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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): OCTOBER 2, 1998
------------------------
ATRIUM COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 333-20095 75-2642488
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification
Number)
1341 W. MOCKINGBIRD LANE 75247
SUITE 1200W (Zip code)
DALLAS, TEXAS
(Address of principal
executive offices)
Registrant's telephone number, including area code: (214) 630-5757
N/A
(former address if changed since last report)
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INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 1. CHANGE IN CONTROL OF REGISTRANT AND ITEM 2. ACQUISITION OF ASSETS
On August 3, 1998, D and W Holdings, Inc. ("Holdings"), a Delaware
corporation, entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Atrium Corporation ("Atrium Corp."), D and W Acquisition Corp.
("Merger Sub") and the securityholders listed therein, to acquire all of the
outstanding capital stock of Atrium Corp. through a series of transactions (the
"Transactions") described below. Atrium Corp., owns 100% of the outstanding
capital stock of Atrium Companies, Inc. (the "Registrant" or "Atrium"). GE
Investment Private Placement Partners II, a Limited Partnership ("GEIPPPII") and
Ardatrium L.L.C. ("Ardatrium") formed Holdings by acquiring all of its
outstanding common stock for an aggregate purchase price of $50.0 million (the
"Merger Sub Contribution"). 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 Atrium Corp. by Holdings was effected through a merger on
October 2, 1998 of Merger Sub, a wholly owned subsidiary of Holdings, with and
into Atrium Corp. (the "Merger") pursuant to the terms of the Merger Agreement.
Prior to the Merger, Holdings formed Merger Sub as a wholly owned subsidiary and
contributed the Merger Sub Contribution in exchange for all of Merger Sub's
outstanding common stock. As a result of the Merger, Atrium Corp. became a
direct wholly owned subsidiary of Holdings, and the Registrant became an
indirect wholly owned subsidiary of Holdings. Upon completion of the
Transactions, GEIPPPII and Ardshiel and its affiliates beneficially own
approximately 97.0% of the outstanding common stock of Holdings. Prior to the
consummation of the Transactions, Atrium Corp. and the Registrant were
controlled by affiliates of Hicks, Muse, Tate & Furst Incorporated.
Pursuant to the terms of the Merger Agreement, substantially all of the
outstanding equity securities of Atrium Corp. were converted into the right to
receive the merger consideration of $97.2 million (the "Merger Consideration")
in cash. The Merger Considerations was derived by reducing the Atrium Corp.
purchase price of $225.0 million by transaction costs of $2.4 million, assumed
indebtedness of $122.7 million and $2.7 million of equity securities of Atrium
Corp., owned by certain members of management of Atrium Corp., which were
converted into comparable equity securities of Holdings. The Merger
Consideration was funded with (i) $50.0 million in cash comprising the Merger
Sub Contribution that became an asset of Atrium Corp. in the Merger, (ii) $20.0
million in cash proceeds from the issuance of Senior Discount Debentures due
2010 by Atrium Corp. to GEIPPPII and Ardatrium (the "Discount Debentures"),
(iii) $24.0 million in cash proceeds from a loan from the Registrant (the
"Intercompany Loan") which was funded by a portion of the proceeds of a term
loan to the Registrant under the Credit Facility (as defined below), (iv) $3.0
million of expenses paid by the Registrant on behalf of Atrium Corp.'s selling
shareholders and (v) $0.2 million in cash proceeds from the issuance of common
stock of Holdings to certain members of management of Atrium followed by a
capital contribution of such proceeds by Holdings to Atrium Corp.
Prior to the Merger, GEIPPPII, Ardshiel and certain other stockholders held
investments in debt and equity securities of Wing Industries Holdings, Inc.
("Wing Holdings", and together with its subsidiary, Wing Industries, Inc.,
"WIH") and Door Holdings, Inc. ("Door Holdings", and together with its
subsidiaries, R.G. Darby Company, Inc. and Total Trim, Inc., "Door").
Immediately prior to the consummation of the Merger, all of the outstanding
subordinated debt and associated warrants to purchase common stock of Wing
Holdings and Door Holdings were converted into common stock of WIH and Door,
respectively. The stockholders of Wing Holdings and Door Holdings contributed
their common stock in WIH and Door to Holdings in exchange for common stock of
Holdings. Immediately after the consummation of the Merger, Holdings contributed
all of the common stock of Wing Holdings and Door Holdings to Atrium Corp.,
which in turn contributed the common stock of Wing Holdings and Door Holdings to
the Registrant.
Consummation of the Merger constituted a change of control (the "Change of
Control") under Section 4.8 of the Indenture (as amended and supplemented
through the date hereof, the "Indenture"),
2
dated as of November 27, 1996, as amended, by and among Atrium, the Subsidiary
Guarantors (as defined in the Indenture) and United States Trust Company of New
York, as trustee. Such Change of Control allows the holders of Atrium's 10 1/2%
Senior Subordinated Notes (the "Notes") due November 15, 2006, to cause Atrium
to purchase the Notes at a purchase price in cash equal to 101% of the
outstanding principal plus accrued and unpaid interest to the date of purchase
(the "Change of Control Offer"). The Change of Control Offer expires November 6,
1998 (the "Change of Control Expiration Date").
To finance the payment of a portion of the Merger Consideration, the
repayment of certain indebtedness of each of WIH, Door and Atrium (the "Existing
Debt Repayment"), a portion of the Change of Control Offer and related fees and
expenses, Atrium entered into the $205,000,000 Credit Agreement, dated as of
October 2, 1998, between Atrium Companies, Inc., as Borrower, D and W Holdings,
Inc., as Parent, 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 (the "Credit Facility"). The Credit Facility is comprised
of two term loan facilities in the amounts of $75.0 million and $100.0 million
and, except as provided below, have maturity dates of June 30, 2005 and June 30,
2006, respectively and a revolving credit facility and letter of credit sub
facility in the amounts of $30.0 million and $5.0 million, respectively. The
revolving credit facility matures on June 30, 2004. Borrowings under the Credit
Facility bear interest at the Issuer's option at either (a) the greater of (i)
the Administrative Agent's corporate base rate and (ii) the federal funds rate
plus 0.5% per annum, plus in each case, the applicable margin, as defined in the
Credit Facility or (b) LIBOR plus the applicable margin.
Upon consummation of the Merger, $75.0 million of the $100.0 million term
loan facility was placed in an escrow account to fund a portion of the amounts
payable, if any, in the Change of Control Offer. If any of the $75.0 million
remains in escrow after the Change of Control Expiration Date, the remaining
proceeds mature on the next succeeding day. In addition, GEIPPPII and Ardatrium
deposited into escrow $25.0 million through the additional issuance of Discount
Debentures by Atrium Corp. In the event proceeds from the issuance of the
additional Discount Debentures remain in escrow after the Change of Control
Expiration Date, such proceeds will be used to repay the Discount Debentures.
The balance (which will not exceed $1.0 million, plus accrued and unpaid
interest on the Notes, if any), if any, of amounts payable in excess of $100.0
million in the Change of Control Offer will be paid from available cash or
financed with the proceeds of revolving loans under the Credit Facility.
Pursuant to a Stockholders Agreement, dated October 2, 1998, by and among
GEIPPPII, Ardatrium and certain of its affiliates and certain other stockholders
of Holdings (the "Stockholders Agreement"), the Stockholders (as defined in the
Stockholders Agreement) have agreed that the authorized number of directors of
Holdings shall consist of up to nine directors. In the event that there are less
than seven directors, the directors shall include one director designated by
GEIPPPII, so long as it is a Stockholder; Randall Fojtasek, as long as he is an
employee of Holdings or any of its subsidiaries and holds equity securities or
securities convertible into equity securities of Holdings; and each other
director shall be designated by Ardshiel and its affiliates so long as any of
them are Stockholders. In the event the Board of Directors consists of seven or
more members, GEIPPPII, so long as it is a Stockholder, shall be entitled to
designate two directors; Mr. Fojtasek, so long as he is an employee of Holdings
or any of its subsidiaries and holds equity securities or securities convertible
into equity securities of Holdings, shall be a director, and Ardshiel and its
affiliates shall designate the remainder of the directors. Notwithstanding the
foregoing, in the event Holdings or any of its subsidiaries, subject to
applicable grace periods and certain exceptions, default in the payment of
principal or interest on indebtedness, the aggregate outstanding principal
amount of which is greater than $15,000,000 or if the final maturity of any such
indebtedness is accelerated, Ardshiel's and its affiliate's rights to designate
directors shall be limited to the designation of two directors and GEIPPPII
shall, as long as it is a Stockholder, shall be entitled to designate the
remainder of the directors which Ardshiel and its affiliates would otherwise
have been entitled to elect. Upon the occurrence of an Initial Public Offering
(as defined in the Stockholder Agreement), GEIPPPII's rights to designate any
director and Mr. Fojtasek's right to be a director shall terminate and
Ardshiel's and its affiliate's rights shall be limited to the designation of two
directors, so long as it is a Stockholder.
3
Effective October 2, 1998, the following directors of Atrium Corp. resigned:
John R. Muse, Michael J. Levitt, Stephen M. Humphrey, C. Dean Metropoulos,
Michel Reichert and Randall S. Fojtasek. Pursuant to the Stockholders Agreement,
the following were elected directors of Holdings: Randall S. Fojtasek, R. L.
Gilmer, Sam A. Wing, Jr., Daniel T. Morley, James G. Turner, Roger A. Knight,
Andreas Hildebrand, Donald W. Torey and Nimrod Natan. Messrs. Hildebrand and
Torey are the GEIPPPII designees and the remaining directors, other than Mr.
Fojtasek, are the Ardshiel designees.
There are no arrangements that would result in a change of control on any
subsequent date.
Information regarding the Transaction of Atrium, WIH and Door disclosed in
Atrium's Notice of Change of Control and Offer to Purchase filed as Exhibit 20.1
hereto is hereby incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired
The financial statements are listed in the accompanying Index to
Financial Statements on page F-1 of this report.
(b) Pro Forma Financial Information
Atrium Companies, Inc. and Subsidiaries:
Unaudited Pro Forma Consolidated Financial Statements (page 5)
Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1998 (page
7)
Notes to Unaudited Pro Forma Consolidated Balance Sheet as of June 30,
1998 (page 8)
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended
December 31, 1997 (page 10)
Notes to Unaudited Pro Forma Consolidated Statement of Income for the
Year Ended
December 31, 1997 (page 11)
Unaudited Pro Forma Consolidated Statement of Income for the Period Ended
June 30, 1998 (page 15)
(c) Exhibits
*2.1 Agreement and Plan of Merger by and among D and W Holdings, Inc.,
D and W Acquisition Corp., Atrium Corporation, and the securityholders
therein dated as of August 3, 1998.
*4.1 Stockholders Agreement, dated as of October 2, 1998, by and among D and W
Holdings, Inc., a Delaware Corporation (the "Company"), and each of the
individuals and entities signatory hereto (each a "Stockholder" and
together the "Stockholders").
*20.1 Notice of Change of Control and Offer to Purchase, dated as of October 9,
1998, by Atrium Companies, Inc. for any and all of its 10 1/2% Senior
Subordinated Notes due November 15, 2006, Series B.
*20.2 Supplemental Letter to Notice of Change of Control and Offer to Purchase,
dated October 19, 1998.
*99.1 Credit Agreement dated as of October 2, 1998 by and among Atrium Companies,
Inc., as Borrower, D and W Holdings, Inc., as Parent, 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.
*99.2 Press Release
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* Filed herewith.
4
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements
("Unaudited Pro Forma Financial Statements") of the Combined Company are based
on the audited and unaudited historical financial statements listed in Item 7 of
this Current Report on Form 8-K. The Combined Company shall mean Atrium
Companies, Inc. and its subsidiaries after giving effect to the Transactions,
and therefore shall include WIH, Door and their respective subsidiaries.
The Unaudited Pro Forma Financial Statements have been prepared to give
effect to the Transactions. For financial statement purposes, WIH is deemed to
be the "accounting acquiror" in a reverse acquisition transaction.
Prior to the Transactions, GEIPPPII owned a significant interest in both WIH
and Door. As a result of the Transactions, GEIPPPII now owns approximately 94.5%
of Holdings. To the extent GEIPPPII acquired additional minority interest in WIH
and Door, such interest has been recorded at GEIPPPII's acquisition cost or
"fair value". GEIPPPII also recorded its acquisition of a 94.5% interest in
Atrium Corp. at "fair value". For purposes of the Unaudited Pro Forma Financial
Statements, GEIPPPII's basis in the companies which are a part of the
Transactions have been "pushed down" to the Unaudited Pro Forma Financial
Statements. The Unaudited Pro Forma Financial Statements also reflect various
other effects of the Transactions such as capital contributions, retirement of
existing debt and write-off of related financing costs, issuance of new debt and
transaction expenses.
The Unaudited Consolidated Pro Forma Balance Sheet has been prepared to give
effect to the Transactions as if they occurred on June 30, 1998. The Unaudited
Pro Forma Consolidated Statements of Income give effect to the Transactions as
if they occurred on January 1, 1997.
The unaudited pro forma adjustments are based upon available information and
certain assumptions that the Combined Company believes are reasonable. The
Unaudited Pro Forma Financial Statements and the accompanying notes should be
read in conjunction with the historical financial statements listed in the Index
to Financial Statements in Item 7 of this Current Report on Form 8-K and the
history of the Combined Company as presented below.
The Combined Company was formed through a series of transactions and
acquisitions. The following summary should be considered in conjunction with
reading the unaudited pro forma consolidated financial information:
July 3, 1995--The common stock of Atrium (formerly known as Fojtasek
Companies, Inc.), was acquired by a wholly owned subsidiary of Heritage Fund I,
L.P. in a transaction that was accounted for as a recapitalization (the
"Heritage Transaction"). Atrium manufactures and sells doors, windows and
various building materials throughout the United States. Atrium was founded in
1948 as a leading vertically-integrated domestic manufacturer and distributor of
a full line of residential windows and doors and began manufacturing operations
in 1953.
September 1, 1996--Atrium purchased certain assets of Keller Aluminum
Products of Texas ("Keller"), a division of Keller Building Products, which was
owned by Keller Industries, Inc. The assets were recorded at cost.
September 30, 1996--Atrium Corp. acquired Atrium Door and Window Company of
the Northeast ("ADW--Northeast"), formerly known as Bishop Manufacturing
Company, Incorporated ("Bishop"), a manufacturer of vinyl replacement windows
and doors for the residential market in the northeast region of the United
States. Atrium Corp. contributed the capital stock of ADW--Northeast to Atrium.
