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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
/X/ Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
December 31, 1999.
or
/ / Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required) for the
transition period from to .
Commission File Number 333-20095
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ATRIUM COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 75-2642488
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1341 W. MOCKINGBIRD LANE, SUITE 1200W
DALLAS, TEXAS 75247
(Address of executive offices, including zip code)
(214) 630-5757
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) and (g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
State the aggregate market value of the voting stock held by non-affiliates of
the registrant--NONE
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 30, 2000, the registrant had 100 shares of Common Stock, par
value $.01 per share outstanding.
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ATRIUM COMPANIES, INC. AND SUBSIDIARIES
1999 FORM 10-K
TABLE OF CONTENTS
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ITEM NO. DESCRIPTION PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 22
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 23
Item 11. Executive Compensation...................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 32
Item 13. Certain Relationships and Related Transactions.............. 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 36
Signatures.............................................................. 37
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PART I
ITEM 1. BUSINESS
THE TERM "COMPANY" REFERS TO ATRIUM COMPANIES, INC. (THE REGISTRANT) AFTER
THE RECAPITALIZATION DESCRIBED ON PAGE 10 AND THE REVERSE ACQUISITION OF WING
INDUSTRIES, INC. AND ITS PARENT, WING INDUSTRIES HOLDINGS, INC. (TOGETHER
"WING"). D AND W HOLDINGS, INC. ("D AND W") IS THE DIRECT PARENT OF ATRIUM
CORPORATION ("CORP"), THE DIRECT PARENT OF THE COMPANY. THE TERM "ATRIUM" REFERS
TO ATRIUM COMPANIES, INC. (THE PREVIOUS REGISTRANT) PRIOR TO THE
RECAPITALIZATION AND REVERSE ACQUISITION OF WING. THE TERM DARBY REFERS TO R.G.
DARBY COMPANY, INC., TOTAL TRIM, INC. AND THEIR DIRECT PARENT DOOR
HOLDINGS, INC., AS A COMBINED ENTITY, WHICH ENTITIES WERE CONTRIBUTED TO THE
COMPANY AND BECAME SUBSIDIARIES IN CONNECTION WITH THE RECAPITALIZATION.
ALL REFERENCES TO PRO FORMA ASSUME THAT THE ACQUISITIONS EFFECTED DURING
1999 OF DELTA MILLWORK, INC. ("DARBY-SOUTH"), HEAT, INC. ("HEAT") AND CHAMPAGNE
INDUSTRIES, INC. ("CHAMPAGNE") DESCRIBED IN "RECENT DEVELOPMENTS" AND THE
"RECAPITALIZATION" EFFECTED IN 1998 DESCRIBED IN "SELECTED FINANCIAL DATA" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" OCCURRED ON JANUARY 1, 1998 AND THE FINANCIAL DATA IS THAT OF THE
COMPANY, DARBY-SOUTH, HEAT AND CHAMPAGNE FOR THE YEARS ENDED DECEMBER 31, 1999
AND 1998.
THE COMPANY
We are one of the largest manufacturers and distributors of residential
windows and doors in the United States based on 1999 pro forma net sales. We
offer a complete product line including aluminum, vinyl and wood windows and
doors to our customers, which include leading national homebuilders and home
center retailers such as Del Webb, Centex, The Home Depot and Lowe's. We have
grown rapidly through a combination of internal growth and by making
complementary acquisitions.
We were founded in 1948 and have become one of the two largest manufacturers
and suppliers of residential non-wood windows and the third largest manufacturer
and supplier of residential doors in the United States based on 1999 pro forma
net sales. Our portfolio of products includes some of the industry's most
recognized brand names including ATRIUM-Registered Trademark- and
WING-Registered Trademark-.
We have 58 manufacturing facilities and distribution centers strategically
located in 24 states to service customers on a nationwide basis. We distribute
through multiple channels including direct distribution to large homebuilders
and independent contractors, one-step distribution through home centers and
lumberyards and two-step distribution to wholesalers and dealers who
subsequently resell to lumberyards, contractors and retailers. We believe that
our multi-channel distribution network allows us to reach the greatest number of
end customers and provide nationwide service to those customers.
Our company is vertically integrated with operations that include:
- The extrusion of aluminum and vinyl, which is utilized internally in our
fabrication operations or sold to third parties;
- The manufacture and assembly of window and door units, including
pre-hanging of doors, and sale of such units to wholesalers, lumberyards,
home centers and homebuilders;
- A turn-key installation program in which we supply and install many of our
products, including windows and interior and exterior doors; and
- The sale of finished products to homebuilders, remodelers and contractors
through company-owned distribution centers located across the country.
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PRODUCTS
We are one of a few window and door manufacturers that offer a diversified
product line that consists of a full range of aluminum and vinyl windows and
wood interior, exterior and patio doors. Our full product line allows us to
differentiate ourselves from our competition, leverage our distribution system
and be well-positioned to benefit from shifts in product preference. As
significant regional product preferences exist among aluminum, vinyl and wood, a
full product line is important to serve a national customer base effectively. We
estimate that approximately 60% of our 1999 pro forma sales were derived from
the sale of windows, approximately 37% from the sale of doors, and approximately
3% from the sale of other products and services.
WINDOWS. Our window products include sliders, double hung, and casement
products and are sold under the ATRIUM-Registered Trademark-,
CHAMPAGNE-REGISTERED TRADEMARK-, THERMAL-REGISTERED TRADEMARK-, BEST
BUILT-REGISTERED TRADEMARK-, KEL-STAR-Registered Trademark- and HR brand names.
We sell our windows primarily to building contractors and lumberyards through
direct and one-step distribution.
The demand for our aluminum and vinyl products vary by region:
- ALUMINUM--Aluminum windows are the product of choice in the southern
United States due to the region's warmer weather and more value-conscious
customers. Aluminum is the most appropriate fenestration material for the
region because it provides less thermal efficiency at a lower cost than
either vinyl or wood.
- VINYL--Demand for vinyl windows, particularly in colder climates, has
significantly increased over the last five years as vinyl windows have
gained acceptance as a substitute for wood windows. This trend has been
strengthened as prices for vinyl windows have become more competitive with
wood products and durability and energy efficiency have improved. We
entered the vinyl window market in mid-1995 and have increased sales of
vinyl windows by leveraging the ATRIUM brand name and our distribution
channels and through acquisitions.
DOORS. We estimate that our revenues from the sale of doors in 1999,
represented approximately 6% of the total U.S. door market. We estimate that
approximately 90% of our door sales in 1999 were generated from interior doors
and 10% from exterior doors. Our door products are sold under the
ATRIUM-Registered Trademark-, WING-Registered Trademark- and SUPER
MILLWORK-Registered Trademark- brand names. We sell our doors primarily to home
center retailers through one-step distribution.
- INTERIOR DOORS--There are two broad categories of interior doors: bi-fold
doors and passage doors. Bi-fold doors are hinged folding doors and
passage doors are the traditional doors used to connect rooms. There are
also two types of interior wood bi-fold doors and passage doors: solid
wood doors and hollow core doors. Solid doors are made completely of wood
while hollow core doors consist of two door facings glued to a wood frame
and are hollow on the inside. Both solid wood and hollow core passage
doors are sold one of two ways, either as slabs or as pre-hung units.
Slabs refer to the door itself and pre-hung units refer to slab doors
already hinged to a door frame at the factory.
- EXTERIOR DOORS--Our exterior door product offering consists primarily of
patio doors and pre-hung wood and steel entry doors.
We estimate that approximately 45% of our 1999 door sales were generated
from the sale of pre-hung doors, 30% from solid wood doors, 10% from hollow core
doors and 15% from patio doors. We estimate that approximately 60% of all
passage doors sold through home center retailers are sold as pre-hung units,
mainly because of the ease of installation for the do-it-yourself consumer. We
are one of the few vertically-integrated companies that both manufactures and
pre-hangs the doors. We believe that sales of our pre-hung door line will
continue to grow and will represent a larger portion of our total door sales in
the future.
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OTHER PRODUCTS AND SERVICES. We also manufacture and distribute other
products, including cafe doors, shutters, columns, decking products and patio
enclosures. We manufacture two types of cafe doors as well as louvered shutters.
The shutters can be used both for interior and exterior applications. Columns
come in many styles and are purchased from domestic suppliers. The deck & dock
products are made of vinyl and serve as an alternative to the more traditional
wood counterpart. The enclosures are custom built to any size and are made from
aluminum and vinyl product.
We also offer a turnkey total installation program in which we supply and
install all interior doors, exterior doors, mouldings, locks, hardware, wire
shelving, bath accessories, plate glass mirrors, and toilet partitions. This
concept allows a developer to transfer the risk associated with retaining
reliable work crews and provides protection from cost overruns. We believe that
developers view this as a value added service and are willing to pay a premium
price for it.
SALES, MARKETING AND DISTRIBUTION
One of the key components of our marketing strategy is to capitalize on the
complementary nature of our distribution channels. Historically, the majority of
our revenues of window business have been derived from sales to remodelers,
homebuilders, lumberyards and wholesalers, while through our door business we
have targeted principally home center retailers. We continue to broaden our
product offerings principally by selling doors to our traditional window
customers and windows to our traditional door customers.
We have a multi-channel distribution network that includes direct, one-step
and two-step distribution as well as 32 company-owned distribution centers. Our
distribution strategy maximizes our market penetration and reduces reliance upon
any one distribution channel for the sale of our products. Furthermore, as a
manufacturer and distributor of windows and doors for more than four decades, we
have developed long-standing relationships with key distributors in each of our
markets. In each instance, we seek to secure the leading distributors in each
market. If we cannot secure a top-tier distributor in a desired geographic
market, we will consider an acquisition or start up of our own distribution
center in such market.
We also sell to major home center retailers and smaller regional-based
retail centers. Although these have become more important to us because they
target the repair and remodeling market, they still accounted for less than
one-third of our total sales in 1999. One of our goals is to continue to
increase our window business' market share in the repair and remodeling market
by capitalizing our door business' strong relationship with home center
retailers.
We utilize the following distribution channels:
- Direct Distribution: We sell our windows and doors directly to
contractors, remodelers and other homebuilders without the use of an
intermediary. By selling directly to builders, we are able to increase our
gross profits while at the same time offering builders more favorable
pricing.
- One-Step Distribution: We sell our finished windows directly to
lumberyards, building products distributors, home centers, and
company-owned distribution centers, which will then sell to contractors,
homebuilders or remodelers. While it is not required that lumberyards or
building products distributors carry our products on an exclusive basis,
it is not unusual for them to do so. In addition, they generally purchase
based on orders, keeping little or no inventory. One-step distribution
tends to be used most often in metropolitan areas.
- Two-Step Distribution: Two-step distribution is the selling of completed
doors and windows to a wholesaler or distributor who then sells the
products to lumberyards, building products retailers and home centers.
These intermediaries will in turn sell the windows and doors to the
homebuilders, homeowners or remodelers. The wholesalers and distributors
tend to maintain product inventory in order to service the needs of their
client base for small quantities. Essentially, these middlemen sell to
customers who do not guarantee sufficient volume to purchase directly from
us. Two-step
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distribution is more common in rural areas since urban areas are serviced
by home centers and large lumberyards.
- Company-Owned Distribution Centers: We maintain company-owned
distribution facilities in key markets where available independent
distributors are weak or where we have been unable to make adequate
arrangements with existing distributors. Company-owned distribution
centers essentially act as one-step distributors.
To enhance our market coverage and leverage our considerable brand equity,
we currently market our windows and patio doors under primarily four brand
names, ATRIUM-REGISTERED TRADEMARK-, KEL-STAR-REGISTERED TRADEMARK-,
THERMAL-REGISTERED TRADEMARK- and H-R WINDOWS. Due to the fact that we enjoy
such significant national name recognition at both the building trade and
consumer levels, we decided to bring the product lines of almost all our other
brands under the ATRIUM-REGISTERED TRADEMARK- name. We are currently in the
process of rolling our CHAMPAGNE-REGISTERED TRADEMARK- and BEST BUILT-REGISTERED
TRADEMARK- product lines into the ATRIUM-REGISTERED TRADEMARK- brand. We have
completed rolling our SKOTTY and BISHOP product lines, as well as those from the
Gentek and Masterview acquisitions in 1997 and 1999, respectively, into the
ATRIUM-REGISTERED TRADEMARK- brand. We expect to extend the ATRIUM-REGISTERED
TRADEMARK- brand to other products, as well as to appropriate product lines
acquired in the future.
WINDOWS. We market our window products through a sales force consisting of
approximately 100 company salaried and commissioned sales representatives and
approximately 125 independent commissioned sales representatives. Each of our
divisions is supported by a sales manager, direct sales representatives and
independent representatives. The sales managers coordinate marketing activities
among both company and independent representatives. Our sales representatives
focus primarily on direct sales to homebuilders, remodelers and contractors,
while independent sales representatives sell to home centers, lumberyards and
wholesalers. In general, independent sales representatives carry our window and
door products on an exclusive basis, although they may carry other building
products from other manufacturers.
Our full product line has also been an asset to our sales force, especially
when we are exploring a new distribution channel opportunity. Window
distributors have come to recognize us as a WINDOW supplier, as opposed to an
ALUMINUM window supplier or a VINYL window supplier. The distributors frequently
do not buy the whole range of products since regional tastes vary and
distributors tend to work according to regions. However, these distributors
value our ability to provide these products should they ever demand them.
We believe that customer service plays a key role in the marketing process.
On-time delivery of products, order fill rate, consistency of service and
flexibility in meeting changing customer requirements have made it possible for
us to build a large and loyal customer base that includes companies such as
Centex Homes, one of the nation's largest home-builders, and The Home Depot, the
nation's largest home center retailer.
DOORS. Our marketing strategy centers primarily on the fact that we can
supply home center retailers with our own complete line of wood doors. We are
the only company in the industry that is able to provide this convenience. The
"one-stop shopping" we provide enables retailers to reduce their transaction
costs, as they have to pay only one invoice, work with one sales representative,
and schedule the receipt of goods with only one company. Our goal is to be the
"preferred supplier" for the door aisle of home center retailers.
Our pricing/product offering strategy focuses on offering the end consumer
lower price points without sacrificing profit margins. We have executed this
strategy in two steps. First, we have consolidated the current product offerings
in order to simplify the overall offering and reduce inventory levels. Second,
on the remaining product offerings, we offer good, better and best products to
the market. Certain of the products in the offering have been redesigned (with
particular emphasis on taking costs out of the products) in order to have an
offering with three distinct price points. This promotes more "trading up" to
our higher quality products by the customer and displays a complete product
line.
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For door sales we use an internal sales force. In addition, senior
executives are actively involved with both sales and customer service. This
group is segregated between national and regional accounts. Approximately 82% of
our door business sales are made to national retail home center chains.
To assist the sales force and provide better service to its customers, we
have over 35 merchandising managers. The merchandising managers provide home
center retailers with in-store services such as product knowledge seminars,
store product resets (to straighten stock and fix displays), sales analysis and
in-store merchandising. They also work with the retailers to resolve claims
issues and to handle product returns. This is a significant advantage to us, as
it is a level of service very few suppliers can offer.
Our promotional efforts are focused on the home center industry and its
customers. We offer cooperative advertising programs to certain of our major
customers, which gives us exposure in our customers' local media (e.g.,
newspaper, radio, television) and thus enabling us to generate sales at
individual locations. We also invest in in-store displays showing operating door
units and photographs of in-room settings in order to generate sales once
customers are in the stores. Product knowledge classes are frequently held to
inform store employees about the features and benefits of each product. Award
winning packaging and in-store signage are used to further general awareness
within the stores. We also offer retailers a video showing how quickly a
homeowner can install a bi-fold door using only basic hand tools.
OPERATIONS
We manufacture and sell our windows through a vertically integrated process
that includes extrusion, fabrication and distribution. We realize many
operational and cost benefits from our vertically integrated window operations.
By extruding aluminum and vinyl components in-house, we are able to secure a
low-cost, reliable source of extrusions, control product quality and reduce
inventory levels. The integration of extrusion and fabrication operations gives
us significantly more control over our manufacturing costs. We continually work
to achieve cost savings through increased capacity utilization at our efficient
facilities, adoption of best practices, reduction of cost of materials,
rationalization of product lines and reduction of inventory.
We continue to build on what we believe is our position as one of the
industry's lowest cost manufacturers. Because of the scale of our operations, we
are able to negotiate price concessions for our raw materials, including glass
and vinyl. This is an important consideration since total cost of new materials
typically comprises 45% to 50% of revenue.
We have been manufacturing products in Texas since 1953 and today have seven
primary manufacturing facilities in the state. As home centers, such as The Home
Depot and Lowe's, have expanded throughout the country, we have strategically
established or acquired twelve new manufacturing operations in Alabama, Ohio,
New York, North Carolina, Pennsylvania, Illinois, Colorado, Washington, Florida
and Texas in order to serve these customers more efficiently. We believe we are
one of the only door suppliers which can service the home centers on a national
basis. As the home centers continue to expand into new markets, we expect to
open new facilities to serve these regions.
As part of the integration of Wing and Atrium, the Atrium Wood patio door
division has merged its manufacturing, distribution and sales functions with
Wing. Due to the fact that both divisions sell over 80% of their products to the
Home Centers, significant benefits have been realized from the combination
between the sales and distribution functions of Atrium Wood and Wing. Both
service the same customers and distribute to the same retail locations.
INDUSTRY OVERVIEW
In 1999, new construction spending in the United States totaled over $547
billion, of which residential and commercial spending totaled approximately $322
billion and $225 billion, respectively. Within the residential construction
market, new construction spending and remodeling and replacement spending
totaled approximately $240 billion and approximately $82 billion, respectively.
The residential construction market consists of single-family and multi-family
housing construction. In 1999, housing starts in the
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United States totaled approximately 1.8 million, of which approximately
1.4 million were single-family homes and approximately 0.4 million were
multi-family homes. During 1999, approximately 90% of Atrium's window and door
sales were to the single-family housing construction market, and the remaining
10% of sales were to the multi-family housing construction market.
We believe that, in 1999, United States residential window and door
expenditures were approximately $13.5 billion, of which new construction and
remodel and replacement expenditures represented approximately $5.7 billion and
$7.8 billion, respectively.
The domestic window market has grown to more than approximately
60.6 million in unit sales in 1999, and has generally outpaced the growth in the
domestic building materials industry. The residential door market has grown more
than approximately 20% in sales over the last five years. According to F.W.
Dodge, the U.S. residential door market represents more than 60.4 million units
annually.
WINDOWS. The residential window industry can be divided into two end-use
segments: new construction (an estimated 20.6 million windows shipped in 1999)
and repair and remodeling (approximately 41.2 million windows sold in 1999). We
believe that the repair and remodeling segment will continue to experience
strong growth due to the strength of sales of existing homes and the increase in
the average age of homes from 23 years to 28 years in the last decade. We
believe the expected growth in this segment represents an especially attractive
opportunity to leverage existing relationships with the home center retailers.
The home center industry is one of the fastest growing retail sectors in the
United States. According to the National Home Center News, the U.S. retail home
improvement market is expected to grow from $150.0 billion in 1998 to over $170
billion by the year 2000.
DOORS. Demand for doors is derived from three principal segments: new
residential construction, repair and remodeling and commercial construction. We
are primarily affected by repair and remodeling expenditures as our products are
predominantly sold at home centers that cater to the "do-it-yourself" market and
to the smaller builders who principally do remodeling work. We estimate that
interior doors sold to the repair and remodeling segment constitute at least
one-third of all interior doors sold in the United States. We believe that the
repair and remodeling segment will continue to experience strong growth since
approximately three-quarters of total housing transactions are sales of existing
homes.
COMPETITION
The residential window and door industry is highly fragmented. With few
exceptions, competitors are privately-owned, regional companies with sales under
$100 million. On a national basis we compete with a few national companies in
different regions, products, distribution channels and price points, but do not
compete against any single company across all of these areas. We compete with
various other companies in specific regions within each market.
- - WINDOWS--ALUMINUM AND VINYL. Our major competitors for the sale of aluminum
windows are Reliant Building Products, Inc. and MI Home Products, Inc. In the
vinyl window and door segment, there is no dominant manufacturer that operates
on a national basis. Regional manufacturers that compete on a local and
regional basis characterize the segment. Historically, demand for vinyl
windows and doors has been concentrated in the cooler regions of the United
States. Our major competitors for the sale of vinyl windows are SilverLine
Building Products, Simonton Windows and Milgard Manufacturing Inc. In
addition, we compete with a number of regional manufacturers that sell
directly to repair and remodeling contractors.
- - PATIO DOORS--WOOD. In the wood patio door segment of the industry, two large
manufacturers, Andersen Corporation and Pella Corporation, sell premium
products on a national basis. Our wood patio doors are sold at a medium price
point and primarily through home centers throughout the United States and
direct to builders. We have many competitors at our price point in the wood
window and door segment, including Kolbe & Kolbe Millwork Co. Inc. and Hurd
Millwork Co. Inc.
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DOORS. We estimate that approximately 60% of all interior passage doors
sold through home centers are pre-hung. We expect this percentage to grow due to
the convenience and ease of installation of pre-hung doors. The pre-hung door
industry is very fragmented and consists primarily of hundreds of small
companies that do not manufacture doors and who have annual sales of $10.0 to
$30.0 million each. These companies are finding it increasingly difficult to
compete due to their lack of manufacturing capability. Our key competitors are
Premdor, Inc. and Jeld Wen, both of which manufacture and pre-hang doors. Other
competitors include Steves and Sons and Haley Bros.
INFLATION AND RAW MATERIALS
During the past several years, the rate of general inflation has been
relatively low and has not had a significant impact on our results of
operations. We purchase raw materials, including aluminum, glass, wood and
vinyl, that are subject to fluctuations in price that may not reflect the rate
of general inflation. These materials fluctuate in price based on supply and
demand. Historically, there have been periods of significant and rapid aluminum
and wood price changes, both upward and downward, with a concurrent short-term
impact on our operating margins. We historically mitigated the effects of these
fluctuations over the long-term by passing through price increases to our
customers and through other means. For example, we enter into forward
commitments for aluminum billet to hedge against price changes, see the
footnotes to our consolidated financial statements for the year ended
December 31, 1999. The primary raw materials used in the production of our
windows and doors are readily available and are procured from numerous
suppliers. Currently, wood is purchased through multiple sources from around the
world, with little dependence on one company or one country.
SEASONALITY
The new home construction market and the market for external repairs and
remodeling in northern climates are seasonal, with increased related product
sales in the second and third quarters. The market for interior repairs and
remodeling in northern climates tends to grow in the first and fourth quarters.
Although this results in seasonal fluctuations in the sales of certain of our
products, the complementary nature of our window and door business' selling
seasons helps mitigate this seasonality.
CYCLICALITY
Demand in the window and door manufacturing and distribution industry is
influenced by new home construction activity and the demand for repair and
remodeling. For the year ended December 31, 1999, we believe that approximately
42% of our pro forma sales were related to new home construction. Trends in the
housing sector directly impact our financial performance. Accordingly, the
strength of the U.S. economy, the age of existing home stock, job growth,
interest rates, consumer confidence and the availability of consumer credit, as
well as demographic factors, such as inter/intra-state migration of the U.S.
population have a direct impact on us. Cyclical declines in new housing starts
may adversely impact our business.
EMPLOYEES
We employ approximately 4,200 persons, of whom approximately 4,120 are
employed at our manufacturing facilities and distribution centers and
approximately 80 are employed at corporate headquarters. Approximately 1,300 of
our hourly employees are covered by collective bargaining agreements. We entered
into collective bargaining agreements in 1998 with the United Needle and
Industrial Trade Employee Union, SWRJB, ACTWU, AFL-CIO-CLC, covering certain
employees at the Atrium Aluminum, H-R Windows, Atrium Wood and Extruders
manufacturing facilities. All of these collective bargaining agreements expire
in May, 2001. In addition, we have collective bargaining agreements with The
Sheet Metal International Association Local Union No. 54, due to expire on
September 30, 2001, for our Kel-Star operations and Local Union 2743, Southern
Council of Industrial Workers, Chartered By United Brotherhood of Carpenters and
Joiners of America, AFL/CIO, due to expire on October 6, 2001, for our
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Woodville Extruders operations. There are no union affiliations in connection
with any of our other divisions. We believe that our relationship with our
employees is good.
BACKLOG AND MATERIAL CUSTOMERS
We have no material long-term contracts. Orders are generally filled within
5 to 7 days of receipt. Our backlog is subject to fluctuation due to various
factors, including the size and timing of orders for our products and is not
necessarily indicative of the level of future revenue.
Our sales to The Home Depot, Inc., a leading home center retailer
represented 26% and 42% of our net sales for the years ended December 31, 1999
and 1998, respectively.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
We are subject to numerous federal, state, local and foreign environment
statutes and regulations relating to, among other things, air and water quality,
the discharge of materials into the environment, the handling and disposal of
wastes or otherwise relating to safety, health and protection of the environment
issues. We do not expect ongoing compliance with such provisions to have a
material impact on our earnings or competitive position in the foreseeable
future. Additionally, no significant capital expenditures are anticipated
related to ongoing compliance with such provisions. However, the applicable
requirements under the law are subject to amendment, and to the imposition of
new, other, or additional requirements and to changing interpretations of
agencies or courts. We cannot assure that new, other or additional requirements
would not be imposed or that expenditures, including material expenditures,
would not be required to comply.
We are involved in various stages of investigation and cleanup relative to
environmental protection matters, some of which relate to waste disposal sites.
The potential costs related to such matters and the possible impact thereof on
future operations have been assessed, and we believe that we have made adequate
provision for these costs such that they will have no material adverse effect
upon our financial condition or our operations. We cannot be certain that
significant capital expenditures will not become necessary for investigation and
cleanup of environmental conditions which are currently unknown.
Prior to 1993, we received correspondence in which we were named as a
potentially responsible party of two Superfund sites, pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or
comparable state service. In one instance, we have entered into a settlement and
in the other instance, the group of potentially responsible parties negotiated a
proposed redemption price which was approved by the relevent state agency and is
being reviewed by the United States Environmental Protection Agency. Based on
the actions to date, and our current insurance coverage, we believe that any
liability associated with the Superfund sites does not currently have or will
not have a material adverse effect on our financial condition, results of
operations or liquidity. However, because CERCLA provides for strict and
sometimes joint and several liability, we cannot determine with certainty that
the liabilities in question will not result in material expenditures in the
future.
THE (RECAPITALIZATION)
On August 3, 1998, D and W Holdings, Inc. ("Parent or "D and W"), entered
into an Agreement and Plan of Merger (the "Merger Agreement") with Atrium
Corporation ("Corp"), the parent of the Company and securityholders revised
therein to acquire all of the outstanding capital stock of Corp for
$225.0 million, through a series of transactions (such transactions are referred
to as the "Recapitalization") described below. Corp owned 100% of the
outstanding capital stock of Atrium prior to the merger. In connection with the
merger, GE Investment Private Placement Partners II, a Limited Partnership
("GEIPPPII"), and Ardatrium L.L.C. ("Ardatrium") formed Parent by acquiring all
of its outstanding common stock for an aggregate purchase price of $50.0
million. GEIPPPII is a private equity partnership affiliated with GE
Investments, a wholly-owned investment management subsidiary of the General
Electric Company. Ardatrium is an affiliate of Ardshiel, Inc. ("Ardshiel"), a
private equity investment firm based in New York.
10
<PAGE>
The acquisition of Corp by Parent was effected through the merger on
October 2, 1998 of a merger sub, a wholly owned subsidiary of Parent, with and
into Corp (the "Merger") pursuant to the terms of the Merger Agreement. Prior to
the Merger, Parent contributed $50.0 million to Atrium Corp. in exchange for all
of its outstanding common stock. As a result of the Merger, Corp became a direct
wholly-owned subsidiary of Parent, and the Company became an indirect
wholly-owned subsidiary of Parent.
In connection with the merger, GEIPPPII and an affiliate of Ardshiel
recapitalized Wing and Darby and contributed them to the Company. As a part of
the Recapitalization, GEIPPPII and Ardshiel contributed to the Company
$50.0 million from the sale of common stock of the Company's ultimate parent and
approximately $52.0 million in the implied asset value of the Wing and Darby
businesses.
RECENT DEVELOPMENTS
DELTA ACQUISITION
On January 27, 1999, the Company acquired certain assets of Delta Millwork,
Inc. (subsequently renamed as R.G. Darby Company-South and Total
Trim, Inc.-South, together Darby-South), a privately held door pre-hanger
located in Orlando, Florida, for approximately $1,755, including fees and
transaction expenses of $155 and $200 to be paid upon the achievement of certain
financial targets. The Company financed the acquisition through its revolving
credit facility. The results of operations for the acquired business are
included in the Company's consolidated financial statements beginning
January 27, 1999.
HEAT ACQUISITION
On May 17, 1999, the Company acquired Heat, Inc. ("Heat"), a privately held
vinyl and door company, and its subsidiaries with operations located in Yakima,
Washington (Best Built, Inc.) and Pittsburgh, Pennsylvania (Thermal Industries,
Inc.) for approximately $85,000, which included $679 of assumed indebtedness.
Additionally, a post closing adjustment of $4,095 was paid on May 17, 1999
related to the working capital and cash delivered in excess of the target
defined in the purchase agreement. The Company financed the acquisition with a
portion of the proceeds raised from the issuance of $175,000 Senior Subordinated
Notes due 2009 offering (see financial statement Note 4). The results of
operations for the acquired business are included in the Company's consolidated
financial statements beginning May 17, 1999.
CHAMPAGNE ACQUISITION
On May 17, 1999, the Company acquired Champagne Industries, Inc., a
privately held vinyl and door company located in Denver, Colorado for
approximately $4,426, including assumed indebtedness, transaction fees and $500
to be paid upon achievement of certain financial targets. The Company financed
the acquisition with a portion of the proceeds raised in the $175,000 Senior
Subordinated Notes due 2009 offering (see financial statement Note 4). The
results of operations for the acquired business are included in the Company's
consolidated financial statements beginning May 17, 1999.
ELLISON ACQUISITION
On March 29, 2000, the Company announced the signing of a definitive
purchase and sale agreement to acquire the assets of Ellison Window and Door and
the stock of Ellison Extrusion Systems, Inc. (collectively "Ellison") for a
combined purchase price of $125,000. The acquisition proceeds include
approximately $101,500 of cash, $500 of assumed indebtedness and $23,000 of
D and W stock. The cash portion of the acquisition will be funded through a
combination of approximately $78,500 of new equity from D and W in the form of
common equity and/or preferred stock with the remainder coming from an
additional borrowing on the Company's existing Credit Agreement.
11
<PAGE>
TRADEMARKS AND PATENTS
The Company has registered and nonregistered trade names and trademarks
covering the principal brand names and product lines under which its products
are marketed.
ITEM 2. PROPERTIES
Our operations are conducted at the owned or leased facilities described
below:
<TABLE>
<CAPTION>
CAPACITY
(SQUARE) OWN/
LOCATION PRINCIPAL USE FEET LEASE
- -------- ----------------------------------------------- --------- -----
<S> <C> <C> <C>
Dallas, Texas............ Fabrication of aluminum windows 186,000 Lease
Fabrication of vinyl windows 90,000 Lease
Fabrication of aluminum windows 266,000 Lease
Irving, Texas............ Fabrication of aluminum windows 148,600 Own
Fabrication of aluminum patio doors 110,000 Own
Greenville, Texas........ Manufacture of solid wood, patio doors, hollow
core bi-fold and passage doors and custom
doors; pre-hanging 300,000 Lease
Manufacture of solid wood and hollow bi-fold
and passage doors; pre-hanging 180,000 Lease
Warehouse facility 30,000 Lease
Carrollton, Texas........ Extrusion of vinyl 25,200 Lease
Woodville, Texas......... Extrusion of aluminum 120,000 Lease
Fabrication of aluminum windows and storm doors 180,000 Lease
Wylie, Texas............. Extrusion of aluminum 100,000 Lease
Mt.Pleasant, Texas....... Door component manufacturing 110,000 Lease
New Braunfels, Texas..... Distribution of aluminum windows 10,000 Lease
Allentown, Manufacture of hollow core bi-fold and passage
Pennsylvania........... doors; pre-hanging warehouse 105,000 Lease
Las Vegas, Nevada........ Distribution of aluminum windows 30,400 Lease
Phoenix, Arizona......... Fabrication of aluminum windows and storm doors 220,000 Lease
Bridgeport, Fabrication of vinyl windows
Connecticut............ 75,000 Lease
Clinton, Massachusetts... Fabrication of vinyl windows 31,000 Own
Farmingdale, New York.... Distribution of vinyl windows 6,000 Lease
Anaheim, California...... Fabrication of vinyl windows 80,000 Lease
Salt Lake City, Utah..... Distribution of vinyl windows 10,000 Lease
Union City, California... Distribution of vinyl windows 10,000 Lease
Portland, Oregon......... Distribution of vinyl windows 10,000 Lease
Arlington, Washington.... Distribution of vinyl windows 3,000 Lease
Yakima, Washington....... Fabrication of vinyl windows 58,000 Lease
Colorado Springs, Distribution of vinyl windows
Colorado............... 15,000 Lease
Denver, Colorado......... Fabrication of vinyl windows 108,000 Lease
Florence, Alabama........ Door pre-hanging; warehouse 60,000 Lease
Orlando, Florida......... Door pre-hanging; warehouse 50,000 Lease
Charlotte, North Door pre-hanging; warehouse
Carolina............... 40,000 Lease
Hanover Park, Illinois... Door pre-hanging; warehouse 73,000 Lease
Solon, Ohio.............. Door pre-hanging; warehouse 30,000 Lease
Alsip, Illinois.......... Distribution of vinyl windows 17,337 Lease
Altoona, Pennsylvania.... Distribution of vinyl windows 5,000 Lease
Arlington Heights, Distribution of vinyl windows
Illinois............... 15,660 Lease
Baltimore, Maryland...... Distribution of vinyl windows 16,400 Lease
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
CAPACITY
(SQUARE) OWN/
LOCATION PRINCIPAL USE FEET LEASE
- -------- ----------------------------------------------- --------- -----
<S> <C> <C> <C>
Beltsville, Maryland..... Distribution of vinyl windows 5,685 Lease
Distribution of vinyl windows 7,540 Lease
Cheektowaga, New York.... Distribution of vinyl windows 10,000 Lease
Cincinnati, Ohio......... Distribution of vinyl windows 10,000 Lease
Distribution of vinyl windows 10,830 Lease
Columbus, Ohio........... Distribution of vinyl windows 11,250 Lease
Detroit, Michigan........ Distribution of vinyl windows 4,800 Lease
East Hartford, Distribution of vinyl windows
Connecticut............ 5,000 Lease
East Syracuse, New Distribution of vinyl windows
York................... 8,250 Lease
Marietta, Georgia........ Distribution of vinyl windows 7,000 Lease
Mechanicsburg,
Pennsylvania........... Distribution of vinyl windows 3,988 Lease
Murrysville, Fabrication of vinyl windows
Pennsylvania........... 166,000 Own
Nashville, Tennessee..... Distribution of vinyl windows 5,500 Lease
Philadelphia, Distribution of vinyl windows
Pennsylvania........... 17,000 Own
Pittsburgh, Extrusion of vinyl
Pennsylvania........... 65,000 Lease
Pittsburgh, Fabrication of deck/dock product
Pennsylvania........... 30,000 Lease
Pittsburgh, Enclosure assembly, showroom, and distribution
Pennsylvania........... of vinyl windows 33,788 Lease
Richmond, Virginia....... Distribution of vinyl windows 5,000 Lease
Spring Hill, Florida..... Distribution of vinyl windows 10,000 Lease
St. Louis, Missouri...... Distribution of vinyl windows 10,100 Lease
Wilmington, Distribution of vinyl windows
Massachusetts.......... 5,688 Lease
</TABLE>
We maintain our corporate headquarters in Dallas, Texas. The facility
provides approximately 17,500 square feet and is leased for a seven-year term
expiring in 2004.
