in the LIFO reserve, cost of goods sold would have been 75.5% of net
sales in 1998 and 78.9% in 1997.
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, delivery,
general and administrative expenses increased $24,083 from $15,671 (15.8% of net
sales during 1997) to $39,754 (18.8% of net sales during 1998). The increase was
primarily due to the inclusion of selling, delivery, general and administrative
expenses of Super Millwork for twelve months and the Company and Darby for
three months. Additionally, selling and delivery expenses increased due to the
increase in net sales. The increase in selling, delivery, general and
administrative expenses as a percentage of net sales is due largely to the
addition of the Company and Darby, as these expenses represent a greater
percentage of net sales at the Company and Darby than Wing.
AMORTIZATION EXPENSE. Amortization expense increased $1,359 from $774
during 1997 to $2,133 during 1998. The increase was largely due to the
amortization of goodwill recorded in connection with the Recapitalization.
NON CASH STOCK OPTION COMPENSATION EXPENSE. Stock option compensation
expense increased $3,851 from $0 during 1997 to $3,851 during 1998. Stock option
compensation expense consisted of $2,813 representing the difference between the
fair market value of common stock of D and W and the exercise price associated
with a warrant granted to an executive of the Company in connection with the
Recapitalization, charges associated with previously issued stock options at
exercise prices below the fair value of the underlying common stock and charges
associated with certain variable options.
INTEREST EXPENSE. Interest expense increased $6,128 from $2,953 during 1997
to $9,081 during 1998. The increase in interest expense was due primarily to an
increase in average outstanding debt related to the loans issued and Senior
Subordinated Notes due 2006 assumed in connection with the Recapitalization. In
addition, interest expense included the amortization of deferred financing costs
recorded in connection with the Recapitalization.
EXTRAORDINARY CHARGE. Extraordinary charge increased $639 from $0 during
1997 to $639 during 1998. Extraordinary charge represents the write-off of
certain deferred financing costs incurred in the placement
18
of Wing's debt, which was repaid in connection with the Recapitalization. This
amount is net of income tax benefit of $392.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations and availability under the Revolving Credit
Facility ("Revolving Facility") are the Company's principal sources of
liquidity. During 1999, cash was primarily used in connection with the
acquisitions of Darby-South, Heat and Champagne and for capital expenditures.
Net cash provided by operating activities was $8,835 during 1999 compared to
cash used in operating activities of $10,253 during 1998. The increase in cash
provided by operations was primarily attributable to an increase in net income
and an increase in inventories. Cash flows from financing activities decreased
from cash provided of $125,184 during 1998 to $108,480 during 1999. The decrease
was due primarily to borrowings and contributions from Corp. made in connection
with the Recapitalization in 1998.
OTHER CAPITAL RESOURCES
In connection with the Recapitalization, the Company entered into a Credit
Agreement providing for a Revolving Facility in the amount of $30,000, which was
increased to $40,000 in June 1999, of which $5,000 is available under a letter
of credit sub-facility. The Revolving Facility has a maturity date of June 30,
2004. At December 31, 1999, the Company had $20,096 of availability under the
Revolving Facility, net of borrowings of $15,270 and outstanding letters of
credit totaling $4,634.
CAPITAL EXPENDITURES
The Company had net cash capital expenditures of $8,111 during 1999,
compared to $2,209 and $1,355 during 1998 and 1997, respectively. The 1998
capital expenditures are exclusive of the Recapitalization. The increase is
largely due to the addition of the Company and Darby for the last three months
of 1998 and Darby-South, Heat and Champagne during 1999. The Company expects
capital expenditures (exclusive of acquisitions) in 2000 to be approximately
$11,000, however, actual capital requirements may change, particularly as a
result of acquisitions the Company may make. Capital expenditures exclude costs
related to the implementation of the Company's new management information system
which include internally capitalized costs.
The ability of the Company to meet its debt service and working capital
obligations and capital expenditure requirements is dependent, however, upon the
future performance of the Company and its subsidiaries which, in turn, will be
subject to general economic conditions and to financial, business and other
factors, including factors beyond the Company's control. As of March 30, 2000,
the Company had $20,060 available for borrowings under the Revolving Facility,
net of borrowings of $15,500 and outstanding letters of credit totaling $4,440.