The transaction was recorded under the purchase method of accounting.
October 25, 1996--WIH acquired (the "Wing Acquisition") 100% of the
outstanding common stock of Wing Industries, Inc. ("Wing"), and Wing Acquisition
Corporation ("WAC"), a Delaware corporation
5
and a wholly owned subsidiary of WIH, was merged with and into Wing, with Wing
being the surviving corporation. WIH did not have any significant activity prior
to the Wing Acquisition. Wing was founded in 1924 and incorporated in 1941. Wing
manufactures and markets bifold, louver, stile and rail, and flush doors, and
related products for the home improvement and home building industries.
November 27, 1996--Atrium was effectively recapitalized in a transaction in
which affiliates of Hicks Muse Tate & Furst Incorporated purchased approximately
82% of Atrium Corp.'s newly issued common stock and redeemed the equity
interests of selling securityholders of Atrium (the "Hicks Muse Transaction").
The redemption payments were funded through the issuance of the Notes and the
other outstanding debt of Atrium was refinanced. The transaction was accounted
for as a recapitalization.
July 1, 1997--Atrium purchased the assets of the Western Window Division of
Gentek Building Products, Inc. ("Gentek") (the results of operations associated
with these assets are referred to as "Gentek"). Gentek, located in Anaheim,
California, is engaged in the manufacture and sale of vinyl replacement windows
to independent remodelers and contractors. The acquisition was accounted for
under the purchase method of accounting.
November 10, 1997--Wing purchased certain assets of the Door Division of
Super Millwork, Inc. ("Super Millwork") in a transaction accounted for under the
purchase method of accounting (the "Super Millwork Acquisition"). The Door
Division of Super Millwork, located in Melville, New York, is engaged in the
distribution, manufacture and sale of doors and other millwork. The Door
Division, along with Marvin Windows, comprised the consolidated entity of Super
Millwork.
January 8, 1998--Door acquired all of the outstanding common stock of Darby
(the "Darby Acquisition") in a transaction accounted for under the purchase
method of accounting. Darby, founded in 1983, provides interior and exterior
doors, vanity mirrors, door knobs and locks, shelving, molding, and related
installation to contractors of apartment buildings and hotels.
March 27, 1998--Atrium purchased substantially all of the assets (the
"Masterview Acquisition") of Masterview Window Company, LLC ("Masterview"), a
privately held window and door company located in Phoenix, Arizona in a
transaction accounted for under the purchase method of accounting.
These transactions have been presented in the Unaudited Pro Forma
Consolidated Statement of Income as if they occurred on January 1, 1997. All of
the transactions have been recorded in the historical balance sheets of the
respective acquiring companies as of June 30, 1998. The Unaudited Pro Forma
Financial Statements are not indicative of either future results of operations
or the results that might have occurred if the Transactions had been consummated
on the indicated dates.
6
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
HISTORICAL PRO FORMA
-------------------------- ----------------------------------
ATRIUM WING DOOR ADJUSTMENTS CONSOLIDATED
-------- ------- ------- ----------------- ------------
CURRENT ASSETS:
Cash and cash equivalents............. $ 1 $ 139 $ 182 $ -- $ 322
Equity securities--available for
sale................................ 113 -- -- -- 113
Accounts receivable, net.............. 34,005 6,476 3,487 -- 43,968
Inventories........................... 19,091 18,748 1,448 -- 39,287
Prepaid expenses and other current
assets.............................. 988 935 175 -- 2,098
Deferred tax asset.................... 692 -- -- -- 692
-------- ------- ------- -------- ------------
Total current assets.............. 54,890 26,298 5,292 -- 86,480
PROPERTY, PLANT AND EQUIPMENT, net...... 18,540 7,942 585 -- 27,067
GOODWILL, net........................... 37,550 22,130 22,220 81,598(1) 218,030
2,359(2)
223(3)
51,950(4)
DEFERRED FINANCING COSTS, net........... 5,143 1,151 198 8,653(4) 15,145
OTHER ASSETS............................ 4,067 756 3 -- 4,826
-------- ------- ------- -------- ------------
Total assets.......................... $120,190 $58,277 $28,298 $144,783 $351,548
-------- ------- ------- -------- ------------
-------- ------- ------- -------- ------------
CURRENT LIABILITIES:
Current portion of notes payable...... $ 1,900 $ 3,367 $ 500 $ (5,767)(4) $ 1,750
1,750(4)
Accounts payable...................... 17,350 4,746 1,166 -- 23,262
Accrued liabilities................... 8,122 3,542 1,245 (819)(4) 12,090
-------- ------- ------- -------- ------------
Total current liabilities............. 27,372 11,655 2,911 (4,836) 37,102
LONG-TERM LIABILITIES:
Notes payable......................... 123,058 32,091 14,285 (11,337)(5) 218,250
(5,286)(6)
(52,811)(4)
118,250(4)
Deferred tax liability................ 1,058 449 -- -- 1,507
Other liabilities..................... 300 2,500 4,000 -- 6,800
-------- ------- ------- -------- ------------
Total long-term liabilities........... 124,416 35,040 18,285 48,816 226,557
-------- ------- ------- -------- ------------
Total liabilities..................... 151,788 46,695 21,196 43,980 263,659
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock.......................... -- 1 1 (2)(7) --
Paid-in-capital....................... 33,512 9,891 6,468 11,337(5) 85,895
5,286(6)
16,488(1)
2,359(2)
223(3)
331(7)
Retained earnings (accumulated
deficit)............................ (65,117) 1,690 633 65,117(1) 1,994
(329)(7)
Accumulated other comprehensive
income.............................. 7 -- -- (7)(1) --
-------- ------- ------- -------- ------------
Total stockholder's equity
(deficit)........................... (31,598) 11,582 7,102 100,803 87,889
-------- ------- ------- -------- ------------
Total liabilities and stockholder's
equity (deficit).................. $120,190 $58,277 $28,298 $144,783 $351,548
-------- ------- ------- -------- ------------
-------- ------- ------- -------- ------------
7
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
(1) Elimination of Atrium's accumulated deficit of $65,117 and unrealized
gain on equity securities available for sale of $7 and recording GEIPPPII's and
Ardshiel's basis in Atrium as follows:
GEIPPPII's contribution...................................... $ 49,500
Ardatrium's contribution..................................... 500
Elimination of Atrium's historical paid-in capital........... (33,512)
---------
Net increase in Atrium's paid-in capital..................... $ 16,488
---------
---------
As a result of the above entries, the following details the
net increase in goodwill:
Elimination of Atrium's accumulated deficit................ $ 65,117
Elimination of unrealized gain on equity securities
available for sale....................................... (7)
Net increase in Atrium's paid-in capital................... 16,488
---------
Net increase in goodwill................................... $ 81,598
---------
---------
(2) Recording of GEIPPPII's purchase of additional interest of WIH of 5.03%
from 89.47% fully converted basis prior to the Transactions to 94.50%
immediately after the Transactions as follows:
GEIPPPII's basis in WIH prior to the Transactions.......... $ 22,160
GEIPPPII's purchase of minority interest................... 1,818
Basis of remaining minority interest....................... 1,300
---------
Adjusted basis in WIH...................................... 25,278
Historical equity of WIH................................... 11,582
Conversion of exchangeable subordinated notes payable
(5)...................................................... 11,337
---------
Adjusted equity of WIH after conversion of debt............ 22,919
---------
Net increase in equity related to the acquisition of WIH's
minority
interest................................................. $ 2,359
---------
---------
(3) Recording of GEIPPPII's purchase of additional interest of Door of 2.19%
from 92.31% fully converted basis prior to the Transactions to 94.50%
immediately after the Transactions as follows:
GEIPPPII's basis in Door prior to the Transactions......... $ 11,391
GEIPPPII's purchase of minority interest................... 379
Basis of remaining minority interest....................... 841
---------
Adjusted basis in Door..................................... 12,611
Historical equity of Door.................................. 7,102
Conversion of subordinated note payable (6)................ 5,286
---------
Adjusted equity of Door after conversion of debt........... 12,388
---------
Net increase in equity related to the acquisition of Door's
minority
interest................................................. $ 223
---------
---------
8
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
(4) To record borrowings under the Credit Facility, including related
deferred financing costs, to record the Existing Debt Repayment and the
write-off of associated deferred financing costs.
NOTES PAYABLE
Borrowings under the Credit Facility
B Tranche............................................. $ 75,000
C Tranche............................................. 25,000
Discount Debentures issued by Atrium Corp............... 20,000
---------
Total Notes Payable (including $1,750 of current
portion).............................................. $ 120,000
Less Existing Debt Repayment:
Atrium Notes Payable--Current Portion................. (1,900)
WIH Notes Payable--Current Portion.................... (3,367)
Door Notes Payable--Current Portion................... (500)
---------
(5,767)
Atrium Notes Payable--Long Term Portion............... (23,058)
WIH Notes Payable--Long Term Portion (including
capital leases)..................................... (20,754)
Door Notes Payable--Long Term Portion................. (8,999)
---------
(52,811)
Atrium accrued interest............................... (162)
WIH accrued interest.................................. (633)
Door accrued interest................................. (24)
---------
(819)
DEBT FINANCING COSTS
Debt financing costs capitalized........................ (11,000)
Write off of associated deferred financing costs
Atrium................................................ 998
WIH................................................... 1,151
Door.................................................. 198
---------
Net increase in deferred financing costs................ (8,653)
---------
Net increase in goodwill................................ $ 51,950
---------
---------
(5) Conversion of GEIPPPII's and Ardshiel's or its affiliates' interest in
WIH's exchangeable subordinated notes payable of $12,460 and $40, respectively,
less $1,163 of unamortized discount related to detachable warrants converted to
common stock pursuant to the Transactions.
(6) Conversion of GEIPPPII's and Ardshiel's or its affiliates' interest in
Door's subordinated note payable of $5,940 and $60, respectively, less $714 of
unamortized discount related to detachable warrants converted to common stock
pursuant to the Transactions.
(7) Elimination of Door's retained earnings and common stock and the
elimination of WIH common stock as Atrium's Common Stock remains outstanding.
Note: No adjustment has been made in the Unaudited Pro Forma Financial
Statements to conform the accounting policies of Atrium, WIH and Door. The
Combined Company believes there will not be material adjustments to the
balance sheet, other than as shown above, in the application of the
purchase price.
