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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, 1998.
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 April 15, 1999, the registrant had 100 shares of Common Stock, par
value $.01 per share outstanding.
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ATRIUM COMPANIES, INC. AND SUBSIDIARIES
1998 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....................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders..................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters... 13
Item 6. Selected Financial Information.......................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 14
Item 8. Financial Statements and Supplementary Data............................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 18
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 19
Item 11. Executive Compensation.................................................. 21
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 27
Item 13. Certain Relationships and Related Transactions.......................... 28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 31
Signatures.......................................................................... 32
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PART I
ITEM 1. BUSINESS
ALL REFERENCES TO PRO FORMA ASSUMES THAT THE "RECAPITALIZATION" DESCRIBED ON
PAGE 11, 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 ATRIUM, WING AND DARBY FOR THE ENTIRE YEAR
ENDED DECEMBER 31, 1998.
THE TERM "WING" REFERS TO WING INDUSTRIES, INC. AND ITS DIRECT PARENT, WING
INDUSTRIES HOLDINGS, INC., AS A COMBINED ENTITY AND 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 OUR
COMPANY AND BECAME OUR SUBSIDIARIES IN CONNECTION WITH THE RECAPITALIZATION OF
ATRIUM IN 1998.
THE COMPANY
We are one of the largest manufacturers and distributors of residential
windows and doors in the United States based on 1998 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 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 non-wood windows and the third largest manufacturer and
supplier of doors in the United States, based on 1998 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 29 manufacturing facilities and distribution centers strategically
located in 14 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.
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, vinyl and wood windows
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 55% of
our 1998 pro forma sales were derived from the sale of windows, 40% from the
sale of doors, and approximately 5% from the sale of other products and
services.
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WINDOWS. Our window products include sliders, double hung, and casement
products and are sold under the ATRIUM-Registered Trademark- and HR brand names.
We sell our products primarily to building contractors and lumberyards through
direct and one-step distribution.
The demand for our aluminum, vinyl and wood products vary by region:
- ALUMINUM--Aluminum windows are the product of choice in the southern
United States due to the regions' 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.
- WOOD--Wood windows have the highest thermal efficiency and highest cost
compared to aluminum and vinyl. Accordingly, wood windows are in demand in
colder regions and in higher end homes. The ATRIUM-Registered Trademark-
name gained wide recognition in the 1970s and 1980s through the success of
our line of wood patio doors. In order to capitalize on this success, we
added a wood window line in 1991 including aluminum-clad and primed wood
windows and patio doors. We have made the strategic decision to minimize
our participation in the wood window business as it is concentrated on the
higher end of our market which is not part of our core focus.
DOORS. We estimate that our revenues from the sale of doors in 1998,
represented approximately 6% of the total U.S. door market. We estimate that
approximately 85% of our door sales were generated from interior doors and 15%
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 products 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 steel entry doors.
We estimate that 45% of our 1998 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 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.
OTHER PRODUCTS AND SERVICES. We also manufacture and distribute other
products including cafe doors, columns and shutters. 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.
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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 plan 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 8 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 the acquisition or start up of our own distribution
center in such market.
We also sell windows 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-fifth of our total window sales in 1998. One of our goals is 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 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.
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To enhance our market coverage and leverage our considerable brand equity,
we currently market our windows and patio doors under primarily two brand names,
ATRIUM-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 have now completed rolling our
SKOTTY and BISHOP product lines, as well as those from the Gentek acquisition in
1997, 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 75 company salaried and commissioned sales representatives and
approximately 100 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.
For door sales we use an internal sales force consisting of seven people. In
addition, senior executives are actively involved with both sales and customer
service. This group is segregated between national and regional accounts.
Approximately 80% of our door business sales are made to national retail home
center chains. The internal sales force was realigned in early 1995 reducing the
sales staff from 18 to 7 while increasing the number of merchandise managers. As
a result, we have a smaller, more focused sales force which is better structured
to give the home centers the attention required at the store level.
To assist the sales force and provide better service to its customers, we
have over 20 merchandising managers. The merchandising managers provide home
center retailers with in-store services such as
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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.
Promotional efforts are focused on the home center industry and its
customers. Cooperative advertising programs are offered to certain of our major
customers, giving us exposure in our customers' local media (e.g., newspaper,
radio, television) in order 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 wood products in Texas since 1953 and today have
three 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 seven new manufacturing operations in
Alabama, Ohio, New York, North Carolina, Pennsylvania, Illinois 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 is merging its manufacturing, distribution and sales functions with
Wing. We are currently fitting a facility to locate all of Atrium Wood's and a
portion of Wing's manufacturing operations. Due to the fact that both divisions
sell over 80% of their products to the Home Centers, we believe significant
benefits can be realized from the synergies between the sales and distribution
functions of Atrium Wood and Wing. Both service the same customers and
distribute to the same retail locations. This integration is expected to be
completed during the fourth quarter of 1999.
INDUSTRY OVERVIEW
In 1998, new construction spending in the United States totaled over $550
billion, of which residential and commercial spending totaled $250 billion and
$300 billion, respectively. Within the residential construction market, new
construction spending and remodel and replacement spending totaled $170 billion
and $80 billion, respectively. The residential construction market consists of
single-family and multi-family housing construction. In 1998, housing starts in
the United States totaled approximately 1.5 million, of which 1.2 million were
single-family homes and 0.3 million were multi-family homes. During 1998,
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approximately 91% of Atrium's window and door sales were to the single-family
housing construction market, and the remaining 9% of sales were to the
multi-family housing construction market.
We believe that, in 1998, United States residential window and door
expenditures were approximately $10.0 billion, of which new construction and
remodel and replacement expenditures represented approximately $4.3 billion and
$5.7 billion, respectively.
The domestic window market has grown to more than 58.2 million in unit sales
in 1998, and has generally outpaced the growth in the domestic building
materials industry. The domestic door market has grown more than 10% in sales
over the last five years. According to F.W. Dodge, the U.S. residential door
market represents more than 58.0 million units annually.
WINDOWS. The residential window industry can be divided into two end-use
segments: new construction (an estimated 18.7 million windows shipped in 1998)
and repair and remodeling (approximately 39.5 million windows sold in 1998). 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 Caradon
Better-Bilt 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.