INFLATION, TRENDS AND GENERAL CONSIDERATIONS
The Company has evaluated and expects to continue to evaluate possible
acquisitions on an ongoing basis and at any given time may be engaged in
discussions or negotiations with respect to acquisition candidates. The
Company's performance is dependent to a significant extent upon the levels of
new residential construction, residential replacement and remodeling and
non-residential construction, all of which are affected by such factors as
interest rates, inflation and unemployment. In the near term, the Company
expects to operate in an environment of relatively stable levels of construction
and remodeling activity. However, increases in interest rates could have a
negative impact on the level of housing construction and remodeling activity.
The demand for the Company's products is seasonal, particularly in the Northeast
and Midwest regions of the United States where inclement weather during the
winter months usually reduces the level of building and remodeling activity in
both the home improvement and new construction markets. The Company's lower
sales levels usually occur during the first and fourth
19
quarters. Since a high percentage of the Company's 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 the working capital of the Company's
subsidiaries is greater from late in the first quarter until early in the fourth
quarter.
MARKET RISK
The Company is exposed to market risks related to changes in interest rates
and commodity pricing. The Company uses derivative financial instruments on a
limited basis to hedge economic exposures. The Company does not enter into
derivative financial instruments or other financial instruments for speculative
trading purposes.
INTEREST RATE RISK
The Company is exposed to market risk from changes in interest rates
primarily through its investing and borrowing activities. In addition, the
Company's ability to finance future acquisition transactions may be impacted if
the Company is unable to obtain appropriate financing at acceptable interest
rates. The Company manages its borrowing exposure to changes in interest rates
by utilizing a combination of fixed and variable rate debt instruments. In
addition, as of December 31, 1999, the Company hedged its exposure on a portion
of its variable rate debt by entering into interest rate swap agreements to lock
in a fixed rate. At December 31, 1999, approximately 56% of the carrying values
of the Company's long-term debt were either at fixed interest rates or covered
by interest rate swap agreements that fixed the interest rates.
The following table presents principal cash flows of variable rate debt by
maturity date and the related average interest rate. The table also presents the
notional amount of the swaps and their expected future interest rates. The
notional amount is used to calculate the contractual payments to be exchanged.
The interest rates are weighted between the various loans based on debt
outstanding and are estimated based on implied forward rates using a yield curve
at December 31, 1999.
EXPECTED MATURITIES (DOLLARS IN THOUSANDS)
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
-------- -------- -------- -------- -------- ---------- -------- ----------
LIABILITIES
Variable--rate
debt............... $17,270 $2,000 $2,000 $2,000 $2,000 $118,430 $143,700 $143,700
Average interest
rate............... 10.45% 10.74% 10.76% 10.85% 10.95% 11.14% -- --
INTEREST RATE
DERIVATIVES
Notional amount...... $ 563 -- -- -- -- -- $ 563 563
Average pay rate..... 6.50% -- -- -- -- -- -- --
Average receive
rate............... 7.06% -- -- -- -- -- -- --
Notional amount...... -- -- -- $2,498 -- -- $ 2,498 2,524
Average pay rate..... 6.25% 6.25% 6.25% 6.25% -- -- -- --
Average receive
rate............... 7.06% 7.35% 7.38% 7.47% -- -- -- --
20
At December 31, 1998, long-term debt included variable-rate debt of
$149,548, which approximated its fair value, with an average interest rate of
10.6%. The Company also had two interest rate swaps outstanding as follows:
SWAP #1 SWAP #2
-------- --------
Notional amount........................................... $563 $2,498
Fair value................................................ 563 2,524
Average pay rate.......................................... 6.50% 6.25%
Average receive rate...................................... 7.06% 7.31%
COMMODITY PRICING RISK
The Company is subject to significant market risk with respect to the
pricing of its principal raw materials, which include, among others, plastics,
resins, glass, wood and aluminum. If prices of these raw materials were to
increase dramatically, the Company may not be able to pass such increases onto
its customers and, as a result, gross margins could decline significantly. The
Company manages its exposure to commodity pricing risk through purchasing
aluminum forward commitments. The following is information related to aluminum
forward commitments at December 31, 1999:
FORWARD COMMITMENTS, EXPECTED TO MATURE DURING 2000
Contract volumes:
Fixed prices.............................................. 12,800,000pounds
Floating prices........................................... 62,013,000pounds
Contract amount............................................. $10,321
Fair value.................................................. $11,281
YEAR 2000 DISCLOSURE
The following Year 2000 statements constitute a Year 2000 Readiness
Disclosure within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.