9
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1997
1997 AND 1998 COMPLETED
COMPLETED PRO FORMA ACQUISITIONS PRO FORMA
HISTORICAL ACQUISITIONS ---------------------------- HISTORICAL ------------ -----------
--------- ------------------ ACQUISITIONS ATRIUM BEFORE ---------- SUPER ACQUISITION
ATRIUM GENTEK MASTERVIEW ADJUSTMENTS TRANSACTIONS WIH MILLWORK ADJUSTMENTS
--------- ------- ---------- ----------- -------------- ---------- ------------ -----------
NET SALES........... $186,764 $ 6,733 $25,007 $-- $218,504 $99,059 $23,351 $--
COST OF GOODS
SOLD.............. 121,301 5,083 19,056 -- 145,440 78,270 18,085 --
--------- ------- ---------- ----------- -------------- ---------- ------------ -----
Gross profit...... 65,463 1,650 5,951 -- 73,064 20,789 5,266 --
OPERATING EXPENSES:
Selling, delivery,
general and
administrative
expenses........ 44,486 982 3,105 (124)(a) 48,449 16,445 4,487 225(b)
Stock option
compensation
expense......... 307 -- -- -- 307 -- -- --
--------- ------- ---------- ----------- -------------- ---------- ------------ -----
44,793 982 3,105 (124) 48,756 16,445 4,487 225
--------- ------- ---------- ----------- -------------- ---------- ------------ -----
Income (loss)
from
operations.... 20,670 668 2,846 124 24,308 4,344 779 (225)
INTEREST EXPENSE.... 11,523 -- 779 1,654(f) 13,956 2,953 169 708(g)
OTHER INCOME
(EXPENSE), net.... 1,088 -- (30) -- 1,058 -- -- --
--------- ------- ---------- ----------- -------------- ---------- ------------ -----
Income before
income
taxes......... 10,235 668 2,037 (1,530) 11,410 1,391 610 (933)
PROVISION (BENEFIT)
FOR INCOME
TAXES............. 4,068 267 -- 172(j) 4,507 695 -- (110)(k)
--------- ------- ---------- ----------- -------------- ---------- ------------ -----
NET INCOME (LOSS)... $ 6,167 $ 401 $ 2,037 $(1,702) $ 6,903 $ 696 $ 610 $(823)
--------- ------- ---------- ----------- -------------- ---------- ------------ -----
--------- ------- ---------- ----------- -------------- ---------- ------------ -----
PRO FORMA
------------ THE
PRO FORMA THE COMBINED COMBINED
HISTORICAL ------------------------ COMPANY ADJUSTMENTS COMPANY
WIH BEFORE ---------- ACQUISITION DOOR BEFORE BEFORE AFTER AFTER
TRANSACTIONS DOOR ADJUSTMENTS TRANSACTIONS TRANSACTIONS TRANSACTIONS TRANSACTIONS
-------------- ---------- ----------- ----------- ------------ ------------ ----------
NET SALES........... $122,410 $16,956 $ -- $16,956 $357,870 $-- $357,870
COST OF GOODS
SOLD.............. 96,355 10,227 -- 10,227 252,022 -- 252,022
-------------- ---------- ----------- ----------- ------------ ------------ ----------
Gross profit...... 26,055 6,729 -- 6,729 105,848 -- 105,848
OPERATING EXPENSES:
Selling, delivery,
general and
administrative
expenses........ 21,157 4,707 (1,013)(c) 3,694 73,300 3,391(d) 76,691
Stock option
compensation
expense......... -- -- -- -- 307 208(e) 515
-------------- ---------- ----------- ----------- ------------ ------------ ----------
21,157 4,707 (1,013) 3,694 73,607 3,599 77,206
-------------- ---------- ----------- ----------- ------------ ------------ ----------
Income (loss)
from
operations.... 4,898 2,022 1,013 3,035 32,241 (3,599) 28,642
INTEREST EXPENSE.... 3,830 61 1,510(h) 1,571 19,357 4,606(i) 23,963
OTHER INCOME
(EXPENSE), net.... -- 90 -- 90 1,148 -- 1,148
-------------- ---------- ----------- ----------- ------------ ------------ ----------
Income before
income
taxes......... 1,068 2,051 (497) 1,554 14,032 (8,205) 5,827
PROVISION (BENEFIT)
FOR INCOME
TAXES............. 585 -- 528(l) 528 5,620 (1,637)(m) 3,983
-------------- ---------- ----------- ----------- ------------ ------------ ----------
NET INCOME (LOSS)... $ 483 $ 2,051 $ (1,025) $ 1,026 $ 8,412 $(6,568) $ 1,844
-------------- ---------- ----------- ----------- ------------ ------------ ----------
-------------- ---------- ----------- ----------- ------------ ------------ ----------
10
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(a) Reflects net decrease in the amortization expense relating to goodwill
as a result of Atrium's acquisition of Gentek and Masterview on July 1, 1997 and
March 27, 1998, respectively, as follows:
Amortization expense of Gentek goodwill of $3,320 being amortized
over 40 years...................................................... $ 42
Elimination of Masterview's historical amortization expense of
goodwill of $10,689 being amortized over 15 years.................. (698)
Amortization expense of goodwill of $21,282 being amortized over 40
years.............................................................. 532
---------
$ (124)
---------
---------
(b) Reflects net increase in selling, delivery, general and administrative
expenses resulting from the elimination of certain one-time costs, and the
amortization expense relating to goodwill and non-compete agreement as a result
of the Super Millwork Acquisition on November 10, 1997, as follows:
Elimination of a one-time transaction bonus and associated payroll
taxes paid to senior executive in connection with the Super
Millwork Acquisition............................................... $ (32)
Amortization expense of goodwill of $9,945 being amortized over 40
years.............................................................. 207
Amortization of non-compete agreement being amortized over 5 years... 50
---------
$ 225
---------
---------
(c) Reflects net decrease in selling, delivery, general and administrative
expenses for amortization expense relating to goodwill and compensation expense
resulting from Door's acquisition of the common stock of Darby as follows:
Reduction of compensation expense paid to a former stockholder's
salary and bonus compensation that will be received pursuant to a
three year employment agreement.................................. $ (1,676)
Compensation expense paid to a former stockholder pursuant to a
three year employment agreement.................................. 100
Amortization of goodwill of $22,503 being amortized over 40
years............................................................ 563
---------
$ (1,013)
---------
---------
(d) Reflects net increase in amortization expense relating to goodwill as a
result of the Transactions:
Elimination of historical goodwill amortization.................... $ (2,060)
Amortization of $218,030 of goodwill being amortized over 40
years............................................................ 5,451
---------
$ 3,391
---------
---------
11
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(e) Reflects net increase in stock option compensation expense as a result
of the Transactions:
Elimination of historical stock option compensation.................. $ (307)
Stock option compensation related to 2,600,000 shares issued at $.01
with a fair market value of $1.00 vesting over five years.......... 515
---------
$ 208
---------
---------
(f) Reflects net increase in interest expense resulting from Atrium's
acquisition of Gentek and Masterview as follows:
Interest expense resulting from the borrowing of $6,500 on Atrium's
revolving credit facility at 7.9% for Gentek...................... $ 257
Elimination of historical interest expense of Masterview related to
debt that was paid off including the amortization of related
deferred financing
costs............................................................. (779)
Interest expense resulting from borrowings under a $17,500 term loan
at 7.875% for Masterview.......................................... 1,378
Interest expense resulting from the borrowing of $9,029 on Atrium's
revolving credit facility at 7.9% for Masterview.................. 713
Amortization of deferred financing costs of $508 related to the
issuance of the term loan and amendment of the revolving credit
facility for Masterview........................................... 85
---------
$ 1,654
---------
---------
(g) Reflects net increase in interest expense resulting from the Super
Millwork Acquisition as follows:
Elimination of historical interest expense........................... $ (169)
Interest expense resulting from the borrowing of $194 under Wing's
revolving credit facility at 10.0%................................. 16
Interest expense resulting from the borrowing of $6,750 under Wing's
term loan facility at 8.8%......................................... 495
Interest expense resulting from the borrowing of $4,000 exchangeable
subordinated debt at 11.0%......................................... 366
---------
$ 708
---------
---------
12
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(h) Reflects net increase in interest expense resulting from Door's
acquisition of the common stock of Darby as follows:
Elimination of historical interest expense.......................... $ (61)
Interest expense resulting from the issuance of $10,000 senior debt
at 8.5%........................................................... 850
Interest expense resulting from the issuance of $6,000 subordinated
debt at 11.5%..................................................... 690
Amortization of deferred financing costs being amortized over 7
years............................................................. 31
---------
$ 1,510
---------
---------
(i) Reflects net increase in interest expense resulting from the
Transactions:
Elimination of historical interest expense related to debt to be
repaid, including amortization of deferred financing costs....... $ (8,365)
Interest expense resulting from the borrowing of $100,000 at 9%
pursuant to the Credit Facility.................................. 9,000
Interest expense resulting from the borrowing of $20,000 Discount
Debentures at 12% issued by Atrium Corp. (non-cash
payment-in-kind by Atrium Corp.)................................. 2,400
Amortization of deferred financing costs of $11,000 related to the
Credit Facility.................................................. 1,571
---------
$ 4,606
---------
---------
The Pro Forma Consolidated Statement of Income has been prepared assuming
that none of the Notes will be tendered in the Change of Control Offer. In the
event all of the Notes were tendered in the Change of Control Offer, adjusted
net interest expense would decrease by $1,500.
Borrowings under the Credit Facility bear interest at a variable rate. A one
percentage point increase or decrease in the applicable interest rate would
increase or decrease adjusted net interest expense by $1,000.
(j) Reflects the income tax provision related to the historical earnings of
Gentek and Masterview and the income tax effect of the pro forma adjustments
discussed in (a) and (f) using the federal statutory income tax rate of 34%.
Prior to the Masterview Acquisition, Masterview, a limited liability company,
was classified as a partnership for federal and state income tax purposes with
income or loss accruing directly to the members. Accordingly, no provisions or
credits for federal or state income taxes are reflected in the Masterview
historical financial statements.
(k) Reflects the income tax provision related to the historical earnings of
Super Millwork and the income tax effect of the pro forma adjustments discussed
in (b) and (g) using the federal statutory income tax rate of 34%. Prior to the
acquisition, Super Millwork was classified as an S-corporation for federal and
state income tax purposes with income or loss accruing directly to the
shareholders. Accordingly, no provisions or credits for federal or state income
taxes are reflected in the Super Millwork historical financial statements.
13
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(l) Reflects the income tax provision related to the historical earnings of
Darby and the income tax effect of the pro forma adjustments discussed in (c)
and (h) using the federal statutory income tax rate of 34%. Prior to the
acquisition, Darby was classified as an S-corporation for federal and state
income tax purposes with income or loss accruing directly to the shareholders.
Accordingly, no provisions or credits for federal or state income taxes are
reflected in the Darby historical financial statements.
(m) Reflects the income tax effect of the pro forma adjustments discussed in
(e) and (i) using the federal statutory income tax rate of 34%. No income tax
effect has been reflected for the pro forma adjustment discussed in (j) as the
additional goodwill recorded as a result of the Transactions is non-deductible
for federal tax purposes.
14
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
1998 PRO FORMA
COMPLETED ----------------------------- THE COMBINED
HISTORICAL ACQUISITION ATRIUM HISTORICAL COMPANY
----------- ------------- ACQUISITIONS BEFORE -------------------- BEFORE
ATRIUM MASTERVIEW ADJUSTMENTS TRANSACTIONS WIH DOOR TRANSACTIONS
----------- ------------- --------------- ------------ --------- --------- -------------
NET SALES.................. $ 106,482 $ 6,219 $ -- $ 112,701 $ 71,848 $ 10,432 $ 194,981
COST OF GOODS SOLD......... 70,526 4,687 -- 75,213 56,197 6,386 137,796
----------- ------ ----- ------------ --------- --------- -------------
Gross profit............. 35,956 1,532 -- 37,488 15,651 4,046 57,185
OPERATING EXPENSES:
Selling, delivery,
general and
administrative
expenses............... 24,377 834 (45)(b) 25,166 12,180 2,043 39,389
Stock option compensation
expense................ 447 -- -- 447 -- -- 447
----------- ------ ----- ------------ --------- --------- -------------
24,824 834 (45) 25,613 12,180 2,043 39,836
----------- ------ ----- ------------ --------- --------- -------------
Income from
operations........... 11,132 698 45 11,875 3,471 2,003 17,349
INTEREST EXPENSE........... 6,241 158 386(d) 6,785 2,105 789 9,679
OTHER INCOME (EXPENSE),
net...................... (223) (173) 171(f) (225) -- 5 (220)
----------- ------ ----- ------------ --------- --------- -------------
Income before income
taxes.................. 4,668 367 (170) 4,865 1,366 1,219 7,450
PROVISION FOR INCOME
TAXES.................... 1,711 -- 67(g) 1,778 675 586 3,039
----------- ------ ----- ------------ --------- --------- -------------
NET INCOME................. $ 2,957 $ 367 $ (237) $ 3,087 $ 691 $ 633 $ 4,411
----------- ------ ----- ------------ --------- --------- -------------
----------- ------ ----- ------------ --------- --------- -------------
PRO FORMA
----------------------------
THE COMBINED
ADJUSTMENTS COMPANY
AFTER AFTER
TRANSACTIONS TRANSACTIONS
------------- -------------
NET SALES.................. $ (232)(a) $ 194,749
COST OF GOODS SOLD......... (232)(a) 137,564
------------- -------------
Gross profit............. -- 57,185
OPERATING EXPENSES:
Selling, delivery,
general and
administrative
expenses............... 1,626(c) 41,015
Stock option compensation
expense................ -- 447
------------- -------------
1,626 41,462
------------- -------------
Income from
operations........... (1,626) 15,723
INTEREST EXPENSE........... 2,303(e) 11,982
OTHER INCOME (EXPENSE),
net...................... (220)
------------- -------------
Income before income
taxes.................. (3,929) 3,521
PROVISION FOR INCOME
TAXES.................... (783)(h) 2,256
------------- -------------
NET INCOME................. $ (3,146) $ 1,265
------------- -------------
------------- -------------
15
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
FOR THE PERIOD ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
(a) Represents the elimination of intercompany sales of $232 from WIH to
Door during the first six months of 1998.
(b) Reflects net decrease in the amortization expense relating to goodwill
as a result of the Masterview Acquisition as follows:
Elimination of historical amortization of goodwill of $10,689 being
amortized over 15 years............................................ $ (178)
Amortization of goodwill of $21,282 associated with the Transactions
being amortized over 40 years...................................... 133
---------
$ (45)
---------
---------
(c) Reflects net increase in amortization expense relating to goodwill as a
result of the Transactions:
Elimination of historical goodwill amortization.................... $ (1,099)
Amortization of $218,030 of goodwill being amortized over 40
years............................................................ 2,725
---------
$ 1,626
---------
---------
(d) Reflects net increase in interest expense as a result of the Masterview
Acquisition as follows:
Elimination of historical interest expenses related to debt that was
paid off including the amortization of related deferred financing
costs.............................................................. $ (158)
Interest expense resulting from the issuance of $17,500 term loan at
7.875%............................................................. 345
Interest expense resulting from the borrowing of $9,029 on Atrium's
revolving credit facility at 7.9%.................................. 178
Amortization of deferred financing costs of $508 related to the
issuance of the term loan and amendment of the revolving credit
facility........................................................... 21
---------
$ 386
---------
---------
(e) Reflects net increase in interest expense resulting from the
Transactions:
Elimination of historical interest expense related to debt to be
repaid, including amortization of deferred financing costs....... $ (4,183)
Interest expense resulting from the borrowing of $100,000 at 9%
pursuant to the Credit Facility.................................. 4,500
Interest expense resulting from the borrowing of $20,000 Discount
Debentures at 12% issued by Atrium Corp. (non-cash
payment-in-kind by Atrium Corp.)................................. 1,200
Amortization of deferred financing costs of $11,000 related to the
Credit Facility.................................................. 786
---------
$ 2,303
---------
---------
16
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
FOR THE PERIOD ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
The Pro Forma Consolidated Statement of Income has been prepared assuming
that none of the Notes will be tendered in the Change of Control Offer. In the
event all of the Notes were tendered in the Change of Control Offer, adjusted
net interest expense would decrease by $750.
Borrowings under the Credit Facility bear interest at a variable rate. A one
percentage point increase or decrease in the applicable interest rate would
increase or decrease adjusted net interest expense by $500.
(f) Reflects the elimination of one-time bonuses and associated payroll
taxes aggregating $171 paid to certain members of senior management of
Masterview in connection with the Masterview Acquisition.
(g) Reflects the income tax provision related to the historical earnings of
Masterview and the income tax effect of the pro forma adjustments discussed in
notes (b), (d) and (f) using the federal statutory income tax rate of 34%. Prior
to the acquisition, Masterview, a limited liability company, was classified as a
partnership for federal and state income tax purposes with income or loss
accruing directly to the memebers. Accordingly, no provisions or credits for
federal or state income taxes are reflected in the Masterview historical
financial statements.
(h) Reflects the income tax effect of the pro forma adjustment discussed in
(e) using the statutory federal income tax rate of 34%. No income tax effect has
been reflected for the pro forma adjustment discussed in (f) as the additional
goodwill recorded as a result of the Transactions is non-deductible for federal
tax purposes.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATRIUM COMPANIES, INC.
By: /s/ JEFF L. HULL
-----------------------------------------
Name: Jeff L. Hull
Title: CHIEF FINANCIAL OFFICER, SECRETARY
AND TREASURER
Date: October 19, 1998
18
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
ATRIUM COMPANIES, INC.
Report of Independent Accountants.......................................................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................. F-4
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995................... F-5
Consolidated Statements of Stockholder's Equity (Deficit) for the years ended December 31, 1997, 1996 and
1995................................................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............... F-7
Notes to Consolidated Financial Statements................................................................. F-9
MASTERVIEW WINDOW COMPANY, LLC
Report of Independent Accountants.......................................................................... F-27
Financial Statements:
Statement of Financial Position as of December 31, 1997.................................................. F-28
Statement of Income for the year ended December 31, 1997................................................. F-29
Statement of Changes in Members' Equity for the year ended December 31, 1997............................. F-30
Statement of Cash Flows for the year ended December 31, 1997............................................. F-31
Notes to Financial Statements.............................................................................. F-32
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
Report of Independent Accountants.......................................................................... F-38
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................. F-39
Consolidated Statements of Income for the year ended December 31, 1997, the periods ended December 31,
1996 and October 25, 1996 and the year ended December 31, 1995......................................... F-40
Consolidated Statements of Stockholders' Equity for the year ended December 31, 1997, the periods ended
December 31, 1996 and October 25, 1996 and the year ended December 31, 1995............................ F-41
Consolidated Statements of Cash Flows for the year ended December 31, 1997, the periods ended December
31, 1996 and October 25, 1996 and the year ended December 31, 1995..................................... F-42
Notes to Consolidated Financial Statements................................................................. F-43
DOOR DIVISION OF SUPER MILLWORK, INC.