- WINDOWS AND PATIO DOORS--WOOD. In the wood window and door segment of the
industry, two large manufacturers, Andersen Corporation and Pella
Corporation, sell premium products on a national basis. Our wood windows
and 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, 1998. 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, 1998, 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 3,200 persons, of whom approximately 3,150 are
employed at our manufacturing facilities and distribution centers and
approximately 50 are employed at corporate headquarters. Approximately 1,200 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
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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 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 are concentrated with one of the leading home center retailers,
Home Depot. For the year ended December 31, 1998, Home Depot accounted for
approximately 23% of our pro forma net sales. No other customer accounted for
more than 10% of our pro forma net sales.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
We are subject to numerous federal and state statutes and regulations
relating to, among other things, air and water quality, the discharge of
materials into the environment, and safety and health 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.
We have been named as a party in several government enforcement and private
actions associated with old waste disposal sites, some of which are on the U.S.
Environmental Protection Agency's Superfund priority list. These actions seek
cleanup costs and in some cases, damages for personal injury or property damage.
Given the uncertain nature of liability under CERCLA for Superfund sites, and
uncertainties regarding factual circumstances, the remedy to be implemented, and
other factors, we cannot determine with certainty the extent of our liability,
if any. However, we do not believe, based upon the information available at this
time, that the outcome of the matters discussed above will result in liability
which exceeds the limited amount of our alleged contribution to the respective
sites, and we do not believe that there will be a material adverse effect on our
financial condition, results of operations or liquidity.
RECENT DEVELOPMENTS
RECAPITALIZATION
On October 2, 1998, GE Investment Private Placement Partners II, a Limited
Partnership ("GEIPPPII"), which was formed by GE Investment Management
Incorporated, a wholly-owned subsidiary of General Electric Company, and
Ardshiel, Inc. ("Ardshiel"), a private equity firm, and certain of its
affiliates, acquired Atrium in a transaction valued at $225.0 million. In
connection with the Atrium acquisition, GEIPPPII and Ardshiel recapitalized Wing
and Darby and combined them with Atrium. As part of the recapitalization,
through a newly-formed company named D and W Holdings, Inc. ("Parent" or "D and
W"), GEIPPPII and Ardshiel contributed to Atrium $50.0 million of contributed
equity from the sale of common stock, approximately $52.0 million in the implied
value of the Wing and Darby businesses
10
and $45.0 million of contributed equity funded by the issuance of 12% senior
discount debentures (the "Discount Debentures") by Atrium Corporation ("Atrium
Corp."), our direct holding company. The remaining sources of funds were
financed with a $205.0 million senior secured credit facility consisting of a
$30.0 million revolver ($2.0 million drawn at closing), a $75.0 million term
loan B, and a $100.0 million term loan C (of which approximately $29.1 million
was repaid 36 days after closing). The revolving credit facility, term loan B
and term loan C mature in June 2004, June 2005 and June 2006, respectively. The
transactions described in this paragraph are referred to in this 10-K as the
"1998 Recapitalization" or "Recapitalization."
DELTA ACQUISITION
On January 27, 1999, the Company acquired certain assets of Delta Millwork,
Inc., a privately held door pre-hanger located in Orlando, Florida, with 1998
sales of $8.8 million. The Company financed the acquisition through its
revolving credit facility. The results of operations for the acquired business
will be included in the Company's consolidated financial statements beginning
January 27, 1999.
MANAGEMENT CHANGE
On April 9, 1999, the Company completed a separation agreement with Randall
S. Fojtasek, President and Chief Executive Officer, whereby Mr. Fojtasek
resigned from the Company effective March 31, 1999. The Board of Directors has
nominated Jeff L. Hull, Executive Vice President and Chief Financial Officer,
and Ken L. Gilmer, Executive Vice President and Chief Operating Officer, to
oversee day-to-day operations and report directly to the Executive Committee of
the Board of Directors. The Company expects to take a charge of approximately
$1,750 in the first quarter of fiscal year 1999 for severance benefits related
to this management change.
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.
11
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 wood patio doors 266,000 Lease
Fabrication of vinyl windows 90,000 Lease
Irving, Texas.................. Fabrication of aluminum windows 147,218 Own
Extrusion die manufacturing 1,400 Own
Irving, Texas.................. Distribution of all window types 22,000 Own
Fabrication of aluminum patio doors 98,000 Own
Wylie, Texas................... Extrusion of aluminum 100,000 Own
Carrollton, Texas.............. Extrusion of vinyl 25,200 Lease
Phoenix, Arizona............... Distribution of aluminum windows 44,743 Lease
Las Vegas, Nevada.............. Distribution of aluminum windows 30,400 Lease
Woodville, Texas............... Fabrication of aluminum windows and storm doors 180,000 Lease
Extrusion of aluminum 120,000 Lease
San Antonio, Texas............. Distribution of aluminum windows 10,000 Lease
Anaheim, California............ Fabrication of vinyl windows 80,000 Lease
Union City, California......... Distribution of vinyl windows 10,000 Lease
Portland, Oregon............... Distribution of vinyl windows 10,000 Lease
Salt Lake City, Utah........... Distribution of vinyl windows 10,000 Lease
Clinton, Massachusetts......... Fabrication of vinyl windows 31,000 Own
Bridgeport, Connecticut........ Fabrication of vinyl windows 75,000 Lease
Farmingdale, New York.......... Distribution of vinyl windows 6,000 Lease
Greenville, Texas.............. Manufacture of solid wood and hollow core bi-fold and
passage doors; pre-hanging 180,000 Own
Greenville, Texas.............. Door finishing operation; custom door manufacture 30,000 Lease
Hanover Park, Illinois......... Manufacture of hollow core bi-fold and passage doors;
pre-hanging; warehouse 73,000 Lease
Allentown, Pennsylvania........ Manufacture of hollow core bi-fold and passage doors; door
pre-hanging; warehouse 105,000 Lease
Mt. Pleasant, Texas............ Door manufacturing 110,000 Lease
Cleveland, Ohio................ Door pre-hanging; warehouse 30,000 Lease
Charlotte, North Carolina...... Door pre-hanging; warehouse 40,000 Lease
Florence, Alabama*............. Door pre-hanging; warehouse 60,000 Lease
- ------------------------
*Leased from affiliates of certain stockholders. See "Certain Relationships and
Related Transactions-- Facility Leases."