As of March 30, 2000, none of the Company's subsidiaries had experienced any
significant Year 2000 related problems. There have been no instances where
mission-critical and non-mission-critical systems have failed to perform
correctly. However, the Year 2000 issue still poses several potential risks to
the Company and its subsidiaries. A number of the Company's customers and
suppliers (third parties) utilize computers and computer software to varying
degrees in conjunction with the operation of their businesses. The customers and
suppliers of those businesses may utilize computers as well. Should the
Company's customers and suppliers, or the businesses on which they depend
experience any Year 2000 related computer problems, such third parties' cash
flow could be disrupted, adversely affecting their ability to pay the Company,
if a customer, or, if a supplier, their ability to pay their suppliers for goods
needed to supply the Company. Such disruptions could have adverse affects on the
Company and its subsidiaries. The Company assessed its Year 2000 third party
exposure through the use of questionnaires and personal interviews during 1999.
As of March 30, 2000, the Company was not aware of any supply or credit problems
related to the Year 2000 issue.
Should Year 2000 related problems occur which cause any of the systems of
certain third parties upon which the Company and its subsidiaries depends become
inoperative, increased personnel costs could be incurred if additional staff is
required to perform functions that the inoperative systems would have otherwise
performed. As of March 30, 2000, the Company had not experienced any disruptions
of third party services related to the Year 2000 issue.
The Company's expenditures for remediation directly related to correcting
Year 2000 issues were approximately $2,000, including businesses acquired in
1999. The total expenditures of approximately
21
$2,000 consisted of approximately $1,500 of IT computer hardware equipment costs
and approximately $500 of IT software and non-IT computer hardware expenditures.
All of the Company's Year 2000 compliance expenditures have been funded from the
Company's operating cash flow.
The Company's Year 2000 compliance budget does not include significant
amounts for hardware replacement because the Company has historically employed a
strategy to continually upgrade its computer systems. Consequently, the
Company's Year 2000 compliance budget has not required the diversion of funds
from or the postponement of the implementation of other planned IT projects.
The Company believes it is not possible to estimate the potential lost
revenue due to the remaining potential Year 2000 problems discussed above as the
occurrence, extent and longevity of such potential problems cannot be predicted.
As of March 30, 2000 the Company believes that it has not experienced any lost
revenue related to the Year 2000 issue.
FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" amended by SFAS
No. 137 "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FAS No. 133--Amendment of FAS No. 133" (combined
"SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 2000. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1999 and
thereafter). SFAS 133 cannot be applied retroactively. SFAS 133 must be applied
to (a) derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the Company's election, before January 1, 1998).
The Company is in the process of quantifying the impacts of adopting
SFAS 133 on its financial statements and has not determined the timing of or
method of adoption of SFAS 133.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are listed in the accompanying Index to Financial
Statements on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information concerning the directors and the
executive officers of D and W and its subsidiaries.
NAME AGE POSITION
- ---- -------- --------
Frank E. Sheeder.......................... 56 Chief Executive Officer and Director
Jeff L. Hull.............................. 34 President, Chief Financial Officer,
Treasurer and Director
R.L. Gilmer............................... 46 Executive Vice President, Chief Operating
Officer and Director, Divisional
President--Wing Industries, Inc.
Louis W. Simi, Jr......................... 59 Executive Vice President of Operations of
Atrium
Robert E. Burns........................... 34 Sr. Vice President of Operations of Atrium
Cliff Darby............................... 35 Divisional President--R.G. Darby
Company, Inc. and Total Trim, Inc.
Eric W. Long.............................. 31 Vice President, Corporate Controller and
Secretary
Sam A. Wing, Jr........................... 76 Chairman Emeritus and Director
Daniel T. Morley.......................... 47 Chairman of the Board of Directors
James G. Turner........................... 31 Vice President and Director
Roger A. Knight........................... 40 Director
Andreas Hildebrand........................ 32 Director
John Deterding............................ 68 Director
Nimrod Natan.............................. 36 Director
Frank E. Sheeder joined D and W and Atrium effective March 28, 2000. Prior
to joining the Company, Mr. Sheeder served as Chief Operating Officer of Zurn
Industries, Inc. from 1995 to 1999. Mr. Sheeder also served as Chief Executive
Officer of Eljer Industries, Inc. from 1997 to 1998. Prior to Zurn and Eljer,
Mr. Sheeder served in various capacities with GAF Corporation and General
Electric.