Report of Independent Accountants.......................................................................... F-60
Carve-out Financial Statements:
Carve-out Balance Sheets as of November 10, 1997 and December 31, 1996................................... F-61
Carve-out Statements of Income and Changes in Business Unit Equity for the period from January 1, 1997 to
November 10, 1997 and for the year ended December 31, 1996............................................. F-62
Carve-out Statements of Cash Flows for the period from January 1, 1997 to November 10, 1997 and for the
year ended December 31, 1996........................................................................... F-63
Notes to Carve-out Financial Statements.................................................................... F-64
F-1
PAGE
---------
R.G. DARBY COMPANY, INC. AND TOTAL TRIM, INC.
Report of Independent Accountants.......................................................................... F-68
Combined Financial Statements:
Combined Balance Sheets as of December 31, 1997 and 1996................................................. F-69
Combined Statements of Income for the years ended December 31, 1997 and 1996............................. F-70
Combined Statements of Stockholder's Equity for the years ended
December 31, 1997 and 1996............................................................................. F-71
Combined Statements of Cash Flows for the years ended December 31, 1997 and 1996......................... F-72
Notes to Combined Financial Statements..................................................................... F-73
ATRIUM COMPANIES, INC.
Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheet as of June 30, 1998........................................................... F-77
Consolidated Statements of Income for the six months ended June 30, 1998 and 1997........................ F-78
Consolidated Statements of Comprehensive Income for the six months ended June 30, 1998 and 1997.......... F-79
Consolidated Statement of Stockholder's Equity (Deficit) for the six months ended June 30, 1998.......... F-80
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997.................... F-81
Notes to Consolidated Financial Statements................................................................. F-82
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheet as of June 30, 1998........................................................... F-86
Consolidated Statements of Income for the six months ended June 30, 1998 and 1997........................ F-87
Consolidated Statement of Stockholders' Equity for the six months ended June 30, 1998.................... F-88
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997.................... F-89
Notes to Consolidated Financial Statements................................................................. F-90
DOOR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheet as of June 30, 1998........................................................... F-92
Consolidated Statements of Income for the six months ended June 30, 1998 and 1997........................ F-93
Consolidated Statement of Stockholders' Equity for the six months ended June 30, 1998.................... F-94
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997.................... F-95
Notes to Consolidated Financial Statements................................................................. F-96
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Atrium Corporation:
We have audited the accompanying consolidated balance sheets of Atrium
Companies, Inc. and its subsidiaries, (the "Company"), a wholly-owned subsidiary
of Atrium Corporation, as of December 31, 1997 and 1996 and the related
consolidated statements of income, stockholder's equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Atrium
Companies, Inc. and its subsidiaries as of December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
March 27, 1998
F-3
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
----------------------
1997 1996
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 1 $ 617
Equity securities--available for sale................................................... 27 --
Accounts receivable, net................................................................ 24,376 21,975
Inventories............................................................................. 16,534 13,474
Prepaid expenses and other current assets............................................... 1,608 1,765
Deferred tax asset...................................................................... 692 2,555
---------- ----------
Total current assets.................................................................... 43,238 40,386
PROPERTY, PLANT AND EQUIPMENT, net........................................................ 16,388 13,970
GOODWILL, net............................................................................. 14,884 11,963
DEFERRED FINANCING COSTS, net............................................................. 4,961 5,173
OTHER ASSETS.............................................................................. 3,904 3,258
---------- ----------
Total assets............................................................................ $ 83,375 $ 74,750
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable........................................................................ $ 10,007 $ 8,528
Current portion of notes payable........................................................ -- --
Accrued liabilities..................................................................... 7,102 6,580
---------- ----------
Total current liabilities............................................................... 17,109 15,108
LONG-TERM LIABILITIES:
Notes payable........................................................................... 100,000 100,000
Deferred tax liability.................................................................. 1,058 818
---------- ----------
Total long-term liabilities............................................................. 101,058 100,818
---------- ----------
Total liabilities....................................................................... 118,167 115,926
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock $.01 par value, 3,000 shares authorized, 100 shares issued and
outstanding........................................................................... -- --
Paid-in capital......................................................................... 32,790 31,936
Accumulated deficit..................................................................... (67,503) (73,112)
Unrealized loss on equity securities--available for sale................................ (79) --
---------- ----------
Total stockholder's deficit............................................................. (34,792) (41,176)
---------- ----------
Total liabilities and stockholder's deficit............................................. $ 83,375 $ 74,750
---------- ----------
---------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1997 1996 1995
---------- ---------- ----------
NET SALES.................................................................... $ 186,764 $ 156,269 $ 135,478
COST OF GOODS SOLD........................................................... 121,301 102,341 93,975
---------- ---------- ----------
Gross profit............................................................... 65,463 53,928 41,503
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses..................... 44,486 34,815 29,303
Special charges............................................................ -- 3,044 7,188
Stock option compensation expense.......................................... 307 3,023 308
---------- ---------- ----------
44,793 40,882 36,799
---------- ---------- ----------
Income from operations..................................................... 20,670 13,046 4,704
INTEREST EXPENSE............................................................. 11,523 4,786 2,753
OTHER INCOME (EXPENSE), net.................................................. 1,088 (182) 1,442
---------- ---------- ----------
Income before income taxes and extraordinary charge........................ 10,235 8,078 3,393
PROVISION FOR INCOME TAXES................................................... 4,068 2,699 1,544
---------- ---------- ----------
Income before extraordinary charge......................................... 6,167 5,379 1,849
EXTRAORDINARY CHARGE ON EARLY RETIREMENT OF DEBT (net of income tax benefit
of $720)................................................................... -- 1,176 --
---------- ---------- ----------
NET INCOME................................................................... $ 6,167 $ 4,203 $ 1,849
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
UNREALIZED
RETAINED LOSS ON EQUITY TOTAL
COMMON STOCK EARNINGS SECURITIES STOCKHOLDER'S
--------------- PAID IN (ACCUMULATED AVAILABLE EQUITY
SHARES AMOUNT CAPITAL DEFICIT) FOR SALE (DEFICIT)
------ ------ ------- ------------ -------------- -------------
BALANCE, December 31, 1994.............. 100 $-- $ 484 $ 39,881 --$ $ 40,365
Capital contribution.................. -- -- 22,100 -- -- 22,100
Net distributions to stockholders..... -- -- -- (79,741) -- (79,741)
Land contribution..................... -- -- 575 -- -- 575
Stock option compensation expense..... -- -- 308 -- -- 308
Net income............................ -- -- -- 1,849 -- 1,849
------ ------ ------- ------------ ----- -------------
BALANCE, December 31, 1995.............. 100 -- 23,467 (38,011) -- (14,544)
Capital contributions................. -- -- 5,025 -- -- 5,025
Net distributions to Holding.......... -- -- -- (39,304) -- (39,304)
Stock option compensation expense..... -- -- 3,023 -- -- 3,023
Income tax benefit upon exercise of
Holding's stock options............. -- -- 421 -- -- 421
Net income............................ -- -- -- 4,203 -- 4,203
------ ------ ------- ------------ ----- -------------
BALANCE, December 31, 1996.............. 100 -- 31,936 (73,112) -- (41,176)
Contributions from Holding............ -- -- 476 -- -- 476
Distributions to Holding.............. -- -- -- (558) -- (558)
Stock option compensation expense..... -- -- 307 -- -- 307
Unrealized loss on equity securities
available for sale.................. -- -- -- -- (79) (79)
Income tax benefit upon exercise of
Holding's stock options............. -- -- 71 -- -- 71
Net income............................ -- -- -- 6,167 -- 6,167
------ ------ ------- ------------ ----- -------------
BALANCE, December 31, 1997.............. 100 $-- $32,790 $(67,503) $(79) $(34,792)
------ ------ ------- ------------ ----- -------------
------ ------ ------- ------------ ----- -------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 6,167 $ 4,203 $ 1,849
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary charge, net of income tax benefit............................... -- 1,176 --
Depreciation and amortization................................................. 3,278 2,205 1,779
Amortization of deferred financing costs...................................... 642 279 138
Noncash bonuses............................................................... -- -- 1,609
Gain on retirement of assets.................................................. (38) (10) (429)
Gain on sale of equity securities............................................. (2) -- --
Stock option compensation expense............................................. 307 3,023 308
Deferred tax provision (benefit).............................................. 2,102 (1,303) 202
Changes in assets and liabilities, net of acquisitions in 1997 and 1996:
Accounts receivable, net...................................................... (640) (3,056) (523)
Inventories................................................................... (1,688) 2,252 540
Prepaid expenses and other current assets..................................... 197 (730) 171
Accounts payable.............................................................. (1,165) 815 722
Accrued liabilities........................................................... (57) (87) 541
--------- --------- ---------
Net cash provided by operating activities................................... 9,103 8,767 6,907
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment...................................... (3,438) (3,380) (2,337)
Proceeds from sales of assets................................................... 68 25 784
Purchases of equity securities.................................................. (480) -- --
Proceeds from sales of equity securities........................................ 375 -- --
Increase in other assets........................................................ (1,377) (1,134) (1,677)
Payment for acquisition, net of cash acquired................................... (6,561) (10,243) --
--------- --------- ---------
Net cash used in investing activities......................................... (11,413) (14,732) (3,230)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable........................................................ -- (62,928) (8,605)
Net borrowings under revolving credit facility.................................. -- 7,740 --
Proceeds from issuance of senior subordinated notes............................. -- 100,000 --
Proceeds from issuance of notes payable......................................... -- 6,000 57,155
Checks drawn in excess of bank balances......................................... 2,135 -- 946
Deferred financing costs........................................................ (430) (5,457) (2,127)
Capital contributions........................................................... -- 25 22,100
Contributions from Holding...................................................... 476 -- --
Net distributions to stockholders............................................... -- -- (74,268)
Net distributions to Holding.................................................... (558) (39,304) --
Income tax benefit upon exercise of Holding's stock options..................... 71 421 --
--------- --------- ---------
Net cash provided by (used in) financing activities........................... 1,694 6,497 (4,799)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. (616) 532 (1,122)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................................... 617 85 1,207
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR............................................ $ 1 $ 617 $ 85
--------- --------- ---------
--------- --------- ---------
F-7
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1997 1996 1995
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest...................................................................... $ 10,393 $ 3,699 $ 2,420
Income taxes.................................................................. 2,737 4,514 1,064
Noncash distributions......................................................... -- -- 4,899
Noncash contribution from Holding............................................. -- 5,000 --
During 1996, the Company acquired all of the capital stock of ADW--Northeast
for a combined purchase price of $19,531 of which $10,243 was paid in cash, as
follows:
Fair value of net assets acquired............................... $ 20,705
Payable to seller............................................... (1,000)
Cash acquired................................................... (3,288)
Common stock issued by Holding.................................. (5,000)
Liabilities assumed............................................. (1,174)
---------
Cash paid for capital stock of ADW--Northeast................... $ 10,243
---------
---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Atrium Companies, Inc. (the "Company"), (formerly Fojtasek Companies, Inc.,
a Texas corporation), is engaged in the manufacture and sale of doors, windows
and various building materials throughout the United States. A significant
portion of the Company's sales relates to new home construction activity, which
is cyclical in nature.
On July 3, 1995, the stockholders of Fojtasek Companies, Inc. ("Fojtasek")
executed a stock purchase agreement (the "Heritage Transaction") whereby all of
Fojtasek's common stock was acquired by FCI Holding Corp. ("FCI Holding"), a
Delaware holding company which was established in connection with the Heritage
Transaction (Note 12). On September 30, 1996, Atrium Corporation ("Holding"), a
Delaware parent company which owned 100% of FCI Holding (which owned 100% of
Fojtasek) acquired Atrium Door and Window Company of the Northeast
("ADW--Northeast," formerly Bishop), a manufacturer of vinyl replacement windows
and doors and contributed the capital stock of ADW--Northeast to Fojtasek (Note
15). On November 8, 1996, in connection with the Hicks Muse Transaction (the
"Hicks Muse Transaction"), Fojtasek, which was a Texas corporation, was merged
with and into FCI Holding (Note 12). The two companies were merged to achieve
certain business objectives related to brand-name recognition. The surviving
Delaware corporation was renamed "Atrium Companies, Inc.," (the "Company") which
is a direct, wholly-owned subsidiary of Holding. The merger was accounted for as
a merger of companies under common control and the assets were valued at
historical cost.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, ADW--Northeast, acquired in September 1996,
and Atrium Door and Window Company-- West Coast ("ADW--West Coast," formerly H-R
Window Supply, Inc). ADW--Northeast refers to the combined consolidated results
of Atrium Door and Window Company of the Northeast (the merged companies
formerly named Vinyl Building Specialties of Connecticut, Inc. and Bishop
Manufacturing Company, Incorporated), its subsidiary Atrium Door and Window
Company of New England ("ADW-- New England" formerly Bishop Manufacturing
Company of New England, Inc.), and Atrium Door and Window Company of New York
("ADW--New York" formerly Bishop Manufacturing Co. of New York, Inc.) All
significant intercompany transactions and balances have been eliminated in
consolidation.
INDUSTRY SEGMENT
The Company operates in a single industry segment, the fabrication and
distribution of doors and windows and related components.
REVENUE RECOGNITION
Revenue from the sale of doors and windows and related components is
recorded at the time of delivery and billing to the customer. Allowances are
established to recognize the risk of sales returns from customers.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with original maturities
of three months or less to be cash equivalents.
F-9
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are net of allowances for doubtful accounts of $608 and
$1,497 as of December 31, 1997 and 1996, respectively.
PROVISION FOR WARRANTY CLAIMS
Estimated warranty costs are provided at the time of the sale of the
warranted product.
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 concentrated in the southern regions of the U.S. and
focus upon the distribution and sale of building products. Sales in the state of
Texas accounted for approximately 38.3% of revenue in 1997. 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 does not believe it is
dependent upon any single customer. No single customer accounted for more than
10% of sales.
INVENTORIES
Inventories are valued at the lower of cost (last-in, first-out or "LIFO")
or market. Management believes that the LIFO method results in a better matching
of current costs with current revenues.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation. Prior to January 1, 1997, the Company provided for depreciation
and amortization using straight-line and accelerated methods. For all assets
acquired subsequent to January 1, 1997, the Company depreciates the assets on a
straight-line basis over their estimated useful lives, as follows:
ESTIMATED
USEFUL LIFE
-------------
Buildings and improvements..................................................... 5 - 40 years
Machinery and equipment........................................................ 3 - 12 years
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.