We maintain our corporate headquarters in Dallas, Texas. The facilities
provide approximately 11,000 square feet and are 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.
12
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 and 1998, and the selected balance sheet data
at December 31, 1995, 1996, 1997 and 1998 were derived from the audited
financial statements of Atrium as described further below. The selected
financial data as of and for the year ended December 31, 1994, were derived from
Atrium's unaudited financial statements, which in the opinion of management
reflect all adjustments necessary for a fair presentation of results for such
periods. 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 Holdings, Inc. contributed the assets of Wing and
Darby to Atrium.
As Wing was determined to be the accounting acquiror in a "reverse
acquisition", the historical financial statements of Atrium (prior to October 3,
1998) were replaced with the historical financial statements of Wing. As a
result, the statement of operations for 1998 only includes the operations of
Atrium and Darby from October 3 through December 31. The statements of
operations for the years ended December 31, 1994, 1995 and 1997, the periods
ended October 25, 1996 and December 31, 1996 only include the operations and
accounts of Wing and its predecessor. Wing was acquired by it present
controlling shareholders on October 25, 1996. The December 31, 1998 balance
sheet includes the accounts of Atrium, Wing, Darby and each of their respective
subsidiaries. The December 31, 1994, 1995, 1996 and 1997, and October 25, 1996
balance sheets only include the accounts of Wing and its predecessor.
PREDECESSOR
---------------------------------
PERIOD PERIOD
ENDED ENDED YEAR ENDED YEAR ENDED
OCTOBER 25, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1996 1997 1998
--------- --------- ----------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Net sales.................................... $ 72,496 $ 68,481 $ 62,880 $ 13,200 $ 99,059 $ 211,059
Income before income taxes................... 179 491 1,789 532 1,391 159,140
Net income (loss)............................ 35 279 1,119 303 696 (2,819)
BALANCE SHEET DATA (END OF PERIOD):
Total assets................................. $ 20,740 $ 18,515 $ 19,966 $ 36,404 $ 55,383 $ 359,869
Total debt................................... 10,296 8,522 8,154 20,489 32,238 179,227
OTHER DATA:
EBITDA(1).................................... $ 1,777 $ 2,374 $ 3,014 $ 1,166 $ 5,836 $ 14,732
Depreciation and amortization................ 689 844 716 260 1,492 7,950
Interest expense............................. 909 1,039 509 374 2,953 9,081
- ------------------------------
(1) 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.
13
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 Atrium (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 Holdings, Inc. contributed the assets of Wing and
Darby to Atrium.
As Wing was determined to be the accounting acquiror in a "reverse
acquisition", the historical financial statements of Atrium (prior to October 3,
1998) were replaced with the historical financial statements of Wing. As a
result, the statement of operations for 1998 only includes the operations of
Atrium and Darby from October 3 through December 31. The statements of
operations for the years ended December 31, 1998 and 1997, the periods ended
October 25, 1996 and December 31, 1996 only include the operations and accounts
of Wing and its predecessor. Wing was acquired by it present controlling
shareholders on October 25, 1996.
14
RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PERCENTAGES)
The following table sets forth for the periods indicated, information
derived from Atrium's consolidated statements of operations expressed as
percentage of net sales.
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Net sales................................................................................ 100.0% 100.0% 100.0%
Cost of goods sold....................................................................... 75.4 79.0 75.2
--------- --------- ---------
Gross profit............................................................................. 24.6 21.0 24.8
Selling, delivery, general and administrative expenses................................... 18.8 15.8 20.4
Amortization expense..................................................................... 1.0 0.8 0.2
Stock option compensation expense........................................................ 1.8 -- --
--------- --------- ---------
Income from operations................................................................... 2.9 4.4 4.2
Interest expense......................................................................... 4.3 3.0 1.2
Other income, net........................................................................ 0.3 -- --
--------- --------- ---------
Income (loss) before income taxes and extraordinary charge............................... (1.1) 1.4 3.1
Provision (benefit) for income taxes..................................................... (0.1) 0.7 1.2
--------- --------- ---------
Income (loss) before extraordinary charge................................................ (1.0) 0.7 1.9
Extraordinary charge, net of income tax benefit.......................................... 0.3 -- --
--------- --------- ---------
Net income (loss)........................................................................ (1.3)% 0.7% 1.9%
--------- --------- ---------
--------- --------- ---------
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.
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.
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.
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 Parent 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 assumed in connection with the Recapitalization. In addition,
interest expense included the amortization of deferred financing costs recorded
in connection with the recapitalization.
15
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 of Wing's debt, which
was repaid in connection with the Recapitalization. This amount is net of income
tax benefit of $392.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales increased by $22,979 from $76,080 in 1996 to $99,059
in 1997. The increase was primarily due to the increase in sales to the large
home center retail chains. The two largest home center retailers, which are
Wing's top two customers, have experienced sales growth in excess of 25%.
Additionally, the increase included $4,140 from the Super Millwork acquisition
in November 1997.
COST OF GOODS SOLD. Cost of goods sold increased from 75.2% of net sales
during 1996 to 79.0% of net sales during 1997. The increase is largely the
result of significant start-up costs incurred at the Cleveland prehanging
facility, the Allentown, Pennsylvania prehanging and hollow core manufacturing
facility and transition costs associated with moving a portion of the sales
volume attributable to the Super Millwork acquisition to the Allentown facility.
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, delivery,
general and administrative expenses increased $158 from $15,513 (20.4% of sales
during 1996) to $15,671 (15.8% of sales during 1997). The decrease as a
percentage of sales is primarily attributable to lower freight costs per unit as
additional prehanging/distribution facilities are opened. Additionally, retail
store display expenses were reduced as a result of the implementation of a lower
cost display program.
AMORTIZATION EXPENSE. Amortization expense increased $649 from $125 during
1996 to $774 during 1997. The increase was due primarily to the amortization of
goodwill recorded in connection with the October 1996 acquisition of Wing.