Jeff L. Hull has served as President of D and W and Atrium since
August 1999 and as Director since April 1999 and Chief Financial Officer and
Treasurer from April 1996. Prior to that, Mr. Hull managed the asset/liability
department of AmVestors Financial Corporation (NYSE:AMV) from June 1995. From
1990 to 1995, he was an audit manager with the accounting firm of Deloitte &
Touche. Mr. Hull is a certified public accountant.
R.L. Gilmer has served as Executive Vice President of D and W and Atrium
since April 1999 and as the Chief Operating Officer and Director of D and W and
Atrium since October 1998. Mr. Gilmer has also served as President of Wing
Industries from October 1996. Prior to that, he was Vice President of Wing from
July 1993 to October 1996. Mr. Gilmer has served Wing in various capacities
since 1986 including as Controller and Manufacturing Manager. Prior to joining
Wing, Mr. Gilmer was a certified public accountant with the accounting firm of
Arthur Andersen & Co.
Louis W. Simi, Jr. has served as Executive Vice President since 1993 and
General Manager of our Atrium Aluminum division from 1971 to 1998. Mr. Simi also
served as Director of Atrium from July 1995 to November 1996. He has served in
other capacities with us and our subsidiaries since 1966.
Robert E. Burns joined Atrium in January 2000 as Senior Vice President of
Operations. Prior to that Mr. Burns was Vice President of Operations of Baldwin
Hardware, a division of Masco Corp. from March 1996. Prior to joining Masco,
Mr. Burns was a management consultant with Universal Scheduling Company for six
years.
23
Cliff Darby has served as President of Darby since 1993 and has worked for
Darby since 1988, overseeing operations and sales for Darby and Total
Trim, Inc.
Eric W. Long has served as Vice President since April 1999, as Secretary
since March 2000 and as Corporate Controller of Atrium since April 1996. Prior
to April 1999, Mr. Long served as Assistant Secretary of Atrium from April 1996.
From April 1995 to April 1996, Mr. Long was a financial analyst with Applebee's
International. From 1991 to 1995, he was with the accounting firm of Deloitte
& Touche L.L.P. Mr. Long is a certified public accountant.
Sam A. Wing, Jr. has served as Chairman Emeritus and Director of D and W
since October 1998. Mr. Wing has served Wing in various capacities since 1946,
including as Chairman Emeritus from 1996 until October 1998, as Chairman and
Chief Executive Officer of Wing from 1995 until 1996 and as Chairman of Wing
from 1994 until 1995. Prior to that, Mr. Wing was Chairman and Chief Executive
Officer of Wing from 1969 to 1994.
Daniel T. Morley has served as Chairman of the Board of Directors of D and W
since October 1998. Mr. Morley has served as President of Ardshiel since 1997
and Chairman of WIH since 1996 and Door since January 1998. Mr. Morley also
serves as Chairman of Astro Textiles, Inc. and Koala Holdings, Inc, privately
held companies.
James G. Turner has served as Vice President and Director of D and W and
Atrium since October 1998. Mr. Turner has served as a Principal of Ardshiel
since June 1997. Mr. Turner has also served as a Director of Wing since
October 1997 and Door since December 1997. From March 1994 until June 1997,
Mr. Turner worked as an Associate for Ardshiel. Prior to that, Mr. Turner worked
for Chemical Banking Corp. Mr. Turner is also a Director of Avanti
Petroleum, Inc. and several other privately held companies.
Roger A. Knight has served as a Director of D and W since October 1998.
Mr. Knight has served as a Principal of Ardshiel since May 1998. Prior to
joining Ardshiel, he was Managing Director and a member of Coopers & Lybrand
Securities, Inc., the wholly-owned investment banking subsidiary of Coopers &
Lybrand L.L.P. (now known as PricewaterhouseCoopers LLP).
Andreas Hildebrand has served as a Director of D and W since October 1998.
Mr. Hildebrand is Vice President--Private Equities of GE Investments.
Mr. Hildebrand also served as a Director of Wing since October 1997 and of Darby
since January 1998. He has served in other capacities with GE Investments during
the past five years. Mr. Hildebrand is also a Director of Eagle Family Foods
Holdings, Inc.
John C. Deterding has served as Director of D and W since October 1998.