We believe that our manufacturing plants are generally in good operating
condition and are adequate to meet future anticipated requirements.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in litigation arising in the ordinary
course of our business, none of which is expected to individually have a
material adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's outstanding
equity securities.
ITEM 6. SELECTED FINANCIAL DATA
The selected income statement data set forth below for the year ended
December 31, 1995, the periods ended October 25, 1996 and December 31, 1996 and
the years ended December 31, 1997, 1998 and 1999, and the selected balance sheet
data at December 31, 1995, 1996, 1997, 1998 and 1999 were derived from the
audited consolidated financial statements of Atrium as described further below.
The selected historical financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements, related notes and other financial
information included elsewhere in this 10-K.
Prior to October 2, 1998, Atrium's historical financial statements as filed
with the Securities and Exchange Commission included its operations and the
operations of its subsidiaries. On October 2, 1998, pursuant to the
Recapitalization, D and W contributed the assets of Wing and Darby to the
Company.
As Wing was determined to be the acquiror in the reverse acquisition, the
historical financial statements of "Atrium" (the previous registrant) were
replaced with the historical financial statements of Wing. As a result, the
statement of operations for 1998 only includes the operations of the Company and
Darby from October 3, 1998. The statements of operations for the year ended
December 31, 1997, only include the operations and accounts of Wing and its
predecessor, Wing was acquired by the current controlling shareholders on
October 25, 1996. Additionally, the operations of Delta Millwork, Inc. (renamed
R.G. Darby Company-South and Total Trim, Inc.-South, together, "Darby-South")
are included since the date of acquisition, January 27, 1999 and the operations
of Heat, Inc. ("Heat") and Champagne Industries, Inc. ("Champagne") are included
since their date of acquisition, May 17, 1999. The December 31, 1999 balance
sheet includes the accounts of the Company, Wing, Darby, Darby-South, Heat,
Champagne and each of their respective subsidiaries, while the December 31, 1998
balance sheet includes the accounts of the Company, Wing, Darby and each of
their respective subsidiaries.
<TABLE>
<CAPTION>
PREDECESSOR
---------------------------
PERIOD PERIOD
YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, OCTOBER 25, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1996 1997 1998 1999
------------- ----------- ------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $68,481 $62,880 $ 13,200 $ 99,059 $ 211,059 $ 498,456
Income (loss) before income taxes
and extraordinary charge........ 491 1,789 532 1,391 (2,329) 10,795
Net income (loss)................. 279 1,119 303 696 (2,819) 2,218
BALANCE SHEET DATA (END OF PERIOD):
Total assets...................... $18,515 $19,966 $ 36,404 $ 55,383 $ 359,869 $ 484,136
Total debt........................ 8,522 8,154 20,489 32,238 179,227 316,711
OTHER DATA:
EBITDA(1)......................... $ 2,374 $ 3,014 $ 1,166 $ 5,836 $ 14,732 $ 55,394
Depreciation and
amortization(2)................. 844 716 260 1,492 7,980 14,189
Interest expense.................. 1,039 509 374 2,953 9,081 28,524
CASH FLOWS PROVIDED BY (USED IN):
Operating activities.............. $ 3,409 $ 664 $ 1,112 $ 1,148 $ (10,253) 8,835
Investing activities.............. (1,667) (934) (29,265) (11,763) (125,184) (108,480)
Financing activities.............. (1,876) 69 28,193 10,609 135,403 100,939
</TABLE>
- ------------------------------
(1) EBITDA represents income before interest, income taxes, extraordinary
charge, depreciation and amortization, special charges, stock option
compensation expense and certain non-recurring expenses related to one-time
expenses. While EBITDA is not intended to represent cash flow from
operations as defined by GAAP and should not be considered as an indicator
of operating performance or an alternative to cash flow or operating income
(as measured by GAAP) or as a measure of liquidity, it is included herein to
provide additional information with respect to the ability of Atrium to meet
its future debt service, capital expenditures and working capital
requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Atrium believes EBITDA provides
investors and analysts in the building materials industry the necessary
information to analyze and compare historical results of Atrium on a
comparable basis with other companies on the basis of operating performance,
leverage and liquidity. However, as EBITDA is not defined by GAAP, it may
not be calculated or comparable to other similarly titled measures within
the building materials industry.
(2) Includes expense related to non cash stock option compensation expense.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements of the Company (after the Recapitalization)
which appears elsewhere in this 10-K.
CERTAIN FORWARD-LOOKING STATEMENTS
This 10-K contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties relating to the Company that are based on
the beliefs of the management. When used in this 10-K, the words "anticipate",
"believe", "estimate", "expect", "intend", and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to the risks and uncertainties regarding the operations and results of
operations of the Company as well as its customers and suppliers, including as a
result of the availability of consumer credit, interest rates, employment
trends, changes in levels of consumer confidence, changes in consumer
preferences, national and regional trends in new housing starts, raw material
costs, pricing pressures, shifts in market demand, and general economic
conditions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions or estimates prove incorrect, actual results may
vary materially from those described herein as anticipated, believed, estimated,
expected or intended.
ATRIUM (AFTER THE RECAPITALIZATION)
Prior to October 2, 1998, Atrium's historical financial statements as filed
with the Securities and Exchange Commission included its operations and the
operations of its subsidiaries. On October 2, 1998, pursuant to the
Recapitalization, D and W contributed the assets of Wing and Darby to the
Company.
As Wing was determined to be the acquiror in the reverse acquisition, the
historical financial statements of "Atrium" (the previous registrant) were
replaced with the historical financial statements of Wing. As a result, the
statement of operations for 1998 only includes the operations of the Company and
Darby from October 3, 1998. The statements of operations for the year ended
December 31, 1997, only include the operations and accounts of Wing and its
predecessor. Wing was acquired by the current controlling shareholders on
October 25, 1996. Additionally, the operations of Delta Millwork, Inc. (renamed
R.G. Darby Company-South and Total Trim, Inc.-South, collectively,
"Darby-South") are included since the date of acquisition, January 27, 1999 and
the operations of Heat, Inc. ("Heat") and Champagne Industries, Inc.
("Champagne") are included since their date of acquisition, May 17, 1999. The
December 31, 1999 balance sheet includes the accounts of the Company, Wing,
Darby, Darby-South, Heat, Champagne and each of their respective subsidiaries,
while the December 31, 1998 balance sheet includes the accounts of the Company,
Wing, Darby and each of their respective subsidiaries.
15
<PAGE>
RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PERCENTAGES)
The following table sets forth for the periods indicated, information
derived from the Company's consolidated statements of operations expressed as
percentage of net sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 68.4 75.4 79.0
----- ----- -----
Gross profit................................................ 31.6 24.6 21.0
Selling, delivery, general and administrative expenses...... 21.7 18.8 15.8
Amortization expense........................................ 1.7 1.0 0.8
Non cash stock option compensation expense.................. 0.1 1.8 --
Special charges............................................. 0.4 -- --
----- ----- -----
Income from operations...................................... 7.8 2.9 4.4
Interest expense............................................ 5.7 4.3 3.0
Other income, net........................................... 0.1 0.3 --
----- ----- -----
Income (loss) before income taxes and extraordinary
charge.................................................... 2.2 (1.1) 1.4
Provision (benefit) for income taxes........................ 1.3 (0.1) 0.7
----- ----- -----
Income (loss) before extraordinary charge................... 0.8 (1.0) 0.7
Extraordinary charge, net of income tax benefit............. 0.4 0.3 --
----- ----- -----
Net income (loss)........................................... 0.4% (1.3)% 0.7%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES. Net sales increased by $287,397 from $211,059 in 1998 to
$498,456 in 1999, or approximately 136.2%. Net sales in 1999, increased
principally as a result of the Recapitalization and the acquisitions of Darby
South, Heat and Champagne, as well as higher sales volume. The Recapitalization
contributed an increase of $204,296 from Atrium (previous registrant) and Darby
due to increased sales volumes and inclusion for the entire year of 1999, as
opposed to the inclusion since the Recapitalization on October 2, 1998. Atrium's
(previous registrant) sales volume grew approximately $13,622, or 5.8%. This
increase included approximately $18,374 from its aluminum and vinyl window
operations, or a 8.7% growth rate, offset by a decline of $4,752, or 22.7% from
its wood patio door operations due to the Company's efforts to eliminate
less-profitable sales territories. Darby grew $1,782, or 8.4% in 1999.
Additionally, the acquisitions of Darby-South, Heat and Champagne increased net
sales by $77,628 during 1999. These acquisitions grew $13,021, or 14.1% in 1999.
Net sales at Wing increased 3.7% over prior year due to increased sales to the
large home center retail chains. Excluding the loss of sales of $4,680 from the
bankruptcy of a significant customer (Hechinger), sales would have increased
$10,118, or 7.4%.
COST OF GOODS SOLD. Cost of goods sold decreased from 75.4% of net sales
during 1998 to 68.4% of net sales during 1999. The decrease was largely due to
the addition of Atrium (previous registrant) and Darby, which operate at higher
margins then Wing, since they were included in operations from October 2, 1998.
Additionally, the acquisitions of Darby-South, Heat and Champagne improved the
percentage as these divisions had a combined cost of goods sold as a percent of
net sales of 60.7% and 60.8% in 1999 and 1998, respectively. If Atrium (previous
registrant), Darby and the 1999 acquisitions were included for the entire years
of 1999 and 1998, cost of goods sold would have been 68.1% and 68.7%,
respectively. This improvement was primarily the result of favorable aluminum
prices from forward commitments partially offset by slightly higher vinyl and
wood prices. In the year 2000, the rising cost of vinyl resin (due to increasing
oil prices) and aluminum prices are expected to adversely impact cost of sales
percentages. This situation should be mitigated as price increases are
implemented over the next several quarters. Had all year-end inventory values
been stated on a FIFO basis, year-end inventory would have been approximately
$37 lower in 1999, $112 lower in 1998 and $97 higher in 1997. Overall, changes
in the cost of products sold
16
<PAGE>
as a percentage of net sales for one period as compared to another period may
reflect a number of factors, including changes in the relative mix of products
sold and, the effects of changes in sales prices, material costs and changes in
productivity levels.
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, delivery,
general and administrative expenses increased $68,026 from $39,754 (18.8% of net
sales during 1998) to $107,780 (21.6% of net sales during 1999). The increase
was primarily due to the inclusion of Atrium (previous registrant), Darby,
Darby-South, Heat and Champagne for a full year during 1999, and an increase in
sales volume. If Atrium (previous registrant), Darby and the 1999 acquisitions
were included for the entire years of 1999 and 1998, selling, delivery, general
and administrative expenses would have been 22.3% of net sales during 1999 and
21.3% of net sales during 1998, with the increase being primarily contributed to
Wing.
Selling expenses increased from 4.4% of net sales during 1998 to 6.2% of net
sales during 1999. The increase was primarily due to a 0.8% point increase at
Wing and the acquisitions Heat and Champagne, which have higher selling
expenses. The increase was partially offset by a 0.3% point decrease in selling
expenses as a percent of net sales at the Atrium (previous registrant) due to
various cost saving measures which were implemented during 1999. If Atrium
(previous registrant), Darby and the 1999 acquisitions were included for the
entire years of 1999 and 1998, selling expenses would have been 7.0% and 6.7% of
net sales, respectively. The increase over prior year is primarily attributed to
increases in salaries of the new merchandising managers at Wing and cooperate
advertising allowances at Atrium Wood which are fixed at the beginning of the
year and do not vary with sales levels. Due to the elimination of certain sales
territories, sales volume declined and a corresponding increase as a percent of
sales occurred.
General and administrative expenses increased from 5.6% of net sales during
1998 to 7.9% of net sales during 1999. The increase was primarily due to a 2.4%
point increase at Wing and the acquisitions Darby-South, Heat and Champagne,
which have higher general and administrative expenses than Atrium (previous
registrant). The increase was partially offset by a 0.6% point decrease in
general and administrative expenses as a percent of net sales at Atrium
(previous registrant) due to sales volume increases without any incremental
fixed costs. If Atrium (previous registrant), Darby and the 1999 acquisitions
were included for the entire years of 1999 and 1998, general and administrative
expenses would have been 8.1% and 7.4% of net sales, respectively. This increase
was primarily attributable to a $750 charge to bad debt expense at Wing related
to the bankruptcy of a significant customer (Hechinger).
Delivery expenses decreased from 8.8% of net sales during 1998 to 7.5% of
net sales during 1999. The decrease was primarily due to a 0.8% point decrease
at the Atrium (previous registrant) and the acquisitions Darby-South, Heat and
Champagne, which have significantly lower delivery expenses than the Company and
Wing. If Atrium (previous registrant), Darby and the 1999 acquisitions were
included for the entire years of 1999 and 1998, delivery expenses would have
increased slightly to 7.3% of net sales during 1999, primarily due increases in
fuel cost, and 7.2% of net sales during 1998.
AMORTIZATION EXPENSE. Amortization expense increased $6,584 from $2,133
during 1998 to $8,717 during 1999. The increase was primarily due to the
continued amortization of the goodwill recorded in connection with the
Recapitalization and amortization of the new goodwill related to the
acquisitions of Darby-South, Heat and Champagne, which was $1,151 during 1999.
NON CASH STOCK OPTION COMPENSATION EXPENSE. Non cash stock option
compensation expense decreased $3,723from $3,851 in 1998 to $128 in 1999. In
1998, compensation expense was recorded for the options issued in connection
with the Recapitalization. In 1999, the Company recorded expense related to the
Company's variable options, under which expense is recorded as the value of the
options appreciate.
SPECIAL CHARGE. The company recorded a one-time charge of $1,886 for
severance benefits and related expenses incurred in connection with the
separation agreement entered into by the Company and the former President and
Chief Executive Officer.
17
<PAGE>
INTEREST EXPENSE. Interest expense increased $19,443 from $9,081 during
1998 to $28,524 during 1999. The increase in interest expense was due primarily
to an increase in the average outstanding debt related to the $175 million
10 1/2 Senior Subordinated Notes due 2009 issued during the year. Additionally,
interest expense included the amortization of the deferred financing costs
recorded in connected with the Notes.
EXTRAORDINARY CHARGE. Extraordinary charge increased from $639 during 1998
to $1,936 during 1999. Extraordinary charge in 1999 consisted of the write-off
of deferred financing costs of $896 and the payment of a tender premium of
$2,182 in connection with the issuance of the Senior Subordinated Notes, the
paydown of Term Loan B and the retirement of the 10 1/2 Senior Subordinated
Notes due 2006. This amount is net of income tax benefit of $1,142.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES. Net sales increased by $112,000 from $99,059 in 1997 to $211,059
in 1998. The increase was due primarily to a combined increase in net sales of
$87,909 from the addition of the Company and Darby in connection with the
Recapitalization in October 1998 and the acquisition of Super Millwork in
November 1997. Additionally, net sales at Wing increased 24.3% due to the
increase in sales to the large home center retail chains.
COST OF GOODS SOLD. Cost of goods sold decreased from 79.0% of net sales
during 1997 to 75.4% of net sales during 1998. The decrease was due largely to
the addition of the Company and Darby in the fourth quarter of 1998, as these
divisions operate at higher margins than Wing. Excluding the effects of the
change in the LIFO reserve, cost of goods sold would have been 75.5% of net
sales in 1998 and 78.9% in 1997.
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, delivery,
general and administrative expenses increased $24,083 from $15,671 (15.8% of net
sales during 1997) to $39,754 (18.8% of net sales during 1998). The increase was
primarily due to the inclusion of selling, delivery, general and administrative
expenses of Super Millwork for twelve months and the Company and Darby for
three months. Additionally, selling and delivery expenses increased due to the
increase in net sales. The increase in selling, delivery, general and
administrative expenses as a percentage of net sales is due largely to the
addition of the Company and Darby, as these expenses represent a greater
percentage of net sales at the Company and Darby than Wing.
AMORTIZATION EXPENSE. Amortization expense increased $1,359 from $774
during 1997 to $2,133 during 1998. The increase was largely due to the
amortization of goodwill recorded in connection with the Recapitalization.
NON CASH STOCK OPTION COMPENSATION EXPENSE. Stock option compensation
expense increased $3,851 from $0 during 1997 to $3,851 during 1998. Stock option
compensation expense consisted of $2,813 representing the difference between the
fair market value of common stock of D and W and the exercise price associated
with a warrant granted to an executive of the Company in connection with the
Recapitalization, charges associated with previously issued stock options at
exercise prices below the fair value of the underlying common stock and charges
associated with certain variable options.
INTEREST EXPENSE. Interest expense increased $6,128 from $2,953 during 1997
to $9,081 during 1998. The increase in interest expense was due primarily to an
increase in average outstanding debt related to the loans issued and Senior
Subordinated Notes due 2006 assumed in connection with the Recapitalization. In
addition, interest expense included the amortization of deferred financing costs
recorded in connection with the Recapitalization.
EXTRAORDINARY CHARGE. Extraordinary charge increased $639 from $0 during
1997 to $639 during 1998. Extraordinary charge represents the write-off of
certain deferred financing costs incurred in the placement
18
<PAGE>
of Wing's debt, which was repaid in connection with the Recapitalization. This
amount is net of income tax benefit of $392.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations and availability under the Revolving Credit
Facility ("Revolving Facility") are the Company's principal sources of
liquidity. During 1999, cash was primarily used in connection with the
acquisitions of Darby-South, Heat and Champagne and for capital expenditures.
Net cash provided by operating activities was $8,835 during 1999 compared to
cash used in operating activities of $10,253 during 1998. The increase in cash
provided by operations was primarily attributable to an increase in net income
and an increase in inventories. Cash flows from financing activities decreased
from cash provided of $125,184 during 1998 to $108,480 during 1999. The decrease
was due primarily to borrowings and contributions from Corp. made in connection
with the Recapitalization in 1998.
OTHER CAPITAL RESOURCES
In connection with the Recapitalization, the Company entered into a Credit
Agreement providing for a Revolving Facility in the amount of $30,000, which was
increased to $40,000 in June 1999, of which $5,000 is available under a letter
of credit sub-facility. The Revolving Facility has a maturity date of June 30,
2004. At December 31, 1999, the Company had $20,096 of availability under the
Revolving Facility, net of borrowings of $15,270 and outstanding letters of
credit totaling $4,634.
CAPITAL EXPENDITURES
The Company had net cash capital expenditures of $8,111 during 1999,
compared to $2,209 and $1,355 during 1998 and 1997, respectively. The 1998
capital expenditures are exclusive of the Recapitalization. The increase is
largely due to the addition of the Company and Darby for the last three months
of 1998 and Darby-South, Heat and Champagne during 1999. The Company expects
capital expenditures (exclusive of acquisitions) in 2000 to be approximately
$11,000, however, actual capital requirements may change, particularly as a
result of acquisitions the Company may make. Capital expenditures exclude costs
related to the implementation of the Company's new management information system
which include internally capitalized costs.
The ability of the Company to meet its debt service and working capital
obligations and capital expenditure requirements is dependent, however, upon the
future performance of the Company and its subsidiaries which, in turn, will be
subject to general economic conditions and to financial, business and other
factors, including factors beyond the Company's control. As of March 30, 2000,
the Company had $20,060 available for borrowings under the Revolving Facility,
net of borrowings of $15,500 and outstanding letters of credit totaling $4,440.
INFLATION, TRENDS AND GENERAL CONSIDERATIONS
The Company has evaluated and expects to continue to evaluate possible
acquisitions on an ongoing basis and at any given time may be engaged in
discussions or negotiations with respect to acquisition candidates. The
Company's performance is dependent to a significant extent upon the levels of
new residential construction, residential replacement and remodeling and
non-residential construction, all of which are affected by such factors as
interest rates, inflation and unemployment. In the near term, the Company
expects to operate in an environment of relatively stable levels of construction
and remodeling activity. However, increases in interest rates could have a
negative impact on the level of housing construction and remodeling activity.
The demand for the Company's products is seasonal, particularly in the Northeast
and Midwest regions of the United States where inclement weather during the
winter months usually reduces the level of building and remodeling activity in
both the home improvement and new construction markets. The Company's lower
sales levels usually occur during the first and fourth
19
<PAGE>
quarters. Since a high percentage of the Company's manufacturing overhead and
operating expenses are relatively fixed throughout the year, operating income
and net earnings tend to be lower in quarters with lower sales levels. In
addition, the demand for cash to fund the working capital of the Company's
subsidiaries is greater from late in the first quarter until early in the fourth
quarter.
MARKET RISK
The Company is exposed to market risks related to changes in interest rates
and commodity pricing. The Company uses derivative financial instruments on a
limited basis to hedge economic exposures. The Company does not enter into
derivative financial instruments or other financial instruments for speculative
trading purposes.
INTEREST RATE RISK
The Company is exposed to market risk from changes in interest rates
primarily through its investing and borrowing activities. In addition, the
Company's ability to finance future acquisition transactions may be impacted if
the Company is unable to obtain appropriate financing at acceptable interest
rates. The Company manages its borrowing exposure to changes in interest rates
by utilizing a combination of fixed and variable rate debt instruments. In
addition, as of December 31, 1999, the Company hedged its exposure on a portion
of its variable rate debt by entering into interest rate swap agreements to lock
in a fixed rate. At December 31, 1999, approximately 56% of the carrying values
of the Company's long-term debt were either at fixed interest rates or covered
by interest rate swap agreements that fixed the interest rates.
The following table presents principal cash flows of variable rate debt by
maturity date and the related average interest rate. The table also presents the
notional amount of the swaps and their expected future interest rates. The
notional amount is used to calculate the contractual payments to be exchanged.
The interest rates are weighted between the various loans based on debt
outstanding and are estimated based on implied forward rates using a yield curve
at December 31, 1999.
EXPECTED MATURITIES (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
-------- -------- -------- -------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES
Variable--rate
debt............... $17,270 $2,000 $2,000 $2,000 $2,000 $118,430 $143,700 $143,700
Average interest
rate............... 10.45% 10.74% 10.76% 10.85% 10.95% 11.14% -- --
INTEREST RATE
DERIVATIVES
Notional amount...... $ 563 -- -- -- -- -- $ 563 563
Average pay rate..... 6.50% -- -- -- -- -- -- --
Average receive
rate............... 7.06% -- -- -- -- -- -- --
Notional amount...... -- -- -- $2,498 -- -- $ 2,498 2,524
Average pay rate..... 6.25% 6.25% 6.25% 6.25% -- -- -- --
Average receive
rate............... 7.06% 7.35% 7.38% 7.47% -- -- -- --
</TABLE>
20
<PAGE>
At December 31, 1998, long-term debt included variable-rate debt of
$149,548, which approximated its fair value, with an average interest rate of
10.6%. The Company also had two interest rate swaps outstanding as follows:
<TABLE>
<CAPTION>
SWAP #1 SWAP #2
-------- --------
<S> <C> <C>
Notional amount........................................... $563 $2,498
Fair value................................................ 563 2,524
Average pay rate.......................................... 6.50% 6.25%
Average receive rate...................................... 7.06% 7.31%
</TABLE>
COMMODITY PRICING RISK
The Company is subject to significant market risk with respect to the
pricing of its principal raw materials, which include, among others, plastics,
resins, glass, wood and aluminum. If prices of these raw materials were to
increase dramatically, the Company may not be able to pass such increases onto
its customers and, as a result, gross margins could decline significantly. The
Company manages its exposure to commodity pricing risk through purchasing
aluminum forward commitments. The following is information related to aluminum
forward commitments at December 31, 1999:
<TABLE>
<S> <C>
FORWARD COMMITMENTS, EXPECTED TO MATURE DURING 2000
Contract volumes:
Fixed prices.............................................. 12,800,000pounds
Floating prices........................................... 62,013,000pounds
Contract amount............................................. $10,321
Fair value.................................................. $11,281
</TABLE>
YEAR 2000 DISCLOSURE
The following Year 2000 statements constitute a Year 2000 Readiness
Disclosure within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.
As of March 30, 2000, none of the Company's subsidiaries had experienced any
significant Year 2000 related problems. There have been no instances where
mission-critical and non-mission-critical systems have failed to perform
correctly. However, the Year 2000 issue still poses several potential risks to
the Company and its subsidiaries. A number of the Company's customers and
suppliers (third parties) utilize computers and computer software to varying
degrees in conjunction with the operation of their businesses. The customers and
suppliers of those businesses may utilize computers as well. Should the
Company's customers and suppliers, or the businesses on which they depend
experience any Year 2000 related computer problems, such third parties' cash
flow could be disrupted, adversely affecting their ability to pay the Company,
if a customer, or, if a supplier, their ability to pay their suppliers for goods
needed to supply the Company. Such disruptions could have adverse affects on the
Company and its subsidiaries. The Company assessed its Year 2000 third party
exposure through the use of questionnaires and personal interviews during 1999.
As of March 30, 2000, the Company was not aware of any supply or credit problems
related to the Year 2000 issue.
Should Year 2000 related problems occur which cause any of the systems of
certain third parties upon which the Company and its subsidiaries depends become
inoperative, increased personnel costs could be incurred if additional staff is
required to perform functions that the inoperative systems would have otherwise
performed. As of March 30, 2000, the Company had not experienced any disruptions
of third party services related to the Year 2000 issue.
The Company's expenditures for remediation directly related to correcting
Year 2000 issues were approximately $2,000, including businesses acquired in
1999. The total expenditures of approximately
21
<PAGE>
$2,000 consisted of approximately $1,500 of IT computer hardware equipment costs
and approximately $500 of IT software and non-IT computer hardware expenditures.
All of the Company's Year 2000 compliance expenditures have been funded from the
Company's operating cash flow.
The Company's Year 2000 compliance budget does not include significant
amounts for hardware replacement because the Company has historically employed a
strategy to continually upgrade its computer systems. Consequently, the
Company's Year 2000 compliance budget has not required the diversion of funds
from or the postponement of the implementation of other planned IT projects.
The Company believes it is not possible to estimate the potential lost
revenue due to the remaining potential Year 2000 problems discussed above as the
occurrence, extent and longevity of such potential problems cannot be predicted.
As of March 30, 2000 the Company believes that it has not experienced any lost
revenue related to the Year 2000 issue.
FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" amended by SFAS
No. 137 "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FAS No. 133--Amendment of FAS No. 133" (combined
"SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 2000. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1999 and
thereafter). SFAS 133 cannot be applied retroactively. SFAS 133 must be applied
to (a) derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the Company's election, before January 1, 1998).
The Company is in the process of quantifying the impacts of adopting
SFAS 133 on its financial statements and has not determined the timing of or
method of adoption of SFAS 133.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are listed in the accompanying Index to Financial
Statements on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information concerning the directors and the
executive officers of D and W and its subsidiaries.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Frank E. Sheeder.......................... 56 Chief Executive Officer and Director
Jeff L. Hull.............................. 34 President, Chief Financial Officer,
Treasurer and Director
R.L. Gilmer............................... 46 Executive Vice President, Chief Operating
Officer and Director, Divisional
President--Wing Industries, Inc.
Louis W. Simi, Jr......................... 59 Executive Vice President of Operations of
Atrium
Robert E. Burns........................... 34 Sr. Vice President of Operations of Atrium
Cliff Darby............................... 35 Divisional President--R.G. Darby
Company, Inc. and Total Trim, Inc.
Eric W. Long.............................. 31 Vice President, Corporate Controller and
Secretary
Sam A. Wing, Jr........................... 76 Chairman Emeritus and Director
Daniel T. Morley.......................... 47 Chairman of the Board of Directors
James G. Turner........................... 31 Vice President and Director
Roger A. Knight........................... 40 Director
Andreas Hildebrand........................ 32 Director
John Deterding............................ 68 Director
Nimrod Natan.............................. 36 Director
</TABLE>
Frank E. Sheeder joined D and W and Atrium effective March 28, 2000. Prior
to joining the Company, Mr. Sheeder served as Chief Operating Officer of Zurn
Industries, Inc. from 1995 to 1999. Mr. Sheeder also served as Chief Executive
Officer of Eljer Industries, Inc. from 1997 to 1998. Prior to Zurn and Eljer,
Mr. Sheeder served in various capacities with GAF Corporation and General
Electric.
Jeff L. Hull has served as President of D and W and Atrium since
August 1999 and as Director since April 1999 and Chief Financial Officer and
Treasurer from April 1996. Prior to that, Mr. Hull managed the asset/liability
department of AmVestors Financial Corporation (NYSE:AMV) from June 1995. From
1990 to 1995, he was an audit manager with the accounting firm of Deloitte &
Touche. Mr. Hull is a certified public accountant.
R.L. Gilmer has served as Executive Vice President of D and W and Atrium
since April 1999 and as the Chief Operating Officer and Director of D and W and
Atrium since October 1998. Mr. Gilmer has also served as President of Wing
Industries from October 1996. Prior to that, he was Vice President of Wing from
July 1993 to October 1996. Mr. Gilmer has served Wing in various capacities
since 1986 including as Controller and Manufacturing Manager. Prior to joining
Wing, Mr. Gilmer was a certified public accountant with the accounting firm of
Arthur Andersen & Co.
Louis W. Simi, Jr. has served as Executive Vice President since 1993 and
General Manager of our Atrium Aluminum division from 1971 to 1998. Mr. Simi also
served as Director of Atrium from July 1995 to November 1996. He has served in
other capacities with us and our subsidiaries since 1966.
Robert E. Burns joined Atrium in January 2000 as Senior Vice President of
Operations. Prior to that Mr. Burns was Vice President of Operations of Baldwin
Hardware, a division of Masco Corp. from March 1996. Prior to joining Masco,
Mr. Burns was a management consultant with Universal Scheduling Company for six
years.
23
<PAGE>
Cliff Darby has served as President of Darby since 1993 and has worked for
Darby since 1988, overseeing operations and sales for Darby and Total
Trim, Inc.
Eric W. Long has served as Vice President since April 1999, as Secretary
since March 2000 and as Corporate Controller of Atrium since April 1996. Prior
to April 1999, Mr. Long served as Assistant Secretary of Atrium from April 1996.
From April 1995 to April 1996, Mr. Long was a financial analyst with Applebee's
International. From 1991 to 1995, he was with the accounting firm of Deloitte
& Touche L.L.P. Mr. Long is a certified public accountant.
Sam A. Wing, Jr. has served as Chairman Emeritus and Director of D and W
since October 1998. Mr. Wing has served Wing in various capacities since 1946,
including as Chairman Emeritus from 1996 until October 1998, as Chairman and
Chief Executive Officer of Wing from 1995 until 1996 and as Chairman of Wing
from 1994 until 1995. Prior to that, Mr. Wing was Chairman and Chief Executive
Officer of Wing from 1969 to 1994.
Daniel T. Morley has served as Chairman of the Board of Directors of D and W
since October 1998. Mr. Morley has served as President of Ardshiel since 1997
and Chairman of WIH since 1996 and Door since January 1998. Mr. Morley also
serves as Chairman of Astro Textiles, Inc. and Koala Holdings, Inc, privately
held companies.
James G. Turner has served as Vice President and Director of D and W and
Atrium since October 1998. Mr. Turner has served as a Principal of Ardshiel
since June 1997. Mr. Turner has also served as a Director of Wing since
October 1997 and Door since December 1997. From March 1994 until June 1997,
Mr. Turner worked as an Associate for Ardshiel. Prior to that, Mr. Turner worked
for Chemical Banking Corp. Mr. Turner is also a Director of Avanti
Petroleum, Inc. and several other privately held companies.
Roger A. Knight has served as a Director of D and W since October 1998.
Mr. Knight has served as a Principal of Ardshiel since May 1998. Prior to
joining Ardshiel, he was Managing Director and a member of Coopers & Lybrand
Securities, Inc., the wholly-owned investment banking subsidiary of Coopers &
Lybrand L.L.P. (now known as PricewaterhouseCoopers LLP).
Andreas Hildebrand has served as a Director of D and W since October 1998.
Mr. Hildebrand is Vice President--Private Equities of GE Investments.
Mr. Hildebrand also served as a Director of Wing since October 1997 and of Darby
since January 1998. He has served in other capacities with GE Investments during
the past five years. Mr. Hildebrand is also a Director of Eagle Family Foods
Holdings, Inc.
John C. Deterding has served as Director of D and W since October 1998.