INTEREST EXPENSE. Interest expense increased $2,070 from $883 during 1996
to $2,953 during 1997. The increase was due largely to an increase in average
outstanding debt which resulted from the incurrence of additional debt related
to the Wing acquisition in October 1996 and the Super Millwork acquisition in
November 1997, as well as borrowings under the Wing Credit Facility. Interest
expense during 1996 and 1997 includes amortization of related deferred financing
costs.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations and availability under the Revolving Facility
are the Company's principal sources of liquidity. During 1998, cash was
primarily used in connection with the Recapitalization and for capital
expenditures. Net cash used in operating activities was $8,024 during 1998
compared to cash provided by operations of $1,148 during 1997. The increase in
cash used in operations was primarily attributable to a decrease in net income
and an increase in inventories. Cash flows from financing activities increased
from cash provided of $10,609 during 1997 to $133,174 during 1998. The increase
was due primarily to borrowings and contributions from Corp. made in connection
with the Recapitalization.
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, 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, 1998, the Company
had $23,273 of availability under the Revolving Facility, net of borrowings of
$4,118 and outstanding letters of credit totaling $2,609.
CAPITAL EXPENDITURES
The Company had cash capital expenditures (exclusive of the
Recapitalization) of $2,221 during 1998, compared to $1,355 and $1,083 during
1997 and 1996, respectively. The increase is largely due to the addition of the
Company and Darby for the last three months of 1998. The Company expects capital
expenditures (exclusive of acquisitions) in 1999 to be approximately $9,500,
however, actual capital
16
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 31, 1999,
the Company had $16,991 available for borrowings under the Revolving Facility,
net of borrowings of $10,700 and outstanding letters of credit totaling $2,609.
YEAR 2000
Many existing computer systems and applications and other control devices
are coded to use only two digits (rather than four) to identify a year in the
date code field. These date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. Many computer
programs and systems, including certain programs and systems utilized by us, are
highly dependent upon financial and other data that, based on the program's or
system's inability to distinguish between the Year 2000 and other century-end
dates, could be misreported or misinterpreted and cause significant errors. If
not corrected, many computer applications could fail when processing data
related to the Year 2000. In addition, two interacting systems, applications or
devices, each of which has individually been fixed so that it will individually
handle Year 2000 issue, could nonetheless suffer "integration failure" because
their method of dealing with the problem is not compatible.
This Year 2000 issue impacts our owned or licensed computer systems and
equipment and the computer systems and equipment of third parties upon which we
rely. The Year 2000 problem could cause these systems to fail, err, and, in the
case of third party systems, become incompatible with our systems. Therefore, if
we, or a significant third party fail to become Year 2000 ready, or if the Year
2000 problem causes our systems to become internally incompatible or
incompatible with any key third party systems, our business could suffer
material disruptions.
We are assessing the impact of the Year 2000 problem and have or intend to
modify portions of our hardware and software so that our computer systems will
function properly with respect to date in the Year 2000 and thereafter. We have
reviewed and continue to review each operating unit for the appropriate
information system enhancements, with respect to both Year 2000 problem as well
as strategic system upgrade.
To achieve our overall operating strategy, we are enhancing our information
technology by installing new software to implement a fully integrated
manufacturing system for our operating units. This system is intended to be Year
2000 compliant. Each operating unit was prioritized for installation of the
system based on any Year 2000 issues, with the final phase of implementation and
installation of this system scheduled to be completed by the third quarter of
1999. We believe that with this strategy and completed installations, the Year
2000 problem will not pose significant operational problem for us. We can not
assure you, however, that our computer systems, or other companies acquired in
the future or the computer systems of other companies with whom we conduct
business, will be Year 2000 compliant prior to December 31, 1999 or that the
inability of any such systems to process accurately Year 2000 data will not have
a material adverse effect on our business, operating results or financial
condition.
The total amount of costs to be incurred by the Company to address these
system enhancements is estimated at $1,500. The Company has expensed
approximately $750 through December 31, 1998.
17
FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130") "Reporting
Comprehensive Income." FAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. FAS 130 is effective for financial statement periods
beginning after December 15, 1997. The Company adopted FAS 130 beginning January
1, 1998. The Company had no comprehensive income for all periods presented prior
to January 1, 1998.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC") Issued Statement of Position
98-1 ("SOP 98-1") "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" that is effective for reporting periods beginning
after December 15, 1998, but provides for earlier application if certain
conditions are met. The Company has applied the provisions of SOP 98-1 in its
financial statements for the year ended December 31, 1998 and its adoption had
no material effect on the Company's consolidated financial position or results
of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133") "Accounting for Derivative Instruments and Hedging
Activities" that is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company will implement the provisions of FAS 133 as
required. The future adoption of FAS 133 in not expected to have a material
effect on the Company's consolidated financial position or results of
operations.
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.
18
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 Holdings, Inc. and its subsidiaries.
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
R.L. Gilmer.......................................... 45 Executive Vice President, Chief Operating Officer and
Director
Jeff L. Hull......................................... 33 Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
Louis W. Simi, Jr.................................... 58 Executive Vice President of Operations, Atrium
Companies, Inc.
Michael Quadhamer.................................... 34 President, Wing Industries, Inc.
Cliff Darby.......................................... 32 President, R.G. Darby Company, Inc. and Total Trim,
Inc.
Eric W. Long......................................... 31 Vice President, Corporate Controller and Assistant
Secretary
Sam A. Wing, Jr...................................... 75 Chairman Emeritus and Director
Daniel T. Morley..................................... 46 Chairman of the Board of Directors
James G. Turner...................................... 30 Vice President and Director
Roger A. Knight...................................... 39 Director
Andreas Hildebrand................................... 31 Director
John Deterding....................................... 65 Director
Nimrod Natan......................................... 35 Director
R.L. Gilmer has served as Executive Vice President of D and W since April
1999 and as the Chief Operating Officer and Director of D and W since October
1998. Mr. Gilmer has also served as President and Chief Executive Officer of
Wing Industries Holdings since 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.
Jeff L. Hull has served as Executive Vice President and Director of D and W
since April 1999 and as Chief Financial Officer, Treasurer and Secretary of D
and W since October 1998. Mr. Hull has served as our Chief Financial Officer
from April 1996 and Secretary and Treasurer from December 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.
Louis W. Simi, Jr. has served as our Executive Vice President from 1993 to
October 1998 and General Manager of our Atrium Aluminum division from 1971 to
1998. Mr. Simi also served as our Director from July 1995 to November 1996. He
has served in other capacities with us and our subsidiaries since 1966.