Mr. Deterding has been the owner of Deterding Associates, a real estate
consulting company, since June 1993. From 1975 until June 1993, he served as
Senior Vice President and General Manager of the Commercial Real Estate division
of General Electric Capital Corporation ("GECC"). From November 1989 to June
1993, Mr. Deterding served as Chairman of the General Electric Real Estate
Investment Company, a privately held REIT. He served as Director of GECC
Financial Corporation from 1986 to 1993.
Nimrod Natan has served as a Director of D and W since October 1998.
Mr. Natan has served as a Principal of Ardshiel since 1997. Mr. Natan also
serves as a director of Wing and Astro Holdings, Inc., a privately held company.
Prior to joining Ardshiel in 1997, Mr. Natan was a management consultant with
Gemini Consulting for four years.
24
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION AND OTHER INFORMATION
COMPENSATION OF NAMED EXECUTIVE OFFICERS. The following table provides
certain summary information for each of the years ended December 31, 1997, 1998
and 1999 concerning compensation paid or accrued by us to or on behalf of the
Chief Executive Officer and the four other most highly compensated persons
functioning effectively as our executive officers whose individual combined
salary and bonus exceeded $100,000 during such period (the "Named Executive
Officers"):
ANNUAL COMPENSATION LONG-TERM
------------------------------------ COMPENSATION
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) OPTIONS# ($)
- --------------------------- -------- -------- ---------- ------------ ------------ ------------
Jeff L. Hull .............. 1999 $250,000 $ 150,000 $ -- 425,000 $ --
President, Chief 1998 155,000 175,000 -- 1,183,842 --
Financial Officer and 1997 120,000 20,000 -- 5,000 15,146(2)
Treasurer
R.L. Gilmer ............... 1999 225,000 83,500 -- -- --
Executive Vice President, 1998 215,000 56,250 -- 1,183,842 --
Chief Operating Officer 1997 138,679 70,000 -- -- --
Louis W. Simi, Jr. ........ 1999 170,000 110,000 -- -- --
Executive Vice President 1998 170,000 185,000 -- 250,000 662,923(3)
of Operations 1997 125,000 250,690 -- -- 106,025(2)
Cliff Darby ............... 1999 156,000 135,000 -- -- --
Divisional President-- 1998 150,000 76,000 -- 832,314 --
R.G. Darby Company, Inc. 1997 150,000 66,000 -- -- --
and Total Trim, Inc.
*Randall S. Fojtasek ...... 1999 87,500 0 1,750,000(4) 5,735,369 3,802,809(4)
President and Chief 1998 350,000 3,140,000 -- -- 2,542,570(3)
Executive Officer 1997 350,000 125,000 -- 308,928(2)
- ------------------------
* Resigned effective March 31, 1999.
Frank Sheeder joined the Company as Chief Executive Officer effective
March 28, 2000. Accordingly, no compensation was paid in 1999. See
"Employment Agreements."
(1) Perquisites related to automobile and expense allowances are excluded since
the aggregated amounts are the lesser of $50,000 or 10% of the total annual
salary.
(2) Amounts represent fees received in connection with the termination of the
purchase and sale agreement to acquire PlyGem Industries, Inc.
(3) In connection with a change of control transaction, certain members of
management were granted options at below fair market prices. Accordingly,
compensation expense is being recognized for financial statement purposes.
Upon completion of the 1998 Recapitalization and the exercise of these
options, the compensatory portion of the options were reflected in the
individual's wages and in our financial statements.
(4) In connection with Mr. Fojtasek's resignation in March 1999, he was paid
accrued severance of approximately $1.8 million and through the cancellation
of warrants an additional $3.8 million was paid to terminate the said
warrants.
25
OPTION GRANTS DURING 1999. The following table sets forth option grants to
the Named Executive Officers during the year ended December 31, 1999.
INDIVIDUAL GRANTS
NUMBER OF -------------------------- POTENTIAL REALIZABLE VALUE AT
SECURITIES % OF TOTAL ASSUMED ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION FOR OPTION
OPTIONS GRANTED TO EXERCISE OR TERM(2)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ------------------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ---------- ------------ ----------- ---------- ----------- -----------
Jeff L. Hull.......... 200,000 6.7 1.10 7/1/09 145,912 364,049
150,000 5.1 1.25 10/1/09 114,282 287,774
75,000 2.5 .01 10/1/09 57,141 143,887
R.L. Gilmer........... -- -- -- -- -- --
Louis W. Simi, Jr..... -- -- -- -- -- --
Cliff Darby........... -- -- -- -- -- --
Randall S. Fojtasek... -- -- -- -- -- --
- ------------------------
(1) All options are for the common stock of D and W Holdings, Inc..