Mr. Deterding has been the owner of Deterding Associates, a real estate
consulting company, since June 1993. From 1975 until June 1993, he served as
Senior Vice President and General Manager of the Commercial Real Estate division
of General Electric Capital Corporation ("GECC"). From November 1989 to June
1993, Mr. Deterding served as Chairman of the General Electric Real Estate
Investment Company, a privately held REIT. He served as Director of GECC
Financial Corporation from 1986 to 1993.
Nimrod Natan has served as a Director of D and W since October 1998.
Mr. Natan has served as a Principal of Ardshiel since 1997. Mr. Natan also
serves as a director of Wing and Astro Holdings, Inc., a privately held company.
Prior to joining Ardshiel in 1997, Mr. Natan was a management consultant with
Gemini Consulting for four years.
24
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION AND OTHER INFORMATION
COMPENSATION OF NAMED EXECUTIVE OFFICERS. The following table provides
certain summary information for each of the years ended December 31, 1997, 1998
and 1999 concerning compensation paid or accrued by us to or on behalf of the
Chief Executive Officer and the four other most highly compensated persons
functioning effectively as our executive officers whose individual combined
salary and bonus exceeded $100,000 during such period (the "Named Executive
Officers"):
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------------------ COMPENSATION
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) OPTIONS# ($)
- --------------------------- -------- -------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jeff L. Hull .............. 1999 $250,000 $ 150,000 $ -- 425,000 $ --
President, Chief 1998 155,000 175,000 -- 1,183,842 --
Financial Officer and 1997 120,000 20,000 -- 5,000 15,146(2)
Treasurer
R.L. Gilmer ............... 1999 225,000 83,500 -- -- --
Executive Vice President, 1998 215,000 56,250 -- 1,183,842 --
Chief Operating Officer 1997 138,679 70,000 -- -- --
Louis W. Simi, Jr. ........ 1999 170,000 110,000 -- -- --
Executive Vice President 1998 170,000 185,000 -- 250,000 662,923(3)
of Operations 1997 125,000 250,690 -- -- 106,025(2)
Cliff Darby ............... 1999 156,000 135,000 -- -- --
Divisional President-- 1998 150,000 76,000 -- 832,314 --
R.G. Darby Company, Inc. 1997 150,000 66,000 -- -- --
and Total Trim, Inc.
*Randall S. Fojtasek ...... 1999 87,500 0 1,750,000(4) 5,735,369 3,802,809(4)
President and Chief 1998 350,000 3,140,000 -- -- 2,542,570(3)
Executive Officer 1997 350,000 125,000 -- 308,928(2)
</TABLE>
- ------------------------
* Resigned effective March 31, 1999.
Frank Sheeder joined the Company as Chief Executive Officer effective
March 28, 2000. Accordingly, no compensation was paid in 1999. See
"Employment Agreements."
(1) Perquisites related to automobile and expense allowances are excluded since
the aggregated amounts are the lesser of $50,000 or 10% of the total annual
salary.
(2) Amounts represent fees received in connection with the termination of the
purchase and sale agreement to acquire PlyGem Industries, Inc.
(3) In connection with a change of control transaction, certain members of
management were granted options at below fair market prices. Accordingly,
compensation expense is being recognized for financial statement purposes.
Upon completion of the 1998 Recapitalization and the exercise of these
options, the compensatory portion of the options were reflected in the
individual's wages and in our financial statements.
(4) In connection with Mr. Fojtasek's resignation in March 1999, he was paid
accrued severance of approximately $1.8 million and through the cancellation
of warrants an additional $3.8 million was paid to terminate the said
warrants.
25
<PAGE>
OPTION GRANTS DURING 1999. The following table sets forth option grants to
the Named Executive Officers during the year ended December 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
NUMBER OF -------------------------- POTENTIAL REALIZABLE VALUE AT
SECURITIES % OF TOTAL ASSUMED ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION FOR OPTION
OPTIONS GRANTED TO EXERCISE OR TERM(2)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ------------------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ---------- ------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jeff L. Hull.......... 200,000 6.7 1.10 7/1/09 145,912 364,049
150,000 5.1 1.25 10/1/09 114,282 287,774
75,000 2.5 .01 10/1/09 57,141 143,887
R.L. Gilmer........... -- -- -- -- -- --
Louis W. Simi, Jr..... -- -- -- -- -- --
Cliff Darby........... -- -- -- -- -- --
Randall S. Fojtasek... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) All options are for the common stock of D and W Holdings, Inc..
(2) The assumed rates are compounded annually for the full terms of the options.
(3) Options vest ratably over the life of the respective employment contract,
except for Simi and Darby, which vest ratably over five years and Hull's
which vest daily over the life of his employment agreement.
AGGREGATED OPTION EXERCISES AND FISCAL-YEAR-END OPTION VALUES. The
following table sets forth option exercises by the Named Executive Officers and
value of in-the-money unexercised options held at December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-
SHARES AT FY-END (#) MONEY OPTIONS AT FY-END
ACQUIRED ON VALUE --------------------------------- ---------------------------------
NAME EXERCISE (#) REALIZED($) EXERCISABLE(1) UNEXERCISABLE(1) EXERCISABLE(2) UNEXERCISABLE(2)
- ---- ------------ ------------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Jeff L. Hull......... -- $ -- 688,136 1,045,706 $359,876 $214,084
R.L. Gilmer.......... -- -- 835,643 887,882 405,338 221,970
Louis W. Simi, Jr.... -- -- 312,500 187,500 325,625 46,875
Cliff Darby.......... -- -- 393,997 904,518 43,003 115,138
Randall S. Fojtasek.. 5,735,369(3) 3,802,809(3) -- -- -- --
</TABLE>
- ------------------------
(1) Represents options held by the named individual to purchase common stock of
D and W Holdings, Inc.
(2) Based on the fair market value of the option shares at fiscal year end
($1.25 per share) less the exercise price per share payable for such shares.
(3) Represents shares underlying warrants to purchase common stock of D and W
Holdings, Inc. that were canceled and retired, upon Mr. Fojtasek's
resignation.
1998 STOCK OPTION PLAN
In connection with the 1998 Recapitalization, the Board of Directors and
stockholders of D and W adopted the D and W Holdings, Inc. 1998 Stock Option
Plan (the "1998 Plan") providing for the grant of options to purchase common
stock of D and W to key employees and eligible non-employees of D and W and its
subsidiaries. The 1998 Plan originally provided for the grant of options to
purchase up to 11,991,142 shares of D and W common stock. Upon consummation of
the acquisitions of Heat, Inc. and Champagne Industries, Inc., the 1998 Plan was
amended to increase the number of options to 14,991,142.
26
<PAGE>
After the acquisitions and 1999 grants, 3,817,142 shares of D and W common stock
were reserved for future grants under the 1998 Plan. The 1998 Plan is
administered by the compensation committee of the Board of Directors of
D and W.
The 1998 Plan provides that options may be granted in the form of incentive
options qualified for favorable tax treatment under Section 422 of the Internal
Revenue Code or in the form of non-qualified options, which do not qualify under
Section 422. All options granted are non-qualified options. Unless otherwise
provided by the compensation committee, options granted under the 1998 Plan
generally have a term of ten (10) years from the date of grant and vest in equal
installments annually over three to five years dependent on continued
employment. No option is exercisable until it has vested. Options granted upon
consummation of the 1998 Recapitalization in exchange for outstanding options of
Darby and Wing continue to vest on the schedule applicable to the exchanged
options. Of such options, options to purchase 371,138 shares of D and W common
stock were fully vested upon grant. Of the options granted in connection with
the 1998 Recapitalization, options to purchase 993,115 shares of D and W common
stock will vest only in connection with a value event, defined as:
- the sale of D and W common stock by D and W in an offering registered with
the SEC which constitutes a qualifying public offering,
- D and W merging or consolidating with another corporation in a merger in
which the surviving corporation has freely tradeable common stock, or
- the sale or transfer of substantially all of the assets of D and W and its
subsidiaries, taken as a whole.
The exercise price of all options was set by the compensation committee upon
grant, and with respect to incentive options is at least equal to the fair
market value of the D and W common stock on the date of grant.
Options are nontransferable other than in accordance with the laws of
descent and distribution. Unvested options will expire, unless otherwise
provided by the compensation committee, upon the optionee's death, disability or
termination of employment for any reason. Upon an optionee's death or disability
the optionee or his or her representative or heir will have the right to
exercise the vested portion of any options. Upon termination for cause or
voluntary termination by the optionee without good reason all vested options
will automatically expire. Upon termination of employment for any other reason,
including retirement or termination without cause, the optionee will have the
right to exercise the vested portion of any option. Also, upon termination of an
optionee's employment for any reason, D and W will have the right to purchase
outstanding options and any shares of D and W common stock held by the optionee
as a result of the exercise of an option.
REPLACEMENT STOCK OPTION PLAN
In addition to the 1998 Plan, D and W adopted the D and W Holdings, Inc.
Replacement Stock Option Plan (the "Replacement Plan") to govern the terms of
certain options to purchase D and W common stock which were granted in
replacement of outstanding options of Atrium Corp. in connection with the 1998
Recapitalization. Under the Replacement Plan, options to purchase an aggregate
of 1,575,000 shares of D and W common stock were granted in exchange for
outstanding options of Atrium Corp. which were not cashed out in the 1998
Recapitalization. In connection with the acquisitions of Heat, Inc. and
Champagne Industries, Inc., the Replacement Plan was amended increased the
number of shares available to 2,575,000. The options granted pursuant to the
Replacement Plan vest ratably over periods ranging from three to five years on
each anniversary date of the grant. The replacement options have exercise prices
ranging from $0.01 to $0.16 per share. As of December 31, 1999, 374,469 shares
of D and W common stock were reserved for future grants under the Replacement
Plan.
27
<PAGE>
Upon termination of an optionee's employment, D and W shall have the right
to repurchase from the optionee all or any portion of their replacement option.
Upon exercise of any vested portion of a replacement option, D and W may require
the optionee to execute a buy-sell agreement containing provisions similar to
the repurchase provisions described above, as a condition to such option
exercise.
The Replacement Plan provides that all options granted thereunder are in the
form of nonqualified options, which are options that do not qualify for favored
tax treatment under Section 422 of the Internal Revenue Code. The replacement
options have a term of 20 years from the date of grant subject to early
termination in connection with termination of employment. No option is
exercisable until it is vested. Replacement options are not transferable by an
optionee, either voluntarily, involuntarily or by operation of law, except that
options may be transferred to an optionee's family members or personal
representative, so long as the transferee agrees to be bound by the provisions
of an option agreement and replacement plan.
BONUS PLAN
We maintain a bonus plan providing for annual bonus awards to certain key
employees. Such bonus amounts are based on the Company and its divisions meeting
certain performance goals established by our board of directors.
OTHER BENEFIT PROGRAMS
Our executive officers also participate in other employee benefit programs
including health and dental insurance, group life insurance, long-term and
short-term disability, and a savings and supplemental retirement plan (the
"401(k) Plan") on the same basis as our other employees.
EMPLOYMENT AGREEMENTS
Mr. Sheeder has entered into an employment agreement with D and W pursuant
to which he serves as Chief Executive Officer of D and W. Mr. Sheeder's
employment agreement has a four-year term, commencing March 28, 2000. Under the
terms of Mr. Sheeder's employment agreement, he is entitled to receive an annual
base salary of $325,000, subject to increase at the discretion of the Board of
Directors. The agreement provides that Mr. Sheeder may receive an annual
performance bonus of up to $325,000;
- 75% of which will be payable contingent on achievement of D and W's EBITDA
plan,
- 25% of which will be payable contingent on achievement of management's
objectives set by the Board of Directors.
Pursuant to the agreement, Mr. Sheeder has received options to purchase
2,500,000 shares of D and W common stock pursuant to the stock option plan.
1,000,000 shares have a strike price of $1.25 and the remaining
1,500,000 shares have a strike price of $1.50. The options will vest annually in
equal installments over four years from the date of grant. The agreement also
provides that in the event Mr. Sheeder is terminated by D and W without cause,
or terminates his employment for good reason, D and W will pay to Mr. Sheeder a
payment
- in a lump sum, an amount equal to the sum of his annual base salary earned
or accrued through the termination date, reimbursement of his reasonable
and necessary expenses, any unpaid accrued vacation pay and any amount
arising from his benefits to be received pursuant to D and W's investment
plans, plus
- equal to a prorated portion of his incentive bonus, plus
- equal to one-twelfth of his annual base salary on the date of termination
together with 80% of his maximum incentive bonus for each month during a
period of twenty-four months following the date of his termination.
28
<PAGE>
Such payments would also be made if Mr. Sheeder's employment is terminated
by D and W in connection with a change of control of D and W, as defined in the
agreement. Pursuant to the agreement, Mr. Sheeder agrees not to compete with
D and W and its subsidiaries until (i) one year following termination by
D and W for cause or due to disability or as a result of termination initiated
by him without good reason, or (ii) the last day of any period he is receiving
severance payments upon termination by D and W without cause or upon a change of
control, or as a result of termination initiated by him with good reason.
Mr. Hull has entered into an employment agreement with D and W pursuant to
which he serves as President and Chief Financial Officer of D and W. Mr. Hull's
employment agreement has a three-year term, commencing in October 1999. Under
the terms of Mr. Hull's employment agreement, he is entitled to receive an
annual base salary of $250,000, subject to increase at the discretion of the
Board of Directors. The agreement provides that Mr. Hull may receive an annual
performance bonus of up to $150,000;
- 50% of which will be payable contingent on achievement of D and W's EBITDA
plan,
- 50% of which will be payable contingent on achievement of management's
objectives set by the Board of Directors.
Pursuant to the agreement, Mr. Hull has received options to purchase
1,733,842 shares of D and W common stock pursuant to the stock option plan. The
options have various exercise prices ranging from $.01 to $1.25 per share,
subject to adjustment under the stock option plan, and will vest daily over
three and four years from the date of grant. The agreement also provides that in
the event Mr. Hull is terminated by D and W without cause, or terminates his
employment for good reason, D and W will pay to Mr. Hull a payment
- in a lump sum, an amount equal to the sum of his annual base salary earned
or accrued through the termination date, reimbursement of his reasonable
and necessary expenses, any unpaid accrued vacation pay and any amount
arising from his benefits to be received pursuant to D and W's investment
plans, plus
- equal to a prorated portion of his incentive bonus, plus
- equal to one-twelfth of his annual base salary on the date of termination
together with 80% of his maximum incentive bonus for each month during a
period of twenty-four months following the date of his termination.
Such payments would also be made if Mr. Hull's employment is terminated by
D and W in connection with a change of control of D and W, as defined in the
agreement. Pursuant to the agreement, Mr. Hull agrees not to compete with
D and W and its subsidiaries until (i) one year following termination by
D and W for cause or due to disability or as a result of termination initiated
by him without good reason, or (ii) the last day of any period he is receiving
severance payments upon termination by D and W without cause or upon a change of
control, or as a result of termination initiated by him with good reason.
Mr. Gilmer has entered into an employment agreement with D and W pursuant to
which he serves as Chief Operating Officer of D and W. Mr. Gilmer's employment
agreement has a four year term, commencing in October 1998. Under the terms of
Mr. Gilmer's employment agreement, he is entitled to receive an annual base
salary of $225,000, as adjusted, subject to increase at the discretion of the
Board of Directors. The agreement provides that Mr. Gilmer may receive an annual
performance bonus of up to $125,000,
- 75% of which will be payable contingent on achievement of D and W's EBITDA
plan,
- 15% of which will be payable contingent on achievement of management
objectives set from time to time by the Board of Directors, and
- 10% of which will be payable contingent on achievement of a target return
on equity for D and W set by the Board of Directors.
29
<PAGE>
Pursuant to the agreement, Mr. Gilmer received options to purchase 1,723,524
shares of D and W common stock with exercise prices ranging from $.01 to $1.56.
These options vest annually in equal installments over 3 to 4 years. The
agreement also provides that, in the event Mr. Gilmer is terminated by D and W
without cause, or terminates his employment for good reason, D and W will pay to
Mr. Gilmer a payment
- in a lump sum, an amount equal to the sum of his annual base salary earned
or accrued through the termination date, reimbursement of his reasonable
and necessary expenses, any unpaid accrued vacation pay and any amount
arising from his benefits to be received pursuant to Holdings' investment
plans, plus
- an amount equal to a prorated portion of his incentive bonus, plus
- an amount equal to one-twelfth of his annual base salary on the date of
termination together with 80% of his maximum base incentive bonus for each
month during a period of twelve months following the date of his
termination.
Such payments would also be made if Mr. Gilmer's employment is terminated by
D and W in connection with a change of control of D and W, as defined in the
agreement. Pursuant to the agreement, Mr. Gilmer agrees not to compete with
D and W and its subsidiaries until (i) one year following termination by
D and W for cause or due to disability or as a result of termination initiated
by him without 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.
We 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.
TERMINATION AGREEMENTS
On April 9, 1999, Randall S. Fojtasek, President and Chief Executive Officer
and Director of D and W, entered into an agreement and release with D and W,
Corp., the Company and certain subsidiaries of the Company parties thereto
(collectively, the Company"), Ardshiel, GE Investment Management Incorporated
and GEIPPPII whereby Mr. Fojtasek resigned as officer and director of the
Company, effective as of March 31, 1999.
30
<PAGE>
Pursuant to the agreement and release, the Company agreed to make certain
severance benefits payments to Mr. Fojtasek in connection with his resignation,
including a payment (i) in a lump sum of $1,625, (ii) in a lump sum, an amount
equal to the amount of Mr. Fojtasek's annual base salary accrued through the
termination date, reimbursement of his reasonable and necessary expenses, and
unpaid and accrued vacation pay and (iii) of an accrued investments arising from
Mr. Fojtasek's benefits to be received pursuant to D and W's investment plans.
Mr. Fojtasek agreed not to compete with the Company for a period of three years
from the termination date.
In addition, in connection with his resignation, Mr. Fojtasek entered into a
warrant purchase agreement with D and W, Ardshiel, GE Investment Management
Incorporated and GEIPPPII, dated as of June 1999, pursuant to which D and W
repurchased from Mr. Fojtasek (i) a warrant, dated as of October 2, 1998, to
purchase 4,735,369 shares of D and W common stock and (ii) a warrant, dated as
of October 2, 1998, to purchase 1,000,000 D and W common stock, for the
aggregate purchase price of $3,803.
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 may
compensate non-employee directors not affiliated with GEIPPPII or Ardshiel
in the future for their service on our board.
31
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We are a wholly-owned subsidiary of Atrium Corporation, 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 30, 2000, 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.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PERCENTAGE
- ---- ---------------- ----------
<S> <C> <C>
GE Investment Private Placement Partners II, a Limited
Partnership............................................... 92,970,561 95.2%
3003 Summer Street
Stamford, CT 06984-7900
Ardshiel, Inc............................................... 5,776,282(1) 5.9%
230 Park Avenue, Suite 2527
New York, NY 10169
Jeff L. Hull................................................ 858,839(2) *
R.L. Gilmer................................................. 1,171,509(2) 1.2%
Louis W. Simi, Jr........................................... 312,500(2) *
Cliff Darby................................................. 1,730,621(2) 1.8%
Sam A. Wing, Jr............................................. -- --
Daniel T. Morley............................................ 5,776,282(3) 5.9%
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 11.7%
</TABLE>
- ------------------------
* 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) 2,916,501 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 858,839, 835,643 312,500 and 671,468 shares of D and W common stock
issuable upon exercise of options granted to Messrs. Hull, Gilmer, Simi and
Darby, respectively. Such options are exercisable within 60 days.
(3) 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.
32
<PAGE>
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.
Ardshiel and its affiliates, shall be entitled to designate up to six directors.
Subject to certain exceptions, each of the Major Stockholders other than
GEIPPPII has 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 purchase a pro rata portion of the equity
securities or Discount Debentures held by such Major Stockholder or holder of
Discount Debentures. 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.
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, which was
amended on May 17, 1999, 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 $1.8 million plus expenses.
The Company paid $1.9 million under this agreement in 1999. Additionally, the
management agreement provides that, prior to 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 has the right to 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 will 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 $1.4 million upon the
33
<PAGE>
acquisitions of Delta Millwork, Inc., Heat, Inc. and Champagne Industries, Inc.
and paid Ardshiel's 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.
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, 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 1998 Recapitalization.
D and W has agreed to cause
- us to make dividend payments to Atrium Corp. to enable it to make interest
and principal payments on, or to repurchase, redeem or prepay, 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). Presently, the Credit Facility restricts the Company's ability
to pay dividends 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."
On May 17, 1999, in connection with the issuance of the $175,000 of 10 1/2%
Senior Subordinated Notes due 2009, we utilized $21,500 of the net proceeds from
the issuance to pay a distribution to Atrium Corp. Atrium Corporation, in turn,
repaid $21,500 (of which $1,500 represented accretion of discount) of the
$45,000 Discount Debentures issued in connection with the October 2, 1998
Recapitalization.
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
34
<PAGE>
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.
FACILITY LEASES
On July 3, 1995, Fojtasek Industrial Properties, Ltd., a limited partnership
in which Randall S. Fojtasek, the former President and Chief Executive Officer,
owned an equity interest of approximately 10.2%, executed leases with us with
respect to our Atrium Wood, Atrium Vinyl and our H-R Windows division
facilities. Both leases were 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 $1,323, $1,245, and $753 in 1999, 1998 and
1997, respectively. In November 1999, these facilities were sold to an
unaffiliated third-party. In connection with this sale, we negotiated a new
lease and terminated the lease with Fojtasek Industrial Properties, Ltd.
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 1999 were
$15. This sublease was terminated in September 1999.
Darby is a party to a facilities lease agreement with R.G. Darby, a former
stockholder of Darby and the father of Cliff Darby, Divisional President of
Darby. Pursuant to the terms of the lease, Darby pays rent to Mr. Darby monthly,
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 1999
and 1998 was approximately $186 and $144, respectively.
35
<PAGE>
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 schedule II is presented.
(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:
None
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
By: /s/ JEFF L. HULL
-----------------------------------------
Jeff L. Hull
PRESIDENT, CHIEF FINANCIAL OFFICER,
TREASURER AND DIRECTOR
</TABLE>
Date: April 15, 1999
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following person on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
President, Chief Financial
Officer, Treasurer and
/s/ JEFF L. HULL Director (Principal
------------------------------------------- Executive Officer and March 30, 2000
Jeff L. Hull Principal Financial
Officer)
Vice President, Corporate
* Controller and Secretary
------------------------------------------- (Principal Accounting March 30, 2000
Eric W. Long Officer)
*
------------------------------------------- Director March 30, 2000
R.L. Gilmer
*
------------------------------------------- Director March 30, 2000
Daniel T Morley
*
------------------------------------------- Director March 30, 2000
Roger A. Knight
*
------------------------------------------- Director March 30, 2000
Sam A. Wing, Jr.
*
------------------------------------------- Director March 30, 2000
James G. Turner
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
*
------------------------------------------- Director March 30, 2000
Nimrod Natan
*
------------------------------------------- Director March 30, 2000
John Deterding
*
------------------------------------------- Director March 30, 2000
Andreas Hildebrand
</TABLE>
Jeff L. Hull, by signing his name hereto, signs and executes this document
on behalf of each of the above-named officers and directors of Atrium
Companies, Inc. on the 30th day of March 2000, pursuant to powers of attorney
executed on behalf of each of such officers and directors, and contemporaneously
filed hereunto with the Securities and Exchange Commission.
<TABLE>
<S> <C> <C> <C>
*By: /s/ JEFF L. HULL
--------------------------------------
Jeff L. Hull
ATTORNEY-IN-FACT
</TABLE>
Date: March 30, 2000
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
ATRIUM COMPANIES, INC.
Report of Independent Accountants........................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and
1998.................................................... F-3
Consolidated Statements of Operations for the year ended
December 31, 1999, 1998 and 1997........................ F-4
Consolidated Statements of Stockholders' Equity for the
year ended December 31, 1999, 1998 and 1997............. F-5
Consolidated Statements of Cash Flows for the year ended
December 31, 1999, 1998 and 1997........................ F-6
Notes to Consolidated Financial Statements.................. F-7
Schedule II Valuation and Qualifying Accounts.............. S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
March 30, 2000
To the Board of Directors and Stockholder of
Atrium Companies, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 36 and listed in the index appearing under
Item 14(a)(2) on page 36, respectively, present fairly, in all material
respects, the financial position of Atrium Companies, Inc. and its subsidiaries
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
F-2
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,294 $ --
Restricted cash........................................... 869 --
Equity securities--available for sale..................... 111 137
Accounts receivable, net of allowance of $1,670 and $778,
respectively............................................ 59,213 46,466
Inventories............................................... 61,277 46,289
Prepaid expenses and other current assets................. 12,441 7,756
Deferred tax asset........................................ 2,359 1,249
-------- --------
Total current assets...................................... 137,564 101,897
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $10,584 and $3,247, respectively.......... 35,165 26,760
GOODWILL, net of accumulated amortization of $8,971 and
$2,354, respectively...................................... 287,873 214,749
DEFERRED FINANCING COSTS, net of accumulated amortization of
$2,281 and $379, respectively............................. 17,607 11,058
OTHER ASSETS................................................ 5,927 5,405
-------- --------
Total assets.............................................. $484,136 $359,869
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable.......................... 2,297 2,209
Accounts payable.......................................... 26,737 25,353
Accrued liabilities....................................... 25,055 15,432
-------- --------
Total current liabilities................................. 54,089 42,994
-------- --------
LONG-TERM LIABILITIES:
Notes payable............................................. 314,414 177,018
Deferred tax liability.................................... 2,557 1
Other long-term liabilities............................... 3,056 6,800
-------- --------
Total long-term liabilities............................... 320,027 183,819
-------- --------
Total liabilities......................................... 374,116 226,813
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock $.01 par value, 3,000 shares authorized, 100
shares issued and outstanding........................... -- --
Paid-in capital........................................... 109,624 134,852
Retained earnings (accumulated deficit)................... 398 (1,820)
Accumulated other comprehensive income (loss)............. (2) 24
-------- --------
Total stockholder's equity................................ 110,020 133,056
-------- --------
Total liabilities and stockholder's equity.............. $484,136 $359,869
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
NET SALES............................................... $498,456 $211,059 $99,059
COST OF GOODS SOLD...................................... 340,909 159,140 78,270
-------- -------- -------
Gross profit.......................................... 157,547 51,919 20,789
-------- -------- -------
OPERATING EXPENSES:
Selling, delivery, general and administrative
expenses.............................................. 107,780 39,754 15,671
Amortization expense.................................. 8,717 2,133 774
Non cash stock option compensation expense............ 128 3,851 --
Special charges....................................... 1,886 -- --
-------- -------- -------
118,511 45,738 16,445
-------- -------- -------
Income from operations.............................. 39,036 6,181 4,344
INTEREST EXPENSE........................................ 28,524 9,081 2,953
OTHER INCOME, net....................................... 283 571 --
-------- -------- -------
Income (loss) before income taxes and extraordinary
charge................................................ 10,795 (2,329) 1,391
PROVISION (BENEFIT) FOR INCOME TAXES.................... 6,641 (149) 695
-------- -------- -------
Income (loss) before extraordinary charge............. 4,154 (2,180) 696
EXTRAORDINARY CHARGE ON EARLY RETIREMENT OF DEBT (net of
income tax benefit of $1,142 and $392 in 1999 and
1998, respectively)................................... 1,936 639 --
-------- -------- -------
NET INCOME (LOSS)....................................... $ 2,218 $ (2,819) $ 696
======== ======== =======
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-4
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK CLASS A CLASS B EARNINGS
--------------------- ------------------- ------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT)
-------- ---------- -------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996........ -- $ -- 26 $ -- 55 $ 1 $ 9,326 $ 303
Net income........................ -- -- -- -- -- -- -- 696
Issuance of warrants.............. -- -- -- -- -- -- 349 --
--- ---------- --- ---- --- ---- -------- -------
Balance, December 31, 1997........ -- -- 26 -- 55 1 9,675 999
Conversion of Wing's common stock
to Atrium's common stock........ 100 -- (26) -- (55) (1) 1 --
Conversion of exchangeable
subordinated note payable....... -- -- -- -- -- -- 11,375 --
Step-up of Wing's assets due to
purchase of minority interest... -- -- -- -- -- -- 1,247 --
Contribution of assets of Darby... -- -- -- -- -- -- 13,147 --
Capital contribution from Atrium
Corp............................ -- -- -- -- -- -- 95,340 --
Non cash stock option compensation
expense......................... -- -- -- -- -- -- 3,851 --
Exercise of stock options......... -- -- -- -- -- -- 216 --
Comprehensive loss:
Net loss........................ -- -- -- -- -- -- -- (2,819)
Unrealized gain on equity
securities.................... -- -- -- -- -- -- -- --
--- ---------- --- ---- --- ---- -------- -------
Total comprehensive loss.......... (2,819)
--- ---------- --- ---- --- ---- -------- -------
Balance, December 31, 1998........ 100 -- -- -- -- -- 134,852 (1,820)
Net income........................ -- -- -- -- -- -- -- 2,218
Unrealized loss on equity
securities...................... -- -- -- -- -- -- -- --
Non cash stock option compensation
expense......................... -- -- -- -- -- -- 128 --
Capital contributions from Atrium
Corp............................ -- -- -- -- -- -- 635 --
Distribution to Atrium Corp....... -- -- -- -- -- -- (25,991) --
--- ---------- --- ---- --- ---- -------- -------
Balance, December 31, 1999........ 100 $ -- -- $ -- -- $ -- $109,624 $ 398
=== ========== === ==== === ==== ======== =======
<CAPTION>
ACCUMULATED OTHER TOTAL
COMPREHENSIVE STOCKHOLDER'S
INCOME (LOSS) EQUITY
-------------------- -------------
<S> <C> <C>
Balance, December 31, 1996........ $-- $ 9,630
Net income........................ -- 696
Issuance of warrants.............. -- 349
--- --------
Balance, December 31, 1997........ -- 10,675
Conversion of Wing's common stock
to Atrium's common stock........ -- --
Conversion of exchangeable
subordinated note payable....... -- 11,375
Step-up of Wing's assets due to
purchase of minority interest... -- 1,247
Contribution of assets of Darby... -- 13,147
Capital contribution from Atrium
Corp............................ -- 95,340
Non cash stock option compensation
expense......................... -- 3,851
Exercise of stock options......... -- 216
Comprehensive loss:
Net loss........................ -- (2,819)
Unrealized gain on equity
securities.................... 24 24
--- --------
Total comprehensive loss.......... 24 (2,795)
--- --------
Balance, December 31, 1998........ 24 133,056
Net income........................ -- 2,218
Unrealized loss on equity
securities...................... (26) (26)
Non cash stock option compensation
expense......................... -- 128
Capital contributions from Atrium
Corp............................ -- 635
Distribution to Atrium Corp....... -- (25,991)
--- --------
Balance, December 31, 1999........ $(2) $110,020
=== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 2,218 $ (2,819) $ 696
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Extraordinary charge, net of income tax benefit........... 896 639 --
Depreciation and amortization............................. 14,061 4,158 1,492
Non cash stock option compensation expense................ 128 3,851 --
Amortization of deferred financing costs.................. 1,902 732 390
Accretion of discount on senior subordinated notes in 1999
and exchangable subordinated notes payable in 1998 and
1997.................................................... 95 105 113
Provision for bad debts................................... 1,123 227 60
Gain on sales of assets................................... (78) (12) --
Deferred tax provision.................................... 4,445 358 184
Changes in assets and liabilities, net of acquisitions:
Accounts receivable..................................... (4,710) (1,751) (218)
Inventories............................................. (6,424) (12,297) (2,990)
Prepaid expenses and other current assets............... (3,420) (2,142) (166)
Accounts payable........................................ (3,025) 2,630 354
Accrued liabilities..................................... 1,624 (3,932) 1,233
--------- -------- ---------
Net cash provided by (used in) operating activities... 8,835 (10,253) 1,148
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (16,996) (2,221) (1,355)
Proceeds from sales of assets............................. 8,885 12 --
Acquisition of Heat, Champagne and Delta Millwork, net of
cash acquired and debt and accrued interest assumed..... (95,327) -- --
Acquisition of Atrium, net of cash acquired and debt and
accrued interest assumed................................ -- (120,977) --
Acquisition of the Door Division of Super Millwork........ -- -- (10,408)
Other assets.............................................. (5,042) (1,998) --
--------- -------- ---------
Net cash used in investing activities................. (108,480) (125,184) (11,763)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of senior subordinated notes....... 172,368 -- --
Proceeds from borrowings under term notes................. -- 145,930 --
Payment of notes payable.................................. (15,000) (29,563) (1,032)
Payment of senior subordinated notes previously
outstanding............................................. (29,070) (70,930) (70)
Net borrowings under revolving credit facility............ 11,152 4,118 1,497
Proceeds from issuance of exchangeable subordinated
notes................................................... -- -- 3,960
Proceeds from issuance of notes payable................... -- -- 6,790
Deferred financing costs.................................. (9,347) (11,437) (536)
Scheduled principal payments on term notes................ (2,241) (500) --
Contributions from (distributions to) Atrium Corp......... (25,356) 95,340 --
Exercise of stock options................................. -- 216 --
Payment of other long-term liabilities.................... (2,003) -- --
Checks drawn in excess of bank balances................... 436 2,229 --
--------- -------- ---------
Net cash provided by financing activities............. 100,939 135,403 10,609
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1,294 (34) (6)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. -- 34 40
--------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 1,294 $ -- $ 34
========= ======== =========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest................................................ $ 23,227 $ 11,765 $ 2,620
Income taxes, net of refunds............................ (1,181) 536 550
Cash received during the period held as:
Restricted cash......................................... 869
Noncash investing and financing activities:
Conversion of exchangeable subordinated notes payable... -- 11,375 --
Contribution of Darby's assets.......................... -- 13,147 --
Step-up of Wing's assets due to purchase of minority
interest............................................... -- 1,247 --
Purchase of equipment under capital leases.............. -- 20 840
Payable to seller....................................... -- -- 2,500
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-6
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION:
Atrium Companies, Inc. (the "Company") is engaged in the manufacture and
sale of doors, windows and various building materials throughout the United
States.