Michael Quadhamer has served as President of Wing since October 1998. Prior
to that, he served as Vice President and Chief Financial Officer of Wing
Industries Holdings from October 1996 until October 1998. Mr. Quadhamer has
served Wing in various capacities since 1991 including as Controller and as
Director of Global Operations. Prior to joining Wing, he worked for the
accounting firm of Arthur Andersen & Co. Mr. Quadhamer is a certified public
accountant.
Cliff Darby has served as President of Darby since 1993 and has worked for
Darby since 1988, performing numerous functions including overseeing operations
in the door plant, installing materials for Total Trim, Inc., sales, and pricing
of jobs.
19
Eric W. Long has served as Vice President of Atrium since April 1999 and as
Corporate Controller and Assistant Secretary of Atrium since 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 from 1995 until 1996 and as Chairman 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 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. since 1991.
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 the 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., a privately held company.
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. Mr. Deterding is also a Director of Patriot
American Hospitality and a former member and trustee of the Urban Land
Institute.
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.
20
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, 1996, 1997
and 1998 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 $100,000 during such period (the "Named Executive
Officers"):
ANNUAL COMPENSATION LONG-TERM
----------------------------------------- COMPENSATION
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION(1) YEAR ($) ($) ($)(1) OPTIONS# ($)
- --------------------------------- --------- ---------- ------------ --------------- ------------- -------------
*Randall S. Fojtasek ............ 1998 $ 350,000 $ 3,140,000 $ -- $ 5,735,369 $ 2,542,570(2)
President and Chief Executive 1997 350,000 125,000 -- -- 308,928(3)
Officer 1996 303,865 3,075,000 -- 2,195,222 221,500(4)
Jeff L. Hull .................... 1998 155,000 175,000 -- 1,183,842 --
Executive Vice President, Chief 1997 120,000 20,000 -- 5,000 15,146(3)
Financial Officer, Secretary 1996 100,000 0 -- 100,000 --
and Treasurer
R.L. Gilmer ..................... 1998 215,000 56,250 -- 1,183,842 --
Executive Vice President, Chief 1997 138,679 70,000 -- -- --
Operating Officer 1996 106,113 286,889 -- 539,682 --
Louis W. Simi, Jr. .............. 1998 170,000 185,000 -- 250,000 662,923(2)
Executive Vice President of 1997 125,000 250,690 -- -- 106,025(3)
Operations, Atrium Companies, 1996 125,000 270,681 -- 511,237 282,886(4)
Inc.
Cliff Darby ..................... 1998 150,000 76,000 -- 832,314 --
President, R.G. Darby Company, 1997 150,000 66,000 -- -- --
Inc. and Total Trim, Inc. 1996 150,000 66,000 -- -- --
- ------------------------
* Resigned effective March 31, 1999.
(1) Perquisites related to automobile and expense allowances are excluded since
the aggregated amounts are the lesser of $50,000 or 10% of the total annual
salary.
(2) In connection with a change of control transaction, certain members of
management were granted options at below fair market prices. Accordingly,
compensation expense is being recognized for financial statement purposes.
Upon completion of the 1998 Recapitalization and the exercise of these
options, the compensatory portion of the options were reflected in the
individual's wages and in our financial statements.
(3) Amounts represent fees received in connection with the termination of the
purchase and sale agreement to acquire PlyGem Industries, Inc.
(4) In connection with a change of control transaction, certain members of
management were granted options at below fair market prices. Accordingly,
compensation expense is being recognized for financial statement purposes.
21
OPTION GRANTS DURING 1998. The following table sets forth option grants to
the Named Executive Officers during the year ended December 31, 1998.
NUMBER OF INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
SECURITIES -------------------------------- AT ASSUMED ANNUAL RATES OF
UNDERLYING % OF TOTAL STOCK PRICE APPRECIATION
OPTIONS OPTIONS GRANTED EXERCISE OR FOR OPTION TERM(2)
GRANTED TO EMPLOYEES IN BASE PRICE EXPIRATION --------------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- --------------------------- ---------- ----------------- ------------- ----------- ------------ ------------
Randall S. Fojtasek........ 1,894,148 15 $ 1.00 10/02/08 $ 1,191,419 $ 3,019,272
2,841,221 22 .01 10/02/08 4,599,937 7,341,715
Jeff L. Hull............... 1,183,842 9 1.00 10/02/08 744,637 1,887,044
R.L. Gilmer................ 1,183,842 9 1.00 10/02/08 744,637 1,887,044
Louis W. Simi, Jr.......... 250,000 2 1.00 10/02/08 157,250 398,500
Cliff Darby................ 466,101 4 1.00 10/02/08 293,178 742,965
832,314 8 .83 1/09/08 434,416 1,101,019
- ------------------------
(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.
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, 1998.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE- MONEY OPTIONS AT
SHARES OPTIONS AT FY-END (#) FY-END
ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- -------------- ------------ ---------- -------------- ------------ -------------
Randall S. Fojtasek....... 2,195,222(1) $ 5,118,108 3,841,221 1,894,148(3) $ 3,802,808 $ --
Jeff L. Hull.............. 105,000(1) 244,805 125,000 1,183,842(3) 123,750 --
R.L. Gilmer............... 883(2) 108,167 231,136 1,183,842(3) 228,825 --
Louis W. Simi, Jr......... 511,237(1) 1,191,937 250,000 250,000(3) 247,500 --
Cliff Darby............... -- -- 231,136 466,101(3) 228,824 --
- ------------------------
(1) Represents options exercised by the named individual to purchase common
stock of Atrium Corp.
(2) Represents options exercised to purchase common stock of Wing Industries
Holdings, Inc.
(3) Represents options held by the named individual to purchase common stock of
D and W Holdings, Inc.
(4) Represents options held by the named individuals to purchase common stock of
D and W Holdings, Inc. Based on the fair market value of the option shares
at fiscal year end ($1.00 per share) less the exercise price per share
payable for such shares.
OPTION PLANS
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 "New 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 Stock Option Plan provides for the grant of options to
purchase up to 11,991,142 shares of D and W common stock. In conjunction with
the 1998 Recapitalization, options to purchase
22
3,582,353 shares of D and W common stock were granted to management of Darby and
Wing in exchange for outstanding options to purchase Darby and Wing stock.