(2) The assumed rates are compounded annually for the full terms of the options.
(3) Options vest ratably over the life of the respective employment contract,
except for Simi and Darby, which vest ratably over five years and Hull's
which vest daily over the life of his employment agreement.
AGGREGATED OPTION EXERCISES AND FISCAL-YEAR-END OPTION VALUES. The
following table sets forth option exercises by the Named Executive Officers and
value of in-the-money unexercised options held at December 31, 1999.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-
SHARES AT FY-END (#) MONEY OPTIONS AT FY-END
ACQUIRED ON VALUE --------------------------------- ---------------------------------
NAME EXERCISE (#) REALIZED($) EXERCISABLE(1) UNEXERCISABLE(1) EXERCISABLE(2) UNEXERCISABLE(2)
- ---- ------------ ------------- -------------- ---------------- -------------- ----------------
Jeff L. Hull......... -- $ -- 688,136 1,045,706 $359,876 $214,084
R.L. Gilmer.......... -- -- 835,643 887,882 405,338 221,970
Louis W. Simi, Jr.... -- -- 312,500 187,500 325,625 46,875
Cliff Darby.......... -- -- 393,997 904,518 43,003 115,138
Randall S. Fojtasek.. 5,735,369(3) 3,802,809(3) -- -- -- --
- ------------------------
(1) Represents options held by the named individual to purchase common stock of
D and W Holdings, Inc.
(2) Based on the fair market value of the option shares at fiscal year end
($1.25 per share) less the exercise price per share payable for such shares.
(3) Represents shares underlying warrants to purchase common stock of D and W
Holdings, Inc. that were canceled and retired, upon Mr. Fojtasek's
resignation.
1998 STOCK OPTION PLAN
In connection with the 1998 Recapitalization, the Board of Directors and
stockholders of D and W adopted the D and W Holdings, Inc. 1998 Stock Option
Plan (the "1998 Plan") providing for the grant of options to purchase common
stock of D and W to key employees and eligible non-employees of D and W and its
subsidiaries. The 1998 Plan originally provided for the grant of options to
purchase up to 11,991,142 shares of D and W common stock. Upon consummation of
the acquisitions of Heat, Inc. and Champagne Industries, Inc., the 1998 Plan was
amended to increase the number of options to 14,991,142.
26
After the acquisitions and 1999 grants, 3,817,142 shares of D and W common stock
were reserved for future grants under the 1998 Plan. The 1998 Plan is
administered by the compensation committee of the Board of Directors of
D and W.
The 1998 Plan provides that options may be granted in the form of incentive
options qualified for favorable tax treatment under Section 422 of the Internal
Revenue Code or in the form of non-qualified options, which do not qualify under
Section 422. All options granted are non-qualified options. Unless otherwise
provided by the compensation committee, options granted under the 1998 Plan
generally have a term of ten (10) years from the date of grant and vest in equal
installments annually over three to five years dependent on continued
employment. No option is exercisable until it has vested. Options granted upon
consummation of the 1998 Recapitalization in exchange for outstanding options of
Darby and Wing continue to vest on the schedule applicable to the exchanged
options. Of such options, options to purchase 371,138 shares of D and W common
stock were fully vested upon grant. Of the options granted in connection with
the 1998 Recapitalization, options to purchase 993,115 shares of D and W common
stock will vest only in connection with a value event, defined as:
- the sale of D and W common stock by D and W in an offering registered with
the SEC which constitutes a qualifying public offering,
- D and W merging or consolidating with another corporation in a merger in
which the surviving corporation has freely tradeable common stock, or
- the sale or transfer of substantially all of the assets of D and W and its
subsidiaries, taken as a whole.
The exercise price of all options was set by the compensation committee upon
grant, and with respect to incentive options is at least equal to the fair
market value of the D and W common stock on the date of grant.