Prior to October 2, 1998, Atrium Companies, Inc.'s, ("Atrium") (the previous
registrant), historical financial statements as previously filed with the
Securities and Exchange Commission included its operations and the operations of
its wholly-owned subsidiaries, Atrium Door and Window Company of the Northeast,
Atrium Door and Window Company of New England, Atrium Door and Window Company of
New York (collectively "ADW--Northeast"), Atrium Door and Window Company--West
Coast ("ADW--West Coast") and Atrium Door and Window Company of Arizona
("ADW--Arizona"). On October 2, 1998, pursuant to an acquisition and merger (the
"Recapitalization" or "reverse acquisition") as more fully described in Note 3,
the Company's indirect Parent (D and W Holdings, Inc.) contributed the assets of
Wing Industries Holdings, Inc. and its subsidiary Wing Industries, Inc.
(collectively "Wing") and Door Holdings, Inc. and its subsidiaries R.G. Darby
Company, Inc. and Total Trim, Inc. (collectively "Darby") to the Company.
As Wing was determined to be the acquiror in the 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 the Company and
Darby from October 3, 1998. The statement of operations for the year ended
December 31, 1997, only include the operations and accounts of Wing and its
predecessor. Wing was acquired by the current controlling shareholders on
October 25, 1996. Additionally, the operations of Delta Millwork, Inc. (renamed
R.G. Darby Company-South and Total Trim-South, collectively, "Darby-South") are
included since the date of acquisition, January 27, 1999 and the operations of
Heat, Inc. ("Heat") and Champagne Industries, Inc. ("Champagne") are included
since their date of acquisition, May 17, 1999. The December 31, 1999 balance
sheet includes the accounts of the Company, Wing, Darby, Darby-South, Heat,
Champagne and each of their respective subsidiaries, while the December 31, 1998
balance sheet includes the accounts of the Company, Wing, Darby and each of
their respective subsidiaries.
F-7
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION: (CONTINUED)
The following unaudited pro forma information presents consolidated
operating results as though the Recapitalization and the acquisitions of
ADW-Arizona (which was acquired March 27, 1998), Darby-South, Heat and Champagne
(see Note 4) had occurred at the beginning of the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
NET SALES................................................ $498,456 $526,931 $211,059 $493,032
COST OF GOODS SOLD....................................... 340,909 358,998 159,140 338,810
-------- -------- -------- --------
Gross Profit........................................... 157,547 167,933 51,919 154,222
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses... 107,780 117,482 39,754 105,059
Amortization expense..................................... 8,717 9,518 2,133 9,518
Non-cash stock option compensation expense............... 128 128 3,851 7,925
Special charges.......................................... 1,886 1,886 -- --
-------- -------- -------- --------
118,511 129,014 45,738 122,502
Income from operations................................. 39,036 38,919 6,181 31,720
INTEREST EXPENSE......................................... 28,524 32,765 9,081 32,765
OTHER INCOME, net........................................ 283 348 571 502
-------- -------- -------- --------
Income before taxes.................................... 10,795 6,502 (2,329) (543)
PROVISION (BENEFIT) FOR INCOME TAXES..................... 6,641 5,170 (149) 2,296
-------- -------- -------- --------
Income (loss) from continuing operations................. $ 4,154 $ 1,332 $ (2,180) $ (2,839)
======== ======== ======== ========
Other Information:
Depreciation expense..................................... $ 5,344 $ 5,885 $ 1,996 $ 5,521
======== ======== ======== ========
</TABLE>
The above pro forma information excludes $7,351 of special charges for the
year ended December 31, 1998 related to the 1998 Recapitalization (see Note 3).
2. SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
INDUSTRY SEGMENT
The Company operates in a single industry segment, the fabrication,
distribution and installation of doors and windows and related components for
the residential construction, manufactured housing and the remodeling and
renovation markets.
F-8
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
Revenue from the sale of doors and windows and related components is
recorded at the time of delivery to the customer. Allowances are established to
recognize the risk of sales returns from customers and estimates of warranty
costs.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with original maturities
of three months or less to be cash equivalents. At December 31, 1999 and 1998,
the Company had $4,447 and $4,012 of checks outstanding that were reclassified
into accounts payable.
RESTRICTED CASH
Restricted cash represents proceeds received from certain dispositions of
property, plant and equipment. In accordance with the provisions of the
Company's Credit Agreement (See Note 9), the Company is required to reinvest the
proceeds within 180 days or alternatively retire debt associated with the Term
Loans B and C. Until the proceeds are applied in accordance with the provisions
of the Credit Agreement, the funds are held as restricted cash.
EQUITY SECURITIES--AVAILABLE FOR SALE
Investments in equity securities--available for sale are carried at market
based on quoted market prices, with unrealized gains (losses) recorded in
stockholder's equity.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of trade accounts receivable.
The Company's customers are located in all 50 states and in 6 different
countries. The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
The Company has sales to two significant customers as follows (presented as a
percentage of actual net sales):
<TABLE>
<CAPTION>
PERIODS ENDED
------------------------------
CUSTOMER 12/31/99 12/31/98 12/31/97
- -------- -------- -------- --------
<S> <C> <C> <C>
The Home Depot, Inc................................. 26% 42% 43%
Lowe's Companies, Inc............................... 8% 17% 22%
</TABLE>
INVENTORIES
Inventories are valued at the lower of cost (last-in, first-out or "LIFO")
or market. Work-in- process and finished goods inventories consist of materials,
labor and manufacturing overhead. Inventory costs include direct materials,
labor and manufacturing overhead. Management believes that the LIFO method
results in a better matching of current costs with current revenues. Under the
first-in, first-out method
F-9
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(FIFO) of accounting, such inventories would have been approximately $37 and
$112 lower at December 31, 1999 and 1998, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation. The Company depreciates the assets principally on a straight-line
basis for financial reporting purposes over their estimated useful lives, as
follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
-----------
<S> <C>
Buildings and improvements.................................. 5-40 years
Machinery and equipment..................................... 3-12 years
</TABLE>
Gains or losses on disposition are based on the net proceeds and the
adjusted carrying amount of the assets sold or retired. Expenditures for
maintenance, minor renewals and repairs are expensed as incurred, while major
replacements and improvements are capitalized.
GOODWILL
Goodwill represents the excess of cost over fair market value of net assets
acquired. Goodwill is being amortized over 40 years on a straight-line basis.
Management continually reviews the carrying value of goodwill for recoverability
based on anticipated undiscounted cash flows of the assets to which it relates.
The Company considers operating results, trends and prospects of the Company, as
well as competitive comparisons. The Company also takes into consideration
competition within the building materials industry and any other events or
circumstances which might indicate potential impairment. When goodwill is
determined not to be recoverable, an impairment is recognized as a charge to
operations.
The Company believes that a 40 year useful life for goodwill is appropriate
based upon the fact that the majority of the Company's operating entities have
been in business over fifty years with some of the industry's most recognized
brand names including Atrium and Wing. Management believes its brand names have
an indeterminable life that may equal or exceed 40 years and therefore, will
amortize goodwill over that period. Further, products are not significantly
impacted by technological risks that would cause the Company to consider
reducing the goodwill life. The Company's management periodically reviews the
appropriateness of the estimated useful life of goodwill.
CAPITALIZED SOFTWARE COSTS
The Company capitalizes internal employee costs and external consulting
costs associated with implementing and developing software for internal use.
Internal costs capitalized include payroll and payroll-related costs for
employees who are directly associated with the development, modification and
implementation of the software. External costs include direct expenses related
to consulting and other professional fees consumed in developing, modifying and
implementing the software. Capitalization of costs occurs upon the completion of
the preliminary project stage and when management believes it is probable a
project will be completed and the software will be used to perform the function
intended. Amortization begins when the software is put into place and is
calculated on a straight-line basis over three
F-10
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
years. Management continually reviews the carrying value and expected
functionality of the accumulated costs for potential impairment. When it is no
longer probable that computer software being developed will be completed,
modified or placed in service, the assets carrying value will be adjusted to the
lower of cost or fair value.
Unamortized capitalized software costs at December 31, 1999 and 1998 were
$3,333 and $3,663, respectively, and are included in other long-term assets.
Amortization expense for 1999, 1998 and 1997 was $2,005, $304 and $0,
respectively.
INCOME TAXES
The provision for income taxes is based on pretax income as reported for
financial statement purposes. Deferred income taxes are provided in accordance
with the liability method of accounting for income taxes to recognize the tax
effects of temporary differences between financial statement and income tax
accounting.
As discussed in Note 3, the Company's Statement of Operations for the year
ended December 31, 1997 only includes the operations and accounts of Wing and
its predecessor. Wing and its predecessor filed a consolidated tax return for
this period. For the year ended December 31, 1999 and 1998 the Company is
included in the D and W Holdings ("Parent") consolidated tax return. The
Company's income taxes for the year ended December 31, 1999 and 1998 have been
presented as if calculated on a stand-alone separate tax return basis. As of
December 31, 1999 and 1998, included in prepaid expenses and other current
assets are income tax receivables due from Parent of $3,006 and $5,019,
respectively.
FORWARD COMMITMENTS
The Company periodically enters into forward commitments to hedge price
variances in materials. Changes in the market value of forward commitments are
recognized in income when the effects of the related charges in the hedged items
are recognized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" amended by SFAS
No. 137 "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FAS No. 133--Amendment of FAS No. 133" (combined
"SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 2000. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1999 and
thereafter). SFAS 133 cannot be applied retroactively. SFAS 133 must be applied
to (a) derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were
F-11
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
issued, acquired, or substantively modified after December 31, 1997 (and, at the
Company's election, before January 1, 1998).
The Company is in the process of quantifying the impact of adopting
SFAS 133 on its financial statements and has not determined the timing of or
method of adoption of SFAS 133.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates. Significant
estimates are used in calculating bad debt, workers' compensation and warranty
accruals, and in recognizing deferred tax assets and liabilities.
ADVERTISING COSTS
Advertising costs are expensed when incurred and were $4,457, $2,841 and
$1,800, for 1999, 1998 and 1997, respectively. These costs are reflected in
"selling, delivery, general and administrative" in the consolidated statements
of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 balances to
conform to the 1999 presentation.
3. THE REVERSE ACQUISITION (RECAPITALIZATION):
On August 3, 1998, D and W Holdings, Inc. ("Parent or D and W"), entered
into an Agreement and Plan of Merger (the "Merger Agreement") with Atrium
Corporation ("Corp"), the parent of the Company and other necessary parties to
acquire all of the outstanding capital stock of Corp for $225.0 million, through
a series of transactions (the "Recapitalization") described below. Corp owned
100% of the outstanding capital stock of Atrium prior to the Merger discussed
below. GE Investment Private Placement Partners II, a limited partnership
("GEIPPPII"), and Ardatrium L.L.C. ("Ardatrium") formed Parent by acquiring all
of its outstanding common stock for an aggregate purchase price of $50.0
million. GEIPPPII is a private equity partnership affiliated with GE
Investments, a wholly-owned investment management subsidiary of General Electric
Company. Ardatrium is an affiliate of Ardshiel, Inc. ("Ardshiel"), a private
equity investment firm based in New York.
The acquisition of Corp by Parent was effected through the merger on
October 2, 1998 of a wholly owned subsidiary of Parent, with and into Corp (the
"Merger") pursuant to the terms of the Merger Agreement. Prior to the Merger,
Parent contributed $50.0 million to a wholly-owned subsidiary in exchange for
all of its outstanding common stock. As a result of the Merger, Corp became a
direct wholly-owned subsidiary of Parent, and the Company became an indirect
wholly owned subsidiary of Parent.
Pursuant to the terms of the Merger Agreement, all of the outstanding equity
securities of Corp were converted into the right to receive the merger
consideration of $94.2 million (the "Merger Consideration")
F-12
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
3. THE REVERSE ACQUISITION (RECAPITALIZATION): (CONTINUED)
in cash, net of transaction costs of $5.4 million, outstanding indebtedness of
$122.7 million and $2.7 million of equity securities of Corp, owned by certain
members of management of the Company, which were converted into comparable
equity securities of Parent. The Merger Consideration was funded with (i) the
$50.0 million in cash that became an asset of Corp in the Merger,
(ii) $20.0 million in cash proceeds from the issuance of Senior Discount
Debentures due 2010 by Corp. to GEIPPPII and Ardatrium (the "Discount
Debentures"), (iii) approximately $24.0 million in cash proceeds from a loan
from the Company (the "Intercompany Loan") which was funded by a portion of the
proceeds of a term loan to the Company under the Credit Facility (see Note 9),
and (iv) $0.2 million in cash proceeds from the issuance of common stock of
Parent to certain members of management of the Company followed by a capital
contribution of such proceeds by Parent to Corp.
Prior to the Merger, both GEIPPPII and Ardshiel held investments in Wing and
Darby in the form of common stock, subordinated debt and/or warrants as follows:
(AMOUNTS IN EQUIVALENT COMMON
SHARES)
WING
<TABLE>
<CAPTION>
SECURITY TYPE GEIPPPII ARDSHIEL OTHER TOTAL
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Common A.................................. 12,500 6,153 6,848 25,501
Common B.................................. 54,500 - - 54,500
Subordinated Debt......................... 68,657 - - 68,657
Warrants.................................. 23,378 5,714 - 29,092
------- ------ ----- -------
159,035 11,867 6,848 177,750
======= ====== ===== =======
DARBY
</TABLE>
<TABLE>
<CAPTION>
SECURITY TYPE GEIPPPII ARDSHIEL OTHER TOTAL
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Common.................................... 49,005 495 7,500 57,000
Subordinated Debt......................... 41,807 422 - 42,229
Warrants.................................. 11,595 117 - 11,712
------- ----- ----- -------
102,407 1,034 7,500 110,941
======= ===== ===== =======
</TABLE>
Immediately prior to the consummation of the Merger, all of the outstanding
subordinated debt and associated warrants to purchase common stock of Wing and
Darby were converted into common stock of Wing and Darby, respectively. The
stockholders of Wing and Darby contributed their common stock in Wing and Darby
to Parent in exchange for common stock in Parent. Immediately after the
consummation of the Merger, Parent contributed all of the common stock of Wing
and Darby to Corp, which in turn contributed such stock to the Company.
F-13
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
3. THE REVERSE ACQUISITION (RECAPITALIZATION): (CONTINUED)
This transaction resulted in an increase in GEIPPPII's ownership interest in
Wing and Darby as follows:
<TABLE>
<CAPTION>
WING PERCENTAGE OWNERSHIP
---- --------------------
<S> <C>
Immediately prior to the consummation
Equity basis in common stock............................ 83.75%
Equity basis on a fully converted basis................. 89.47%
Subsequent to merger...................................... 94.83%
</TABLE>
<TABLE>
<CAPTION>
DARBY
<S> <C>
Immediately prior to the consummation
Equity basis in common stock............................ 85.97%
Equity basis on a fully converted basis................. 92.31%
Subsequent to merger...................................... 94.83%
</TABLE>
GEIPPPII's cost basis in Wing and Atrium was pushed-down to the Company.
This resulted in a partial "step-up" of Wing and Darby's assets and a
corresponding purchase of minority interest from Atrium's previous owners. The
increase in GEIPPPII's financial interest in Wing and Atrium was accounted for
in accordance with EITF 90-13, ACCOUNTING FOR SIMULTANEOUS COMMON CONTROL
MERGERS.
The minority interests acquired by GEIPPPII in Wing and Darby were 5.36% and
2.52%, respectively. The amount paid for the minority interest in Wing and Darby
was $1,849 and $433, respectively. The purchase method of accounting was also
applied to the net assets of Wing and Darby to the extent minority interest was
acquired. Goodwill was increased by $1,247 and $243 for Wing and Darby,
respectively.
Further, GEIPPPII and Ardatrium invested cash in the Company that is
reflected as a capital contribution from Atrium Corporation. The amounts
invested by each party are reflected below:
<TABLE>
<CAPTION>
CASH INVESTED
-------------
<S> <C>
GEIPPPII.................................................... $49,500
Ardatrium................................................... 500
Management.................................................. 340
Discount Debentures issued by Atrium Corporation............ 45,000
-------
Capital Contribution from Atrium Corporation to Atrium
Companies, Inc.......................................... $95,340
=======
</TABLE>
Upon completion of the Recapitalization, GEIPPPII and Ardatrium and its
affiliates beneficially owned approximately 96.7% of the outstanding common
stock of Parent with management owning the remaining 3.3%.
The acquisition of Corp by Parent and the Merger was accounted for as a
reverse acquisition. As Wing's shareholder group received the largest ownership
interest in Parent, Wing was determined to be the
F-14
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
3. THE REVERSE ACQUISITION (RECAPITALIZATION): (CONTINUED)
"accounting acquiror" in the reverse acquisition. As a result, purchase
accounting was applied to the assets and liabilities of Atrium. The purchase
price was allocated to Atrium's assets and liabilities as follows:
<TABLE>
<S> <C>
Equity securities available for sale........................ $ 113
Accounts receivable......................................... 32,097
Inventories................................................. 18,766
Prepaid expenses and other current assets................... 4,506
Deferred tax asset.......................................... 2,268
Property, plant and equipment............................... 18,391
Other noncurrent assets..................................... 3,326
Goodwill.................................................... 170,447
Current liabilities......................................... (24,614)
Other long-term liabilities................................. (300)
--------
Total purchase price........................................ $225,000
========
</TABLE>
The purchase price included cash paid of $120,977, net of the retirement of
certain indebtedness, and the assumption of debt and accrued interest of
$104,023.
In 1999, the Company recorded purchase price adjustments of $3,262, within
goodwill related to the resolution of certain acquisition contingencies relating
primarily to additional transaction costs, the fair value of certain fixed
assets and additional liabilities.
In connection with the acquisition of Atrium, certain integration activities
were undertaken in the acquired business. These activities included the
elimination of certain product lines and the associated inventory, severance
paid to employees terminated through the elimination of redundant positions,
costs associated with plant closings and rent expenses related to idle
facilities. In connection with these integration activities the Company recorded
accrued provisions using the purchase method of accounting. The activity
impacted by these provisions is summarized as follows:
<TABLE>
<CAPTION>
RESERVE
BALANCE AT ADDITIONS EXPENDITURES BALANCE AT
DECEMBER 31, 1998 IN 1999 IN 1999 DECEMBER 31, 1999
------------------ ------------- ------------ ------------------
<S> <C> <C> <C> <C>
Product line rationalizations..... 750 912 (1,464) 198
Severance expenses................ -- 400 (400) --
Idle facility expenses............ -- 1,176 (428) 748
Other............................. -- 334 (334) --
--- ----- ------ -----
750 2,822 (2,626) 946
=== ===== ====== =====
</TABLE>
4. ACQUISITIONS:
DELTA ASSET PURCHASE:
On January 27, 1999, the Company acquired certain assets of Delta
Millwork, Inc. (renamed R.G. Darby Company-South and Total Trim, Inc.-South,
collectively Darby-South), a privately held door
F-15
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
4. ACQUISITIONS: (CONTINUED)
pre-hanger located in Orlando, Florida, for approximately $1,755 including fees
and transaction expenses of $155 and $200 to be paid upon the achievement of
certain financial targets. The Company financed the acquisition through its
revolving credit facility.
The acquisition of Delta Millwork, Inc. has been accounted for as a purchase
in accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16"). The aggregate purchase price has been allocated to the
underlying assets and liabilities based upon their respective estimated fair
market values at the date of acquisition, with the remainder allocated to
goodwill, which will be amortized over 40 years. The results of operations for
the acquired business are included in the Company's consolidated financial
statements beginning January 27, 1999. The purchase price allocation,
preliminary in nature and subject to change, is as follows:
<TABLE>
<S> <C>
Accounts receivable, net.................................... $1,178
Inventories................................................. 620
Prepaid expenses and other current assets................... 40
Property, plant and equipment, net.......................... 137
Other noncurrent assets..................................... 5
Goodwill.................................................... 492
Accounts payable............................................ (633)
Accrued liabilities......................................... (84)
------
Total purchase price.................................... $1,755
======
</TABLE>
HEAT STOCK PURCHASE
On May 17, 1999, the Company acquired the stock of Heat, Inc. ("Heat"), a
privately held vinyl window and door company with operations located in Yakima,
Washington (Best Built, Inc.) and Pittsburgh, Pennsylvania (Thermal Industries,
Inc.), pursuant to a stock purchase agreement (the "Purchase Agreement"), dated
as of April 20, 1999, among Heat, its shareholders and optionholders, H.I.G.
Vinyl, Inc., a Cayman Island corporation, H.I.G. Investment Fund, L.P., a Cayman
Island limited partnership and H.I.G. Capital Management, Inc., a Delaware
corporation. The Company paid $85,000, which included $679 of assumed
indebtedness. Additionally, a post closing adjustment of $4,095 was paid on
May 17, 1999 related to working capital and cash delivered in excess of the
target defined in the Purchase Agreement. The Company financed the acquisition
with a portion of the proceeds raised in the $175,000 Senior Subordinated Notes
due 2009 offering.
The acquisition of Heat has been accounted for as a purchase in accordance
with APB 16. The aggregate purchase price has been allocated to the underlying
assets and liabilities based upon their respective estimated fair market values
at the date of acquisition, with the remainder allocated to goodwill, which will
be amortized over 40 years. The results of operations for the acquired business
are included in
F-16
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
4. ACQUISITIONS: (CONTINUED)
the Company's consolidated financial statements beginning May 17, 1999. The
purchase price allocation, preliminary in nature and subject to change, is as
follows:
<TABLE>
<S> <C>
Cash........................................................ $ 1,158
Accounts receivable, net.................................... 6,540
Inventories................................................. 7,104
Prepaid expenses and other current assets................... 983
Deferred tax assets......................................... 808
Property, plant and equipment, net.......................... 7,546
Other noncurrent assets..................................... 791
Goodwill.................................................... 74,183
Accounts payable............................................ (2,318)
Accrued liabilities......................................... (4,425)
Current portion of notes payable............................ (66)
Deferred tax liability...................................... (334)
-------
Total purchase price.................................... $91,970
=======
</TABLE>
CHAMPAGNE STOCK PURCHASE:
On May 17, 1999, the Company acquired stock of Champagne Industries, Inc., a
privately held vinyl window and door company located in Denver, Colorado, for
approximately $4,426, including assumed indebtedness, transaction fees and $500
to be paid upon the achievement of certain financial targets. The Company
financed the acquisition with a portion of the proceeds raised in the $175,000
Senior Subordinated Notes due 2009 offering.
The acquisition of Champagne Industries, Inc. has been accounted for as a
purchase in accordance with APB 16. The aggregate purchase price has been
allocated to the underlying assets and liabilities based upon their respective
estimated fair market values at the date of acquisition, with the remainder
allocated to goodwill, which will be amortized over 40 years. The results of
operations for the acquired business are
F-17
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
4. ACQUISITIONS: (CONTINUED)
included in the Company's consolidated financial statements beginning May 17,
1999. The purchase price allocation, preliminary in nature and subject to
change, is as follows:
<TABLE>
<S> <C>
Cash........................................................ $ 251
Accounts receivable, net.................................... 1,441
Inventories................................................. 1,037
Prepaid expenses and other current assets................... 142
Deferred tax asset.......................................... 58
Property, plant and equipment, net.......................... 344
Other noncurrent assets..................................... 27
Goodwill.................................................... 2,617
Accounts payable............................................ (1,025)
Accrued liabilities......................................... (438)
Current portion of notes payable............................ (9)
Long term portion of notes payable.......................... (19)
------
Total purchase price.................................... $4,426
======
</TABLE>
5. FAIR VALUE OF FINANCIAL INSTRUMENTS:
In accordance with Statement of Financial Accounting Standards No. 107
("FAS 107") "Disclosures About Fair Value of Financial Instruments," the
following methods have been used in estimating fair value disclosures for
significant financial instruments of the Company.
Estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. Due to the
fact that considerable judgment is required to interpret market data to develop
the estimates of fair value, the estimates presented are not necessarily
indicative of the amounts that could be realized in a current market exchange.
Cash and cash equivalents--The carrying amounts reported in the balance
sheet approximate the fair value.
Equity securities--available for sale--The carrying amounts that are
reported in the balance sheet approximate the fair value based on quoted
market prices.
Notes payable--The fair value of the Company's notes is based on quoted
market prices. The carrying value of notes payable, other than the Senior
Subordinated Notes, approximate fair value due to the floating nature of the
interest rates. Management estimates that the Senior Subordinated Notes of
$175,000 are valued at $170,406 as of December 31, 1999 based on quoted
market prices.
Interest Rate Swaps--The Company has entered into two interest rate swap
agreements whereby the Company will pay the counterparties interest at a
fixed rate and the counterparties will pay the Company interest at a
floating rate equal to the three-month LIBOR interest rate. The fair value
of
F-18
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED)
interest rate swap agreements is the amount at which they could be settled,
based on estimates obtained from lenders. Swaps consisted of the following
at December 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Swap #1
Notional Amount.................................... $ 563 $ 1,406
Fixed Interest Rate................................ 6.50% 6.50%
Termination Date................................... 3/31/00 3/31/00
Unrealized Gain/(Loss)............................. $ -- $ (15)
Swap #2
Notional Amount.................................... $ 2,498 $ 2,827
Fixed Interest Rate................................ 6.25% 6.25%
Termination Date................................... 11/6/03 11/6/03
Unrealized Gain/(Loss)............................. $ 26 $ (87)
</TABLE>
Forward aluminum contracts--The unrealized gains and losses are based on
quotes for aluminum as reported on the London Metal Exchange. As of
December 31, 1999, the Company had forward contracts with fixed rate prices
totaling $10,321 with an unrealized gain of $960.
6. INVENTORIES:
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw materials............................................. $32,481 $27,362
Work-in-process........................................... 4,688 4,129
Finished goods............................................ 24,071 14,686
------- -------
61,240 46,177
LIFO reserve.............................................. 37 112
------- -------
$61,277 $46,289
======= =======
</TABLE>
The change in the LIFO reserve for 1999, 1998 and 1997, resulted in a
decrease in cost of sales of $75 and $209 and an increase in cost of sales of
$95, respectively.
F-19
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land..................................................... $ 956 $ 1,303
Buildings and improvements............................... 8,597 8,671
Machinery and equipment.................................. 35,211 19,311
Construction-in-process.................................. 985 722
-------- -------
Total.................................................. 45,749 30,007
Less accumulated depreciation and amortization........... (10,584) (3,247)
-------- -------
$ 35,165 $26,760
======== =======
</TABLE>
Depreciation expense was $5,346, $1,996 and $1,180 for the years ended
December 31, 1999, 1998 and 1997, respectively.
On November 18, 1999, the Company sold two of its manufacturing facilities
and subsequently leased back the facilities. In connection with the sales, the
Company recognized a net gain of $143. This gain has been deferred and will be
amortized and netted against rent expense over the term of the leases.
8. DEFERRED FINANCING COSTS:
The deferred financing costs relate to costs incurred in the placement of
the Company's debt and are being amortized using the effective interest method
over the terms of the related debt, which range from five to ten years.
Amortization expense for the years ended December 31, 1999, 1998 and 1997 was
$1,902, $732 and $390, respectively and was recorded as interest expense in the
accompanying consolidated statements of operations.
During 1999 the Company wrote off deferred financing costs of $896 and paid
a tender premium of $2,182, net of income tax benefit of $1,142 in connection
with the paydown of the Term Loan B and the retirement of the old Senior
Subordinated Notes due 2006. During 1998 the Company wrote off deferred
financing costs of $639, net of income tax benefit of $392, in connection with
the Recapitalization.
F-20
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. NOTES PAYABLE:
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
$175,000 Senior Subordinated Notes, issued with a discount
of $2,632, due May 17, 2009, with semiannual interest
payments of 10 1/2% due May 1 and November 1.............. $175,000 $ --
$100,000 Senior Subordinated Notes, due November 15, 2006,
with semiannual interest payments of 10 1/2%, repaid May
1999...................................................... -- 29,070
Revolving credit facility................................... 15,270 4,118
$75,000 Term Loan B, due June 30, 2005 with $250 quarterly
payments, interest at either the administrative agent's
base rate plus an applicable margin or LIBOR plus an
applicable margin (9.00% at December 31, 1999)............ 58,750 74,750
$70,930 Term Loan C, due June 30, 2006, with $250 quarterly
payments, interest at either the administrative agent's
base rate plus an applicable margin or LIBOR plus an
applicable margin (9.25% at December 31, 1999)............ 69,680 70,680
Other notes payable......................................... 548 609
-------- --------
319,248 179,227
Less:
Unamortized discount on Senior Subordinated Notes......... (2,537) --
Current maturities of long-term debt...................... (2,297) (2,209)
-------- --------
Long-term debt.......................................... $314,414 $177,018
======== ========
</TABLE>
On May 17, 1999, the Company issued $175,000 of Senior Subordinated Notes
(the "Notes") due May 1, 2009. The notes are non-callable for five years, have a
10.50% stated rate paid semi-annually and were issued at a discount of 98.496 to
yield 10.75% to maturity. In connection with the issuance of the Notes, the
Company retired its $29,070 of senior subordinated notes due November 15, 2006
and paid down $15,000 on its Term Loan B. Additionally, approximately $2,182 was
paid as a tender premium to retire the notes due November 15, 2006 and $896 of
deferred financing fees related to these paydowns were written-off. These
amounts are recorded as extraordinary items in the statement of operations.
The Company entered into a Credit Agreement (the "Credit Agreement"), dated
as of October 2, 1998 with Bank Boston, as administrative agent (the
"Administrative Agent") and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as lead arranger, syndication agent and
documentation agent.
The Credit Agreement provides for three separate facilities (the
"Facilities") consisting of two term loans (referred to individually as "Term
Loan B" and "Term Loan C", and collectively as the "Term Loans") and a revolving
credit facility with a letter of credit sub-facility (the "Revolving Facility",
together with the Term Loans, the "Loans"). The Revolving Facility is in the
amount of $40,000 (increased from $30,000 in June 1999), of which $5,000 is
available under a letter of credit sub-facility. As of December 31,
F-21
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. NOTES PAYABLE: (CONTINUED)
1999 and 1998, letters of credit of $4,634 and $2,609, respectively, were
outstanding. The Revolving Facility has a maturity date of June 30, 2004.
All amounts outstanding under the Credit Agreement are collateralized by
(i) a pledge of all of the capital stock and intercompany notes of the Company
and its direct and indirect subsidiaries existing October 2, 1998 or thereafter
and (ii) an interest in substantially all of the tangible and intangible
properties and assets (including substantially all contract rights, certain real
property interests, trademarks, tradenames, equipment and proceeds of the
foregoing) of Corp, the Company and their respective direct and indirect
domestic subsidiaries existing on the October 2, 1998 or thereafter created or
acquired (the "Domestic Subsidiaries"). Corp and each of the Domestic
Subsidiaries have unconditionally guaranteed, on a joint and several basis, all
obligations of the Company under the Credit Agreement.
The Term Loans have an "excess cash flows" provision mandating additional
principal payments if certain cash flows targets are met during the year. No
additional principal payments are required as of December 31, 1999 or 1998
related to this provision.
The Company is required to pay certain commitment fees in connection with
the Credit Agreement based upon the average daily unused portion of the
Revolving Facility, certain fees assessed in connection with the issuance of
letters of credit as well as other fees specified in the Credit Agreement and
other documents related thereto.
The Credit Agreement requires the Company to comply with certain covenants
which, among other things, include limitations on indebtedness, liens and
further negative pledges, investments, contingent obligations, dividends,
redemptions and repurchases of equity interests, mergers, acquisitions and asset
sales, capital expenditures, sale leaseback transactions, transactions with
affiliates, dividend and other payment restrictions affecting subsidiaries,
changes in business conducted, amendment of documents relating to other
indebtedness and other material documents, creation of subsidiaries, designation
of Designated Senior Indebtedness in respect of the Notes, and prepayment or
repurchase of other indebtedness. The Credit Agreement requires the Company to
meet certain financial tests pertaining to, interest coverage, fixed charge
coverage and leverage. On March 24, 2000, effective December 31, 1999, the
Company amended its Credit Agreement with regards to certain financial
covenants. After giving effect to the amendment, the Company is in compliance
with all related covenants.
The Credit Agreement contains customary events of default, including,
without limitation, payment defaults, covenant defaults, breaches of
representations and warranties, bankruptcy and insolvency, judgments, change of
control and cross-default with certain other indebtedness.
On January 4, 1999, the Company entered into two interest rate collars
totaling $60,000. These collars expire on January 6, 2002. The collars have a
floor of 4.57% and 4.66%, respectively, and caps of 6.00%. To the extent that
the three month US dollar LIBOR rate is below the collar floor, payment is due
from the Company for the difference to the extent the three month US dollar
LIBOR rate is above the collar cap, the Company is entitled to receive the
difference. On August 6, 1999, the Company terminated the collars. The Company
received $790 in connection with the termination. This gain is deferred and
being amortized over 29 months, the remaining term of the collars, as a
reduction to interest expense.
F-22
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. NOTES PAYABLE: (CONTINUED)
Principal payments due during the next five years on long-term notes payable
as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000.............................................. $ 2,297
2001.............................................. 2,237
2002.............................................. 2,009
2003.............................................. 2,004
2004.............................................. 17,270
Thereafter........................................ 293,431
--------
$319,248
========
</TABLE>
10. ACCRUED LIABILITIES:
Accrued expenses and other liabilities consisted of the following at
December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Salaries, wages and related taxes........................... 7,171 4,826
Interest.................................................... 4,451 1,175
Sales, use and property taxes............................... 2,089 1,185
Advertising allowances and customer rebates................. 2,065 2,364
Warranty reserve............................................ 1,492 355
Workers' compensation....................................... 1,027 1,134
Other....................................................... 6,760 4,393
------ ------
25,055 15,432
====== ======
</TABLE>
11. DISTRIBUTIONS TO ATRIUM CORPORATION:
In connection with the issuance of the $175,000 of Senior Subordinated
Notes, the Company utilized $21,500 of the proceeds to pay a distribution to
Atrium Corporation. Atrium Corporation, in turn, repaid $21,500 (of which $1,500
represented accretion of discount) of the $45,000 Discount Debentures issued in
connection with the Recapitalization. The Company had previously recorded the
$45,000 as a capital contribution, therefore the payment was treated as a return
of capital. Additionally, the Company made a payment to Atrium Corporation for
the buyback of stock and the cancellation of certain options by the former CEO
and another manager. All payments have been reflected in the Consolidated
Statement of Stockholder's Equity as a decrease to paid-in capital. The Company
has no commitments to make any further distributions to Atrium Corporation,
except for amounts required under its tax sharing agreement.