Options to purchase an additional 8,153,588 shares of D and W common stock were
granted to management of D and W and its subsidiaries contemporaneously with the
1998 Recapitalization. After the 1998 Recapitalization, 255,201 shares of D and
W common stock were reserved for future grants under the New Plan. The New Plan
is administered by the compensation committee of the Board of Directors of D and
W.
The New 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 in connection with the 1998 Recapitalization
are non-qualified options. Unless otherwise provided by the compensation
committee, options granted under the New Plan generally have a term of ten (10)
years from the date of grant and vest in equal installments annually over 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 for 180 days after the date of death
or disability. 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 for 30 days after the date of termination. 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. If termination
occurs with cause, the purchase price will be the lesser of the fair market
value of the D and W common stock or the original cost of the shares or options
purchased, minus the exercise price of any options purchased. In all other
cases, the purchase price will be equal to the fair market value of the D and W
common stock, minus the exercise price of any options purchased.
REPLACEMENT STOCK OPTION PLAN
In addition to the New Plan, the Board of Directors and stockholders of 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
23
for outstanding options of Atrium Corp. which were not cashed out in the 1998
Recapitalization. The options granted pursuant to the Replacement Plan vest
ratably over a period of five years on each anniversary date of the grant. The
replacement options have an exercise price of $0.01 per share.
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.
In the event such termination of employment is for Cause, as defined in the
Replacement Plan, the price per option repurchased will be equal to the lesser
of $1.00 per underlying share and the market value per share of D and W common
stock in either case, minus $0.01 per share. If termination occurs for any
reason other than Cause, the repurchase price will, (i) for the unvested portion
of an option be equal to the lesser of the market value per share and $1.00 per
share, in each case minus $0.01 per share, and (ii) for the vested portion of an
option, be equal to the greater of market value per share or $1.00, in each case
minus $0.01 per share. 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 Atrium 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 insurance, group life insurance, and a savings and supplemental
retirement plan (the "401(k) Plan") on the same basis as our other employees.
EMPLOYMENT AGREEMENTS
Mr. Hull has entered into an employment agreement with D and W pursuant to
which he serves as Chief Financial Officer of D and W. Mr. Hull's employment
agreement has a four year term, commencing in October 1998. Under the terms of
Mr. Hull'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. Hull may receive an annual
performance bonus of up to $125,000, as adjusted;
- 50% of which will be payable contingent on achievement of D and W's EBITDA
plan,
- 35% of which will be payable upon achievement of targets established by
the Board of Directors for bad debt collections, accounts receivable days
and month end closing, and
- 15% of which will be payable contingent on achievement of management's
objectives set from time to time by the Board of Directors.
Pursuant to the agreement, Mr. Hull received options to purchase 1,183,842
shares of D and W common stock pursuant to the stock option plan. The options
have an exercise price of $1.00 per share, subject to adjustment under the stock
option plan, and will vest in equal installments over four years from
24
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 twelve 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.
Pursuant to the agreement, Mr. Gilmer received options to purchase 1,183,842
shares of D and W common stock upon the same terms as the options received by
Mr. Hull. 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 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.
25
The Company entered into an employment agreement with Mr. Simi on January 1,
1998. The compensation provided to Mr. Simi includes an annual base salary of
$170,000, subject to increases at the discretion of the Board of Directors.
Additionally, Mr. Simi is eligible for an incentive bonus based on certain
performance targets.
Mr. Simi's employment agreement terminates on December 31, 2000. If Mr.
Simi's employment with the Company is terminated by the Company for any reason
other than for cause, he will continue to be paid his salary for 12 months,
together with the annual incentive bonus. Mr. Simi has agreed not to compete
with the Company in certain geographic areas for so long as the Company pays
salary to him.
On January 9, 1998, Mr. Cliff Darby entered into an employment agreement
with Darby for a term commencing in January, 1998. Under the terms of Mr.
Darby's employment agreement, he is entitled to receive an annual base salary of
$156,000, as adjusted, subject to increase at the discretion of the Board of
Directors of Darby. Mr. Darby is entitled to annual performance bonus payable
upon the achievement of Darby's EBITDA plan. The agreement also provides that in
the event Mr. Darby is terminated by Darby without cause, as defined in the
agreement, Darby will pay to Mr. Darby a payment
- in a lump sum equal to all compensation accrued and unpaid as of the date
of termination, and
- in equal semi-monthly installments, an amount equal to the compensation to
which Mr. Darby would have been entitled under the agreement for a period
of one year if the agreement had not been terminated.
Pursuant to the agreement, Mr. Darby has agreed not to compete with the
business of Darby for a period of five years from the date of the agreement,
whether the agreement terminates prior to the end of such five year period;
provided that the non-competition covenant shall apply for one year following
termination without cause by Darby regardless of the date of termination.
Upon consummation of the merger, Mr. Darby received options to purchase
466,101 shares of D and W common stock, with an exercise price of $1.00 per
share. Such options vest over a five year period from the date of grant.
BOARD OF DIRECTORS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Daniel T. Morley, and Andreas Hildebrand serve as members of our
compensation committee.
AUDIT COMMITTEE
James G. Turner and Roger A. Knight serve as our audit committee.
EXECUTIVE COMMITTEE
James G. Turner, Roger A. Knight, Andreas Hildebrand, R.L. Gilmer and Jeff
L. Hull serve as our executive committee.
NON-EMPLOYEE DIRECTOR COMPENSATION
Any member of our board of directors who is not an officer or employee does
not receive compensation for serving on our board of directors. We
anticipate compensating non-employee directors not affiliated with GEIPPPII
or Ardshiel in the future for their service on our board.
26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We are a wholly-owned subsidiary of Atrium Corp., which in turn is a
wholly-owned subsidiary of D and W Holdings, Inc. The following table sets forth
certain information regarding the beneficial ownership of D and W common stock
as of March 31, 1999, by each person who owns beneficially more than 5% of the
outstanding common stock of D and W and by the directors and certain executive
officers of D and W. Unless otherwise indicated below, to our knowledge, all
persons listed below have sole voting and investment power with respect to their
shares of common stock of D and W.