Options are nontransferable other than in accordance with the laws of
descent and distribution. Unvested options will expire, unless otherwise
provided by the compensation committee, upon the optionee's death, disability or
termination of employment for any reason. Upon an optionee's death or disability
the optionee or his or her representative or heir will have the right to
exercise the vested portion of any options. Upon termination for cause or
voluntary termination by the optionee without good reason all vested options
will automatically expire. Upon termination of employment for any other reason,
including retirement or termination without cause, the optionee will have the
right to exercise the vested portion of any option. Also, upon termination of an
optionee's employment for any reason, D and W will have the right to purchase
outstanding options and any shares of D and W common stock held by the optionee
as a result of the exercise of an option.
REPLACEMENT STOCK OPTION PLAN
In addition to the 1998 Plan, D and W adopted the D and W Holdings, Inc.
Replacement Stock Option Plan (the "Replacement Plan") to govern the terms of
certain options to purchase D and W common stock which were granted in
replacement of outstanding options of Atrium Corp. in connection with the 1998
Recapitalization. Under the Replacement Plan, options to purchase an aggregate
of 1,575,000 shares of D and W common stock were granted in exchange for
outstanding options of Atrium Corp. which were not cashed out in the 1998
Recapitalization. In connection with the acquisitions of Heat, Inc. and
Champagne Industries, Inc., the Replacement Plan was amended increased the
number of shares available to 2,575,000. The options granted pursuant to the
Replacement Plan vest ratably over periods ranging from three to five years on
each anniversary date of the grant. The replacement options have exercise prices
ranging from $0.01 to $0.16 per share. As of December 31, 1999, 374,469 shares
of D and W common stock were reserved for future grants under the Replacement
Plan.
27
Upon termination of an optionee's employment, D and W shall have the right
to repurchase from the optionee all or any portion of their replacement option.
Upon exercise of any vested portion of a replacement option, D and W may require
the optionee to execute a buy-sell agreement containing provisions similar to
the repurchase provisions described above, as a condition to such option
exercise.
The Replacement Plan provides that all options granted thereunder are in the
form of nonqualified options, which are options that do not qualify for favored
tax treatment under Section 422 of the Internal Revenue Code. The replacement
options have a term of 20 years from the date of grant subject to early
termination in connection with termination of employment. No option is
exercisable until it is vested. Replacement options are not transferable by an
optionee, either voluntarily, involuntarily or by operation of law, except that
options may be transferred to an optionee's family members or personal
representative, so long as the transferee agrees to be bound by the provisions
of an option agreement and replacement plan.
BONUS PLAN
We maintain a bonus plan providing for annual bonus awards to certain key
employees. Such bonus amounts are based on the Company and its divisions meeting
certain performance goals established by our board of directors.
OTHER BENEFIT PROGRAMS
Our executive officers also participate in other employee benefit programs
including health and dental insurance, group life insurance, long-term and
short-term disability, and a savings and supplemental retirement plan (the
"401(k) Plan") on the same basis as our other employees.
EMPLOYMENT AGREEMENTS
Mr. Sheeder has entered into an employment agreement with D and W pursuant
to which he serves as Chief Executive Officer of D and W. Mr. Sheeder's
employment agreement has a four-year term, commencing March 28, 2000. Under the
terms of Mr. Sheeder's employment agreement, he is entitled to receive an annual
base salary of $325,000, subject to increase at the discretion of the Board of
Directors. The agreement provides that Mr. Sheeder may receive an annual
performance bonus of up to $325,000;
- 75% of which will be payable contingent on achievement of D and W's EBITDA
plan,
- 25% of which will be payable contingent on achievement of management's
objectives set by the Board of Directors.
Pursuant to the agreement, Mr. Sheeder has received options to purchase
2,500,000 shares of D and W common stock pursuant to the stock option plan.
1,000,000 shares have a strike price of $1.25 and the remaining
1,500,000 shares have a strike price of $1.50. The options will vest annually in
equal installments over four years from the date of grant. The agreement also
provides that in the event Mr. Sheeder is terminated by D and W without cause,
or terminates his employment for good reason, D and W will pay to Mr. Sheeder a
payment
- in a lump sum, an amount equal to the sum of his annual base salary earned
or accrued through the termination date, reimbursement of his reasonable
and necessary expenses, any unpaid accrued vacation pay and any amount
arising from his benefits to be received pursuant to D and W's investment
plans, plus
- equal to a prorated portion of his incentive bonus, plus
- equal to one-twelfth of his annual base salary on the date of termination
together with 80% of his maximum incentive bonus for each month during a
period of twenty-four months following the date of his termination.