F-23
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
12. FEDERAL INCOME TAX:
Temporary differences that give rise to the deferred income tax assets and
liabilities are as follows as of December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred income tax assets:
Stock option compensation............................... $ 1,191 $ 2,486
Transaction costs....................................... 623 1,341
Allowance for doubtful accounts......................... 575 380
Inventory cost capitalization and valuation............. 1,095 648
Accrued vacation and bonus.............................. 701 608
Warranty reserve........................................ 600 135
Workers' compensation reserve........................... 467 431
Deferred rent........................................... 324 --
Alternative minimum tax credit carryforwards and other 876 130
------- -------
6,452 6,159
Deferred income tax liabilities:
Depreciation............................................ (1,955) (1,861)
LIFO reserve............................................ (1,498) (1,505)
Capitalized software costs.............................. (1,021) (1,039)
Amortization of goodwill................................ (2,176) (506)
------- -------
(6,650) (4,911)
------- -------
Net deferred income tax asset asset (liability)........... (198) 1,248
Less-current deferred tax asset........................... 2,359 1,249
------- -------
Long-term deferred tax liability.......................... $(2,557) $ (1)
======= =======
</TABLE>
A valuation allowance is required against deferred tax assets if, based on
the weight of available evidence, it is more likely than not that some of or all
of the deferred tax assets will not be realized. As of December 31, 1999 and
1998, no valuation reserve was required.
A deferred tax asset of $2,593 was recorded for Corp and Darby in connection
with the Recapitalization.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Current federal income tax provision
(benefit)..................................... 1,714 $(467) $462
Deferred federal income tax provision........... 3,953 330 184
State income tax provision (benefit)............ 974 (12) 49
------ ----- ----
Provision (benefit) for income taxes............ 6,641 $(149) $695
====== ===== ====
</TABLE>
F-24
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
12. FEDERAL INCOME TAX: (CONTINUED)
Reconciliation of the federal statutory income tax rate to the effective tax
rate, was as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Tax computed at statutory rate.................. 3,778 $(815) $473
State taxes, net of federal benefit............. 974 (12) 67
Amortization of goodwill........................ 1,786 495 110
Other........................................... 103 183 45
------ ----- ----
Provision (benefit) for income taxes............ 6,641 $(149) $695
====== ===== ====
</TABLE>
For income tax purposes, Internal Revenue Code Section 197 ("IRC section
197") provides for the amortization of certain intangible assets, including
goodwill, for asset acquisitions occurring after August 1993. Any resulting
difference in the book and tax basis of these intangibles is reflected as a
component of deferred taxes. Amortization expense related to intangible assets
which do not qualify under IRC section 197 is reflected as nondeductible
amortization in the rate reconciliation.
In connection with the Recapitalization, the Company recorded goodwill for
book that is non-deductible for tax purposes. The Company has also recorded as a
temporary difference goodwill attributable to other asset acquisitions whereby
the goodwill is deductible for tax.
The Company has recorded a deferred tax liability relating to the difference
in the book and tax basis of the LIFO reserve. This book and tax basis
difference was created primarily by certain purchase accounting adjustments
relating to Atrium from the 1998 Recapitalization and from the October 1996
acquisition of Wing.
13. RELATED PARTIES:
MANAGEMENT AND INVESTMENT BANKING AGREEMENT
In November 1997, Wing amended its ten-year Management and Investment
Banking Agreement (the "Old Management Agreement") with Ardshiel. Pursuant
thereto, Wing agreed to pay Ardshiel an annual fee of $375 plus expenses for
ongoing management advisory services to Wing. In 1998 and 1997, $368, and $485,
respectively, was paid to Ardshiel under this agreement. The Old Management
Agreement was terminated in connection with the Recapitalization on October 2,
1998.
FINANCIAL ADVISORY FEE
Ardshiel received a financial advisory fee of $600 plus expenses on the
closing date of the October 26, 1996 transaction as compensation for its
services as financial advisor to Wing. In addition, Ardshiel received warrants
to obtain 5,714 shares of Class A voting common stock at no additional cost.
Such warrants can be converted into Class A voting common stock at any time. The
warrants were valued at $332 and were included in the total purchase price of
Wing.
Ardshiel received an investment banking fee of $250 plus expenses on the
closing date of the acquisition of the Door Division of Super Millwork, Inc. as
compensation for its services to Wing in connection with this acquisition.
F-25
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
13. RELATED PARTIES: (CONTINUED)
SHAREHOLDER AGREEMENT
GEIPPPII, Ardatrium and certain of its affiliates, and certain other
shareholders of Parent have entered into a Shareholder Agreement (the
"Shareholder Agreement"), dated as of October 2, 1998, which affect their
relative rights as shareholders of Parent.
The terms of the Shareholder Agreement include provisions that restrict the
parties to certain actions. Specifically, GEIPPPII and Ardshiel may appoint an
agreed upon number of members of the Board of Directors . Further, the
Shareholders Agreement has restrictions on selling, transferring or disposing of
ownership interests in the Company and provisions regarding registration of the
Company's stock under the Securities Act of 1933. Finally, the Shareholder
Agreement indicates the major stockholders cannot take certain enumerated
actions without obtaining the prior written consent of GEIPPPII.
MANAGEMENT AGREEMENT
Parent is a party to a Management Agreement (the "Management Agreement")
dated October 2, 1998 with Ardshiel. Pursuant to the Management Agreement,
Ardshiel provides advice to Parent and its subsidiaries with respect to business
strategy, operations and budgeting and financial controls ("Management
Services") in exchange for an annual fee of $1,750, as amended, plus expenses.
In 1999, amounts paid under this agreement totaled $1,904, which is included in
selling, delivery, general and administrative expenses as incurred.
Additionally, the Management Agreement provides that, prior to entering into any
transaction that involves engaging a financial advisor to perform services in
connection with a sale or purchase of a business or entity or any financing
including, Parent or its subsidiaries must offer Ardshiel the opportunity to
perform such investment banking services, unless in the reasonable exercise of
the business judgement of the Board of Directors of Parent such engagement would
result in a conflict of interest or would otherwise be adverse to the interests
of Parent or such subsidiaries. Ardshiel shall receive a fee for any such
services rendered by Ardshiel to Parent or its subsidiaries which fee shall not
be greater than 2% of the total purchase or sale price for such business or
entity and shall be payable upon consummation of such sale or purchase. The
consent of GEIPPPII is required prior to the payment by Parent or any of its
subsidiaries in paying similar fees to other entities for similar services.
Parent paid a closing fee of approximately $3,375 in 1998 upon the consummation
of the Merger and paid Ardshiel's fees and expenses in connection therewith and
$1,352 in 1999 upon the consummation of the acquisitions of Darby-South, Heat
and Champagne. The Management Agreement will remain in effect until October 2,
2008 and will automatically be renewed for one-year periods unless either party
gives written notice to the contrary at least 30 days prior to the expiration of
the initial or any extended term of the agreement.
NOTES RECEIVABLE
Included in prepaid expenses and other current assets are the following
receivables due from related parties at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Receivables from officers and shareholders'................. $ 76 $123
Receivables from employees.................................. $106 $211
</TABLE>
F-26
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
14. COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with several key
executives of the Company including its Chief Executive Officer, President and
Chief Financial Officer, its Chief Operating Officer and several Divisional
Presidents, Vice Presidents, General Managers and Sales Managers of the
Company's divisions. The agreements generally provide for terms of employment,
annual salaries, bonuses, and eligibility for option awards and severance
benefits.
OPERATING LEASES
The Company has entered into operating lease agreements for office and
manufacturing space, automobiles, and machinery and equipment with unrelated
third parties, affiliates of certain stockholders and certain stockholders of
the Company. Total rent expense for 1999, 1998, and 1997 was $8,414, $2,862, and
$1,189, respectively. Of these totals, amounts paid to related parties was
$1,323, $398 and $0 for 1999, 1998 and 1997, respectively. The Company
terminated its lease agreements with related parties in November 1999 and
entered into replacement lease agreements with unrelated third parties. Future
minimum rents due under operating leases with initial or remaining terms greater
than twelve months are as follows:
<TABLE>
<CAPTION>
TOTAL
--------
<S> <C>
2000........................................................ $ 8,745
2001........................................................ 7,951
2002........................................................ 7,032
2003........................................................ 6,393
2004........................................................ 5,628
Thereafter.................................................. 40,197
-------
$75,946
=======
</TABLE>
Certain of these lease agreements provide for increased payments based on
changes in the consumer price index. Additionally, under certain of these lease
agreements the Company is obligated to pay insurance and taxes.
FORWARD COMMITMENTS
The Company has contracts with various suppliers to purchase aluminum for
use in the manufacturing process. The contracts vary from one to twelve months
and are at fixed quantities with fixed and floating prices. As of December 31,
1999, the Company had forward commitments totaling $10,321 for delivery through
December, 2000 for 74,813,000 pounds of aluminum, of which 12,800,000 pounds
were at fixed prices. As of December 31, 1998, the Company had forward
commitments totaling $2,623 for delivery through December 1999 for 21,100,000
pounds of aluminum, of which 3,600,000 pounds were at fixed prices.
CONTINGENCIES
The Company is party to various claims, legal actions and complaints arising
in the ordinary course of business. In the opinion of management, all such
matters are without merit or are of such kind, or involve such amounts, that an
unfavorable disposition would not have a material effect on the consolidated
financial position, results of operations or liquidity of the Company.
F-27
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
14. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
During 1993, factory employees voted to unionize and become members of
Amalgamated Clothing and Textile Workers Union. A three-year union contract was
executed during 1995 and extended for three additional years in 1998. In
addition, in connection with its Woodville, Texas operations, the Company is
party to collective bargaining arrangements due to expire in 2001.
The Company is involved in various stages of investigation and cleanup
related 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 are uncertain due in part to: the
uncertainty as to the extent of pollution; the complexity of Government laws and
regulations and their interpretations; the varying costs and effectiveness of
alternative cleanup technologies and methods; the uncertain level of insurance
or other types of recovery; and the questionable level of the Company's
involvement. The Company was named in 1988 as a potentially responsible party
("PRP") in two superfund sites pursuant to the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended (the Chemical
Recycling, Inc. site in Wylie, Texas, and the Diaz Refinery site in Little Rock,
Arkansas). The Company believes that based on the information currently
available, including the substantial number of other PRP's and relatively small
share allocated to it at such sites, its liability, if any, associated with
either of these sites will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
Atrium owned one parcel of real estate that requires future costs related to
environmental clean-up. The estimated costs of clean-up have been reviewed by
third-party sources and are expected not to exceed $150. The previous owner of
the property has established an escrow of $400 to remediate the associated
costs. This property was sold in December 1999. The Company has established a
letter of credit of $450 to cover any costs of remediation exceeding the
previous owner's escrow. The Company believes this reserve is adequate to cover
costs associated with this clean-up. No additional liabilities are believed to
exist in regards to the Company's remaining operations.
15. OTHER INCOME, NET:
Other income, net consists of the following for the years ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
Rental, interest and other income... $174 $556
Gain on sale of assets.............. 78 12
Other............................... 31 3
---- ----
$283 $571
==== ====
</TABLE>
16. STOCK OPTIONS:
The Wing Industries Holdings, Inc. Stock Option Plan (the "Plan") was
adopted on October 25, 1996 and amended on November 17, 1997 to provide certain
employees, officers and directors of Wing an opportunity to purchase Class A
voting common stock of Wing. Options available for grant under the Plan included
(1) "Incentive Stock Options" as defined in Section 422 of the Internal Revenue
Code of 1986, as
F-28
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
16. STOCK OPTIONS: (CONTINUED)
amended and (2) Nonqualified Stock Options which were options that did not
constitute Incentive Stock Options.
At December 31, 1997, Nonqualified Stock Options for a total of 14,483
shares of Wing's Class A voting common stock had been granted. During 1998, and
prior to the Recapitalization, 1,766 options were exercised. The remaining
12,717 options were exchanged for 2,528,314 options in the D and W
Holdings, Inc. 1998 Stock Option Plan (the "1998 Plan"). The Plan was terminated
in connection with the Recapitalization. No compensation expense was recorded
during 1997.
THE 1998 PLAN
In connection with the Recapitalization, the Board of Directors of D and W
adopted the 1998 Plan authorizing the issuance of 11,991,142 options to acquire
common stock of D and W. Upon consummation of the acquisitions of Heat, Inc. and
Champagne Industries, Inc., the 1998 Plan was amended to increase the number of
shares of options available for grant to 14,991,142. Through December 31, 1999,
the Board of Directors had granted 11,174,100 options under the 1998 Plan. All
options granted under the 1998 Plan expire ten years from the date of grant.
As of December 31, 1999, 1,218,337 options had been granted in three
tranches under the 1998 Plan in replacement of certain of the options granted
under the Plan. These options consist of (a) options to purchase 462,090 shares
of common stock at an exercise price of $0.01 per share; (b) options to purchase
385,227 shares of common stock at an exercise price of $0.96 per share until
December 1, 2000; and (c) options to purchase 371,020 shares of common stock at
an exercise price of $1.56 per share until December 1, 2000. As of December 31,
1999, all of these options were fully vested.
As of December 31, 1999, options of 431,978 with an exercise price of $1.25
had been granted under the 1998 Plan that become exercisable only as such time
at (each such event, a "Value Event") (a) D and W sells common stock in an
offering registered with the Securities and Exchange Commission, which
constitutes a Qualifying Public Offering (as defined in the 1998 Plan);
(b) D and W is merged or consolidated with another corporation in a merger in
which the surviving corporation has freely tradeable common stock; or
(c) substantially all of the assets of D and W and its subsidiaries, taken as a
whole, are sold or otherwise transferred.
As of December 31, 1999, options of 832,314 had been granted that consisted
of two tranches: (a) - options to purchase 277,438 shares with an exercise price
of $0.96 per share to March 31, 2000 and then increasing 15% per year thereafter
and (b) - options to purchase 554,876 shares with an exercise price of $1.08 per
share to March 31, 2000 and then increasing 30% per year thereafter. For the 15%
and the 30% options, if the holder chooses not to exercise at time of vesting,
the strike price increases annually to the next level until expiration. At
December 31, 1999 one-third of these options were vested. The remaining options
vest equally in one-third increments on January 9, 2000 and 2001, respectively.
As of December 31, 1999, options of 221,725 with an exercise price of $1.65
had been granted that are exercisable only upon the occurrence of a Value Event.
These options vest at such time of occurrence of a value event.
F-29
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
16. STOCK OPTIONS: (CONTINUED)
As of December 31, 1999, options of 6,254,746 options had been granted with
exercise prices ranging from $1.00 to $1.50 per share. These options vest
ratably over periods ranging from three to five years. The options expire ten
years from the date of grant.
Expenses related to the 1998 Plan are recorded at the Company since the
option holders that benefit from the 1998 Plan are employees of the Company. The
Company recorded non cash stock option compensation expense of $128 and $1,038
in 1999 and 1998, respectively, in connection with the difference between the
fair value of the stock at the date of issuance and the respective exercise
prices of each of the above grants and upon appreciation in the fair value for
variable options.
THE REPLACEMENT PLAN
In addition to the 1998 Plan, the Board of Directors 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's common stock which
were granted in replacement of outstanding options of Corp in connection with
the Recapitalization. Under the Replacement Plan, options to purchase in
aggregate of 1,575,000 shares of the Company's common stock were granted in
exchange for outstanding options of Corp which were not cashed out pursuant to
the Merger Agreement. Upon consummation of the acquisitions of Heat, Inc. and
Champagne Industries, Inc., the Replacement Plan was amended to increase the
number of shares of options to 2,575,000. The options granted pursuant to the
Replacement Plan vest ratably over a period ranging from three to five years on
each anniversary date of the grant. The replacement options have exercise prices
ranging from $.01 to $.16 per share. As of December 31, 1999, 2,200,531 shares
of options are outstanding.
Upon termination of the optionee's employment, D and W shall have the right
to repurchase the options. In the event termination was for cause, the price per
option repurchased will be equal to the lesser of $1.00 per underlying share and
the fair value per share of D and W's common stock, in either case, minus $0.01
per share. If termination is for other than cause, the repurchase price will
differ for the vested and unvested portions. The unvested portion will be
reacquired at a purchase price equal to the lesser of the fair value per share
and $1.00 per share, in each case, minus $0.01 per share and the vested portion
may be reacquired at a purchase price equal to the greater of the fair value per
share or $1.00 per share, in each case, minus $0.01 per share.
On October 2, 1998, D and W issued two warrants (the "Warrants") to the then
President and Chief Executive Officer (the "Executive") of the Company. Pursuant
to the terms of the Warrants, the Executive is entitled to purchase 2,841,221
shares of common stock at any time subsequent to the Recapitalization. The
exercise price of the Warrants is $.01 per share. An additional 1,894,148 shares
may be purchased under the Warrants at an exercise price of $1.00, representing
the fair value on the date of grant upon the realization of an 8.0% internal
rate of return. The 1,894,148 options vest ratably each day for three years. The
Warrants will terminate on October 2, 2008. This Warrants was cancelled
June 30, 1998 in connection with the payment of $2,813 to the Executive. The
Company recorded non cash compensation expense of $2,813 for 1998, in connection
with the difference between the fair value of the stock at the date of issuance
($1.00) and the exercise price ($.01), associated with the above Warrants.
In addition, in exchange for other Warrants to purchase common stock of
Corp, the Executive received Warrants to purchase 1,000,000 shares of D and W's
common stock at a price of $.01 per share
F-30
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
16. STOCK OPTIONS: (CONTINUED)
with a term of twenty years. There is no unearned deferred compensation expense
for the Warrants given all expense was recorded through December 31, 1998. These
Warrants were also cancelled June 30, 1999 in connection with the payment of
$990 to the Executive.
If an event or value event as previously defined were to become probable,
the difference between the option price and the then fair value would be charged
to earnings at that time.
The following table summarizes the transactions of the 1998 Plan and the
Replacement Plan (combined) for the years ended December 31, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Outstanding awards, beginning of
period............................... 13,310,941 2,849,863 2,078,473
Granted................................ 2,990,531 13,310,941 771,390
Canceled or expired.................... (2,926,841) -- --
Exchanged.............................. -- (2,528,314) --
Exercised.............................. -- (321,549) --
----------- ---------- -----------
Outstanding awards, end of year........ 13,374,631 13,310,941 2,849,863
=========== ========== ===========
Weighted average grant-date fair value
of awards............................ $ .43 $ .64 $ .50
Weighted average exercise price of
awards exercised..................... $ -- $ .84 $ --
Weighted average exercise price of
awards granted....................... $ .88 $ .82 $ 1.25
Weighted average exercise price, end of
period............................... $ .87 $ .85 $ .74
Awards exercisable, end of period...... 4,092,392 1,064,030 461,937
Awards available for future grant...... 4,191,511 255,201 731,415
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (MONTHS) PRICE EXERCISABLE PRICE
- ------------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Options:
$.01 - .16 2,662,621 107 $ .05 945,423 $ .01
$.96 - 1.08 7,472,287 105 $1.00 2,747,557 $1.00
$1.10 - 1.65 3,239,723 111 $1.23 399,349 $1.53
---------- ---------
13,374,631 4,092,329
========== =========
</TABLE>
In 1995, the FASB issued FASB Statement No. 123 ("FAS 123") "Accounting for
Stock-Based Compensation" which, if fully adopted by the Company, would change
the methods the Company applies
F-31
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
16. STOCK OPTIONS: (CONTINUED)
in recognizing the cost of the stock based plans. Adoption of the cost
recognition provisions of FAS 123 is optional and the Company has decided not to
elect the provisions of FAS 123. However, pro forma disclosures as if the
Company adopted the cost recognition provisions of FAS 123 are required by FAS
123; however, there is no pro forma effect of adopting the cost provisions of
FAS 123 for the years ended December 31, 1999, 1998 and 1997. During 1999, 1998
and 1997, the Company granted only nonqualified stock options and warrants under
the plans.
The fair value of each stock option granted is estimated on the date of
grant using the minimum value method of option pricing with the following
weighted-average assumptions for grants in 1999, 1998 and 1997: dividend yield
of 0.0%; risk-free interest rate of 5.65%; and the expected life of 5 years. (In
determining the "minimum value" SFAS 123 does not require the volatility of the
Company's common stock underlying the options to be calculated or considered
because the Company was not publicly-traded when the options were granted).
Had the compensation cost for the stock-based compensation plans and
warrants been determined consistent with FAS 123, the Company's net income
(loss) for 1999, 1998 and 1997 would have been $1,403, ($3,122) and $440,
respectively.
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts. FAS 123 does not apply to awards prior to 1995.
17. EMPLOYEE BENEFIT PLANS:
The Company maintains an employees' savings plan under Section 401(k) of the
Internal Revenue Code (the "Code"). The Company makes discretionary matching
contributions equal to 50% of the first 4% of the employee's contribution. The
Company contributed $505, $101 and $85 during 1999, 1998 and 1997, respectively.
In connection with the Recapitalization, the Company assumed Darby's plan
under Section 401 of the Code. The plan provided for discretionary contributions
by the employer. The plan did not provide for employee contributions. The
Company contributed $57 to the plans during the period from October 3, 1998 to
December 31, 1998. No contributions were contributed in 1999 and upon receipt of
a favorable tax determination letter from the Internal Revenue Service the plan
was terminated in October 1999 at which time a distribution of $1,710 was made
to eligible employees.
Thermal maintains a qualified 401(k) and profit-sharing plan covering
substantially all of its employees. Under the terms of the plan, Thermal may
contribute up to 25% of the first 8% of each employee's compensation contributed
and may also make discretionary contributions to the plan. Total expense
recorded was $529 during 1999.
During 1998, Best Built implemented a qualified 401(k) plan. Under the terms
of the plan, Best Built may contribute up to 25% of the first 8% of each
employee's compensation contributed. The total expense recorded was $17 during
1999.
Champagne sponsors a 401(k) profit sharing plan covering substantially all
employees. Contributions are determined annually by the Board of Directors. The
total expense recorded was $67 during 1999.
F-32
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
18. SUBSIDIARY GUARANTORS:
In connection with the Company's Senior Subordinated Notes, the Company's
payment obligations under the Notes are fully and unconditionally guaranteed,
jointly and severally (collectively, the Subsidiary Guarantees) on a senior
subordinated basis by its wholly-owned subsidiaries: ADW-Northeast, ADW-
Arizona, ADW-West Coast, Heat, Champagne, Darby-South, Wing and Darby
(collectively, the Subsidiary Guarantors). The Company has no non-guarantor
direct or indirect subsidiaries. The operations related to the assets of
ADW-Northeast ADW-Arizona ADW-West Coast and Darby are included since the
reverse acquisition on October 2, 1998. The operations of Wing are presented for
all periods covered. The operations of Heat and Champagne are included since
their date of acquisition on May 17, 1999 and Darby-South since January 27,
1999. The balance sheet information includes all subsidiaries as of
December 31, 1999 and all subsidiaries acquired prior to January 1, 1999 as of
December 31, 1998. In the opinion of management, separate financial statements
of the respective Subsidiary Guarantors would not provide additional material
information, which would be useful in assessing the financial composition of the
Subsidiary Guarantors. No single Subsidiary Guarantor has any significant legal
restrictions on the ability of investors or creditors to obtain access to its
assets in event of default on the Subsidiary Guarantee other than its
subordination to senior indebtedness.
Following is summarized combined financial information pertaining to these
Subsidiary Guarantors:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
Current assets...................................... $ 59,658 $ 42,887
Noncurrent assets................................... 206,938 157,678
Current liabilities................................. 26,118 16,666
Noncurrent liabilities.............................. 200,620 123,049
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net sales........................................... $ 318,053 $165,333
Gross profit........................................ 91,673 37,340
Net income from continuing operations............... (2,793) 503
Net income.......................................... (2,793) 503
</TABLE>
The Notes and the Subsidiary Guarantees are subordinated to all existing and
future Senior Indebtedness of the Company. The indenture governing the Notes
contains limitations on the amount of additional indebtedness (including Senior
Indebtedness) which the Company may incur.
19. SUBSEQUENT EVENTS:
WOODVILLE EXTRUSION SALE:
On March 7, 2000, the Company sold certain equipment of its Woodville, Texas
extrusion operation for net proceeds of $1,170, including a $300 seller note.
The Company will record a long-term note receivable of $300 and will record a
gain of approximately $200 in the first quarter of 2000 from this sale.
F-33
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
19. SUBSEQUENT EVENTS: (CONTINUED)
ELLISON ACQUISITION:
On March 29, 2000, the Company announced the signing of a definitive
purchase and sale agreement to acquire the assets of Ellison Window and Door and
the stock of Ellison Extrusion Systems, Inc. (collectively "Ellison") for a
combined purchase price of $125,000. The acquisition proceeds include
approximately $101,500 of cash, $500 of assumed indebtedness and $23,000 of
D and W stock. The cash portion of the acquisition will be funded through a
combination of approximately $78,500 of new equity from D and W in the form of
common equity and/or preferred stock with the remainder coming from an
additional borrowing on the Company's existing Credit Agreement.
The acquisition will be accounted for as a purchase in accordance with
APB 16. The aggregate purchase price will be allocated to the underlying assets
and liabilities based upon their respective estimated fair market values at the
date of acquisition. Based on preliminary estimates which will be finalized at a
later date, the excess of purchase price over the fair value of the net assets
acquired ("goodwill") will be approximately $96,000, which will be amortized
over 40 years. The results of operations for the acquired business will be
included in the Company's operations subsequent to the completion of the
transaction, which is expected to be on or about May 15, 2000.
F-34
<PAGE>
ATRIUM COMPANIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN C -
ADDITIONS
--------------------------
COLUMN B - (1) (2)
BALANCE AT CHARGED TO ACQUIRED COLUMN D - COLUMN E -
BEGINNING COSTS AND THROUGH DEDUCTIONS - BALANCE AT
COLUMN A - DESCRIPTION OF PERIOD EXPENSES (A) ACQUISITION WRITE-OFFS (B) END OF PERIOD
- ---------------------- ---------- ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997 $830 $1,791 $ -- $(1,896) $ 725
Year ended December 31, 1998 $725 $3,059 $ -- $(3,006) $ 778
Year ended December 31, 1999 $778 $3,990 $344 $(3,442) $1,670
</TABLE>
(a) includes $2,867, $2,832 and $1,731, respectively for 1999, 1998 and 1997
sales returns and allowances.
(b) net of recoveries.
S-1
<PAGE>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
<C> <C> <S>
2.1 -- Asset Purchase Agreement, dated as of March 4, 1998, among
Masterview Window Company LLC, Atrium Companies, Inc. and,
for the limited purposes set forth therein, BancBoston
Ventures, Inc. (3)
2.2 -- Agreement and Plan of Merger, dated as of August 3, 1998, by
and among D and W Holdings, Inc., D and W Acquisition Corp.,
Atrium Corporation, and the securityholders named
therein (4)
2.3 -- Amendment No. 1 to the Agreement and Plan of Merger, dated
as of October 2, 1998, by and among D and W Holdings, Inc.,
D and W Acquisition Corp., Atrium Corporation and the
securityholders named therein (5)
2.4 -- Amendment No. 2, dated as of April 14, 1999 to the Agreement
and Plan of Merger by and among D and W Holdings, Inc., D
and W Acquisition Corp., Atrium Corporation and the
securityholders named therein (5)
2.5 -- Stock Purchase Agreement, dated as of May 10, 1999, among
Champagne Industries, Inc. and Atrium Companies, Inc. (6)
2.6 -- Stock Purchase Agreement, dated as of April 20, 1999, among
Heat, Inc., shareholders and optionholders named therein,
H.I.G. Vinyl, Inc., H.I.G. Investment Fund, H.I.G. Capital
Management, Inc. and Atrium Companies, Inc. (6)
2.7 -- Amendment No. 1, dated as of May 17, 1999, to the Stock
Purchase Agreement dated as of April 20, 1999, among Heat,
Inc., shareholders and optionholders named therein, H.I.G.
Vinyl, Inc., H.I.G. Investment Fund, L.P., H.I.G. Capital
Management, Inc. and Atrium Companies, Inc. (6)
3.1 -- Certificate of Incorporation of Atrium Companies, Inc., as
amended (1)
3.2 -- Bylaws of Atrium Companies, Inc. (1)
4.1 -- Indenture, dated as of May 17, 1999, by and among Atrium
Companies, Inc., the Guarantors named therein and State
Street Bank and Trust Company (6)
4.2 -- Registration Rights Agreement, dated as of May 17, 1999, by
and among Atrium Companies, Inc., the Guarantors named
therein and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated (6)
10.1 -- Employment Agreement between the Company and Louis W. Simi,
Jr. dated January 1, 1998 (2)
10.2 -- Stockholders Agreement, dated as of October 2, 1998, by and
among D and W Holdings, Inc., and the stockholders signatory
thereto (4)
10.3 -- Credit Agreement dated as of October 2, 1998 by and among
Atrium Companies, Inc., as Borrower, D and W Holdings, Inc.,
the Guarantors party thereto, Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as Lead
Arranger, Syndication Agent and Documentation Agent, and
BankBoston, N.A., as Administrative Agent, and the Lenders
party thereto (4)
10.4 -- Amendment and Consent No. 1, dated as of May 5, 1999, to the
Credit Agreement dated as of October 2, 1998, by and among
Atrium Companies, Inc., D and W Holdings, Inc., Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and BankBoston (6)
</TABLE>
E-1
<PAGE>
<TABLE>
<C> <C> <S>
10.5 -- Amendment No. 2, dated as of June 11, 1999, to the Credit
Agreement dated as of October 2, 1998, by and among Atrium
Companies, Inc., D and W Holdings, Inc., Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
BankBoston (6)
10.6 -- Amendment and Waiver No. 3, dated as of November 17, 1999,
to that certain Credit Agreement, dated as of October 2,
1998 by and among Atrium Companies, Inc., D and W
Holdings, Inc., Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Bank Boston (7)
10.7 -- Amendment and Waiver No. 4, dated as of March 24, 2000, to
that certain Credit Agreement, dated as of October 2, 1998
by and among Atrium Companies, Inc., D and W
Holdings, Inc., Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Bank Boston (7)
10.8 -- Management Agreement, dated as of October 2, 1998, by and
among Ardshiel, Inc.,
D and W Holdings, Inc., Atrium Corporation and Atrium
Companies, Inc. (5)
10.9 -- Amended and Restated Management Agreement, dated as of
May 17, 1999, by and among Ardshiel, Inc., D and W Holdings,
Inc., Atrium Corporation and Atrium Companies, Inc. (6)
10.10 -- Employment Agreement, dated as of March 28, 2000, by and
between D and W Holdings, Inc. and Frank E. Sheeder (7)
10.11 -- Employment Agreement, dated as of October 2, 1999, by and
between D and W Holdings, Inc., Jeff L. Hull (7)
10.12 -- Employment Agreement, dated as of October 2, 1998, by and
between D and W Holdings, Inc., R.L. Gilmer (5)
10.13 -- Employment Agreement, dated as of January 8, 1998, by and
between Door Holdings, Inc. and Cliff Darby (5)
10.14 -- Buy-Sell Agreement, dated as of October 2, 1998, by and
among D and W Holdings, Inc., GE Investment Private
Placement Partners II and R.L. Gilmer (standard
agreement) (5)
10.15 -- Buy-Sell Agreement, dated as of October 2, 1998, by and
among D and W Holdings, Inc., GE Investment Private
Placement Partners II and Cliff Darby (5)
10.16 -- D and W Holdings, Inc. 1998 Stock Option Plan (5)
10.17 -- Amendment No. 1, dated as of May 17, 1999, to the D and W
Holdings, Inc. 1999 Stock Option Plan (6)
10.18 -- D and W Holdings, Inc. 1998 Replacement Stock Option
Plan (5)
10.19 -- Amendment No. 1, dated as of May 17, 1999, to the D and W
Holdings, Inc. Replacement Stock Option Plan (6)
10.20 -- Termination Agreement, dated as of October 2, 1998, between
Atrium Corporation, Atrium Companies, Inc., Hicks, Muse &
Co. Partners, L.P. and Hicks, Muse, Tate & Furst
Incorporated (5)
10.21 -- Agreement and Release, dated as of March 31, 1999, by and
among Randall S. Fojtasek and D and W Holdings, Inc., Atrium
Corporation, Atrium Companies, Inc., Ardshiel, Inc., GE
Investment Management Incorporated, GE Investment Private
Placement Partners II, a Limited Partnership and the parties
named therein (5)
10.22 -- Warrant Purchase Agreement, dated as of June 30, 1999, by
and among Randall S. Fojtasek, D and W Holdings, Inc.,
Ardshiel, Inc. and GE Investment Private Placement Partners
II, a Limited Partnership (7)
10.23 -- Escrow Agreement, dated April 20, 1999, among Atrium
Companies, Inc., H.I.G. Vinyl, Inc. and Bank One, Texas,
N.A. (6)
10.24 -- Escrow Agreement, dated May 17, 1999, among Atrium
Companies, Inc., selling stockholders named therein and Bank
One, Texas, N.A. (6)
</TABLE>
E-2
<PAGE>
<TABLE>
<C> <C> <S>
10.25 -- Indemnification Escrow Agreement, dated as of October 2,
1998, by and among Hicks, Muse Fund III Incorporated, D and
W Holdings, Inc. and Northwest Bank Texas, N.A. (5)
10.26 -- Amendment No. 1, dated April 14, 1999, to Indemnification
Escrow Agreement by and among Hicks, Muse Fund III
Incorporated, D and W Holdings, Inc. and Northwest Bank
Texas, N.A. (5)
12.1 -- Computation of Ratio of Earnings to Fixed Charges (5)
21.1 -- Subsidiaries of the Company (7)
24.1 -- Powers of Attorney (7)
27.1 -- Financial Data Schedule (7)
</TABLE>
- ------------------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-4, dated April 4, 1997, SEC File No. 333-20095.