NAME NUMBER OF SHARES PERCENTAGE
- ----------------------------------------------------------------------------------- ----------------- -------------
GE Investment Private Placement Partners II, a Limited Partnership................. 92,970,561 90.7%
3003 Summer Street
Stamford, CT 06984-7900
Ardshiel, Inc...................................................................... 6,643,600(1) 6.5%
230 Park Avenue, Suite 2527
New York, NY 10169
Randall S. Fojtasek................................................................ 2,841,221(2) 2.8%
R.L. Gilmer........................................................................ 480,159(3) *
Louis W. Simi, Jr.................................................................. 250,000(3) *
Jeff L. Hull....................................................................... 125,000(3) *
Cliff Darby........................................................................ 1,059,000 1.0%
Sam A. Wing, Jr.................................................................... -- --
Daniel T. Morley................................................................... 6,643,600(4) 6.5%
James G. Turner.................................................................... -- --
Roger A. Knight.................................................................... -- --
Andreas Hildebrand................................................................. -- --
John Deterding..................................................................... -- --
Nimrod Natan....................................................................... -- --
All directors and executive officers as a group (13 persons):...................... 11,523,487 11.2%
- ------------------------
* less than 1%.
(1) Includes (i) 1,040,748 shares of D and W common stock issuable upon exercise
of warrants that are currently exercisable; (ii) 1,819,033 shares of D and W
common stock held by Ardatrium L.L.C., Arddoor L.L.C., Ardwing L.L.C. and
Wing Partners, which are under common control with Ardshiel, and (iii)
3,783,819 shares of Holdings common stock held by certain other stockholders
of D and W who have granted proxies to Ardshiel or its affiliates to vote
their shares.
(2) Includes 2,841,221 shares of D and W Holdings common stock issuable upon
exercise of a warrant that is currently exercisable.
(3) Includes 125,000, 230,771 and 250,000 shares of D and W common stock
issuable upon exercise of options granted to Messrs. Hull, Gilmer and Simi,
respectively, under the New Plan. Such options are exercisable within 60
days.
(4) Represents shares beneficially owned by Ardshiel and its affiliates. Mr.
Morley is the President and a stockholder of Ardshiel and a managing member
of Arddoor L.L.C., Ardatrium L.L.C. and Ardwing L.L.C., the general partner
of Wing Partners. Accordingly, Mr. Morley may be deemed to be the beneficial
owner of these shares. Mr. Morley disclaims beneficial ownership of these
shares.
27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE STOCKHOLDERS AGREEMENT
GEIPPPII, Ardshiel, and certain other stockholders of D and W (collectively,
the "Major Stockholders"), have entered into a stockholders agreement, dated as
of October 2, 1998, which affects their relative rights as stockholders of D and
W.
Pursuant to the stockholders agreement, the Major Stockholders have agreed
that the authorized number of directors of D and W shall consist of up to nine
directors. GEIPPPII, so long as it is a stockholder, shall have the right to
designate one director in the event there are less then seven directors, and two
directors in the event the Board of Directors consists of seven or more members.
The remainder of the directors shall be designated by Ardshiel, so long as it is
stockholder.
Subject to certain exceptions, each of the Major Stockholders other than
GEIPPPII have agreed not to sell, transfer or otherwise dispose of such
stockholder's equity securities of D and W and an affiliate of Ardshiel has
agreed not to sell, transfer or otherwise dispose of its Discount Debentures. In
the event that GEIPPPII intends to transfer its equity securities or Discount
Debentures, each of the other Major Stockholders or holders of Discount
Debentures, will be entitled to require the purchaser of such equity securities
or Discount Debentures to purchase a pro rata portion of the equity securities
or Discount Debentures held by such Major Stockholder or holder of Discount
Debentures; PROVIDED, HOWEVER, that in the event such sale, transfer or
disposition by GEIPPPII occurs at any time following the fourth anniversary of
the stockholders agreement, the other stockholders or holders of Discount
Debentures, upon notice by GEIPPPII, will be obligated to sell all of their
equity securities and/or all of their Discount Debentures to the proposed
transferee. Subject to certain conditions, Ardshiel and its affiliates, may
require that GEIPPPII, at Ardshiel's or any of its affiliate's option, (i) sell
or otherwise dispose of its equity securities and Discount Debentures, in an
arm's length transaction to any person or persons who are not affiliates of
Ardshiel or (ii) purchase all of the other Major Stockholders' equity securities
and Discount Debentures for a purchase price provided in the stockholders
agreement. In addition, subject to certain exceptions, GEIPPPII and/or D and W
have the right to purchase from any selling Major Stockholder any or all equity
securities proposed to be sold to a third party by such selling Major
Stockholder.
The stockholders agreement provides that in the event GEIPPPII or any
Ardshiel stockholder or any of their respective affiliates purchases from D and
W equity securities issued after the date of the stockholders agreement, Randall
Fojtasek and affiliates controlled by him shall be entitled to participate in
such investment on a pro rata basis (based on Mr. Fojtasek's relative ownership
of equity interests in D and W Holdings at the time of any such purchase). The
rights granted to Mr. Fojtasek described above may not be assigned to any
person, without the prior written consent of the parties to the stockholders
agreement.
Pursuant to the terms of the stockholders agreement, D and W has granted the
Major Stockholders the right to require D and W, under certain circumstances, to
register under the Securities Act of 1933 any or all shares of D and W common
stock then held by such Major Stockholder and the right, in the event D and W or
any of its subsidiaries proposes to file, subject to certain exceptions, a
registration statement under the Securities Act with respect to any common stock
or equity security, to include in such registration statement for resale by the
Major Stockholders, such Major Stockholder's common stock.
The stockholders agreement provides that D and W cannot take certain
enumerated actions without obtaining the prior written consent of GEIPPPII.
MANAGEMENT AGREEMENT
We are a party to a management agreement dated October 2, 1998 with D and W,
Atrium Corp. and Ardshiel. Pursuant to the management agreement, Ardshiel
provides advice to D and W and its subsidiaries with respect to business
strategy, operations and budgeting and financial controls in exchange for an
annual fee of $1.3 million plus expenses. Additionally, the management agreement
provides that, prior to
28
engaging another financial advisor D and W or its subsidiary must offer Ardshiel
the opportunity to perform investment banking services in connection with a sale
or purchase of a business or any financing. Ardshiel shall receive a closing fee
for any such services which shall not be greater than 2% of the total purchase
or sale price for such business and shall be payable upon consummation of such
sale or such purchase. The consent of GEIPPPII is required prior to the payment
by D and W or any of its subsidiaries of any closing fees to Ardshiel where D
and W or any of its subsidiaries is paying similar fees to other entities for
similar services. D and W paid a closing fee of approximately $3.4 million upon
the consummation of the 1998 Recapitalization and paid Ardshiel's fees and
expenses in connection therewith. The management agreement will remain in effect
until October 2, 2008 and will be automatically renewed for one-year periods
unless either party gives written notice to the contrary at least thirty days
prior to the expiration of the initial or any extended term of the agreement
unless terminated earlier in accordance with its terms.