28
Such payments would also be made if Mr. Sheeder's employment is terminated
by D and W in connection with a change of control of D and W, as defined in the
agreement. Pursuant to the agreement, Mr. Sheeder agrees not to compete with
D and W and its subsidiaries until (i) one year following termination by
D and W for cause or due to disability or as a result of termination initiated
by him without good reason, or (ii) the last day of any period he is receiving
severance payments upon termination by D and W without cause or upon a change of
control, or as a result of termination initiated by him with good reason.
Mr. Hull has entered into an employment agreement with D and W pursuant to
which he serves as President and Chief Financial Officer of D and W. Mr. Hull's
employment agreement has a three-year term, commencing in October 1999. Under
the terms of Mr. Hull's employment agreement, he is entitled to receive an
annual base salary of $250,000, subject to increase at the discretion of the
Board of Directors. The agreement provides that Mr. Hull may receive an annual
performance bonus of up to $150,000;
- 50% of which will be payable contingent on achievement of D and W's EBITDA
plan,
- 50% of which will be payable contingent on achievement of management's
objectives set by the Board of Directors.
Pursuant to the agreement, Mr. Hull has received options to purchase
1,733,842 shares of D and W common stock pursuant to the stock option plan. The
options have various exercise prices ranging from $.01 to $1.25 per share,
subject to adjustment under the stock option plan, and will vest daily over
three and four years from the date of grant. The agreement also provides that in
the event Mr. Hull is terminated by D and W without cause, or terminates his
employment for good reason, D and W will pay to Mr. Hull a payment
- in a lump sum, an amount equal to the sum of his annual base salary earned
or accrued through the termination date, reimbursement of his reasonable
and necessary expenses, any unpaid accrued vacation pay and any amount
arising from his benefits to be received pursuant to D and W's investment
plans, plus
- equal to a prorated portion of his incentive bonus, plus
- equal to one-twelfth of his annual base salary on the date of termination
together with 80% of his maximum incentive bonus for each month during a
period of twenty-four months following the date of his termination.
Such payments would also be made if Mr. Hull's employment is terminated by
D and W in connection with a change of control of D and W, as defined in the
agreement. Pursuant to the agreement, Mr. Hull agrees not to compete with
D and W and its subsidiaries until (i) one year following termination by
D and W for cause or due to disability or as a result of termination initiated
by him without good reason, or (ii) the last day of any period he is receiving
severance payments upon termination by D and W without cause or upon a change of
control, or as a result of termination initiated by him with good reason.
Mr. Gilmer has entered into an employment agreement with D and W pursuant to
which he serves as Chief Operating Officer of D and W. Mr. Gilmer's employment
agreement has a four year term, commencing in October 1998. Under the terms of
Mr. Gilmer's employment agreement, he is entitled to receive an annual base
salary of $225,000, as adjusted, subject to increase at the discretion of the
Board of Directors. The agreement provides that Mr. Gilmer may receive an annual
performance bonus of up to $125,000,
- 75% of which will be payable contingent on achievement of D and W's EBITDA
plan,
- 15% of which will be payable contingent on achievement of management
objectives set from time to time by the Board of Directors, and
- 10% of which will be payable contingent on achievement of a target return
on equity for D and W set by the Board of Directors.
29
Pursuant to the agreement, Mr. Gilmer received options to purchase 1,723,524
shares of D and W common stock with exercise prices ranging from $.01 to $1.56.
These options vest annually in equal installments over 3 to 4 years. The
agreement also provides that, in the event Mr. Gilmer is terminated by D and W
without cause, or terminates his employment for good reason, D and W will pay to
Mr. Gilmer a payment
- in a lump sum, an amount equal to the sum of his annual base salary earned
or accrued through the termination date, reimbursement of his reasonable
and necessary expenses, any unpaid accrued vacation pay and any amount
arising from his benefits to be received pursuant to Holdings' investment
plans, plus
- an amount equal to a prorated portion of his incentive bonus, plus
- an amount equal to one-twelfth of his annual base salary on the date of
termination together with 80% of his maximum base incentive bonus for each
month during a period of twelve months following the date of his
termination.
Such payments would also be made if Mr. Gilmer's employment is terminated by
D and W in connection with a change of control of D and W, as defined in the
agreement. Pursuant to the agreement, Mr. Gilmer agrees not to compete with
D and W and its subsidiaries until (i) one year following termination by
D and W for cause or due to disability or as a result of termination initiated
by him without