F-10
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
Amortization expense of $340 and $75 was recorded for the years ended December
31, 1997 and 1996. Accumulated amortization at December 31, 1997 and 1996 was
$415 and $75, respectively. 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 to the extent the carrying value of related assets
(including goodwill) exceeds the sum of the undiscounted cash flows from those
related assets.
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 straightline basis over five 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.
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.
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.
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
F-11
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 allowance for bad debt,
workers' compensation and warranty accruals, and deferred tax assets and
liabilities.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 balances to
conform to the 1997 presentation.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS:
In accordance with Statement of Financial Accounting Standards (SFAS) No.
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.
Forward aluminum contracts--The unrealized gains and losses are based on
quotes for aluminum as reported on the London Metal Exchange.
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 1997 and 1996 were as follows:
1997 1996
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
ASSETS:
Cash and cash equivalents.................... $ 1 $ 1 $ 617 $ 617
Equity securities--available for sale........ $ 27 $ 27 $ -- $ --
LIABILITIES:
Notes payable................................ $ 100,000 $ 106,000 $ 100,000 $ 102,000
NOTIONAL UNREALIZED NOTIONAL UNREALIZED
AMOUNT GAIN/(LOSS) AMOUNT GAIN/(LOSS)
--------- ------------- --------- -------------
OFF BALANCE SHEET:
Forward aluminum contracts.................... $ 24,960 $ (21) $ 21,656 $ 519
F-12
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
3. INVENTORIES:
Inventories are valued at the lower of cost or market using the LIFO method
of accounting. Work-in-process and finished goods inventories consist of
materials, labor, and manufacturing overhead. Inventories consisted of the
following at December 31:
1997 1996
--------- ---------
Raw materials........................................................... $ 13,653 $ 11,765
Work-in-process......................................................... 705 563
Finished goods.......................................................... 4,056 2,526
--------- ---------
18,414 14,854
LIFO reserve............................................................ (1,880) (1,380)
--------- ---------
$ 16,534 $ 13,474
--------- ---------
--------- ---------
The change in the LIFO reserve for the years ended December 31, 1997, 1996
and 1995 resulted in an increase in cost of sales of $500 and a decrease in cost
of sales by $491 and $851, respectively.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following at December 31:
1997 1996
--------- ---------
Land.................................................................... $ 682 $ 682
Buildings and improvements.............................................. 7,596 7,139
Machinery and equipment................................................. 16,238 11,970
Construction-in-process................................................. 434 705
--------- ---------
Total............................................................... 24,950 20,496
Less accumulated depreciation and amortization.......................... (8,562) (6,526)
--------- ---------
$ 16,388 $ 13,970
--------- ---------
--------- ---------
Depreciation expense was $2,217, $1,681, and $1,554 for the years ended
December 31, 1997, 1996, and 1995, respectively.
5. OTHER ASSETS:
Other assets consisted of the following at December 31:
1997 1996
--------- ---------
Capitalized software costs, net............................................ $ 2,406 $ 1,355
Non-compete agreements, net................................................ 1,125 1,575
Deposits, notes receivable and other....................................... 373 328
--------- ---------
$ 3,904 $ 3,258
--------- ---------
--------- ---------
F-13
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
5. OTHER ASSETS: (CONTINUED)
The costs of the non-compete agreements are being amortized over the terms
of the related agreements, which are five years. Amortization expense for the
years ended December 31, 1997, 1996 and 1995 was $450, $450 and $225,
respectively, resulting in accumulated amortization at December 31, 1997 and
1996 of $1,125 and $675, respectively. Amortization expense of $271 was recorded
for the year ended December 31, 1997 for costs related to capitalized software
costs.
6. 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, 1997, 1996 and 1995 was
$642, $279 and $138, respectively and was recorded as interest expense in the
accompanying Consolidated Statements of Income.
7. ACCRUED LIABILITIES:
Accrued liabilities include the following at December 31:
1997 1996
--------- ---------
Accrued salaries and wages................................................. $ 2,627 $ 2,100
Accrued interest........................................................... 1,358 1,003
Accrued taxes payable...................................................... 1,263 601
Contingent payable related to
ADW--Northeast acquisition............................................. -- 1,000
Warranty and litigation reserve............................................ 781 961
Workers' compensation reserve.............................................. 250 500
Other...................................................................... 823 415
--------- ---------
$ 7,102 $ 6,580
--------- ---------
--------- ---------
8. NOTES PAYABLE:
Notes payable consisted of the following at December 31:
1997 1996
---------- ----------
Senior subordinated notes............................................. $ 100,000 $ 100,000
Less current maturities............................................... -- --
---------- ----------
$ 100,000 $ 100,000
---------- ----------
---------- ----------
In November 1996, the Company issued $100,000 aggregate principal amount of
10 1/2% Senior Subordinated Notes (the "Notes") due November 15, 2006 under the
Indenture dated as of November 27, 1996. Interest on the Notes is payable
semiannually on May 15 and November 15 of each year, commencing on May 15, 1997.
The Notes mature on November 15, 2006. The Company may redeem the Notes based on
certain triggering events. In addition, under certain circumstances the Company
will be
F-14
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
8. NOTES PAYABLE: (CONTINUED)
obligated to make an offer to repurchase the Notes at 100% of the principal
amount, plus accrued and unpaid interest to the date of repurchase, with the net
cash proceeds of certain sales or other dispositions of assets.
The Notes are fully and unconditionally guaranteed, jointly and severally,
on an unsecured, senior subordinated basis, by each of the Company's
subsidiaries (see Note 18). The Indenture permits the Company to incur
additional indebtedness (including Senior Indebtedness) of up to $45,000 as of
December 31, 1997, subject to certain limitations. The Indenture restricts the
Company's ability to pay dividends or make certain other restricted payments,
consummate certain asset sales, or otherwise dispose of all or substantially all
of the assets of the Company and its subsidiaries.
The Company has also entered into a Credit Agreement providing for a
revolving credit facility (the "Credit Facility"). The Credit Facility enables
the Company to borrow up to $20,000. The revolving credit loans bear interest at
a rate based upon the lender's prime rate plus a borrowing margin of 1.5% or a
LIBOR-based rate plus a borrowing margin of 2.5%. The Company pays a commitment
fee of .5% based on the unused portion of the Credit Facility. The Credit
Facility terminates in March 2002. The Company had $19,191 of availability under
the Credit Facility as of December 31, 1997, net of outstanding letters of
credit totaling $809. The Credit Facility contains various covenants that
restrict the Company from taking various actions and requires the Company to
achieve and maintain certain financial covenants.
Principal payments due during the next five years on long-term notes payable
as of December 31, 1997 are as follows:
1998.............................................................................. $ --
1999.............................................................................. --
2000.............................................................................. --
2001.............................................................................. --
2002.............................................................................. --
Thereafter........................................................................ 100,000
----------
$ 100,000
----------
----------
9. FEDERAL INCOME TAX:
In connection with the Heritage Transaction in July 1995, the Company
converted from an S corporation to a C corporation. Accordingly, subsequent to
the Heritage Transaction, the Company accounts for income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes," which requires that deferred
income tax expenses be provided based upon the liability method. Pro forma
federal income tax expense, had the Company been subject to corporate income
taxes for twelve months in 1995, would have been $1,187.
F-15
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. FEDERAL INCOME TAX: (CONTINUED)
Temporary differences that give rise to the deferred income tax assets and
liabilities are as follows as of December 31:
1997 1996
--------- ---------
Deferred income tax assets:
Allowance for doubtful accounts........................................ $ -- $ 495
Deferred stock compensation............................................ 572 501
Inventory cost capitalization and valuation............................ 331 660
Non-compete agreement.................................................. 277 167
Accrued vacation....................................................... 178 173
Warranty and litigation................................................ 90 357
Workers' compensation.................................................. 92 185
Other.................................................................. -- 17
--------- ---------
1,540 2,555
Deferred income tax liabilities:
Depreciation........................................................... (1,050) (811)
Capitalized software costs............................................. (830) --
Other.................................................................. (26) (7)
--------- ---------
(1,906) (818)
Net deferred income tax asset (liability)................................ (366) 1,737
Less-current deferred tax asset.......................................... 692 2,555
--------- ---------
Long-term deferred tax liability......................................... $ (1,058) $ (818)
--------- ---------
--------- ---------
SFAS 109 requires a valuation allowance 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,
1997 and 1996, no valuation reserve was recorded.
The components of the provision for income taxes are as follows for the
years ended December 31:
1997 1996 1995
--------- --------- ---------
Current federal income tax provision............................. $ 1,543 $ 3,388 $ 1,420
Deferred federal income tax provision (benefit).................. 2,102 (930) 202
State income tax provision (benefit)............................. 423 241 (78)
--------- --------- ---------
Provision for income taxes....................................... $ 4,068 $ 2,699 $ 1,544
--------- --------- ---------
--------- --------- ---------
The Company recognized a tax benefit in 1997 and 1996 of $71 and $421,
respectively, related to Holding's stock options. This benefit was recorded
directly to paid in capital.
F-16
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. FEDERAL INCOME TAX: (CONTINUED)
Reconciliation of the federal statutory income tax rate to the effective tax
rate, was as follows for the years ended December 31:
1997 1996 1995
--------- --------- ---------
Tax computed at statutory rate................................... $ 3,482 $ 2,777 $ 1,154
State taxes...................................................... 423 241 (78)
Income tax benefit not recognized on S corporation tax
deductions..................................................... -- -- 655
Prior year return to accrual differences......................... -- (352) --
Other............................................................ 163 33 (187)
--------- --------- ---------
Provision for income taxes....................................... $ 4,068 $ 2,699 $ 1,544
--------- --------- ---------
--------- --------- ---------
10. RELATED PARTIES:
Included in prepaid expenses and other current assets are the following
receivables due from related parties at December 31:
1997 1996
----- -----
Receivables from stockholders................................................... $ 19 $ 82
Receivables from officers....................................................... $ 20 $ 5
Receivables from employees...................................................... $ 64 $ 80
MONITORING AND OVERSIGHT AGREEMENT
Holding and the Company have entered into a ten-year monitoring and
oversight agreement with Hicks Muse. Pursuant thereto, Holding and the Company
have agreed to pay to Hicks Muse a minimum annual fee of $320 for ongoing
financial oversight and monitoring services to the Company. The annual fee is
adjustable upward or downward on January 1 of each calendar year to an amount
equal to 0.2% of the budgeted consolidated annual net sales of the Company and
its subsidiaries for the then-current fiscal year, provided that such fee shall
at no time be less than $320 per year. In the year ended December 31, 1997, $437
was paid to Hicks Muse under this agreement.
FINANCIAL ADVISORY AGREEMENT
Holding and the Company are parties to a ten-year financial advisory
agreement (the "Financial Advisory Agreement") with Hicks Muse pursuant to which
Hicks Muse received a financial advisory fee of $2,000 on the closing date of
the Hicks Muse Transaction as compensation for its services as financial advisor
to the Company in connection with the Hicks Muse Transaction. Pursuant to the
Financial Advisory Agreement, Hicks Muse is also entitled to receive a fee equal
to 1.5% of the transaction value (as defined in the Financial Advisory
Agreement) for each add-on transaction in which the Company or any of its
subsidiaries is involved. In connection with the ADW--West Coast asset
acquisition (see Note 15), the Company paid $92 to Hicks Muse.
F-17
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The Company has entered into operating lease agreements for office and
manufacturing space with unrelated third parties and with certain affiliates of
certain stockholders of the Company. Total rent expense for the years ended
December 31, 1997, 1996 and 1995 was $4,339, $2,012 and $3,156, respectively. Of
these totals, amounts paid to related parties were $753, $605 and $313 in 1997,
1996 and 1995, respectively. Future minimum rents due under operating leases
with initial or remaining terms greater than twelve months are as follows:
RELATED OTHER
PARTIES PARTIES TOTAL
--------- --------- ---------
1998......................................................... $ 1,030 $ 1,768 $ 2,798
1999......................................................... 1,180 1,371 2,551
2000......................................................... 1,180 1,111 2,291
2001......................................................... 1,245 828 2,073
2002......................................................... 1,311 409 1,720
Thereafter................................................... 7,603 174 7,777
--------- --------- ---------
$ 13,549 $ 5,661 $ 19,210
--------- --------- ---------
--------- --------- ---------
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 and fixed and floating prices. As of December 31,
1997 and 1996, the Company had forward commitments totaling $24,960 and $21,656
for delivery through December 1998 and 1997 for 28.6 and 28.7 million pounds of
aluminum, of which 14.3 and 10.0 million pounds were at fixed prices,
respectively.
The Company has entered into employment agreements with several key
executives of the Company including its President and Chief Executive Officer,
its Chief Financial 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.
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
financial position, results of operations or liquidity of the Company.
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. In addition, in connection with the Kel-Star acquisition,
the Company became a party to collective bargaining arrangements due to expire
in 2001.
The Company is 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
F-18
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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 financial position, results of operations or liquidity.
12. STOCK PURCHASE AGREEMENT:
HERITAGE TRANSACTION
On June 23, 1995, Heritage Fund I, L.P. ("Heritage") formed two Delaware
corporations, FCI Holding and its wholly-owned subsidiary, Fojtasek/Heritage
Acquisition Company ("Acquisition Corp."). Heritage contributed approximately
$22,000 to FCI Holding in exchange for 18,318,352 shares of voting common stock,
11,824,398 shares of nonvoting common stock and 11,000 shares of nonvoting
preferred stock of FCI Holding. Additionally, FCI Holding issued 95,854 shares
of voting common stock to a member of management whom had an equity interest in
the voting common stock of Fojtasek prior to the transaction for approximately
$50. In a simultaneous transaction, (i) Acquisition Corp. used the $22,050
proceeds contributed from FCI Holding plus approximately $57,200 borrowed under
a term loan agreement and a revolving line of credit to purchase a majority of
the voting common stock from the Fojtasek shareholders and pay transaction costs
of approximately $5,000 (ii) Fojtasek shareholders exchanged their remaining
1,643,985 shares of Fojtasek voting stock (the "Rollover Stock") to FCI Holding
for 18,318,352 shares of FCI Holding voting common stock, (iii) the Rollover
Stock was contributed by FCI Holding to Acquisition Corp. for shares of
Acquisition Corp. stock issued to FCI Holding and (iv) Acquisition Corp. was
merged into Fojtasek. The transaction was accounted for as a recapitalization as
it did not result in a change of control. Accordingly, the assets and
liabilities of Fojtasek were not revalued. The transaction resulted in an
increase to stockholder's deficit of $57,000.