(2) Incorporated by reference from the Registrant's Report on Form 10-K, dated
March 31, 1998.
(3) Incorporated by reference from the Registrant's Report on Form 8-K, dated
March 27, 1998 and filed on April 13, 1998.
(4) Incorporated by reference from the Registrant's Report on Form 8-K, dated
October 2, 1998 and filed on October 19, 1998.
(5) Incorporated by reference from the Registrant's Report on Form 10-K, dated
March 31, 1999 and filed on April 15, 1999.
(6) Incorporated by reference from the Registrant's Registration Statement on
Form S-4, dated July 15, 1999, SEC File No. 333-82921.
(7) Filed herewith.
E-3
<PAGE>
AMENDMENT AND WAIVER NO. 3
AMENDMENT AND WAIVER NO. 3 (this "AMENDMENT"), dated as of
November 17, 1999, to that certain Credit Agreement, dated as of October 2,
1998 (as amended to the date hereof, the "CREDIT AGREEMENT"; capitalized terms
used herein and not defined shall have the meaning set forth in the Credit
Agreement), among ATRIUM COMPANIES, INC., a Delaware corporation ("BORROWER"),
D AND W HOLDINGS, INC., as Parent, the Guarantors party thereto, the Lenders
party thereto (the "LENDERS"), MERRILL LYNCH & CO., MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED, as Lead Arranger, Syndication Agent and
Documentation Agent (collectively in such capacities, the "LEAD ARRANGER"),
and BANKBOSTON, N.A., as Administrative Agent (the "ADMINISTRATIVE AGENT").
W I T N E S S E T H :
WHEREAS, pursuant to Section 12.04 of the Credit Agreement, each
of the Obligors and each of the undersigned Lenders hereby agree to amend
certain provisions of the Credit Agreement as set forth herein;
NOW, THEREFORE, in consideration of the foregoing, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
SECTION ONE AMENDMENTS. (a) Section 1.01 is amended (i) by
adding the following definitions, each in the appropriate alphabetical order
of the existing defined terms:
"GREENVILLE ACQUISITION" shall mean the acquisition by Borrower of
the property (the "GREENVILLE PROPERTY") located at 1001 Ed Rutherford
Road, Greenville, Texas and described in a Purchase and Sale Agreement
dated February 24, 1999 by and between DowBrands, Inc. and Borrower
pursuant to such document for a purchase price of $2.9 million.
"GREENVILLE EXPENDITURES" shall mean expenditures by Borrower to
effect improvements of the Greenville Property in an amount not to
exceed $2.0 million.
"GREENVILLE SALE-LEASEBACK" shall mean the sale by Borrower of the
Greenville Property for a price not less than $4.9 million and
contemporaneous leasing of the Greenville Property to Borrower by the
purchaser.
(ii) by adding the following to the end of the definition of "Capital
Expenditures":
"and (vii) the payment of the purchase price of the Greenville
Acquisition and the Greenville Expenditures."
<PAGE>
-2-
and; (iii) by adding the following at the end of the definition of "Excluded
Disposition":
"and (vi) the Greenville Sale-Leaseback."
SECTION TWO WAIVER. The Lenders hereby waive any Default or
Event of Default (a) that would not have arisen under Section 9.11(d) had this
Amendment become effective prior to consummation of the Greenville Acquisition
and Greenville Expenditures or (b) arising out of a default in the performance
of Borrower's obligations under Section 9.12 by reason of failure to mortgage
the Greenville Property to the Administrative Agent for the benefit of the
Issuing Lender, the Lenders and the Agents.
SECTION THREE CONDITIONS TO EFFECTIVENESS. This Amendment shall
become effective as of the date ("the EFFECTIVE DATE") when, and only when,
the Administrative Agent shall have received (a) counterparts of this
Amendment executed by each Obligor and the Majority Lenders or, as to any of
the Lenders, advice satisfactory to the Administrative Agent that such Lender
has executed this Amendment and (b) all reasonable costs and expenses of the
Agents in connection with the preparation, execution and delivery of this
Amendment and the other instruments and documents to be delivered hereunder,
if any (including, without limitation, the reasonable fees and expenses of
Cahill Gordon & Reindel). The effectiveness of this Amendment (other than
Sections Six, Seven and Eight hereof) is conditioned upon the accuracy of the
representations and warranties set forth in Section Four hereof. Failure to
perform the covenant set forth Section Four hereof shall result in this
Amendment retroactively not being effective.
SECTION FOUR REPRESENTATIONS, WARRANTIES AND COVENANT. In order
to induce the Lenders and the Agents to enter into this Amendment, each
Obligor (a) represents and warrants to each of the Lenders and the Agents that
after giving effect to this Amendment, (i) no Default or Event of Default has
occurred and is continuing, except Defaults waived pursuant to Section 2; and
(ii) all of the representations and warranties in the Credit Agreement, are
true and complete in all material respects on and as of the date hereof as if
made on the date hereof (or, if any such representation or warranty is
expressly stated to have been made as of a specific date, as of such specific
date) and (b) covenants to each of the Lenders and the Agents that it will use
its best efforts to consummate the Greenville Sale-Leaseback by December 31,
1999.
SECTION FIVE REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND
THE NOTES. On and after the Effective Date, each reference in the Credit
Agreement to "this Agreement", "hereunder", "hereof" or words of like import
referring to the Credit Agreement, and each reference in the Notes and each of
the other Credit Documents to "the Credit Agreement", "thereunder", "thereof"
or words of like import referring to the Credit Agreement, shall mean and be a
reference to the Credit Agreement, as amended by this Amendment. The Credit
Agreement, the Notes and each of the other Credit Documents, as specifically
amended by this Amendment, are and shall continue to be in full force and
effect and are hereby in all respects ratified and confirmed. Without limiting
the generality of the foregoing, the Security Documents and all of the
Collateral described therein do and shall continue to secure the payment of
all Obligations of the Obligors under the Credit Documents, in each case as
amended by this Amendment. The execution, delivery and effectiveness of this
Amendment
<PAGE>
-3-
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of any Lender or any Agent under any of the Credit
Documents, nor constitute a waiver of any provision of any of the Credit
Documents. Each Guarantor ratifies and confirms its Guarantee as in full force
and effect after giving effect to the amendments and waivers herein set forth
and to any prior amendment or waiver to the Credit Agreement.
SECTION SIX COSTS, EXPENSES AND TAXES. Borrower agrees to pay
all reasonable costs and expenses of the Agents in connection with the
preparation, execution and delivery of this Amendment and the other
instruments and documents to be delivered hereunder, if any (including,
without limitation, the reasonable fees and expenses of Cahill Gordon &
Reindel) in accordance with the terms of Section 12.03 of the Credit
Agreement. In addition, Borrower shall pay or reimburse any and all stamp and
other taxes payable or determined to be payable in connection with the
execution and delivery of this Amendment and the other instruments and
documents to be delivered hereunder, if any, and agrees to save each Agent and
each Lender harmless from and against any and all liabilities with respect to
or resulting from any delay in paying or omission to pay such taxes.
SECTION SEVEN EXECUTION IN COUNTERPARTS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute but one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Amendment by telecopier shall be effective as delivery of a manually executed
counterpart of this Amendment.
SECTION EIGHT GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
(WITHOUT GIVING EFFECT TO ANY PROVISIONS THEREOF RELATING TO CONFLICTS OF LAW).
[Signature Pages Follow]
<PAGE>
AMENDMENT AND WAIVER NO. 4
AMENDMENT AND WAIVER NO. 4 (this "AMENDMENT"), dated as of March 24,
2000, to that certain Credit Agreement, dated as of October 2, 1998 (as
amended to the date hereof, the "CREDIT AGREEMENT"; capitalized terms used
herein and not defined shall have the meaning set forth in the Credit
Agreement), among ATRIUM COMPANIES, INC., a Delaware corporation ("BORROWER"),
D AND W HOLDINGS, INC., as Parent, the Guarantors party thereto, the Lenders
party thereto (the "LENDERS"), MERRILL LYNCH & CO., MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED, as Lead Arranger, Syndication Agent and
Documentation Agent (collectively in such capacities, the "LEAD ARRANGER"),
and BANKBOSTON, N.A., as Administrative Agent (the "ADMINISTRATIVE AGENT").
W I T N E S S E T H :
WHEREAS, pursuant to Section 12.04 of the Credit Agreement, each of
the Obligors and each of the undersigned Lenders hereby agree to amend certain
provisions of the Credit Agreement as set forth herein;
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION ONE AMENDMENT AND WAIVER. (A) Notwithstanding any other
provision of the Credit Agreement, subject to the conditions set forth in
Section Two below, the Lenders (a) amend Sections 9.11(a), (b) and (c) as of
the Test Dates that are December 31, 1999 and March 31, 2000 (it being
understood that such Sections are not being amended with respect to any
subsequent Test Dates) as follows: (i) the Total Leverage Ratio as of December
31, 1999 and March 31, 2000 shall not exceed 5.75, (ii) the Interest Coverage
Ratio as of December 31, 1999 and March 31, 2000 shall not be less than 1.75,
and (iii) the Fixed Charge Coverage Ratio as of December 31, 1999 and March
31, 2000 shall not be less than 1.25;
(b) amend Section 9.11 by adding the following:
"(d) MAXIMUM SENIOR LEVERAGE RATIO. The Senior Leverage Ratio shall
not, as of any Test Date during any period set forth in the table below,
exceed the ratio set forth opposite such period in the table below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
12/31/99 and thereafter 2.75";
</TABLE>
(c)AMEND SECTION 3.02 BY DELETING CLAUSES (i) AND (ii) OF SECTION 3.02 AND
REPLACING THEM WITH THE FOLLOWING:
<PAGE>
-2-
"(i) DURING SUCH PERIODS AS SUCH LOAN IS AN ABR LOAN, (a) THE
ALTERNATE BASE RATE (AS IN EFFECT FROM TIME TO TIME), PLUS (b) THE APPLICABLE
MARGIN, PLUS (c)(A) IN THE CASE OF THE REVOLVING CREDIT LOANS, 0.625% AND (B)
IN THE CASE OF TERM LOANS, 0.375%; AND
(ii) DURING SUCH PERIODS AS SUCH LOAN IS A LIBOR LOAN, FOR EACH
INTEREST PERIOD RELATING THERETO, (a) THE LIBOR RATE FOR SUCH LOAN FOR SUCH
INTEREST PERIOD, PLUS (b) THE APPLICABLE MARGIN, PLUS (c)(A) IN THE CASE OF
THE REVOLVING CREDIT LOANS, 0.625%, AND (B) IN THE CASE OF THE TERMS LOANS,
0.375%,"; AND
(d) (^) waive any violation of Section 9.01(i) resulting from the failure to
deliver a consolidated plan and financial forecast for fiscal year 2000 and an
appropriate Officers' Certificate (collectively, the "2000 ANNUAL BUDGET")
within 60 days after the beginning of fiscal year 2000; PROVIDED that such
2000 Annual Budget is delivered to Administrative Agent no later than May 1,
2000 or, if the Administrative Agent shall have agreed to an extension of such
date, to such later date, but in no event later than May 15, 2000.
(B) The Borrower intends to enter into a sale-leaseback transaction
(the "TRANSACTION") whereby (x) it will sell certain of its assets located in
Woodville, Texas, and (y) the buyer of such assets will obtain certain
financing from GE Capital Small Business Finance Corporation which is an
Affiliate of the Borrower. In connection with the Transaction, GE Capital
Small Business Finance Corporation may require the Borrower (or another
Company) to enter into an agreement with it (including, without limitation,
landlord's waivers, intercreditor agreements and subordination agreements).
The Lenders hereby waive the applicable restrictions set forth in Section 9.15
of the Credit Agreement and consent to the Borrower (or any other Company)
entering into agreements with GE Capital Small Business Finance Corporation in
form and substance reasonably satisfactory to the Lead Arranger in connection
with the Transaction.
SECTION TWO CONDITIONS TO EFFECTIVENESS. This Amendment shall become
effective as of the date first above written when, and only when, (a) the
Administrative Agent shall have received (i) counterparts of this Amendment
executed by each Obligor and the Majority Lenders or, as to any of the
Lenders, advice satisfactory to the Administrative Agent that such Lender has
executed this Amendment; and (ii) a one-time cash fee for each Lender that
executes and delivers a signature page to this Amendment not later than the
date this Amendment becomes effective in the aggregate amount equal to 0.250%
of the sum of the aggregate amount of Loans then outstanding owing to such
Lender plus the then effective aggregate amount of the undrawn Revolving
Credit Commitment of such Lender, which fee shall be paid by wire transfer of
immediately available funds to the Administrative Agent and distributed by
the Administrative Agent to the Lenders entitled thereto; and (b) Cahill
Gordon & Reindel shall have received its reasonable fees and expenses
incurred in connection with the preparation, execution and delivery of this
Amendment. The effectiveness of this Amendment (other than Sections Five, Six
and Seven hereof) is also conditioned upon the accuracy of the
representations and warranties set forth in Section Three hereof.
SECTION THREE REPRESENTATIONS AND WARRANTIES; COVENANTS. In order to
induce the Lenders and the Agents to enter into this Amendment, each Obligor
represents and warrants to
<PAGE>
-3-
each of the Lenders and the Agents that after giving effect to this Amendment,
(a) no Default or Event of Default has occurred and is continuing; and (b) all
of the representations and warranties in the Credit Agreement, are true and
complete in all material respects on and as of the date hereof as if made on
the date hereof (or, if any such representation or warranty is expressly
stated to have been made as of a specific date, as of such specific date).
SECTION FOUR REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE
NOTES. On and after the Effective Date, each reference in the Credit Agreement
to "this Agreement", "hereunder", "hereof" or words of like import referring
to the Credit Agreement, and each reference in the Notes and each of the other
Credit Documents to "the Credit Agreement", "thereunder", "thereof" or words
of like import referring to the Credit Agreement, shall mean and be a
reference to the Credit Agreement, as amended by this Amendment. The Credit
Agreement, the Notes and each of the other Credit Documents, as specifically
amended by this Amendment, are and shall continue to be in full force and
effect and are hereby in all respects ratified and confirmed. Without limiting
the generality of the foregoing, the Security Documents and all of the
collateral described therein do and shall continue to secure the payment of
all Obligations of the Obligors under the Credit Documents, in each case as
amended by this Amendment. The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a waiver
of any right, power or remedy of any Lender or any Agent under any of the
Credit Documents, nor constitute a waiver of any provision of any of the
Credit Documents. Each Guarantor ratifies and confirms its Guarantee as in
full force and effect after giving effect to the amendments and waivers herein
set forth and to any prior amendment or waiver to the Credit Agreement.
SECTION FIVE COSTS, EXPENSES AND TAXES. Borrower agrees to pay all
reasonable costs and expenses of the Agents in connection with the
preparation, execution and delivery of this Amendment and the other
instruments and documents to be delivered hereunder, if any (including,
without limitation, the reasonable fees and expenses of Cahill Gordon &
Reindel) in accordance with the terms of Section 12.03 of the Credit
Agreement. In addition, Borrower shall pay or reimburse any and all stamp and
other taxes payable or determined to be payable in connection with the
execution and delivery of this Amendment and the other instruments and
documents to be delivered hereunder, if any, and agrees to save each Agent and
each Lender harmless from and against any and all liabilities with respect to
or resulting from any delay in paying or omission to pay such taxes.
SECTION SIX EXECUTION IN COUNTERPARTS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute but one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Amendment by telecopier shall be effective as delivery of a manually executed
counterpart of this Amendment.
SECTION SEVEN GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT
GIVING EFFECT TO ANY PROVISIONS THEREOF RELATING TO CONFLICTS OF LAW).
{Signature Pages Follow}
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
as of March 28, 2000 and between D and W Holdings, Inc., a Delaware
corporation (together with its successors and assigns permitted hereunder,
the "Company") and Frank Sheeder (the "Employee").
RECITALS
WHEREAS, the Board of Directors of the Company (the "Board of
Directors" or the "Board") and of Atrium Companies, Inc. ("Atrium")
determined that it is in the best interest of each company and its
stockholders to enter into this Agreement for purposes of the Company
employing the Employee on the terms and conditions set forth herein.
AGREEMENTS
NOW, THEREFORE, in consideration of the respective agreements and
covenants set forth herein and other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. EMPLOYMENT PERIOD. Subject to Section 3, the Company hereby
agrees to employ the Employee, and the Employee hereby agrees to be employed
by the Company in accordance with the terms and provisions of this Agreement,
for a period (including any and all renewals thereof, the "Employment
Period") commencing on the date hereof and ending on the fourth anniversary
of such date; provided, however, that the Employment Period is renewable for
a series of three year terms thereafter as mutually agreed, upon notice by
the Company at least 30 days prior to the end of the then term. In the event
Employee continues to perform services after the Employment Period, and
pending agreement for extension of the Employment Agreement, such services
shall constitute employment for an unspecified term, terminable at will, with
or without cause or reason, with or without advance notice, and with or
without pay in lieu of advance notice. If the Company provides the Employee
with notice of intent not to renew in accordance with the above, the Company
may in its discretion terminate Employee's services as of the date of such
notice by paying to Employee all amounts that will become due during the
remainder of the Employment Period.
2. TERMS OF EMPLOYMENT.
(a) POSITION AND DUTIES.
(i) During the term of the Employee's employment, the
Employee shall serve as Chief Executive Officer and a director of the Company
and, in so doing, shall perform normal duties and responsibilities associated
with such position, subject to the general direction, approval and control of
the Board of Directors.
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(ii) During the term of the Employee's employment, and
excluding any periods of vacation and other leave to which the Employee is
entitled, the Employee agrees to devote substantially all his business time
to the business and affairs of the Company and to use the Employee's best
efforts to perform faithfully, effectively and efficiently his duties and
responsibilities.
(iii) During the term of the Employee's employment it
shall not be a violation of this Agreement for the Employee to (1) serve on
industry trade, civic or charitable boards or committees, (2) deliver
lectures or fulfill speaking engagements and (3) manage personal investments,
so long as such activities do not interfere with the performance of the
Employee's duties and responsibilities as an employee of the Company.
(iv) During the term of the Employee's employment,
Employee agrees to observe and comply with the Company's rules and policies
as adopted by the Company from time to time.
(v) During the term of the Employee's employment and
during the term of Non-Competition described in Section 10 hereof, the
Employee agrees not to disparage in any material respect the Company or any
of its products or practices, or any of its directors, officers, agents,
representatives, stockholders or affiliates, either orally or in writing.
(b) COMPENSATION.
(i) BASE SALARY. During the term of the Employee's
employment, the Employee shall receive an annual base salary (the "Annual
Base Salary"), which shall be paid in accordance with the customary payroll
practices of the Company, in an amount equal to $325,000. The Board, in its
discretion, may at any time increase the amount of the Annual Base Salary to
such greater amount as it may deem appropriate, and the term "Annual Base
Salary," as used in this Agreement, shall refer to the Annual Base Salary as
it may be so increased. It is understood that the Company may, at any time,
in the discretion of the Board, increase, but not decrease, the amount of the
Annual Base Salary.
(ii) INCENTIVE BONUS. Subject to the terms and
conditions of this Agreement, the Employee shall be entitled to receive an
incentive bonus as set forth on Schedule A hereto. The Incentive Bonus that
the Employee is entitled to receive in accordance with the terms of this
Agreement, including Schedule A hereto, shall be paid to the Employee on or
before March 30th of the calendar year immediately following the year with
respect to which the calculation of the Incentive Bonus is made (whether or
not the Employee is still employed by the Company at such time); provided,
that in no event shall the Incentive Bonus be paid prior to the completion of
the applicable audited financial statements of the Company.
(iii) INCENTIVE SAVINGS, STOCK OPTION AND RETIREMENT
PLANS. During the term of the Employee's employment the Employee shall be
entitled to participate in all incentive, savings, stock option and
retirement plans, practices, policies and programs
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applicable generally to other employees of the Company (the "Investment
Plans"), as amended from time to time.
(iv) WELFARE BENEFIT PLANS. During the term of the
Employee's employment, the Employee and/or the Employee's family, as the case
may be, shall be eligible for participation in and shall receive all benefits
under the welfare benefit plans, practices, policies and programs (the
"Welfare Plans") provided by the Company, including medical, prescription,
dental, disability, salary continuance, employee life, group life, accidental
death and travel accident insurance plans and programs, as amended from time
to time, to the extent applicable generally to other employees of the Company.
(v) PERQUISITES. During the term of the Employee's
employment, the Employee shall be entitled to receive, in addition to the
benefits described above, such perquisites and fringe benefits as shall
appertain to his position in accordance with any policies, practices and
procedures established by the Board, as amended from time to time. The
Employee shall be entitled to receive prompt reimbursement for membership
dues at a country club, not to exceed $350 per month, which amount shall be
grossed up for income taxes as applicable.
(vi) EXPENSES. During the term of the Employee's
employment, the Employee shall be entitled to receive prompt reimbursement
for all reasonable employment expenses incurred by the Employee in accordance
with the Company's policies, practices and procedures, as amended from time
to time. The Employee shall be entitled to receive prompt reimbursement of up
to $5,000 per annum for his personal legal and financial planning expenses
relating to his employment with the Company, which amount shall be grossed up
for income taxes as applicable.
(vii) AUTOMOBILE. The Company recognizes the Employee's
need for an automobile for business purposes. The Employee shall be entitled
to receive prompt reimbursement for an automobile not to exceed $1,000 per
month plus reasonable related expenses for maintenance and insurance, which
amount shall be grossed up for income taxes as applicable.
(viii) VACATION. During the term of the Employee's
employment, the Employee shall be entitled to four (4) weeks' paid vacation
each calendar year. Any vacation shall be taken at the reasonable and mutual
convenience of the Company and the Employee. Accrued vacation not taken in
any calendar year will not be carried forward or used in any subsequent
calendar year and the Employee shall not be entitled to receive pay in lieu
of accrued but unused vacation in any calendar year. Vacation will be deemed
to accrue daily for purposes of the payments described in Section 4 hereof.
(ix) STOCK OPTIONS. Upon the effective date of this
Agreement, the Employee will be entitled to the stock options described on
Schedule B hereto.
(x) STOCK PURCHASE. Upon execution of this Agreement,
the Employee will execute the Subscription Agreement, attached as Exhibit A
hereto (the "Subscription
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Agreement") in connection with his purchase of 833,333 shares of common stock
of the Company for a purchase price of $999,999.60.
(xi) KEY-MAN INSURANCE. At any time during the
Employment Period, the Company shall have the right to insure the life of the
Employee for the Company's sole benefit, and to determine the amount of
insurance and the type of policy. The Employee shall cooperate with the
Company in taking out such insurance by submitting to physical examinations,
by supplying all information required by the insurance company, and by
executing all necessary documents. The Employee shall incur no financial
obligation by executing any required document, and shall have no interest in
any such policy.
3. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. The Employee's employment shall
terminate automatically upon the Employee's death during the Employment
Period. If the Disability (as defined below) of the Employee has occurred
during the Employment Period, the Company may give to the Employee written
notice in accordance with Section 12(b) of its intention to terminate the
Employee's employment. In such event, the Employee's employment with the
Company shall terminate effective on the 30th day after receipt of such
notice by the Employee (the "Disability Effective Date"), if, within the 30
days after such receipt, the Employee shall not have returned to perform,
with or without reasonable accommodation, the essential functions of his
position. For purposes of this Agreement, at any time the Company or any of
its affiliates sponsors a long-term disability plan for the Company's
employees, "Disability" shall mean disability as defined in such long term
disability plan for the purpose of determining a participant's eligibility
for benefits, provided, however, if the long term disability plan contains
multiple definitions of disability, "Disability" shall refer to that
definition of disability which, if the Employee qualified for such disability
benefits, would provide coverage for the longest period of time. The
determination of whether the Employee has a Disability shall be made by the
person or persons required to render disability determinations under the
long-term disability plan. At any time the Company does not sponsor a
long-term disability plan for its employees, "Disability" shall mean the
Employee's inability to perform, with or without reasonable accommodation,
the essential functions of his position hereunder for a period of 120 days,
consecutive or non-consecutive, in any 12-month period due to mental or
physical incapacity, as determined by a physician selected by the Company or
its insurers and acceptable to the Employee or the Employee's legal
representative, such agreement as to acceptability not to be unreasonably
withheld or delayed. Any refusal by Employee to submit to a medical
examination for the purpose of determining Disability under this Section 3(a)
shall be deemed to constitute conclusive evidence of Employee's Disability.
(b) CAUSE OR WITHOUT CAUSE. The Company may terminate the
Employee's employment during the Employment Period for Cause or without
Cause. For purposes of this Agreement, "Cause" shall mean (i) a breach by the
Employee of the Employee's obligations under Section 2(a) (other than as a
result of physical or mental incapacity) which constitutes a continued
material nonperformance by the Employee of his obligations and duties
thereunder,
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as determined by the Board, and which (other than in the case of a violation
of Section 2(a)(v)) is not remedied promptly after receipt of written notice
from the Company specifying such breach, (ii) commission by the Employee of
an act of fraud, embezzlement, misappropriation, willful misconduct or breach
of fiduciary duty against the Company; (iii) a material breach by the
Employee of Sections 7, 8, 10 or 11; (iv) the Employee's conviction, plea of
no contest or nolo contendere, or unadjudicated probation for any felony or
crime involving moral turpitude; (v) the failure of the Employee to carry
out, or comply with, in any material respect any lawful and reasonable
directive of the Board consistent with the terms of this Agreement, which is
not remedied within 30 days after receipt of written notice from the Company
specifying such failure; (vi) the Employee's unlawful use (including being
under the influence) or possession of illegal drugs on the Company's premises
or while performing the Employee's duties and responsibilities under this
Agreement; or (vii) a failure by the Employee to purchase 833,333 shares of
common stock of the Company pursuant to the terms of the Subscription
Agreement. For purposes of this Agreement, "without Cause" shall mean a
termination by the Company of the Employee's employment during the Employment
Period for any reason other than a termination based upon Cause, death,
Disability or upon a Change of Control, as defined below.
(c) GOOD REASON. The Employee's employment may be terminated
during the Employment Period by the Employee for Good Reason or without Good
Reason; provided, however, that the Employee agrees not to terminate his
employment for Good Reason unless (i) the Employee has given the Company at
least 30 days' prior written notice of his intent to terminate his employment
for Good Reason, which notice shall specify the facts and circumstances
constituting Good Reason, and (ii) the Company has not remedied such facts
and circumstances constituting Good Reason within such 30-day period. For
purposes of this Agreement, "Good Reason" shall mean:
(i) any significant reduction, approved by the Board
(including the board of directors or any body performing such functions of
any surviving or successor entity) without the Employee's consent in the
Employee's position, authority, duties or responsibilities as contemplated in
Section 2(a) or any other action by the Company which results in a material
diminution in such position, authority, duties or responsibilities, excluding
for this purpose an inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of written notice thereof
given by the Employee;
(ii) any termination or material reduction of a
material benefit under any Investment Plan or Welfare Plan in which the
Employee participates unless (A) there is substituted a comparable benefit
that is economically substantially equivalent to the terminated or reduced
benefit prior to such termination or reduction or (B) benefits under such
Investment Plan or Welfare Plan are terminated or reduced with respect to all
similarly situated employees previously granted benefits thereunder;
(iii) any failure by the Company to comply with any of
the provisions of Section 2(b), other than an inadvertent failure not
occurring in bad faith and which is remedied by the Company promptly after
receipt of written notice thereof given by the Employee;
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(iv) without limiting the generality of the foregoing,
any material breach by the Company or any of its subsidiaries or other
affiliates (as defined below) of (A) this Agreement or (B) any other
agreement between the Employee and the Company or any such subsidiary or
other affiliate; or
(v) any transfer or relocation of the Employee to a
city that is located more than 75 miles from 1341 E. Mockingbird Lane,
Dallas, Texas, unless the Employee expressly agrees to such transfer in
writing.
As used in this Agreement, the term "affiliate" means,
with respect to a person, any other person controlling, controlled by or
under common control with the first person; the term "control," and
correlative terms, means the power, whether by contract, equity ownership or
otherwise, to direct the policies or management of a person; and the term
"person" means an individual, partnership, corporation, limited liability
company, trust or unincorporated organization, or a government or agency or
political subdivision thereof.
(d) CHANGE OF CONTROL. If a Change of Control (as defined
below) occurs during the Employment Period and the Board (including the board
of directors or any body performing such functions of any surviving or
successor entity) determines in good faith that it is in the Company's best
interest to terminate the Employee's employment with the Company, within one
year of such Change of Control the Company may terminate the Employee's
employment by giving the Employee written notice in accordance with Section
12(b) of its intention to terminate the Employee's employment. Any such
termination by the Company as contemplated in this Section 3(d) is referred
to herein as a termination "upon a Change of Control."
As used in this Agreement, the term "Change of Control" means
the first to occur of: (i) any sale, lease, exchange or other transfer of
all or substantially all of the assets of the Company (including capital
stock or assets of operating subsidiaries) to any person or group of persons,
(ii) a majority of the Board of Directors consists of persons who are not
nominated collectively by Ardshiel, Inc. and its affiliates and GE Investment
Private Placement Partners II, a Limited Partnership or (iii) the acquisition
by any person or group (other than Ardshiel, Inc., GE Investment Private
Placement Partners II, a Limited Partnership and their respective affiliates)
of the power to vote or direct the voting of securities having more than 50%
of the ordinary voting power for the election of directors of the Company.
(e) NOTICE OF TERMINATION. Any termination by the Company
for Cause or without Cause or upon a Change of Control, or by the Employee
for Good Reason or without Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 12(b).
For purposes of this Agreement, a "Notice of Termination" means a written
notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provision so indicated and
(iii) if the Date of Termination (as defined below) is other than the date of
receipt of such notice, specifies the termination date (which date shall not
be more than 15 days after the giving of such notice if the Employee is
giving such notice). The failure by the Employee or the Company to set forth
in the Notice of
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Termination any fact or circumstance which contributes to a showing of Good
Reason or Cause or a termination upon a Change of Control shall not waive any
right of the Employee or the Company hereunder or preclude the Employee or
the Company from asserting such fact or circumstance in enforcing the
Employee's or the Company's rights hereunder.
(f) DATE OF TERMINATION. The term "Date of Termination"
means (i) if the Employee's employment is terminated by the Company for Cause
or upon a Change of Control, or by the Employee for Good Reason, the date of
receipt of the Notice of Termination or any later date specified therein
pursuant to Section 3(e), as the case may be, (ii) if the Employee's
employment is terminated by the Employee without Good Reason, 30 days from
the date of receipt of the Notice of Termination, (iii) if the Employee's
employment is terminated by the Company other than for Cause or upon a Change
of Control, the date on which the Company notifies the Employee of such
termination and (iv) if the Employee's employment is terminated by reason of
death or Disability, the date of death of the Employee or the Disability
Effective Date under Section 3(a), as the case may be.
4. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) FOR CAUSE; WITHOUT GOOD REASON. If, during the
Employment Period, the Company shall terminate the Employee's employment for
Cause or the Employee shall terminate his employment without Good Reason, the
Employee shall forfeit all rights to the Incentive Bonus otherwise due to him
or to which he may be entitled, all unexercised stock options to purchase
shares of common stock of the Company held by Employee shall lapse and expire
notwithstanding anything to the contrary in any stock option agreement , and
the Company shall have no further payment obligations to the Employee or his
legal representatives, other than for the payment of: (i) in a lump sum in
cash within ten (10) days after the Date of Termination the sum of the
Employee's Annual Base Salary through the Date of Termination to the extent
not theretofore paid, any compensation previously deferred by the Employee
(together with any accrued interest or earnings thereon) and any accrued
vacation pay (collectively, the "Accrued Obligations"); and (ii) any amount
arising from the Employee's participation in, or benefits under, any
Investment Plans (the "Accrued Investments"), which amounts shall be payable
in accordance with the terms and conditions of such Investment Plans.
(b) DEATH. If the Employee's employment is terminated by
reason of the Employee's death during the Employment Period, all unexercised
stock options to purchase shares of common stock of the Company held by
Employee shall immediately vest in his legal representatives and become
exercisable notwithstanding anything to the contrary in any stock option
agreement and the Company shall have no further payment obligations to the
Employee or his legal representatives, other than for payment of: (i) in a
lump sum in cash within ten (10) days after the Date of Termination the
Accrued Obligations; (ii) the Accrued Investments, which shall be payable in
accordance with the terms and conditions of the Investment Plans; and (iii)
the Incentive Bonus prorated from the first day of the Company's then current
fiscal year to the Date of Termination (the "Prorated Incentive Bonus"),
payable following calculation of the Incentive Bonus in accordance with
Section 2(b)(ii) hereof.
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(c) DISABILITY. If the Employee's employment is terminated by
reason of the Employee's Disability during the Employment Period, all
unexercised stock options to purchase shares of common stock of the Company
held by Employee shall immediately vest and become exercisable
notwithstanding anything to the contrary in any stock option agreement and
the Company shall have no further payment obligations to the Employee or his
legal representatives, other than for payment of: (i) in a lump sum in cash
within ten (10) days after the Date of Termination the Accrued Obligations;
(ii) the Accrued Investments, which shall be payable in accordance with the
terms and conditions of the Investment Plans; and (iii) the Prorated
Incentive Bonus, payable following calculation of the Incentive Bonus in
accordance with Section 2(b)(ii) hereof.
(d) WITHOUT CAUSE OR FOR GOOD REASON. If the Employee's
employment is terminated by the Company without Cause or by the Employee for
Good Reason, all unexercised stock options to purchase shares of common stock
of the Company held by Employee shall immediately vest and become exercisable
notwithstanding anything to the contrary in any stock option agreement and
the Company shall have no further payment obligations to the Employee or his
legal representatives, other than for: (i) payment of, in a lump sum in cash
within ten (10) days after the Date of Termination, the Accrued Obligations;
(ii) payment of the Accrued Investments, which shall be payable in accordance
with the terms and conditions of the Investment Plans; (iii) payment of the
Prorated Incentive Bonus, payable following calculation of the Incentive
Bonus in accordance with Section 2(b)(ii) hereof; (iv) payment for each month
during a period of 24 months following the Date of Termination (the
"Severance Period") of one-twenty-fourth of the sum of the Employee's Annual
Base Salary on the Date of Termination and 80% of the Incentive Bonus times
two, in accordance with the customary payroll practices of the Company; and
(v) payment of reasonable medical benefits during the Severance Period.