BUY-SELL AGREEMENTS
D and W entered into buy-sell agreements with certain members of its
management pursuant to which D and W may, at its option, repurchase from those
persons all or any portion of their shares of D and W common stock upon the
termination of their employment. Each agreement provides that D and W shall
repurchase those shares at a purchase price equal to the greater of $1.00 per
share or the fair market value of the shares at the date of termination unless
the termination shall have been for cause, in which case the repurchase price
shall be equal to the lesser of the fair market value per share at the date of
termination and $1.00 per share. Each agreement also provides for certain
restrictions on transfer.
In addition to the above, the buy-sell agreements entered into with Messrs.
Gilmer and Darby provide that the manager will have the right to require D and W
to repurchase his shares if he is terminated for any reason other than for cause
and D and W does not exercise its right to purchase the shares.
THE DISCOUNT DEBENTURES
In 1998, Atrium Corp. issued $80.6 million aggregate principal amount at
maturity of its Discount Debentures to GEIPPPII and an affiliate of Ardshiel
(representing $45.0 million in gross proceeds to Atrium Corp.), to fund a
portion of the Atrium merger consideration, the repurchase of $25.0 million of
Atrium's existing senior subordinated notes and repayment of the intercompany
loan described below. See "Description of Certain Indebtedness--Discount
Debentures."
D and W has agreed to cause
- us to make dividend payments to Atrium Corp. to enable Atrium Corp. to
make interest and principal payments on, or to repurchase, redeem or
prepay (at par plus accreted value and unpaid interest), the Discount
Debentures, to the extent we have funds legally available for the payment
of such dividends and we are not prohibited from making such dividend
payments by the terms of any contract to which we are a party (including,
without limitation, the indenture relating to the Credit Facility) and
- Atrium Corp., to the extent Atrium Corp. is not prohibited from doing so
by the terms of any contract to which it or D and W is a party, to pay
interest and principal on, or to repurchase, redeem or repay, the Discount
Debentures from the proceeds of any such dividend payment.
Subject to certain exceptions, an affiliate of Ardshiel has agreed not to
sell, transfer or otherwise dispose of its Discount Debentures. In addition,
such affiliate has certain rights and is subject to certain obligations in the
event of certain transfers by GEIPPPII of its Discount Debentures and is
entitled, under certain circumstances, to require GEIPPPII to sell or otherwise
dispose of its Discount Debentures and equity securities in an arm's length
transaction to any person or persons who are not affiliates of Ardshiel or
purchase such affiliate's Discount Debentures and equity securities. See "--The
Stockholders Agreement."
29
INTERCOMPANY LOAN
In connection with the 1998 Recapitalization, Atrium Corp. issued to us a
$24.0 million subordinated intercompany note and we in turn used a portion of
the proceeds from our term loan under our credit facility to fund the
intercompany loan to Atrium Corp. The intercompany loan to Atrium Corp. bore
interest at a rate of 5.66% per annum computed semiannually. The intercompany
loan was repaid in November 1998 with proceeds from the issuance of Discount
Debentures.
INDEMNIFICATION AGREEMENTS
We entered into indemnification agreements with Jeff L. Hull and Louis W.
Simi, Jr. under which we agreed to indemnify them to the fullest extent
permitted by law, and to advance expenses, if either of them becomes a party to
or witness or other participant in any threatened, pending or completed action,
suit or proceeding by reason of any occurrence related to the fact that the
person is or was our, our subsidiary's or, at our request, another entity's
director, officer, employee, agent or fiduciary, unless a reviewing party
(either outside counsel or a director or directors appointed by the Board of
Directors) determines that the person would not be entitled to indemnification
under applicable law. We expect to enter into similar indemnification agreements
with each of the remaining directors and executive officers.
FACILITY LEASES
On July 3, 1995, Fojtasek Industrial Properties, Ltd., a limited partnership
in which Randall S. Fojtasek owns an equity interest of approximately 10.2%,
executed leases with us with respect to our Atrium Wood's and Atrium Vinyl's
facility and our H-R Windows division's facility. Both leases are absolute net
leases. These leases were extended on October 1, 1997 for a period of ten years,
expiring on July 1, 2008. The amounts paid under these two leases totaled
$1,245,281, $753,000 and $605,338 in 1998, 1997 and 1996, respectively.
Additionally, Fojtasek Interests, a Texas corporation, in which Mr. Fojtasek
owns an interest, subleases approximately 1,500 square feet of office space at
our corporate headquarters. Amounts paid to us under this lease in 1998 were
$19,588.
Darby is a party to a facilities lease agreement with R.G. Darby, a former
stockholder of Darby and the father of Cliff Darby, President of Darby. Pursuant
to the terms of the lease, Darby pays rent to Mr. Darby of approximately $12,000
per month, adjusted annually for inflation. The term of the lease is fifteen
years with three extension terms of five years each. Rent expense paid to Mr.
Darby in 1998 was approximately $144,000.
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are included in this report.
(1) FINANCIAL STATEMENTS:
The financial statements are listed in the accompanying Index to
Financial Statements on page F-1 of this report.
(2) FINANCIAL STATEMENT SCHEDULES:
The financial statement schedules are listed in the Index to Financial
Statement Schedules on page S-1 of this report.
(3) EXHIBITS
The exhibits filed with or incorporated by reference in this report are
listed in the Exhibit Index beginning on page E-1 of this report.
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed by the Registrant during the
fourth quarter:
On October 19, 1998, in accordance with Items 1 and 7 of Form 8-K,
the Company filed a report on Form 8-K announcing the completion of the
merger between D and W Holdings, Inc., Atrium Corporation and D and W
Acquisition Corp. on October 2, 1998. The report included the terms of
the $205.0 million Credit Agreement entered into by the Company to
finance the Transaction. The report also included the financial
statements of the acquired b