After the Heritage Transaction, the voting common stock of FCI Holding was
held by Heritage (49.8%), the Fojtasek shareholders (49.8%) and the management
shareholder (0.4%). FCI Holding owned 100% of the interest in Fojtasek (the
surviving company from the merger with Acquisition Corp.) As a result of its
purchase of nonvoting common stock in the transaction, Heritage held
approximately 68% of the economic interest of FCI Holding.
In connection with the Heritage Transaction, certain assets and liabilities
were excluded from the assets and liabilities of Fojtasek and distributed as
follows. Fojtasek distributed the land, building, and improvements related to
two of its primary operating divisions to certain Fojtasek shareholders. The
book value of the property distributed totaled approximately $9,300. The
shareholders also assumed the industrial development revenue bonds of $4,400,
which were collateralized by the property. Fojtasek also distributed its
investments in rental real estate to certain Fojtasek shareholders. The net book
value of the properties distributed was approximately $3,100. The shareholders
also assumed the related notes payable,
F-19
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
12. STOCK PURCHASE AGREEMENT: (CONTINUED)
which were collateralized by the property. The outstanding balance of the notes
payable transferred was approximately $2,300. These assets were distributed at
fair market value, resulting in a net loss of $205, which was recorded in the
accompanying 1995 Consolidated Statement of Income.
HICKS MUSE TRANSACTION
The Hicks Muse Transaction refers to a recapitalization transaction that
closed concurrent with the closing of the issuance of the Notes in which
affiliates of Hicks Muse purchased a number of newly issued shares of Holding's
Common Stock for $32,000 pursuant to a Stock Purchase Agreement dated November
7, 1996, and certain outstanding shares, and certain options and warrants to
acquire shares of Holding's Common Stock and all outstanding shares of preferred
stock of Holding were redeemed.
This transaction, which was completed on November 27, 1996, required
approximately $134,500 to complete, consisting of $59,417 in redemption payments
to the selling securityholders, $54,369 representing all outstanding
indebtedness under the old credit facility and debt assumed in connection with
its acquisition of ADW--Northeast, $12,472 in redemption payments to preferred
stockholders of Holding (including cumulative dividends in arrears) and
approximately $8,242 of fees and expenses. The funds required to consummate the
Hicks Muse Transaction were provided by (i) the proceeds of the issuance of the
Notes, (ii) $32,000 in equity financing, (iii) drawings of $2,000 under the
Company's Credit Facility, and (iv) other cash provided by the Company of $500.
The shares issued to Hicks Muse, after giving effect to the other elements of
the Hicks Muse Transaction, represent approximately 82.0% of the outstanding
common stock of Holding. The Hicks Muse Transaction has been accounted for as a
recapitalization.
13. SPECIAL CHARGES AND STOCK OPTION COMPENSATION EXPENSE:
Included in special charges in the 1996 Consolidated Statement of Income are
officer bonuses of $3,044 incurred in connection with the Hicks Muse
Transaction. Special charges in 1995 consisted of consulting fees of $408,
officer and management bonuses of $6,380, and restructuring charges of $400
incurred in connection with the Heritage Transaction.
Included in stock option compensation expense are charges associated with
the issuance of new stock options at exercise prices below the fair value of the
underlying common stock, the expense associated with the cash redemption of
certain options, and amortization of deferred compensation expense related to
previously issued options.
14. OTHER INCOME (EXPENSE), NET:
Other income (expense), net consists of the following for the years ended
December 31:
1997 1996 1995
--------- --------- ---------
Insurance settlement............................................. $ 1,193 $ -- $ --
Rental, interest, and other income............................... 65 49 1,013
Gain on sale of assets........................................... 38 10 429
Other............................................................ (208) (241) --
--------- --------- ---------
$ 1,088 $ (182) $ 1,442
--------- --------- ---------
--------- --------- ---------
F-20
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
15. ACQUISITIONS:
ADW--WEST COAST (FORMERLY GENTEK) ASSET PURCHASE:
On July 1, 1997, the Company purchased through its wholly-owned subsidiary,
ADW--West Coast (formerly H-R Window Supply, Inc.), the assets of the Western
Window Division of Gentek Building Products, Inc., located in Anaheim,
California. The purchase price (including transactions expenses) was
approximately $6,562 and was funded from borrowings under the Company's
revolving credit facility. The transaction was accounted for under the purchase
method of accounting. The purchase allocation, preliminary in nature and subject
to change, is as follows:
Cash and advances to the Company.................................................... $ 1
Accounts receivable, net............................................................ 1,760
Inventories......................................................................... 1,372
Other current assets................................................................ 39
Property, plant and equipment, net.................................................. 1,131
Other noncurrent assets............................................................. 28
Goodwill............................................................................ 3,320
Current liabilities................................................................. (1,089)
---------
Total purchase price............................................................ $ 6,562
---------
---------
ADW--NORTHEAST (FORMERLY BISHOP):
Effective September 30, 1996, the Company acquired the capital stock of
ADW--Northeast, a manufacturer of vinyl replacement windows and doors for the
residential market in the northeast region of the United States, for
approximately $19,531. To consummate the acquisition, the Company paid
approximately $13,531 to ADW--Northeast's shareholders (the "Sellers"), agreed
to a $1,000 payable to the Sellers to be paid if certain earnings targets are
met, and issued $5,000 of Holding common stock in exchange for all of
ADW--Northeast's capital stock. The $1,000 was recorded as an accrued liability
in the Company's financial statements at December 31, 1996. During 1997, the
Company paid $500 of the amount and adjusted the purchase price by the remaining
balance (this amount was recorded as a reduction in goodwill). Holding
subsequently contributed the ADW--Northeast capital stock to the Company.
Consequently, as of September 30, 1996, ADW--Northeast became a wholly-owned
subsidiary of the Company. The ADW--Northeast acquisition has been accounted for
under the purchase method of
F-21
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
15. ACQUISITIONS: (CONTINUED)
accounting. Accordingly, the purchase price has been allocated to the assets and
liabilities based upon their estimated fair values at the date of acquisition as
follows:
Cash and advances to the Company................................................... $ 3,288
Accounts receivable, net........................................................... 2,073
Inventories........................................................................ 1,774
Other current assets............................................................... 256
Property, plant and equipment, net................................................. 1,206
Other noncurrent assets............................................................ 70
Goodwill........................................................................... 12,038
Current liabilities................................................................ (986)
Other noncurrent liabilities....................................................... (188)
---------
Total purchase price........................................................... $ 19,531
---------
---------
The Company's Consolidated Statements of Income for the years ended December
31, 1997 and 1996 includes ADW--West Coast's and ADW--Northeast's operations
from the dates of acquisition, July 1, 1997 and September 30, 1996,
respectively. The following table presents the historical consolidated operating
results of the Company for the years ended December 31, 1997 and 1996, compared
to pro forma operating results for such periods. The following unaudited pro
forma information presents consolidated operating results as though the
acquisitions of ADW--West Coast and ADW--Northeast had occurred at the beginning
of the periods presented:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------- -----------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
---------- ----------- ---------- -----------
Net sales.................................... $ 186,764 $ 193,497 $ 156,269 $ 182,099
Income before extraordinary charge........... 6,167 6,568 5,379 6,358
Net income................................... 6,167 6,568 4,203 5,182
KELLER ASSET PURCHASE:
In June 1996, the Company purchased certain assets from a division of Keller
Building Products for $1,150. In September 1996, the Company purchased the
division's inventory for $500. These asset purchases were recorded at cost.
16. STOCK OPTIONS:
In connection with the Heritage Transaction, FCI Holding issued options (the
"Substitute Options") to certain members of Fojtasek management to purchase FCI
Holding's nonvoting common stock. The options vested ratably over five years or
immediately upon a public offering or a sale of substantially all the assets of
FCI Holding or a subsidiary. In connection with this issuance, $1,350 in
compensation expense representing the difference between the market value of the
underlying common stock and the exercise price of the option was deferred and
amortized over the vesting period. To effect the acquisition of ADW--Northeast,
FCI Holding formed Holding. The Substitute Option holders exchanged 2,875,922
F-22
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
16. STOCK OPTIONS: (CONTINUED)
options for equivalent nonvoting common stock options (the "Replacement
Options") in Holding's 1996 Original Stock Option Plan (the "Original Plan"). In
conjunction with the Hicks Muse Transaction, 2,875,922 options of Holding were
tendered at an exercise price of $.01, of which 1,050,000 were exchanged for
Replacement Options of Holding. In connection with the exchanged options, $1,040
was deferred and is being amortized over the new 5 year vesting period. Under
certain circumstances, if the option holders terminate employment prior to the
exercise of such option, they have the right to receive $1.00 per option (net of
the exercise price). Compensation expense of approximately $307, $926 and $308
related to the options was recognized by the Company for the years ended
December 31, 1997, 1996 and 1995, respectively.
FCI Holding also issued stock options (the "Disposition Options") to certain
members of Fojtasek management. Value was recognized on these options based on
the market value of the Company, which became exercisable upon a public offering
or a sale of substantially all the assets of FCI Holding or a subsidiary of FCI
Holding. In connection with the Hicks Muse Transaction, the options vested and
were redeemed and the resultant compensation expense of $743 was recorded in
stock option compensation expense in the 1996 Consolidated Statement of Income.
Upon completion of the Hicks Muse Transaction, Holding adopted the 1996
Stock Option Plan (the "New Plan") authorizing the issuance of 3,500,000 options
to acquire common stock. Holding's New Plan gives certain individuals and key
employees of Holding and any subsidiary corporation thereof who are responsible
for the continued growth of Holding an opportunity to acquire a proprietary
interest in Holding and thus to create in such persons an increased interest in
and a greater concern for the welfare of Holding or any subsidiary. Through
December 31, 1997 and 1996, the Board of Directors of Holding has granted
2,185,390 and 1,910,390 options, respectively, under the New Plan at a weighted
average price of $1.00 per share which represented fair market value on the
dates of grant. The Company applies APB Opinion 25 and related interpretations
in accounting for the Plan.
The following table summarizes the transactions of the Original Plan and the
New Plan for the periods ended December 31, 1997, 1996 and 1995 (all outstanding
options were granted to management of the Company):
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
Outstanding options, beginning of period.............................. 2,960,390 2,875,922 --
Granted............................................................... 275,000 2,960,390 2,875,922
Canceled or expired................................................... (504,645) -- --
Exchanged............................................................. -- (1,050,000) --
Exercised............................................................. (355,708) (1,825,922) --
------------ ------------ ------------
Outstanding options, end of year...................................... 2,375,037 2,960,390 2,875,922
------------ ------------ ------------
------------ ------------ ------------
Weighted average exercise price of options exercised.................. $ .72 $ .01 --
Weighted average exercise price of options granted.................... $ 1.00 $ .62 $ .01
Weighted average exercise price, end of period........................ $ .60 $ .65 $ .01
Options exercisable, end of period.................................... 420,007 24,500 --
Options available for future grant.................................... 1,819,255 1,589,610 --
F-23
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
16. STOCK OPTIONS: (CONTINUED)
The options vest over periods ranging from three to five years.
On November 27, 1996, Holding issued a warrant (the "Warrant") to the
President and Chief Executive Officer (the "Executive") of the Company. Pursuant
to the terms of the Warrant, the Executive is entitled to purchase 1,333,333
shares of Holding common stock at any time subsequent to the Hicks Muse
Transaction. The exercise price of the Warrant is $.01 per share. An additional
861,889 shares may be purchased under the Warrant at an exercise price of $1.00,
representing the fair market value on the date of grant upon the realization of
an 8.0% internal rate of return. The 861,889 options vest ratably each day for
three years. The Warrant will terminate on November 27, 2006. The Company
recorded non cash compensation expense of $1,320 for the period ended December
31, 1996 in connection with the difference between the fair market value of the
stock at the date of issuance ($1.00) and the exercise price ($.01).
The following table summarizes information about stock options and warrants
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -----------------------
WEIGHTED WEIGHTED
RANGE OF WEIGHTED AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (MONTHS) PRICE EXERCISABLE PRICE
- -------------- ----------- ------------------- ----------- ---------- -----------
Options:
$ .01 950,000 107 $ .01 190,000 $ .01
$1.00 1,425,037 107 $ 1.00 230,007 $ 1.00
Warrants:
$ .01 1,333,333 107 $ .01 1,333,333 $ .01
$1.00 861,889 107 $ 1.00 314,058 $ 1.00
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement
on Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for
Stock-Based Compensation" ("SFAS 123") which, if fully adopted by the Company,
would change the methods the Company applies in recognizing the cost of the
stock-based plans. Adoption of the cost recognition provisions of SFAS 123 is
optional and the Company has decided not to elect these provisions of SFAS 123.
However, pro forma disclosures as if the Company adopted the cost recognition
provisions of SFAS 123 in 1995 are required by SFAS 123 and are presented below.
In 1997 and 1996, the Company granted only nonqualified stock options 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 1997 and 1996: dividend yield of
0.0%; risk-free interest rate of 7.0%; and the expected life of 10 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 Company's stock-based compensation plans
and warrants been determined consistent with SFAS 123, the Company's net income
for 1997, 1996 and 1995 would have been $6,105, $3,934 and $1,949, respectively.
F-24
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
16. STOCK OPTIONS: (CONTINUED)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and the Company anticipates making awards in the future under its stock-based
compensation plans.
17. EMPLOYEE BENEFIT PLANS:
STOCK PURCHASE PLAN
Holding's 1996 Stock Purchase Plan gives certain key employees of Holding or
related entities who are expected to contribute materially to the success of
Holding or related entities an opportunity to acquire a proprietary interest in
Holding, and thus to retain such persons and create in such persons an increased
interest in and a greater concern for the welfare of Holding and any Related
Entities. The Board of Directors is authorized to offer 500,000 shares for
purchase. As of December 31, 1997 and 1996, 425,000 and 375,000 shares,
respectively, have been purchased under the plan.
401(K)
During 1996, the Company established an employee benefit plan in accordance
with Section 401(k) of the Internal Revenue Code for all employees not covered
under a collective bargaining agreement. The Company may at its discretion match
employee contributions. During the years ended December 31, 1997 and 1996, the
Company incurred no expense.
18. SUBSIDIARY GUARANTORS:
In connection with the Note offering, 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 and ADW--West Coast (collectively, the
Subsidiary Guarantors). The Company has no non-guarantor direct or indirect
subsidiaries. The operations related to the assets of ADW--Northeast and
ADW--West Coast are included since September 30, 1996 and July 1, 1997,
respectively, the dates of acquisition. 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.