(e) CHANGE OF CONTROL. If the Employee's employment is
terminated upon a Change of Control as contemplated in Section 3(d), all
unexercised stock options to purchase shares of common stock of the Company
held by Employee shall immediately vest and become exercisable and the
Company shall have no further payment obligations to the Employee or his
legal representatives, other than for (i) payment of, in a lump sum in cash
within ten (10) days after the Date of Termination, the Accrued Obligations;
(ii) payment of the Accrued Investments, which shall be payable in accordance
with the terms and conditions of the Investment Plans; (iii) payment of the
Prorated Incentive Bonus; (iv) payment for each month during the Severance
Period of one-twenty-fourth of the sum of the Employee's Annual Base Salary
on the Date of Termination and 80% of the Incentive Bonus times two, in
accordance with the customary payroll practices of the Company and (v)
payment of reasonable medical benefits during the Severance Period.
5. RETENTION BONUS. Following a "Change of Control," as
contemplated in Section 3(d), if the Employee is employed by the Company on
the 12-month anniversary of the Change of Control, the Company shall pay the
Employee a retention bonus in the amount of $325,000. Nothing in this
Section 5 shall be deemed to give the Employee the right to be retained in
the employ of the Company or to restrict the right of the Company to
terminate the Employee at any time and for any reason, without Cause or for
Cause or upon a Change of Control. Nothing in this Section 5 shall be deemed
to give the Company the right to require
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the Employee to remain in the employ of the Company or to restrict the
Employee's right to terminate his employment at any time and for any reason,
without Good Reason or for Good Reason.
6. FULL SETTLEMENT; MITIGATION. In no event shall the Employee be
obligated to seek other employment or take any other action by way of
mitigation of the amounts payable to the Employee under any of the provisions
of this Agreement and such amounts shall not be reduced whether or not the
Employee obtains other employment. Neither the Employee nor the Company shall
be liable to the other party for any damages in addition to the amounts
payable under Section 4 arising out of the termination of the Employee's
employment prior to the end of the Employment Period; provided, however, that
the Company shall be entitled to seek damages from the Employee for any
breach of Sections 7, 8, 9, 10 or 11 by the Employee and either party shall
be entitled to seek damages for criminal misconduct.
7. CONFIDENTIAL INFORMATION.
(a) The Employee acknowledges that the Company and its
affiliates have trade, business and financial secrets and other confidential
and proprietary information (collectively, the "Confidential Information").
The term "Confidential Information" includes, without limitation, sales
materials, technical information, processes and compilations of information,
records, specifications and information concerning customers or vendors,
manuals relating to suppliers' products, customer lists, information
regarding methods of doing business, and the identity of suppliers not
otherwise known to the public. "Confidential Information" shall not include
information that is generally known to other persons or entities who can
obtain economic value from its disclosure or use. The Employee may disclose
Confidential Information pursuant to a subpoena or court order, provided,
that, at least ten (10) days (or such lesser period as is practicable given
the terms of any order or subpoena) in advance of any such disclosure, the
Employee shall furnish the Company with a copy of the judicial administrative
order requiring that such information be disclosed together with a written
description of the information to be disclosed (which description shall be in
sufficient detail to allow the Company to determine the nature and scope of
the information proposed to be disclosed), and the Employee covenants and
agrees to cooperate with the Company to deliver the minimum amount of
information necessary to comply with such order.
(b) During and following the Employee's employment by the
Company, the Employee shall hold in confidence and not directly or indirectly
disclose or use or copy or make lists of any Confidential Information or
proprietary data of the Company or its affiliates except to the extent
authorized in writing by the Board or required by any court or administrative
agency, other than to an employee of the Company or its affiliates or a
person to whom disclosure is reasonably necessary or appropriate in
connection with the performance by the Employee of his duties as an employee
of the Company.
(c) The Employee further agrees not to use any Confidential
Information for the benefit of any person or entity other than the Company or
its affiliates.
(d) As used in this Section 7, the term "Company" shall
include the Company and any of its direct or indirect subsidiaries.
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8. RESPONSIBILITIES UPON TERMINATION. Upon the termination of his
employment by the Company for whatever reason and irrespective of whether or
not such termination is voluntary on his part:
(a) The Employee shall advise the Company of the identity of
his new employer within ten (10) days after accepting new employment and
further agrees to keep the Company so advised of any change in employment
during the term of Non-Competition set forth in Section 10 hereof;
(b) The Company in its sole discretion may notify any new
employer of the Employee that he has an obligation not to compete with the
Company during such term;
(c) The Employee shall deliver to the Company any and all
records, forms, contracts, memoranda, work papers, customer data and any
other documents which have come into his possession by reason of his
employment with the Company (including the Company and its direct and
indirect subsidiaries), irrespective of whether or not any of said documents
were prepared for him, and he shall not retain memoranda in respect of or
copies of any of said documents; and
(d) The Employee shall participate in an exit interview with
the Company.
9. SUCCESSORS. The Company may assign its rights and obligations
under this Agreement to any successor to all or substantially all the assets
of the Company, by merger or otherwise, subject, however, to the Employee's
right to terminate this Agreement for Good Reason as provided in Section
3(c), and may assign or encumber this Agreement and its rights hereunder as
security for indebtedness of the Company and its affiliates. All
representations, warranties, covenants, terms, conditions and provisions of
this Agreement shall be binding upon and inure to the benefit of, and be
enforceable by the respective heirs, legal representatives, successors and
permitted assigns of the Company and Employee. Neither this Agreement nor
any rights, interests or obligations hereunder may be assigned by the
Employee without the prior written consent of the Company.
10. NON-COMPETITION.
(a) The term of Non-Competition (herein so called) shall be
for a term beginning on the effective date hereof and continuing until (i)
the first anniversary of the Date of Termination if the Employee's employment
is terminated by the Company for Cause or due to Disability or by the
Employee without Good Reason, or (ii) the last day of the Severance Period if
the Employee's employment is terminated by the Company without Cause (and not
due to Disability) or upon a Change of Control or by the Employee for Good
Reason.
(b) During the term of Non-Competition, the Employee shall
not (other than for the benefit of the Company or its affiliates pursuant to
this Agreement) directly or indirectly, render services to, assist,
participate in the affairs of, or otherwise be connected with, any person or
enterprise (other than the Company), which person or enterprise is engaged
in, or is planning to engage in, and shall not personally engage in, any
business that is in any respect competitive with the business of the Company,
with respect to any products
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of the Company that were within the Employee's management responsibility at
any time within the twelve-month period immediately prior to the termination
of the Employee's employment with the Company, in any capacity which would
(i) utilize the Employee's services with respect to any such business (a)
located within any state of the United States, or any substantially
comparable political subdivision of any other country, wherein the Company
sold or actively attempted to sell, such products within the twelve-month
period immediately prior to the termination of the Employee's employment
with the Company or (b) which sells or markets products similar to products
sold or marketed by the Company in any such state or comparable subdivision;
or (ii) utilize the Employee's services in selling any products similar to
such products of the Company to any person or entity to which the Company
sold or actively attempted to sell such products within the twelve-month
period immediately prior to the termination of the Employee's employment with
the Company (a "Competing Business"). Notwithstanding the foregoing, the
Company agrees that the Employee may own less than five percent of the
outstanding voting securities of any publicly traded company that is a
Competing Business so long as the Employee does not otherwise participate in
such Competing Business in any way prohibited by the preceding clause.
(c) During the term of Non-Competition, Employee will not,
and will not permit any of his affiliates to, directly or indirectly, recruit
or otherwise solicit or induce any employee, customer, subscriber or supplier
of the Company to terminate its employment or arrangement with the Company,
otherwise change its relationship with the Company or establish any
relationship with the Employee or any of his affiliates for any business
purpose deemed competitive with the business of the Company.
(d) The Employee acknowledges that the geographic
boundaries, scope of prohibited activities, and time duration of the
preceding paragraphs are reasonable in nature and are no broader than are
necessary to maintain the goodwill of the Company and its affiliates and the
confidentiality of their Confidential Information, and to protect the other
legitimate business interests of the Company and its affiliates.
(e) If any court determines that any portion of this Section
10 is invalid or unenforceable, the remainder of this Section 10 shall not
thereby be affected and shall be given full effect without regard to the
invalid provisions. If any court construes any of the provisions of this
Section 10, or any part thereof, to be unreasonable because of the duration
or scope of such provision, such court shall have the power to reduce the
duration or scope of such provision and to enforce such provision as so
reduced.
(f) As used in this Section 10, the term "Company" shall
include the Company and any of its direct or indirect subsidiaries.
11. INVENTIONS; ASSIGNMENT. All rights to discoveries, inventions,
improvements and innovations (including all data and records pertaining thereto)
related to the Company's business, whether or not patentable, copyrightable,
registrable as a trademark, or reduced to writing, that the Employee may
discover, invent or originate during the Employment Period, and for a period of
twelve (12) months thereafter, either alone or with others and whether or not
during working hours or by the use of the facilities of the Company
("Inventions"), shall be the exclusive property of the Company. The Employee
shall promptly disclose all
11
<PAGE>
Inventions to the Company, shall execute at the request of the Company any
assignments or other documents the Company may deem necessary to protect or
perfect its rights therein, and shall assist the Company, at the Company's
expense, in obtaining, defending and enforcing the Company's rights therein.
The Employee hereby appoints the Company as his attorney-in-fact to execute
on his behalf any assignments or other documents deemed necessary by the
Company to protect or perfect its rights to any Inventions.
12. MISCELLANEOUS.
(a) CONSTRUCTION. This Agreement shall be deemed drafted
equally by both the parties. Its language shall be construed as a whole and
according to its fair meaning. Any presumption or principle that the
language is to be construed against any party shall not apply. The headings
in this Agreement are only for convenience and are not intended to affect
construction or interpretation. Any references to paragraphs, subparagraphs,
sections or subsections are to those parts of this Agreement, unless the
context clearly indicates to the contrary. Also, unless the context clearly
indicates to the contrary, (a) the plural includes the singular and the
singular includes the plural; (b) "and" and "or" are each used both
conjunctively and disjunctively; (c) "any," "all," "each," or "every" means
"any and all," and "each and every"; (d) "includes" and "including" are each
"without limitation"; (e) "herein," "hereof," "hereunder" and other similar
compounds of the word "here" refer to the entire Agreement and not to any
particular paragraph, subparagraph, section or subsection; and (f) all
pronouns and any variations thereof shall be deemed to refer to the
masculine, feminine, neuter, singular or plural as the identity of the
entities or persons referred to may require.
(b) NOTICES. All notices and other communications hereunder
shall be in writing and shall be given by hand delivery to the other party or
by registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Employee: Frank Sheeder
23 Windsor Ridge Road
Frisco, Texas 75034
Fax: (972) 624-1865
with a copy to:
Robert Sheeder
Jenkens and Gilchrist, P.C.
1445 Ross Avenue
Suite 3200
Dallas, Texas 75202
Fax: (214) 855-4300
12
<PAGE>
If to the Company: D and W Holdings, Inc.
c/o Ardshiel, Inc.
230 Park Avenue, Suite 2527
New York, New York 10169
Attention: Daniel T. Morley
Fax: (212) 972-1809
with a copy to:
Joel M. Simon
Marie Censoplano
Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue, 31st Floor
New York, New York 10022-4697
Fax: (212) 319-4090
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) ENFORCEMENT. If any provision of this Agreement is held
to be illegal, invalid or unenforceable under present or future laws
effective during the term of this Agreement, such provision shall be fully
severable; this Agreement shall be construed and enforced as if such illegal,
invalid or unenforceable provision had never comprised a portion of this
Agreement; and the remaining provisions of this Agreement shall remain in
full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance from this Agreement.
Furthermore, in lieu of such illegal, invalid or unenforceable provision
there shall be added automatically as part of this Agreement a provision as
similar in terms to such illegal, invalid or unenforceable provision as may
be possible and be legal, valid and enforceable.
(d) WITHHOLDING. The Company shall be entitled to withhold
from any amounts payable under this Agreement any federal, state, local or
foreign withholding or other taxes or charges which it is from time to time
required to withhold. The Company shall be entitled to rely on an opinion of
counsel if any questions as to the amount or requirement of such withholding
shall arise.
(e) NO WAIVER. No waiver by either party at any time of any
breach by the other party of, or compliance with, any condition or provision
of this Agreement to be performed by the other party shall be deemed a waiver
of similar or dissimilar provisions or conditions at any time.
(f) EQUITABLE RELIEF. The Employee acknowledges that money
damages would be both incalculable and an insufficient remedy for a breach of
Section 7, 8, 9, 10 or 11 by the Employee and that any such breach would
cause the Company irreparable harm. Accordingly, the Company, in addition to
any other remedies at law or in equity it may have, shall be entitled to
equitable relief, including injunctive relief and specific performance, in
connection with a breach of Section 7, 8, 9, 10 or 11 by the Employee.
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<PAGE>
(g) COMPLETE AGREEMENT. The provisions of this Agreement,
the Buy-Sell Agreement, the Subscription Agreement, and the Non-Qualified
Stock Option Agreements for Key Employees constitute the entire and complete
understanding and agreement between the parties with respect to the subject
matter hereof, and supersedes all prior and contemporaneous oral and written
agreements, representations and understandings between the Employee and the
Company, or its affiliates and subsidiaries, which are hereby terminated.
Other than expressly set forth herein, the Employee and the Company
acknowledge and represent that there are no other promises, terms, conditions
or representations (oral or written) regarding any matter relevant hereto.
This Agreement may be executed in two or more counterparts.
(h) MEDIATION; ARBITRATION. (i) The Company and the Employee
shall mediate any claim or controversy arising out of or relating to this
Agreement or any breach thereof if either of them requests mediation and
gives written notice to the other (the "Mediation Notice"). Any notice given
pursuant to the preceding sentence shall include a brief statement of the
claim or controversy. If the Company and the Employee do not resolve the
claim or controversy within five (5) days after the date of the Mediation
Notice, the Company and the Employee shall then use reasonable efforts to
agree upon an independent mediator. If the Company and the Employee do not
agree upon an independent mediator within ten (10) days after the date of the
Mediation Notice, either party may request that JAMS/Endispute ("JAMS"), or a
similar mediation service of a similar national scope if JAMS no longer then
exists, appoint an independent mediator. The Company and the Employee shall
share the costs of mediation equally and shall pay such costs in advance upon
the request of the mediator or any party. Within ten (10) days after
selection of the mediator, the mediator shall set the mediation. If the
Company and the Employee do not resolve the dispute within thirty (30) days
after the date of the Mediation Notice, the dispute shall be decided by
arbitration as set forth below.
(ii) Any claim or controversy arising out of or
relating to this Agreement or any breach thereof and/or any claim or
controversy arising out of the Buy-Sell Agreement, the Subscription Agreement
and/or the Non-Qualified Stock Option Agreements for Key Employees or any
breach thereof shall be settled by arbitration if such claim or controversy
is not settled pursuant to mediation as set forth above. The venue for any
such arbitration shall be Dallas, Texas, or such other location as the
parties may mutually agree. Except as expressly set forth herein, all
arbitration proceedings under this Section 12(h)(ii) shall be undertaken in
accordance with the Employment Arbitration Rules of the American Arbitration
Association (the "AAA") then in force. Only individuals who are (i) lawyers
engaged full-time in the practice of law and (ii) on the AAA register of
arbitrators shall be selected as an arbitrator. There shall be one arbitrator
who shall be chosen in accordance with the rules of the AAA. Within twenty
(20) days of the conclusion of the arbitration hearing, the arbitrator shall
prepare written findings of fact and conclusions of law. Judgment on the
written award may be entered and enforced in any court of competent
jurisdiction. It is mutually agreed that the written decision of the
arbitrator shall be valid, binding, final and non-appealable. The Company
shall bear the arbitrator's full fees and expenses. In the event action is
brought to enforce the provisions of this Agreement pursuant to this Section
12(h)(ii), the non-prevailing parties shall be required to pay the reasonable
attorneys' fees and expenses of the prevailing parties, except that if in the
opinion of the court or arbitrator
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<PAGE>
deciding such action there is no prevailing party, each party shall pay its
own attorneys' fees and expenses.
(i) SURVIVAL. Sections 4, 6, 7, 8, 9, 10, 11, and 12 of this
Agreement shall survive the termination of this Agreement.
(j) CHOICE OF LAW. This Agreement and the rights and
obligations hereunder shall be governed by and construed in accordance with
the laws of the State of Texas without reference to principles of conflicts
of law of Texas or any other jurisdiction, and, where applicable, the laws of
the United States.
(k) AMENDMENT. This Agreement may not be amended or modified
at any time except by a written instrument approved by the Board and executed
by the Company and the Employee.
(l) EMPLOYEE ACKNOWLEDGMENT. Employee acknowledges that he
has read and understands this Agreement, is fully aware of its legal effect,
has not acted in reliance upon any representations or promises made by the
Company other than those contained in writing herein, and has entered into
this Agreement freely based on his own judgment.
15
<PAGE>
IN WITNESS WHEREOF, the Employee has hereunto set the
Employee's hand and, pursuant to the authorization from the Board, the
Company has caused this Agreement to be executed in its name on its behalf,
on this 28th day of March, 2000, to be effective as of the day and year first
above written.
EMPLOYEE
____________________________________
D AND W HOLDINGS, INC.
By:_________________________________
Name:
Title:
<PAGE>
SCHEDULE A
The Employee shall be entitled to a target bonus in the amount of
$325,000 per annum (the "Incentive Bonus").
(a) 75% of the Employee's Incentive Bonus ("EBITDA Bonus") shall be
payable based upon achievement of the following targets:
(i) If the Company achieves 80% of its budgeted EBITDA, the
Employee shall receive 50% of the EBITDA Bonus.
(ii) If the Company achieves 90% of its budgeted EBITDA, the
Employee shall receive 80% of the EBITDA Bonus.
(iii) If the Company achieves 100% of its budgeted EBITDA, the
Employee shall receive 100% of the EBITDA Bonus.
(iv) If the Company achieves 110% of its budgeted EBITDA, the
Employee shall receive 125% of the EBITDA Bonus.
The EBITDA Bonus will be paid on a sliding scale on a pro rated
basis. For example, if 95% of budgeted EBITDA is achieved, the Employee is
entitled to 90% of the EBITDA Bonus. The Board of Directors will determine
the EBITDA Bonus if the Company achieves less than 80% of the budgeted
EBITDA and in no event will the Company pay in excess of 125% of the EBITDA
Bonus.
For purposes of the EBITDA Bonus, EBITDA shall be defined as
earnings from operations before interest, taxes, depreciation, amortization
and extraordinary gains or losses of the Company and all of its subsidiaries
on a consolidated basis all as determined in accordance with generally
accepted accounting principles consistently applied. Budgeted EBITDA shall
be such amount as is set by the Board of Directors annually as adjusted from
time to time to reflect acquisitions by the Company or its subsidiaries.
(b) The remaining 25% of the Employee's Incentive Bonus shall be based
upon the achievement of management objectives to be set from year to year by
the Board of Directors in writing. The percentage of Incentive Bonus stated
in the preceding sentence shall not be paid on a sliding scale or pro rated
basis.
(c) Achievement of the management objectives related to the remaining 25%
of the Employee's Incentive Bonus set by the Board of Directors shall be
determined by the Board of Directors in its sole discretion. The
above-described performance targets shall be set from time to time by the
Board of Directors in its sole discretion.
<PAGE>
SCHEDULE B
GRANTED OPTIONS: Effective as of the date of this Agreement the Employee
shall be granted options to purchase 1,000,000 shares of common stock of the
Company pursuant to the D and W Holdings, Inc. 1998 Stock Option Plan (the
"Plan"). Such options shall provide the following:
EXERCISE PRICE: $1.25 per share subject to adjustment as set forth in the
Plan.
VESTING: Annually in equal installments over four years from the date of
grant such that all option shares shall be vested as of and after the fourth
anniversary of the date of grant, subject to the terms and conditions of the
Plan and the Non-Qualified Stock Option Agreement for Key Employees, in
accordance with the following schedule:
Vesting Schedule
<TABLE>
<CAPTION>
Anniversary of
Grant Date Vested Shares
<S> <C>
1st 250,000 shares
2nd 250,000 shares
3rd 250,000 shares
4th 250,000 shares
Total 1,000,000 shares
</TABLE>
EARNED GRANTED OPTIONS: Effective as of the date of this Agreement the
Employee shall be granted options to purchase 1,500,000 shares of common
stock of the Company pursuant to the Plan. Such options shall provide the
following:
EXERCISE PRICE: $1.50 per share subject to adjustment as set forth in the
Plan.
VESTING: Annually in equal installments over four years from the date of
grant such that all option shares shall be vested as of and after the fourth
anniversary of the date of grant, subject to the terms and conditions of the
Plan and the Non-Qualified Stock Option Agreement for Key Employees, in
accordance with the following schedule:
<PAGE>
Vesting Schedule
<TABLE>
<CAPTION>
Anniversary of
Grant Date Vested Shares
<S> <C>
1st 375,000 shares
2nd 375,000 shares
3rd 375,000 shares
4th 375,000 shares
Total 1,500,000 shares
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
as of October 2, 1999, by and between D and W Holdings, Inc., a Delaware
corporation (together with its successors and assigns permitted hereunder,
the "Company") and Jeff L. Hull (the "Employee").
RECITALS
A. The Company and the Employee entered into an Employment
Agreement dated as of October 2, 1998 (the "Original Employment Agreement").
B. The Board of Directors of the Company (the "Board") determined
that it is in the best interest of the Company and its stockholders to
terminate the Original Employment Agreement and to enter into this Agreement
for purposes of the Company employing the Employee on the terms and
conditions set forth herein.
AGREEMENTS
NOW, THEREFORE, in consideration of the respective agreements and
covenants set forth herein and other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. EMPLOYMENT PERIOD. Subject to Section 3, the Company hereby
agrees to employ the Employee, and the Employee hereby agrees to be employed
by the Company in accordance with the terms and provisions of this Agreement,
for a period (including any and all renewals thereof, the "Employment
Period") commencing on the date hereof and ending on the third anniversary of
such date; provided the Employment Period is renewable for a series of three
year terms thereafter as mutually agreed upon by the Company and Employee at
least 30 days prior to the end of the then term. In the event Employee
continues to perform services after the Employment Period, and pending
agreement for extension of the Employment Agreement, such services shall
constitute employment for an unspecified term, terminable at will, with or
without cause or reason, with or without advance notice, and with or without
pay in lieu of advance notice. If the Company provides the Employee with
notice of intent not to renew in accordance with the above, the Company may
in its discretion terminate Employee's services as of the date of such notice
by paying to Employee all amounts that will become due during the remainder
of the Employment Period.
<PAGE>
2. TERMS OF EMPLOYMENT.
(a) POSITION AND DUTIES.
(i) During the term of the Employee's employment, the
Employee shall serve as President and Chief Financial Officer of the Company
and, in so doing, shall perform normal duties and responsibilities associated
with such position, subject to the general direction, approval and control of
the Chief Executive Officer of the Company or, if the Company does not have a
Chief Executive Officer, the Chairman of the Board of Directors.
(ii) During the term of the Employee's employment, and
excluding any periods of vacation and other leave to which the Employee is
entitled, the Employee agrees to devote substantially all his business time
to the business and affairs of the Company and to use the Employee's best
efforts to perform faithfully, effectively and efficiently his duties and
responsibilities.
(iii) During the term of the Employee's employment it
shall not be a violation of this Agreement for the Employee to (1) serve on
industry trade, civic or charitable boards or committees, (2) deliver
lectures or fulfill speaking engagements and (3) manage personal investments,
so long as such activities do not interfere with the performance of the
Employee's duties and responsibilities as an employee of the Company.
(iv) Employee agrees to observe and comply with the
Company's rules and policies as adopted by the Company from time to time.
(b) COMPENSATION.
(i) BASE SALARY. During the term of the Employee's
employment, the Employee shall receive an annual base salary ("Annual Base
Salary"), which shall be paid in accordance with the customary payroll
practices of the Company, in an amount equal to $250,000. The Board, in its
discretion, may at any time increase the amount of the Annual Base Salary to
such greater amount as it may deem appropriate, and the term "Annual Base
Salary," as used in this Agreement, shall refer to the Annual Base Salary as
it may be so increased. It is understood that the Company may, at any time,
in the discretion of the Board, increase, but not decrease, the amount of the
Annual Base Salary.
(ii) INCENTIVE BONUS. Employee shall be entitled to
an incentive bonus as set forth on Schedule A hereto.
(iii) INCENTIVE SAVINGS, STOCK OPTION AND RETIREMENT
PLANS. During the term of the Employee's employment the Employee shall be
entitled to
2
<PAGE>
participate in all incentive, savings, stock option and retirement plans,
practices, policies and programs applicable generally to other employees of
the Company ("Investment Plans"), as amended from time to time.
(iv) WELFARE BENEFIT PLANS. During the term of the
Employee's employment, the Employee and/or the Employee's family, as the case
may be, shall be eligible for participation in and shall receive all benefits
under the welfare benefit plans, practices, policies and programs ("Welfare
Plans") provided by the Company (including medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death
and travel accident insurance plans and programs), as amended from time to
time, to the extent applicable generally to other employees of the Company.
(v) PERQUISITES. During the term of the Employee's
employment, the Employee shall be entitled to receive (in addition to the
benefits described above) such perquisites and fringe benefits appertaining
to his position in accordance with any policies, practices and procedures
established by the Board, as amended from time to time.
(vi) EXPENSES. During the term of the Employee's
employment, the Employee shall be entitled to receive prompt reimbursement
for all reasonable employment expenses incurred by the Employee in accordance
with the Company's policies, practices and procedures, as amended from time
to time.
(vii) AUTOMOBILE. The Company recognizes the
Employee's need for an automobile for business purposes. The Company shall
provide the Employee with an automobile allowance of $650 per month plus
reasonable related expenses for maintenance, fuel and insurance.
(viii) VACATION. During the term of the Employee's
employment, the Employee shall be entitled to four (4) weeks paid vacation
each calendar year. Any vacation shall be taken at the reasonable and mutual
convenience of the Company and the Employee. Accrued vacation not taken in
any calendar year will not be carried forward or used in any subsequent
calendar year and the Employee shall not be entitled to receive pay in lieu
of accrued but unused vacation in any calendar year. Vacation will be deemed
to accrue daily for purposes of the payments described in Section 4 hereof.
(ix) STOCK OPTIONS. Upon the effective date of this
Agreement, the Employee will be entitled to the stock options described on
Schedule B hereto.
(c) KEY-MAN INSURANCE. At any time during the Employment
Period, the Company shall have the right to insure the life of the Employee
for the Company's sole benefit, and to determine the amount of insurance and
the type of policy. The Employee shall cooperate with the Company in taking
out such insurance by submitting to physical examinations, by supplying all
information required by the insurance
3
<PAGE>
company, and by executing all necessary documents. The Employee shall incur
no financial obligation by executing any required document, and shall have no
interest in any such policy.
3. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. The Employee's employment shall
terminate automatically upon the Employee's death during the Employment
Period. If the Disability (as defined below) of the Employee has occurred
during the Employment Period, the Company may give to the Employee written
notice in accordance with Section 12(b) of its intention to terminate the
Employee's employment. In such event, the Employee's employment with the
Company shall terminate effective on the 30th day after receipt of such
notice by the Employee (the "Disability Effective Date"), if, within the 30
days after such receipt, the Employee shall not have returned to perform,
with or without reasonable accommodation, the essential functions of his
position. For purposes of this Agreement, "Disability" shall mean the
Employee's inability to perform, with or without reasonable accommodations,
the essential functions of his position hereunder for a period of 120 days,
consecutive or non-consecutive, in any 12-month period due to mental or
physical incapacity, as determined by a physician selected by the Company or
its insurers and acceptable to the Employee or the Employee's legal
representative, such agreement as to acceptability not to be unreasonably
withheld or delayed. Any refusal by Employee to submit to a medical
examination for the purpose of determining Disability under this Section 3(a)
shall be deemed to constitute conclusive evidence of Employee's Disability.
Nothing in this Agreement shall be construed as a waiver of Employee's rights
under the Americans with Disabilities Act or any other applicable law or
statute relating to disabilities or handicaps.
(b) CAUSE OR WITHOUT CAUSE. The Company may terminate the
Employee's employment during the Employment Period for Cause or without
Cause. For purposes of this Agreement, "Cause" shall mean (i) a breach by the
Employee of the Employee's obligations under Section 2(a) (other than as a
result of physical or mental incapacity) which constitutes a continued
material nonperformance by the Employee of his obligations and duties
thereunder, and which is not remedied within 30 days after receipt of written
notice from the Company specifying such breach, (ii) commission by the
Employee of an act of fraud, embezzlement, misappropriation, willful
misconduct or breach of fiduciary duty against the Company; (iii) a material
breach by the Employee of Sections 7, 8, 10 or 11; (iv) the Employee's
conviction, plea of no contest or nolo contendere, or unadjudicated probation
for any felony or crime involving moral turpitude; (v) the failure of the
Employee to carry out, or comply with, in any material respect any lawful and
reasonable directive of the Board consistent with the terms of this
Agreement, which is not remedied within 30 days after receipt of written
notice from the Company specifying such failure; or (vi) the Employee's
unlawful use (including being under the influence) or possession of illegal
drugs on the Company's premises or while performing the Employee's duties and
responsibilities under this Agreement. For purposes of this
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<PAGE>
Agreement, "without Cause" shall mean a termination by the Company of the
Employee's employment during the Employment Period for any reason other than
a termination based upon Cause, death, Disability or upon a Change of
Control, as defined below.
(c) GOOD REASON. The Employee's employment may be
terminated during the Employment Period by the Employee for Good Reason or
without Good Reason; provided, however, that the Employee agrees not to
terminate his employment for Good Reason unless (i) the Employee has given
the Company at least 30 days' prior written notice of his intent to terminate
his employment for Good Reason, which notice shall specify the facts and
circumstances constituting Good Reason, and (ii) the Company has not remedied
such facts and circumstances constituting Good Reason within such 30-day
period. For purposes of this Agreement, "Good Reason" shall mean:
(i) any significant reduction, approved by the Board
without the Employee's consent in the Employee's position, authority, duties
or responsibilities as contemplated in Section 2(a) or any other action by
the Company which results in a material diminution in such position,
authority, duties or responsibilities, excluding for this purpose an
inadvertent action not taken in bad faith and which is remedied by the
Company promptly after receipt of written notice thereof given by the
Employee;
(ii) any termination or material reduction of a
material benefit under any Investment Plan or Welfare Plan in which the
Employee participates unless (A) there is substituted a comparable benefit
that is economically substantially equivalent to the terminated or reduced
benefit prior to such termination or reduction or (B) benefits under such
Investment Plan or Welfare Plan are terminated or reduced with respect to all
employees previously granted benefits thereunder;
(iii) any failure by the Company to comply with any of
the provisions of Section 2(b), other than an inadvertent failure not
occurring in bad faith and which is remedied by the Company promptly after
receipt of written notice thereof given by the Employee; or
(iv) without limiting the generality of the foregoing,
any material breach by the Company or any of its subsidiaries or other
affiliates (as defined below) of (A) this Agreement or (B) any other
agreement between the Employee and the Company or any such subsidiary or
other affiliate.
As used in this Agreement, "affiliate" means, with respect to a
person, any other person controlling, controlled by or under common control
with the first person; the term "control," and correlative terms, means the
power, whether by contract, equity ownership or otherwise, to direct the
policies or management of a person; and "person" means an individual,
partnership, corporation, limited liability company, trust or unincorporated
organization, or a government or agency or political subdivision thereof.
5
<PAGE>
(d) CHANGE OF CONTROL. If a Change of Control (as defined
below) occurs during the Employment Period and the Board determines in good
faith that it is in the Company's best interest to terminate the Employee's
employment with the Company, within one year of such Change of Control the
Company may terminate the Employee's employment by giving the Employee
written notice in accordance with Section 12(b) of its intention to terminate
the Employee's employment. Any such termination by the Company as
contemplated in this Section 3(d) is referred to herein as a termination
"upon a Change of Control."
As used in this Agreement, "Change of Control" means the first
to occur of: (i) any sale, lease, exchange or other transfer of all or
substantially all of the assets of the Company (including capital stock or
assets of operating subsidiaries) to any person or group of persons, (ii) a
majority of the Board of Directors of the Company shall consist of persons
who are not nominated collectively by Ardshiel, Inc. and its affiliates and
GE Investment Private Placement Partners II, a Limited Partnership or (iii)
the acquisition by any person or group (other than Ardshiel, Inc., GE
Investment Private Placement Partners II, a Limited Partnership and their
affiliates) of the power to vote or direct the voting of securities having
more than 50% of the ordinary voting power for the election of directors of
the Company.
(e) NOTICE OF TERMINATION. Any termination by the Company
for Cause or without Cause or upon a Change of Control, or by the Employee
for Good Reason or without Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 12(b).
For purposes of this Agreement, a "Notice of Termination" means a written
notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provision so indicated and
(iii) if the Date of Termination (as defined below) is other than the date of
receipt of such notice, specifies the termination date (which date shall not
be more than 15 days after the giving of such notice). The failure by the
Employee or the Company to set forth in the Notice of Termination any fact or
circumstance which contributes to a showing of Good Reason or Cause or a
termination upon a Change of Control shall not waive any right of the
Employee or the Company hereunder or preclude the Employee or the Company
from asserting such fact or circumstance in enforcing the Employee's or the
Company's rights hereunder.
(f) DATE OF TERMINATION. "Date of Termination" means (i) if
the Employee's employment is terminated by the Company for Cause or upon a
Change of Control, or by the Employee for Good Reason or without Good Reason,
the date of receipt of the Notice of Termination or any later date specified
therein pursuant to Section 3(e), as the case may be, (ii) if the Employee's
employment is terminated by the Company other than for Cause or upon a Change
of Control, the date on which the Company notifies the Employee of such
termination and (iii) if the Employee's
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<PAGE>
employment is terminated by reason of death or Disability, the date of death
of the Employee or the Disability Effective Date, as the case may be.
4. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) FOR CAUSE; WITHOUT GOOD REASON; OTHER THAN FOR DEATH,
DISABILITY OR UPON A CHANGE OF CONTROL. If, during the Employment Period,
the Company shall terminate the Employee's employment for Cause or the
Employee shall terminate his employment without Good Reason, and the
termination of the Employee's employment in any case is not due to his death
or Disability or upon a Change of Control, the Employee shall forfeit all
rights to the Incentive Bonus otherwise due to him or to which he may be
entitled, all unexercised stock options held by Employee shall lapse and
expire, and the Company shall have no further payment obligations to the
Employee or his legal representatives, other than for the payment of: (i) in
a lump sum in cash within ten (10) days after the Date of Termination the sum
of the Employee's Annual Base Salary through the Date of Termination to the
extent not theretofore paid, any compensation previously deferred by the
Employee (together with any accrued interest or earnings thereon) and any
accrued vacation pay (collectively, the "Accrued Obligations"); and (ii) any
amount arising from the Employee's participation in, or benefits under, any
Investment Plans (the "Accrued Investments"), which amounts shall be payable
in accordance with the terms and conditions of such Investment Plans.
(b) DEATH. If the Employee's employment is terminated by
reason of the Employee's death during the Employment Period, all unexercised
stock options held by Employee shall immediately vest (in his legal
representatives) and become exercisable and the Company shall have no further
payment obligations to the Employee or his legal representatives, other than
for payment of: (i) in a lump sum in cash within ten (10) days after the Date
of Termination the Accrued Obligations; (ii) the Accrued Investments, which
shall be payable in accordance with the terms and conditions of the
Investment Plans; and (iii) the Incentive Bonus prorated from the first day
of the Company's then current fiscal year to the Date of Termination (the
"Prorated Incentive Bonus"), payable following calculation of the Incentive
Bonus in accordance with Section 2(b)(ii) hereof.
(c) DISABILITY. If the Employee's employment is terminated
by reason of the Employee's Disability during the Employment Period, all
unexercised stock options held by Employee shall immediately vest and become
exercisable and the Company shall have no further payment obligations to the
Employee or his legal representatives, other than for payment of: (i) in a
lump sum in cash within ten (10) days after the Date of Termination the
Accrued Obligations; (ii) the Accrued Investments, which shall be payable in
accordance with the terms and conditions of the Investment Plans; and (iii)
the Prorated Incentive Bonus, payable following calculation of the Incentive
Bonus in accordance with Section 2(b)(ii) hereof.
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(d) WITHOUT CAUSE OR FOR GOOD REASON. If the Employee's
employment is terminated by the Company without Cause or by the Employee for
Good Reason, all, unvested stock options held by Employee (the "Unvested
Options") shall immediately vest and become exercisable for a period of
thirty (30) days from the Date of Termination (the "Exercise Period") and the
Company shall have no further payment obligations to the Employee or his
legal representatives, other than for: (i) payment of, in a lump sum in cash
within ten (10) days after the Date of Termination, the Accrued Obligations;
(ii) payment of the Accrued Investments, which, except with respect to the
Unvested Options, shall be payable in accordance with the terms and
conditions of the Investment Plans; (iii) payment of the Prorated Incentive
Bonus, payable following calculation of the Incentive Bonus in accordance
with Section 2(b)(ii) hereof; and (iv) payment for each month during a period
of 24 months following the Date of Termination (the "Severance Period") of
one-twelfth of the sum of the Employee's Annual Base Salary on the Date of
Termination and 80% of the Incentive Bonus, in accordance with the customary
payroll practices of the Company. All Unvested Options which remain
unexercised at the end of the Exercise Period shall lapse and expire.
(e) CHANGE OF CONTROL. If the Employee's employment is
terminated upon a Change of Control as contemplated in Section 3(d), all
unexercised stock options held by Employee shall immediately vest and become
exercisable and the Company shall have no further payment obligations to the
Employee or his legal representatives, other than for (i) payment of, in a
lump sum in cash within ten (10) days after the Date of Termination, the
Accrued Obligations; (ii) payment of the Accrued Investments, which shall be
payable in accordance with the terms and conditions of the Investment Plans;
(iii) payment of the Prorated Incentive Bonus; and (iv) payment for each
month during the Severance Period of one-twelfth of the sum of the Employee's
Annual Base Salary on the Date of Termination and 80% of the Incentive Bonus,
in accordance with the customary payroll practices of the Company.
5. RETENTION BONUS. Following a "Change of Control," as
contemplated in Section 3(d), if the Employee is employed by the Company on
the 12-month anniversary of the Change of Control, the Company shall pay the
Employee a retention bonus in the amount of $250,000. Nothing in this
Section 5 shall be deemed to give the Employee the right to be retained in
the employ of the Company or to restrict the right of the Company to
terminate the Employee at any time and for any reason, without Cause or for
Cause or upon a Change of Control. Nothing in this Section 5 shall be deemed
to give the Company the right to require the Employee to remain in the employ
of the Company or to restrict the Employee's right to terminate his
employment at any time and for any reason, without Good Reason or for Good
Reason.
6. FULL SETTLEMENT; MITIGATION. In no event shall the Employee be
obligated to seek other employment or take any other action by way of
mitigation of the amounts payable to the Employee under any of the provisions
of this Agreement and such amounts shall not be reduced whether or not the
Employee obtains other employment. Neither the
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Employee nor the Company shall be liable to the other party for any damages
in addition to the amounts payable under Section 4 arising out of the
termination of the Employee's employment prior to the end of the Employment
Period; provided, however, that the Company shall be entitled to seek damages
from the Employee for any breach of Sections 7, 8, 9, 10, or 11 by the
Employee and either party shall be entitled to seek damages for criminal
misconduct.
7. CONFIDENTIAL INFORMATION.
(a) The Employee acknowledges that the Company and its
affiliates have trade, business and financial secrets and other confidential
and proprietary information (collectively, the "Confidential Information").
"Confidential Information" includes sales materials, technical information,
processes and compilations of information, records, specifications and
information concerning customers or vendors, manuals relating to suppliers'
products, customer lists, information regarding methods of doing business,
and the identity of suppliers. "Confidential Information" shall not include
(i) information that is generally known to other persons or entities who can
obtain economic value from its disclosure or use and (ii) information
required to be disclosed by the Employee pursuant to a subpoena or court
order, or pursuant to a requirement of a governmental agency or law of the
United States of America or a state thereof or any governmental or political
subdivision; PROVIDED, HOWEVER, that the Employee shall take all reasonable
steps to prohibit disclosure pursuant to subsection (ii) above.
(b) During and following the Employee's employment by the
Company, the Employee shall hold in confidence and not directly or indirectly
disclose or use or copy or make lists of any Confidential Information or
proprietary data of the Company or its affiliates except to the extent
authorized in writing by the Board or required by any court or administrative
agency, other than to an employee of the Company or its affiliates or a
person to whom disclosure is reasonably necessary or appropriate in
connection with the performance by the Employee of his duties as an employee
of the Company.
(c) The Employee further agrees not to use any Confidential
Information for the benefit of any person or entity other than the Company or
its affiliates.
(d) As used in this Section 7, "Company" shall include D and
W Holdings, Inc. and any of its direct or indirect subsidiaries.
8. RESPONSIBILITIES UPON TERMINATION. Upon the termination of his
employment by the Company for whatever reason and irrespective of whether or
not such termination is voluntary on his part:
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(a) The Employee shall advise the Company of the identity of
his new employer within ten (10) days after accepting new employment and
further agrees to keep the Company so advised of any change in employment
during the term of Non-Competition set forth in Section 10 hereof;
(b) The Company in its sole discretion may notify any new
employer of the Employee that he has an obligation not to compete with the
Company during such term;
(c) The Employee shall deliver to the Company any and all
records, forms, contracts, memoranda, work papers, customer data and any
other documents which have come into his possession by reason of his
employment with the Company (including D&W Holdings, Inc. and its direct and
indirect subsidiaries), irrespective of whether or not any of said documents
were prepared for him, and he shall not retain memoranda in respect of or
copies of any of said documents; and
(d) The Employee shall participate in an exit interview with
the Company.
9. SUCCESSORS. The Company may assign its rights and obligations
under this Agreement to any successor to all or substantially all the assets
of the Company, by merger or otherwise, subject, however, to the Employee's
right to terminate this Agreement for Good Reason as provided in Section
3(c), and may assign or encumber this Agreement and its rights hereunder as
security for indebtedness of the Company and its affiliates. All
representations, warranties, covenants, terms, conditions and provisions of
this Agreement shall be binding upon and inure to the benefit of, and be
enforceable by the respective heirs, legal representatives, successors and
permitted assigns of the Company and Employee. Neither this Agreement nor
any rights, interests or obligations hereunder may be assigned by the
Employee without the prior written consent of the Company.
10. NON-COMPETITION.
(a) The term of Non-Competition (herein so called) shall be
for a term beginning on the effective date hereof and continuing until (i)
the first anniversary of the Date of Termination if the Employee's employment
is terminated by the Company for Cause or due to Disability or by the
Employee without Good Reason, or (ii) the last day of the Severance Period if
the Employee's employment is terminated by the Company without Cause (and not
due to Disability) or upon a Change of Control or by the Employee for Good
Reason.
(b) During the term of Non-Competition, the Employee shall
not (other than for the benefit of the Company or its affiliates pursuant to
this Agreement) directly or indirectly, render services to, assist,
participate in the affairs of, or otherwise
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<PAGE>
be connected with, any person or enterprise (other than the Company), which
person or enterprise is engaged in, or is planning to engage in, and shall
not personally engage in, any business that is in any respect competitive
with the business of the Company, with respect to any products of the Company
that were within the Employee's management responsibility at any time within
the twelve-month period immediately prior to the termination of the
Employee's employment with the Company, in any capacity which would (i)
utilize the Employee's services with respect to such business within any
state of the United States, or any substantially comparable political
subdivision of any other country, wherein the Company sold or actively
attempted to sell, such products within the twelve-month period immediately
prior to the termination of the Employee's employment with the Company; or
(ii) utilize the Employee's services in selling any products similar to such
products of the Company to any person or entity to which the Company sold or
actively attempted to sell such products within the twelve-month period
immediately prior to the termination of the Employee's employment with the
Company (a "Competing Business"). Notwithstanding the foregoing, the Company
agrees that the Employee may own less than five percent of the outstanding
voting securities of any publicly traded company that is a Competing Business
so long as the Employee does not otherwise participate in such Competing
Business in any way prohibited by the preceding clause.
(c) During the term of Non-Competition, Employee will not,
and will not permit any of his affiliates to, directly or indirectly, recruit
or otherwise solicit or induce any employee, customer, subscriber or supplier
of the Company to terminate its employment or arrangement with the Company,
otherwise change its relationship with the Company or establish any
relationship with the Employee or any of his affiliates for any business
purpose deemed competitive with the business of the Company.
(d) The Employee acknowledges that the geographic
boundaries, scope of prohibited activities, and time duration of the
preceding paragraphs are reasonable in nature and are no broader than are
necessary to maintain the goodwill of the Company and its affiliates and the
confidentiality of their Confidential Information, and to protect the other
legitimate business interests of the Company and its affiliates.
(e) If any court determines that any portion of this Section
10 is invalid or unenforceable, the remainder of this Section 10 shall not
thereby be affected and shall be given full effect without regard to the
invalid provisions. If any court construes any of the provisions of this
Section 10, or any part thereof, to be unreasonable because of the duration
or scope of such provision, such court shall have the power to reduce the
duration or scope of such provision and to enforce such provision as so
reduced.
(f) As used in this Section 10, "Company" shall include D
and W Holdings, Inc. and any of its direct or indirect subsidiaries.
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11. INVENTIONS; ASSIGNMENT. All rights to discoveries, inventions,
improvements and innovations (including all data and records pertaining
thereto) related to the Company's business, whether or not patentable,
copyrightable, registrable as a trademark, or reduced to writing, that the
Employee may discover, invent or originate during the Employment Period, and
for a period of twelve (12) months thereafter, either alone or with others
and whether or not during working hours or by the use of the facilities of
the Company ("Inventions"), shall be the exclusive property of the Company.
The Employee shall promptly disclose all Inventions to the Company, shall
execute at the request of the Company any assignments or other documents the
Company may deem necessary to protect or perfect its rights therein, and
shall assist the Company, at the Company's expense, in obtaining, defending
and enforcing the Company's rights therein. The Employee hereby appoints the
Company as his attorney-in-fact to execute on his behalf any assignments or
other documents deemed necessary by the Company to protect or perfect its
rights to any Inventions.
12. MISCELLANEOUS.
(a) CONSTRUCTION. This Agreement shall be deemed drafted
equally by both the parties. Its language shall be construed as a whole and
according to its fair meaning. Any presumption or principle that the
language is to be construed against any party shall not apply. The headings
in this Agreement are only for convenience and are not intended to affect
construction or interpretation. Any references to paragraphs, subparagraphs,
sections or subsections are to those parts of this Agreement, unless the
context clearly indicates to the contrary. Also, unless the context clearly
indicates to the contrary, (a) the plural includes the singular and the
singular includes the plural; (b) "and" and "or" are each used both
conjunctively and disjunctively; (c) "any," "all," "each," or "every" means
"any and all," and "each and every"; (d) "includes" and "including" are each
"without limitation"; (e) "herein," "hereof," "hereunder" and other similar
compounds of the word "here" refer to the entire Agreement and not to any
particular paragraph, subparagraph, section or subsection; and (f) all
pronouns and any variations thereof shall be deemed to refer to the
masculine, feminine, neuter, singular or plural as the identity of the
entities or persons referred to may require.
(b) NOTICES. All notices and other communications hereunder
shall be in writing and shall be given by hand delivery to the other party or
by registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Employee: Jeff L. Hull
941 Gibbs Crossing
Coppell, Texas 75019
Fax: (972) 304-5238
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If to the Company: D and W Holdings, Inc.
c/o Ardshiel, Inc.
230 Park Avenue, Suite 2527
New York, New York 10169
Attention: Daniel T. Morley
Fax: (212) 972-1809
with a copy to:
Joel M. Simon
Marie Censoplano
Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue, 31st Floor
New York, New York 10022-4697
Fax: (212) 319-4090
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) ENFORCEMENT. If any provision of this Agreement is held
to be illegal, invalid or unenforceable under present or future laws
effective during the term of this Agreement, such provision shall be fully
severable; this Agreement shall be construed and enforced as if such illegal,
invalid or unenforceable provision had never comprised a portion of this
Agreement; and the remaining provisions of this Agreement shall remain in
full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance from this Agreement.
Furthermore, in lieu of such illegal, invalid or unenforceable provision
there shall be added automatically as part of this Agreement a provision as
similar in terms to such illegal, invalid or unenforceable provision as may
be possible and be legal, valid and enforceable.
(d) WITHHOLDING. The Company shall be entitled to withhold
from any amounts payable under this Agreement any federal, state, local or
foreign withholding or other taxes or charges which it is from time to time
required to withhold. The Company shall be entitled to rely on an opinion of
counsel if any questions as to the amount or requirement of such withholding
shall arise.
(e) NO WAIVER. No waiver by either party at any time of any
breach by the other party of, or compliance with, any condition or provision
of this Agreement to be performed by the other party shall be deemed a waiver
of similar or dissimilar provisions or conditions at any time.
(f) EQUITABLE RELIEF. The Employee acknowledges that money
damages would be both incalculable and an insufficient remedy for a breach of
Section 7,
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8, 9, 10 or 11 by the Employee and that any such breach would cause the
Company irreparable harm. Accordingly, the Company, in addition to any other
remedies at law or in equity it may have, shall be entitled, without the
requirement of posting of bond or other security, to equitable relief,
including injunctive relief and specific performance, in connection with a
breach of Section 7, 8, 9, 10 or 11 by the Employee.
(g) COMPLETE AGREEMENT. The provisions of this Agreement
constitute the entire and complete understanding and agreement between the
parties with respect to the subject matter hereof, and supersedes all prior
and contemporaneous oral and written agreements, representations and
understandings between the Employee and the Company, or its affiliates and
subsidiaries, which are hereby terminated. Other than expressly set forth
herein, the Employee and the Company acknowledge and represent that there are
no other promises, terms, conditions or representations (oral or written)
regarding any matter relevant hereto. This Agreement may be executed in two
or more counterparts.
(h) MEDIATION; ARBITRATION. (i) The Company and the
Employee shall mediate any claim or controversy arising out of or relating to
this Agreement or any breach thereof if either of them requests mediation and
gives written notice to the other (the "Mediation Notice"). Any notice given
pursuant to the preceding sentence shall include a brief statement of the
claim or controversy. If the Company and the Employee do not resolve the
claim or controversy within five (5) days after the date of the Mediation
Notice, the Company and the Employee shall then use reasonable efforts to
agree upon an independent mediator. If the Company and the Employee do not
agree upon an independent mediator within ten (10) days after the date of the
Mediation Notice, either party may request that JAMS/Endispute ("JAMS"), or a
similar mediation service of a similar national scope if JAMS no longer then
exists, appoint an independent mediator. The Company and the Employee shall
share the costs of mediation equally and shall pay such costs in advance upon
the request of the mediator or any party. Within ten (10) days after
selection of the mediator, the mediator shall set the mediation. If the
Company and the Employee do not resolve the dispute within thirty (30) days
after the date of the Mediation Notice, the dispute shall be decided by
arbitration as set forth below.
(ii) Any claim or controversy arising out of or
relating to this Agreement or any breach thereof shall be settled by
arbitration if such claim or controversy is not settled pursuant to mediation
as set forth above. The venue for any such arbitration shall be Dallas,
Texas, or such other location as the parties may mutually agree. Except as
expressly set forth herein, all arbitration proceedings under this Section
12(h)(ii) shall be undertaken in accordance with the Commercial Arbitration
Rules of the American Arbitration Association (the "AAA") then in force.
Only individuals who are (i) lawyers engaged full-time in the practice of law
and (ii) on the AAA register of arbitrators shall be selected as an
arbitrator. There shall be one arbitrator who shall be chosen in accordance
with the rules of the AAA. Within twenty (20) days of the
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<PAGE>
conclusion of the arbitration hearing, the arbitrator shall prepare written
findings of fact and conclusions of law. Judgment on the written award may
be entered and enforced in any court of competent jurisdiction. It is
mutually agreed that the written decision of the arbitrator shall be valid,
binding, final and non-appealable; provided however, that the parties hereto
agree that the arbitrator shall not be empowered to award punitive damages
against any party to such arbitration. The arbitrator shall require the
non-prevailing party to pay the arbitrator's full fees and expenses or, if in
the arbitrator's opinion there is no prevailing party, the arbitrator's fees
and expenses will be borne equally by the parties thereto. In the event
action is brought to enforce the provisions of this Agreement pursuant to
this Section 12(h)(ii), the non-prevailing parties shall be required to pay
the reasonable attorneys' fees and expenses of the prevailing parties, except
that if in the opinion of the court or arbitrator deciding such action there
is no prevailing party, each party shall pay its own attorneys' fees and
expenses.
(i) SURVIVAL. Sections 4, 6, 7, 8, 9, 10, 11, and 12 of
this Agreement shall survive the termination of this Agreement.
(j) CHOICE OF LAW. This Agreement and the rights and
obligations hereunder shall be governed by and construed in accordance with
the laws of the State of Texas without reference to principles of conflicts
of law of Texas or any other jurisdiction, and, where applicable, the laws of
the United States.
(k) AMENDMENT. This Agreement may not be amended or
modified at any time except by a written instrument approved by the Board and
executed by the Company and the Employee.
(l) EMPLOYEE ACKNOWLEDGMENT. Employee acknowledges that he
has read and understands this Agreement, is fully aware of its legal effect,
has not acted in reliance upon any representations or promises made by the
Company other than those contained in writing herein, and has entered into
this Agreement freely based on his own judgment.
(m) TERMINATION OF ORIGINAL EMPLOYMENT AGREEMENT. Effective
upon the execution of this Agreement, the Original Employment Agreement shall
automatically be terminated and of no further force or effect and Employee's
employment by the Company and its subsidiaries shall solely be governed by
this Agreement.
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IN WITNESS WHEREOF, the Employee has hereunto set the Employee's hand
and, pursuant to the authorization from the Board, the Company has caused
this Agreement to be executed in its name on its behalf, as of the 2nd day of
October, 1999.
EMPLOYEE
_____________________________________
D AND W HOLDINGS, INC.
By: ________________________________
Name: _______________________________
Title:_______________________________
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SCHEDULE A
TO HULL EMPLOYMENT AGREEMENT
Employee shall be entitled to a target bonus in the amount of $150,000
per annum (the "Incentive Bonus").
50% of the Employee's Incentive Bonus ("EBITDA Bonus") shall be
payable based upon achievement of the following targets:
(i) If the Company achieves 80% of its budgeted EBITDA, the Employee
shall receive 50% of the EBITDA Bonus.
(ii) If the Company achieves 90% of its budgeted EBITDA, the Employee
shall receive 75% of the EBITDA Bonus.
(iii) If the Company achieves 100% of its budgeted EBITDA, the Employee
shall receive 100% of the EBITDA Bonus.
(iv) If the Company achieves 110% of its budgeted EBITDA, the Employee
shall receive 125% of the EBITDA Bonus.
(v) The EBITDA Bonus will be paid on a sliding scale on a pro rated
basis. For example, if 95% of budgeted EBITDA is achieved, the Employee is
entitled to 87.5% of the EBITDA Bonus. No EBITDA Bonus will be paid if the
Company achieves less than 80% of the budgeted EBITDA and in no event will
the Company pay in excess of 125% of the EBITDA Bonus.
(vi) For purposes of the EBITDA Bonus, EBITDA shall be defined as
earnings from operations before interest, taxes, depreciation, amortization
and extraordinary gains or losses of the Company and all of its subsidiaries
on a consolidated basis. Budgeted EBITDA shall be such amount as is set by
the Board of Directors annually as adjusted from time to time to reflect
acquisitions by the Company or its subsidiaries.
35% of the Employee's Incentive Bonus shall be payable based upon
achievement of the following targets:
(i) If the Company meets the performance targets set by the Board
of Directors with respect to Bad Debts/Collections, then the Employee shall
be entitled to receive 10% of the Incentive Bonus.
(ii) If the Company meets the performance targets set by the Board of
Directors with respect to Accounts Receivable Days, then the Employee shall be
entitled to receive 15% of the Incentive Bonus.
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(iii) If the Company meets its performance targets with respect to
Month End Closing, then the Employee shall be entitled to receive 10% of the
Incentive Bonus.
(iv) The above-stated percentages of Incentive Bonus shall not be
paid on a sliding scale or pro rated basis. Achievement of the performance
targets set by the Board of Directors shall be determined by the Board of
Directors in its sole discretion. The above-described performance targets
shall be set from time to time by the Board of Directors in its sole
discretion.
The remaining 15% of the Employee's Incentive Bonus shall be based
upon the achievement of management objectives to be set from year to year by
the Board of Directors.
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SCHEDULE B
Stock Options:
1) Effective as of October 2, 1998, the Employee has been granted options
to purchase 1,183,842 shares of common stock (the Common Stock") of the
Company pursuant to the D and W Holdings, Inc. 1998 Stock Option Plan (the
"Plan") and options to purchase 125,000 shares of Common Stock pursuant to
the D and W Holdings, Inc. 1998 Replacement Plan (the "Replacement Plan").
Notwithstanding the terms of the Plan, the Replacement Plan or any stock
option agreement entered into thereunder by the Company and the Employee (the
"Option Documents"), the vesting schedule for such options is hereby amended
to provide that all such options that are unvested as of October 2, 1999
shall vest in daily increments from October 2, 1999 until October 2, 2002.
2) Effective as of July 1, 1999, the Employee has been granted options to
purchase 200,000 shares of Common Stock at an exercise price of $1.10 per
share. Notwithstanding the terms of the Option Documents, all such options
that are unvested as of July 1, 1999 shall vest in daily increments from July
1, 1999 until July 1, 2002.
3) Effective as of October 1, 1999, the Employee has been granted options
to purchase 75,000 shares of Common Stock at an exercise price of $.01 per
share and options to purchase 150,000 shares of Common Stock at an exercise
price of $1.25 per share. Notwithstanding the terms of the Option Documents,
all such options that are unvested as of the date hereof shall vest in daily
increments from October 1, 1999 until October 1, 2002.
4) Notwithstanding the terms of the Option Documents, in the event the
Company repurchases the stock options described in paragraphs 1, 2 and 3 of
this Schedule B (the "Options") upon the termination of the Employee's
employment by the Company without Cause or by the Employee for Good Reason
(but not in the event of termination of the Employee's employment upon a
Change of Control), the repurchase price for the Options shall not be less
than $1.25 per share (or $1.10 per share, if the Company shall not have
completed the acquisition of certain assets of The Ellison Company, Inc. (the
"Acquisition")), provided that the EBITDA for the Company for the most recent
twelve months is not less than $75 million (or $58 million, if the Company
shall not have completed the Acquisition).
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WARRANT PURCHASE AGREEMENT
Randall S. Fojtasek (hereinafter "Executive"), D and W Holdings, Inc.
(the "Company"), Ardshiel, Inc. ("Ardshiel"), GE Investment Management
Incorporated ("GEIM") and GE Investment Private Placement Partners II, a
Limited Partnership ("GEIPPII") hereby enter into this Agreement
(hereinafter the "Agreement") on June __, 1999. In exchange for the
consideration listed below, Executive promises to comply fully with the terms
of this Agreement. In exchange for Executive's promise, the Company agrees
to provide Executive with the consideration listed below.
1. PURCHASE OF WARRANTS. The Executive hereby conveys to the Company,
free and clear of all options, liens, claims, restrictions and encumbrances
(collectively, "Liens"), all of his right, title and interest in (i) the
Warrant (the "Executive Warrant"), dated as of October 2, 1998, to purchase
4,735,369 shares of common stock, par value $.01 per share, of the Company
(the "Common Stock") and (ii) the Warrant (the "Exchange Warrant"), dated as
of October 2, 1998, to purchase 1,000,000 shares of the Common Stock, for an
aggregate purchase price (the "Purchase Price") equal to $3,802,808.79. The
Executive acknowledges that receipt by the Executive of the Purchase Price
hereunder is in full satisfaction of the Executive's rights under the
Executive Warrant and the Exchange Warrant.
2. REPRESENTATIONS AND WARRANTIES OF THE EXECUTIVE. The Executive
represents and warrants to each of the other parties hereto that (a) the
Executive has the
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requisite authority to execute, deliver and perform this Agreement and to
consummate the transactions contemplated hereby; (b) the Executive has good,
valid and marketable title to the Executive Warrant and the Exchange Warrant
and the Executive Warrant and the Exchange Warrant are owned by the
Executive free and clear of any and all Liens; and (c) upon delivery to the
Company of the Executive Warrant and the Exchange Warrant and accompanying
instruments of transfer against payment therefor, as set forth herein, the
Company will acquire good, valid and marketable title to the Executive
Warrant and Exchange Warrant, free and clear of any and all Liens.
3. AGREEMENT AND RELEASE. The parties hereto agree that the
provisions of Section 11 and the last sentence of the section entitled "End
of Employment Payment" in Attachment A of that certain Agreement and Release
(the "Agreement and Release") dated as of April __, 1999, by and among the
Executive, the Company, Ardsheil, GEIM and GEIPPPII are hereby terminated and
of no further force and effect; PROVIDED, HOWEVER, that all other provisions
of the Agreement and Release shall continue to be in full force and effect.
4. STOCKHOLDERS AGREEMENT. The Executive hereby acknowledges that all
rights of the Executive under that certain Stockholders Agreement dated as of
October 2, 1998 by and among the Company and the stockholders of the Company
signatory thereto are terminated.
2
<PAGE>
5. COMPANY REPRESENTATIONS. The Company represents and warrants that,
as of the date hereof, it (i) is not a party to any confidentiality agreement
relating to the sale of the Company, (ii) has not engaged any financial
advisor in connection with the sale of the Company, and (iii) has no
outstanding written offers to purchase the Company from third parties.
6. ACKNOWLEDGMENT. The Executive acknowledges that he has received
any and all information from the Company or other sources necessary to make
the decision to sell the Executive Warrant and the Exchange Warrant to the
Company and has consulted counsel to the extent the Executive deems necessary.
7. WAIVER. The waiver by any party of a breach of any provision
herein shall not operate or be construed as a waiver of any subsequent breach
by any party.
8. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of Executive, his heirs, beneficiaries, successors and assigns, and
the Company, Ardshiel, GEIM, GEIPPII and their respective successors,
employees, officers, directors, agents and representatives in their capacity
as such.
9. COMPLETE AGREEMENT. This Agreement and the Agreement and Release
sets forth the entire agreement between Executive, the Company, Ardshiel,
GEIM and GEIPPII and may not be modified, altered, changed or terminated
except upon the express prior written consent of Executive, the Company,
Ardshiel, GEIM and GEIPPII.
3
<PAGE>
10. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Texas, without giving effect to its conflict of law rules.
11. MISCELLANEOUS. (a) Whenever the terms "hereof", "hereby",
"herein", or words of similar import are used in this Agreement they shall be
construed as referring to this Agreement in its entirety rather than to a
particular section or provision, unless the context specifically indicates to
the contrary. Any reference to a particular "paragraph" or "section" shall
be construed as referring to the indicated paragraph or section of this
Agreement unless the context specifically indicates to the contrary. The use
of the term "including" herein shall be construed as meaning "including
without limitation."
12. HEADINGS. The headings herein contained are for reference only and
shall not affect the meaning or interpretation of any provision of this
Agreement.
13. NOTICES. All notices and other communications hereunder shall be
in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as provided in the Agreement and Release.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
______________________________ _____________________________
Randall S. Fojtasek
Name: _______________________
Title: ______________________
For D and W Holdings, Inc.
_____________________________
Name: _______________________
Title: ______________________
For Ardshiel, Inc.
_____________________________
Name: _______________________
Title: ______________________
For GE Investment Management
Incorporated
_____________________________
Name: _______________________
Title: ______________________
For GE Investment Private
Placement Partners II, a
Limited Partnership
5
<PAGE>
Exhibit 21.1
SUBSIDIARIES
- - Atrium Door and Window Company - West Coast
- - Atrium Door and Window Company of the Northeast
- - Atrium Door and Window Company of New York
- - Atrium Door and Window Company of Arizona
- - Atrium Door and Window Company of New England
- - Door Holdings, Inc.
- - R.G. Darby Company, Inc
- - Total Trim, Inc.
- - Wing Industries Holdings, Inc.
- - Wing Industries, Inc.
- - R.G. Darby Company - South
- - Total Trim, Inc. - South
- - Heat, Inc.
- - H.I.G. Vinyl, Inc.
- - Champagne Industries, Inc.
- - Thermal Industries, Inc.
- - Best Built, Inc.
<PAGE>
Exhibit 24.1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Atrium
Companies, Inc. has duly caused this Annual Report on Form 10-K for the year
ended December 31, 1999 to be signed by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas on the 30th day of March
2000.
ATRIUM COMPANIES, INC.
By: /s/ Jeff L. Hull
---------------------------------
Name: Jeff L. Hull
Title: President, Chief Financial
Officer and Treasurer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned hereby
constitutes and appoints Jeff L. Hull, the true and lawful attorney-in-fact,
with full power of substitution and resubstitution, to sign on behalf of
Atrium Companies, Inc., a Delaware corporation (the "Company"), and on behalf
of the undersigned in my capacity as an officer and/or a director of the
Company, the Company's Annual Report on Form 10-K for the year ended December
31, 1999, and to sign any or all amendments thereto, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934, as amended, and the regulations promulgated thereunder, granting
unto said attorney-in-fact, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises in order to effectuate the same as fully to all intents and purposes
as the undersigned may or could in person, hereby ratifying and confirming
all that said attorney-in-fact or substitute, may lawfully do or cause to be
done by virtue hereof. IN WITNESS WHEREOF, I have executed this Power of
Attorney effective as of March 30, 2000.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Jeff L. Hull President, Chief Financial Officer,
- ------------------- Treasurer and Director (Principal March 30, 2000
Jeff L. Hull Executive Officer and Principal
Financial Officer)
/s/ Eric W. Long Vice President, Corporate Controller
- ------------------- and Secretary (Principal Accounting March 30, 2000
Eric W. Long Officer
/s/ R.L. Gilmer Executive Vice President, Chief
- ------------------- Operating Officer and Director March 30, 2000
R.L. Gilmer
/s/ Daniel T. Morley
- ------------------- Director March 30, 2000
Daniel T. Morley
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Roger A. Knight
- ------------------- Director March 30, 2000
Roger A. Knight
/s/ James G. Turner
- ------------------- Director March 30, 2000
James G. Turner
/s/ Andreas Hildbrand
- ------------------- Director March 30, 2000
Andreas Hildebrand
/s/ John C. Deterding
- ------------------- Director March 30, 2000
John C. Deterding
/s/ Nimrod Natan
- ------------------- Director March 30, 2000
Nimrod Natan
</TABLE>
II-8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,163
<SECURITIES> 111
<RECEIVABLES> 60,883
<ALLOWANCES> 1,670
<INVENTORY> 61,277
<CURRENT-ASSETS> 137,564
<PP&E> 45,749
<DEPRECIATION> 10,584
<TOTAL-ASSETS> 484,136
<CURRENT-LIABILITIES> 54,089
<BONDS> 314,414
0
0
<COMMON> 0
<OTHER-SE> 110,020
<TOTAL-LIABILITY-AND-EQUITY> 484,136
<SALES> 498,456
<TOTAL-REVENUES> 498,456
<CGS> 340,909
<TOTAL-COSTS> 340,909
<OTHER-EXPENSES> (283)
<LOSS-PROVISION> 1,123
<INTEREST-EXPENSE> 28,524
<INCOME-PRETAX> 10,795
<INCOME-TAX> 6,641
<INCOME-CONTINUING> 39,036
<DISCONTINUED> 0
<EXTRAORDINARY> 1,936
<CHANGES> 0
<NET-INCOME> 2,218
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