F-25
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
18. SUBSIDIARY GUARANTORS: (CONTINUED)
Following is summarized combined financial information pertaining to these
Subsidiary Guarantors:
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
Current assets................................................... $ 12,399 $ 7,939
Noncurrent assets................................................ 17,148 13,242
Current liabilities.............................................. 1,906 1,135
Noncurrent liabilities........................................... -- --
TWELVE MONTHS ENDED DECEMBER
31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Net sales.................................................... $ 20,162 $ 5,020 $ 771
Gross profit................................................. 8,374 2,289 372
Net income (loss) from continuing operations................. 1,495 561 (29)
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. As of December 31, 1997, the maximum
amount of Senior Indebtedness the Company and its Subsidiary Guarantors
collectively, and in the aggregate, could incur was $45,000.
19. SUBSEQUENT EVENTS:
On March 4, 1998, the Company signed an agreement to purchase substantially
all of the assets of Masterview Window Company, LLC. (the "Acquisition" or
"Masterview"), a privately held aluminum window and door company located in
Phoenix, Arizona, for approximately $27,000 including fees and other expenses.
On March 27, 1998, the Company completed the transaction. The Company financed
the Acquisition through a new amended and restated credit agreement provided by
Bankers Trust Company. The new facility includes a $17,500 term loan with the
remainder of the purchase price of $10,000 being drawn from the present $20,000
revolving credit facility. The amended and restated credit agreement is for six
and one-half years expiring September 2004.
The acquisition will be accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations." 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, with the remainder allocated to goodwill. 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") was approximately
$20,000, which will be amortized over 40 years. The results of operations for
the acquired business will be included in the Company's consolidated financial
statements beginning March 27, 1998.
F-26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members of
Masterview Window Company, LLC
We have audited the accompanying statement of financial position of
Masterview Window Company, LLC as of December 31, 1997, and the related
statements of income, changes in members' equity, and cash flows for the year
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Masterview Window Company,
LLC as of December 31, 1997 and the results of its operations and its cash flows
for the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Phoenix, Arizona
March 9, 1998
F-27
MASTERVIEW WINDOW COMPANY, LLC
STATEMENT OF FINANCIAL POSITION
(DOLLARS IN THOUSANDS, EXCEPT UNIT AMOUNTS)
DECEMBER 31,
1997
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................................... $ 4
Restricted cash................................................................................... 209
Accounts receivable, net.......................................................................... 3,299
Inventories....................................................................................... 1,665
Prepaid expenses and other current assets......................................................... 78
------------
Total current assets.............................................................................. 5,255
PROPERTY, PLANT AND EQUIPMENT, net.................................................................. 2,767
GOODWILL, net....................................................................................... 9,858
DEFERRED FINANCING COSTS, net....................................................................... 156
------------
Total assets...................................................................................... $ 18,036
------------
------------
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................................. $ 1,598
Accrued liabilities............................................................................... 602
Bank overdraft.................................................................................... 183
Current maturities of long-term debt.............................................................. 800
Deferred revenue.................................................................................. 381
Other current liabilities......................................................................... 17
------------
Total current liabilities......................................................................... 3,581
LONG-TERM LIABILITIES:
Long-term debt.................................................................................... 6,409
------------
Total liabilities................................................................................. 9,990
MEMBERS' EQUITY:
Class A units, 3,210.0 units authorized, issued and outstanding................................... 3,210
Class B units, 45,161.3 units authorized, issued, and outstanding................................. 4,836
------------
Total members' equity............................................................................. 8,046
------------
Total liabilities and members' equity............................................................. $ 18,036
------------
------------
The accompanying notes are an integral part of these financial statements.
F-28
MASTERVIEW WINDOW COMPANY, LLC
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1997
---------
NET SALES.............................................................................................. $ 25,007
COST OF SALES.......................................................................................... 19,056
---------
Gross profit......................................................................................... 5,951
OPERATING EXPENSES:
Selling, general and administrative expenses......................................................... 3,105
---------
Income from operations............................................................................... 2,846
INTEREST EXPENSE....................................................................................... 779
OTHER INCOME (EXPENSES), net........................................................................... (30)
---------
NET INCOME............................................................................................. $ 2,037
---------
---------
The accompanying notes are an integral part of these financial statements.
F-29
MASTERVIEW WINDOW COMPANY, LLC
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
CLASS A CLASS B
MEMBERS MEMBERS TOTAL
----------- ----------- ---------
BALANCE, December 31, 1996........................................................ $ 3,045 $ 3,587 $ 6,632
Net income...................................................................... 282 1,755 2,037
Distributions to members........................................................ (117) (506) (623)
----------- ----------- ---------
BALANCE, December 31, 1997........................................................ $ 3,210 $ 4,836 $ 8,046
----------- ----------- ---------
----------- ----------- ---------
The accompanying notes are an integral part of these financial statements.
F-30
MASTERVIEW WINDOW COMPANY, LLC
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1997
----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................................... $ 2,037
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization....................................................................... 1,064
Loss on disposal of property and equipment.......................................................... 18
Change in operating assets and liabilities, net:
Accounts receivable............................................................................... (79)
Inventories....................................................................................... 380
Prepaid expenses and other current assets......................................................... 207
Accounts payable.................................................................................. (415)
Accrued liabilities............................................................................... (896)
Deferred revenue.................................................................................. 26
Other current liabilities......................................................................... (20)
----------
Net cash provided by operating activities....................................................... 2,322
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment........................................................... (221)
Sale of property, plant and equipment............................................................... 27
Decrease in restricted cash......................................................................... 83
----------
Net cash used in investing activities............................................................... (111)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdrafts..................................................................................... 124
Proceeds from long-term debt........................................................................ 24,157
Repayments of long-term debt........................................................................ (25,867)
Distributions to members............................................................................ (623)
----------
Net cash used in financing activities............................................................... (2,209)
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................................................. 2
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.......................................................... 2
----------
CASH AND CASH EQUIVALENTS, END OF YEAR................................................................ $ 4
----------
----------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest.......................................................................................... $ 738
The accompanying notes are an integral part of these financial statements.
F-31
MASTERVIEW WINDOW COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT UNIT AMOUNTS)
1. NATURE OF BUSINESS AND ORGANIZATION:
Masterview Window Company, LLC (the "Company") is engaged in the manufacture
and distribution of windows for residential construction. The Company sells
windows primarily to large home-builders in Arizona, Nevada, and Southern
California.
The Company was formed as a limited liability company on October 30, 1996
pursuant to the provisions of Section 18-101 of the Delaware Limited Liability
Company Act ("the Act") to acquire substantially all of the assets and
liabilities of Publicker Industries, Inc.'s ("Publicker") wholly-owned
subsidiary, Masterview Window Company, Inc., on October 31, 1996. The
acquisition has been accounted for as a purchase. The purchase price has been
allocated to the assets acquired and liabilities assumed based on their fair
values at the date of purchase in accordance with APB 16, Business Combinations.
The excess of the purchase price over the fair value of the net assets acquired
has been allocated to goodwill.
2. MEMBERSHIP INTERESTS:
The Company has two classes of members, holders of Class A units and Class B
units. The Class A units are non-voting units with a liquidation value of $1,000
per unit. Class A units are entitled to preferential distributions which accrue
at 9% per annum of the liquidation value, payable on the last day of each fiscal
quarter. If prohibited by a financing agreement, the preferential distributions
are to be paid through the issuance of additional Class A units. During 1997,
282,302 additional Class A units were issued as a preferential distribution. All
Class A units are redeemable on October 31, 2001, at the liquidation value plus
any accrued and unpaid preferential distributions.
Class B units have full voting rights. Net income and losses on these units
are allocated to the members based on each member's percentage ownership
interest in the Company. Class B Minority Members [as defined in Masterview's
Limited Liability Company Agreement (the "Agreement")] may elect, after seven
years, to have their shares repurchased at the then current fair market value as
determined by an independent appraisal.
Each member's liability for the debts and obligations of the Company is
limited as set forth in the Agreement. The term of the Company commenced on
October 31, 1996 and shall continue until December 31, 2046, unless dissolved
before such date in accordance with the provisions of the Agreement.
3. SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of 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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
by the first-in, first-out (FIFO) method.
F-32
MASTERVIEW WINDOW COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT UNIT AMOUNTS)
3. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and is being depreciated
using the straight-line method over the estimated useful lives of the related
assets which are as follows:
Buildings and improvements.................................... 7 - 24 years
Machinery and equipment....................................... 5 years
Transportation equipment...................................... 3 years
Furniture and fixtures........................................ 7 years
Maintenance and repairs are expensed as incurred. Costs of assets sold,
retired, or abandoned and the related accumulated depreciation are eliminated
from the appropriate accounts in the year of disposition, and the resulting gain
or loss is included in income.
GOODWILL
The excess of the purchase price over the fair value of the net assets
acquired is being amortized using the straight-line method over 15 years. The
Company periodically assesses the recoverability of goodwill based on the
expected future undiscounted operating cash flows of the related assets.
DEFERRED FINANCING COSTS
Financing costs related to the acquisition of debt are deferred and
amortized over the term of the related debt using the effective interest method.
DEFERRED REVENUE
Amounts relating to the installation of glass doors and window screens are
billed in advance and deferred until the installation process is complete.
INCOME TAXES
The Company, as a LLC, is classified as a partnership for federal and state
income tax purposes with income or loss accruing directly to the members.
Accordingly, no provisions or credits for federal or state income taxes are
reflected in these financial statements.
4. CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and trade accounts receivable. The
Company places its cash with high credit quality financial institutions. At
times, such cash balances may be in excess of the FDIC insurance limit.
The Company performs ongoing credit evaluations within the context of the
industry in which it operates and maintains reserves for potential credit losses
on customer accounts when deemed necessary. During the year ended December 31,
1997, two customers accounted for 37% of the Company's revenues. At December 31,
1997, two customers accounted for 28% of the Company's receivables.
F-33
MASTERVIEW WINDOW COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT UNIT AMOUNTS)
4. CONCENTRATIONS OF CREDIT RISK: (CONTINUED)
The Company is a regional manufacturer of windows with market concentration
in the residential construction industry. The Company's business is, therefore,
dependent upon economic activity within Arizona, Nevada, and Southern
California.
5. INVENTORIES:
Inventories consist of the following:
DECEMBER 31,
1997
------------
Raw materials................................................................... $ 1,380
Work-in-process................................................................. 80
Finished goods.................................................................. 205
------------
$ 1,665
------------
------------
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
DECEMBER 31,
1997
------------
Land............................................................................ $ 507
Buildings and improvements...................................................... 1,309
Machinery and equipment......................................................... 931
Transportation equipment........................................................ 324
Furniture and fixtures.......................................................... 66
------------
Total......................................................................... 3,137
Less accumulated depreciation................................................... (370)
------------
$ 2,767
------------
------------
7. GOODWILL:
Goodwill consists of the following:
DECEMBER 31,
1997
------------
Goodwill........................................................................ $ 10,689
Less accumulated amortization................................................... (831)
------------
$ 9,858
------------
------------
F-34
MASTERVIEW WINDOW COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT UNIT AMOUNTS)
8. DEFERRED FINANCING COSTS:
Deferred financing costs consist of the following:
DECEMBER 31,
1997
---------------
Deferred financing costs........................................................ $ 203
Less accumulated amortization................................................... (47)
-----
$ 156
-----
-----
9. CREDIT FACILITY:
On October 31, 1996, the Company entered into a Loan and Security Agreement
with Fleet Capital Corporation (the "credit facility") which expires on October
31, 2001. The credit facility provides for an initial term loan of $7,200 and a
revolving line of credit. The revolving line of credit allows for borrowings up
to $3,000, less the amount by which the term loan exceeds $7,000, and is based
upon a borrowing base of eligible accounts receivable and inventory. The credit
facility is collateralized by substantially all of the Company's assets. The
revolving line of credit bears interest (at the option of the Company) at the
bank's prime rate plus 1.25% or a LIBOR Rate (as defined in the credit facility)
plus 2.5%. The term loan bears interest (at the option of the Company) at the
bank's prime rate plus 1.5% or a LIBOR Rate (as defined in the credit facility)
plus 2.75%. A commitment fee equal to .5% per annum on the average monthly
unused balance of the revolving line of credit is also payable by the Company.
Availability under the revolving line of credit was $2,271 at December 31, 1997.
The credit facility agreement requires all amounts collected from trade
receivables to be held in a restricted cash account to be applied against the
credit facility.
The credit facility agreement contains covenants which limit the Company's
ability to incur additional indebtedness, pay distributions, and make capital
expenditures and requires the Company to maintain a minimum net worth and
certain financial ratios as defined in the credit facility.
Outstanding balances on the credit facility were as follows:
DECEMBER 31,
1997
-------------
Revolving line of credit........................................................ $ 729
Term loan....................................................................... 6,480
------
7,209
Less current maturities......................................................... 800
------
$ 6,409
------
------
F-35
MASTERVIEW WINDOW COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT UNIT AMOUNTS)
9. CREDIT FACILITY: (CONTINUED)
The annual amount of principal maturities of long-term debt outstanding at
December 31, 1997 are as follows:
1998................................................................ $ 800
1999................................................................ 1,050
2000................................................................ 1,250
2001................................................................ 1,500
2002................................................................ 2,609
---------
$ 7,209
---------
---------
10. EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) defined contribution plan for all eligible
employees. Eligible employees may contribute up to 15% of their annual salary
within certain limitations. The Company makes matching contributions equal to
25% of the first 6% contributed by the employee. Participants are immediately
vested in their voluntary contributions and vest 100% in the Company's
contributions after two years. The Company contributed $27 for the year ended
December 31, 1997.
11. UNIT OPTIONS:
On October 31, 1996, the Company granted options for 950.8 Class B units to
three officers of the Company. The options were granted with an exercise price
of $100 which was the estimated fair market price on the grant date and may be
exercised only within ten years from the date of grant. The option agreements
call for the options to be vested ratably over a five-year period and have a
weighted average grant date fair value of $26.175.
On October 31, 1996, the Company also granted options for 950.8 Class B
units to three officers of the company to be vested over a five-year period if
the actual EBITDA (as defined) is 90% or more of the budgeted EBITDA (as
defined) in each of the five years. The options were granted with an exercise
price of $100 which was the estimated fair market price on the grant date. The
weighted average grant date fair value was $26.175.
All of the outstanding options have a weighted average remaining contractual
life of 108 months at December 31, 1997. At December 31, 1997, 380.32 options
were vested.
The Company has adopted the disclosure-only provisions of the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the unit option plan.
Had the Company elected to adopt the recognition provision of SFAS 123, net
income would have been reduced by $10 for the year ended December 31, 1997.
The fair value of options granted in 1996 was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.07%, expected life of five years, and
no expected dividends.
F-36
MASTERVIEW WINDOW COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT UNIT AMOUNTS)
12. COMMITMENTS:
The Company leases certain machinery and equipment under operating leases.
Certain of these leases contain renewal provisions and purchase options.
At December 31, 1997, the future minimum lease payments under noncancelable
operating leases are as follows:
YEAR OPERATING
- ----------------------------------------------------------------------------------- -----------
1998............................................................................... $ 176
1999............................................................................... 176
2000............................................................................... 174
2001............................................................................... 168
2002............................................................................... 78
-----
$ 772
-----
-----
Rental expense under noncancelable operating leases totaled $152 for the
year ended December 31, 1997.
13. SUBSEQUENT EVENTS:
ACQUISITION BY ATRIUM COMPANIES, INC.
On March 4, 1998, the Company entered into an agreement to be acquired by
Atrium Companies, Inc. ("Atrium"). The agreement calls for the Company to sell
substantially all of its assets and for Atrium to acquire certain liabilities.
The total purchase price will be approximately $25,500. Completion of the
acquisition, which is expected to occur by the end of March 1998, is contingent
on customary conditions, including the successful cash tender offer and
expiration or termination of the Hart-Scott-Rodino Act waiting period
requirements. The Company will use the proceeds from the sale to repay the
credit facility. As a condition of the credit facility, a finance charge of $102
will be incurred by the Company for the early retirement of the obligations.
MEMBER DISTRIBUTION
On January 12, 1998, a cash distribution to members of $316 was made for the
payment of taxes on earnings generated during the fourth quarter of 1997.
F-37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Wing Industries Holdings, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity, and of cash flows
present fairly, in all material respects, the financial position of Wing
Industries Holdings, Inc. and Subsidiary (the "Company") at December 31, 1997
and 1996, and the results of their operations and their cash flows for the year
ended December 31, 1997 and the period ended December 31, 1996 and of its
predecessor for the period ended October 25, 1996 and the year ended December
31, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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
September 23, 1998
F-38
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------
1997 1996
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 34 $ 40
Accounts receivable, net.................................................................. 9,187 7,238
Inventories............................................................................... 13,557 8,027
Prepaid expenses and other current assets................................................. 832 615
--------- ---------
Total current assets...................................................................... 23,610 15,920
PROPERTY, PLANT AND EQUIPMENT, net.......................................................... 7,553 6,321
GOODWILL, net............................................................................... 22,394 12,825
DEFERRED FINANCING COSTS, net............................................................... 1,374 1,228
OTHER ASSETS................................................................................ 452 110
--------- ---------
Total assets.............................................................................. $ 55,383 $ 36,404
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable.......................................................... $ 3,128 $ 1,313
Current portion of capital lease obligation............................................... 236 --
Accounts payable.......................................................................... 6,438 4,313
Accrued liabilities....................................................................... 2,517 1,141
Deferred tax liability.................................................................... 566 353
--------- ---------
Total current liabilities................................................................. 12,885 7,120
LONG-TERM LIABILITIES:
Notes payable............................................................................. 28,340 19,176
Capital lease obligation.................................................................. 534 --
Deferred tax liability.................................................................... 449 478
Other long-term liabilities............................................................... 2,500 --
--------- ---------
Total long-term liabilities............................................................... 31,823 19,654
--------- ---------
Total liabilities......................................................................... 44,708 26,774
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock; $.01 par value; 2,000 shares authorized; none issued..................... -- --
Class A voting common stock; $.01 par value; 225,000 shares authorized; 25,501 shares
issued and outstanding.................................................................. -- --
Class B nonvoting common stock; $.01 par value; 100,000 shares authorized; 54,500 shares
issued and outstanding (convertible at option of holder into Class A voting common
stock).................................................................................. 1 1
Paid-in capital........................................................................... 9,675 9,326
Retained earnings......................................................................... 999 303
--------- ---------
Total stockholders' equity................................................................ 10,675 9,630
--------- ---------
Total liabilities and stockholders' equity................................................ $ 55,383 $ 36,404
--------- ---------
--------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-39
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997, THE PERIODS ENDED DECEMBER 31, 1996
AND OCTOBER 25, 1996 AND THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
THE COMPANY PREDECESSOR
------------------------ ------------------------
PERIOD PERIOD
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER DECEMBER OCTOBER 25, DECEMBER
31, 1997 31, 1996 1996 31, 1995
----------- ----------- ----------- -----------
NET SALES.................................. $ 99,059 $ 13,200 $ 62,880 $ 68,481
COST OF GOODS SOLD......................... 78,270 9,927 47,311 53,020
----------- ----------- ----------- -----------
Gross profit............................. 20,789 3,273 15,569 15,461
OPERATING EXPENSES:
Selling, delivery, general and
administrative expenses................ 16,445 2,367 13,271 13,931
----------- ----------- ----------- -----------
Income from operations................... 4,344 906 2,298 1,530
INTEREST EXPENSE........................... 2,953 374 509 1,039
----------- ----------- ----------- -----------
Income before income taxes............... 1,391 532 1,789 491
PROVISION FOR INCOME TAXES................. 695 229 670 212
----------- ----------- ----------- -----------
NET INCOME................................. $ 696 $ 303 $ 1,119 $ 279
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial
statements.
F-40
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997, THE PERIODS ENDED DECEMBER 31, 1996
AND OCTOBER 25, 1996 AND THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CLASS B
CLASS A VOTING NONVOTING
COMMON STOCK COMMON STOCK TOTAL
--------------- -------------- TREASURY PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL EARNINGS EQUITY
------- ------ ------ ------ --------- ------- -------- -------------
PREDECESSOR
BALANCE, December 31, 1994......... 511,814 $256 -- $-- $ -- $ 188 $3,892 $ 4,336
Net income....................... 279 279
Exercise of stock options........ 13,010 7 45 52
Purchase of Treasury Stock....... (12,500) (156) (156)
------- ------ ------ ------ --------- ------- -------- -------------
BALANCE, December 31, 1995......... 512,324 263 -- -- (156) 233 4,171 4,511
Net income....................... 1,119 1,119
Exercise of stock options........ 59,040 30 409 439
Tax benefit related to option
exercises...................... 253 253
------- ------ ------ ------ --------- ------- -------- -------------
BALANCE, October 25, 1996.......... 571,364 $293 -- $-- $ (156) $ 895 $5,290 $ 6,322
------- ------ ------ ------ --------- ------- -------- -------------
------- ------ ------ ------ --------- ------- -------- -------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
THE COMPANY
BALANCE, October 26, 1996.......... -- $-- -- $-- $ -- $ -- $-- $--
Net income....................... 303 303
Initial issuance of common
stock.......................... 25,501 54,500 1 7,999 8,000
Issuance of warrants............. 1,327 1,327
------- ------ ------ ------ --------- ------- -------- -------------
BALANCE, December 31, 1996......... 25,501 54,500 1 -- 9,326 303 9,630
Net income....................... 696 696
Issuance of warrants............. 349 349
------- ------ ------ ------ --------- ------- -------- -------------
BALANCE, December 31, 1997......... 25,501 $-- 54,500 $ 1 $ -- $9,675 $ 999 $10,675
------- ------ ------ ------ --------- ------- -------- -------------
------- ------ ------ ------ --------- ------- -------- -------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-41
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997, THE PERIODS ENDED DECEMBER 31, 1996
AND OCTOBER 25, 1996 AND THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
THE COMPANY PREDECESSOR
--------------------------- ---------------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 25, DECEMBER 31,
1997 1996 1996 1995
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 696 $ 303 $ 1,119 $ 279
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 1,492 260 716 844
Amortization of deferred financing costs....................... 390 30 -- --
Provision for bad debts........................................ 1,791 287 1,274 2,706
Deferred tax provision (benefit)............................... 184 60 (71) (172)
Accretion of discount.......................................... 113 33 -- --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable.......................................... (1,949) 582 (2,116) (2,042)
Inventories.................................................. (2,990) (229) (621) 2,241
Prepaid expenses and other current assets.................... (166) 93 219 209
Other assets................................................. -- -- 28 82
Accounts payable............................................. 354 (462) 253 (2,246)
Accrued liabilities.......................................... 1,233 155 (335) 1,487
Other long-term liabilities.................................. -- -- 266 21
------------ ------------ ------------ ------------
Net cash provided by operating activities.................. 1,148 1,112 732 3,409
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..................... (1,355) (122) (962) (1,667)
Payment for acquisitions....................................... (10,408) (29,143) -- --
------------ ------------ ------------ ------------
Net cash used in investing activities...................... (11,763) (29,265) (962) (1,667)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable....................................... (1,032) -- (2,492) (588)
Payments of capital lease obligation........................... (70) -- -- --
Net borrowings (payments) under revolving credit facility...... 1,497 2,951 2,122 (1,184)
Proceeds from issuance of senior subordinated notes............ 3,960 -- -- --
Proceeds from issuance of notes payable........................ 6,790 18,500 -- --
Deferred financing costs....................................... (536) (1,258) -- --
Proceeds from initial issuance of common stock................. -- 8,000 -- --
Proceeds from exercise of stock options........................ -- -- 439 52
Purchase of treasury stock..................................... -- -- -- (156)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities........ 10,609 28,193 69 (1,876)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. (6) 40 (161) (134)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................... 40 -- 161 295
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................... $ 34 $ 40 $-- $ 161
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest..................................................... $ 2,620 $ 167 $ 510 $ 1,056
Income taxes................................................. 550 -- 927 322
Non cash investing and financing activities:.....................
Capital lease obligations...................................... 840 -- -- --
Payable to seller.............................................. 2,500 -- -- --
Issuance of common stock warrants.............................. -- 332 -- --
Tax benefit related to option exercises........................ -- -- 253 --
The accompanying notes are an integral part of the consolidated financial
statements.
F-42
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Wing Industries, Inc. ("WII") was founded in 1924 and incorporated in 1941.
WII manufacturers and markets bifold, louver, stile and rail, and flush doors,
and related products for the home improvement and home building industries.
On October 25, 1996, Wing Acquisition Corporation ("WAC"), a Delaware
corporation and a 100% owned subsidiary of Wing Industries Holdings, Inc.
("Holdings"), a Delaware corporation, purchased 100% of the outstanding common
stock from the selling shareholders of WII, a Texas corporation. Concurrent with
the acquisition, WAC merged with and into WII with WII being the surviving
corporation (the "Transaction"). Holdings did not have any significant activity
prior to the Transaction.
The Transaction resulted in Holdings effectively acquiring 100% of the
common stock of WII, for an aggregate purchase price of approximately $28,500
(hereafter, Holdings and/or WII will be referred to as the "Company"). The total
cost of the acquisition including direct costs incurred aggregated $29,143. The
purchase price was funded with borrowings under a line of credit of
approximately $2,643, term loan borrowings of $10,000, the issuance of $8,500 of
subordinated notes with attached warrants as well as the issuance of $8,000 of
common stock.
The acquisition was accounted for using the purchase method of accounting.
The continuing interest in the Company attributable to management's ownership
interest was not significant. The purchase price allocation was as follows:
Accounts and other receivables..................................... $ 8,106
Inventories........................................................ 7,798
Other current assets............................................... 708
Property, plant and equipment, net................................. 6,364
Other noncurrent assets............................................ 110
Goodwill........................................................... 12,920
Accounts payable (inclusive of $201 of checks drawn in excess of
bank balances)................................................... (4,777)
Accrued liabilities................................................ (1,233)
Deferred tax liability............................................. (771)
Other.............................................................. (82)
---------
Total purchase price......................................... $ 29,143
---------
---------
Included in accounts payable is approximately $507 payable to selling
shareholders for income tax benefits associated with expenses incurred in
connection with the Transaction. This amount remains outstanding at December 31,
1997.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany transactions and balances have
been eliminated in consolidation.
F-43
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INDUSTRY SEGMENT
The Company operates in a single industry segment, the fabrication and
distribution of interior and exterior doors and related products.
REVENUE RECOGNITION
Revenue from the sale of doors and related components is recorded at the
time of delivery and billing to the customer. Allowances are established to
recognize the risk of sales returns from customers.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with original maturities
of three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are net of allowances for doubtful accounts of $725 and
$830 as of December 31, 1997 and 1996, respectively.
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 18 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. Two customers accounted for
approximately 65% of gross sales for 1997, 55% for the periods ended December
31, 1996 and October 25, 1996 and 45% for 1995.
INVENTORIES
Inventories are valued at the lower of cost (last-in, first-out or "LIFO")
or market. 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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Major renewals and
betterments are capitalized, while maintenance and repairs are expensed as
incurred. Upon disposition of an asset, the related costs and accumulated
depreciation are removed from the accounts and any gain or loss is included in
income.
F-44
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Depreciation is provided principally on the straight-line method for financial
reporting purposes, using the following estimated useful lives for the
respective assets:
ESTIMATED
USEFUL LIFE
-------------
Buildings and improvements..................................................... 5 - 40 years
Machinery and equipment........................................................ 3 - 10 years
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.
Amortization expense of $376 and $95 was recorded for the year ended December
31, 1997 and the period ended December 31, 1996. There was no goodwill
recognized during the period ended October 25, 1996 or the year ended December
31, 1995. Accumulated amortization at December 31, 1997 and 1996 was $471 and
$95, respectively. 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 to the extent the carrying value of related assets (including
goodwill) exceeds the sum of the undiscounted cash flows from those related
assets.
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.
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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Significant
estimates are used in calculating allowance for bad debt, workers' compensation
and deferred tax assets and liabilities.
F-45
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed when incurred and were $1,800, $128, $1,222
and $1,255 for the year ended December 31, 1997, the periods ended December 31,
1996 and October 25, 1996, and the year ended December 31, 1995, respectively.
These costs are reflected in "selling, delivery, general and administrative" in
the consolidated statements of income.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, ("SFAS 130") "Reporting
Comprehensive Income". SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 130 is effective for financial statement
periods beginning after December 15, 1997. Management does not anticipate that
SFAS 130 will have a significant effect on the Company's consolidated financial
statements and related disclosures.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to conform
with current year presentation.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS:
In accordance with Statement of Financial Accounting Standards No. 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.
As of December 31, 1997 and 1996, the carrying amounts of certain financial
instruments employed by the Company, including cash, accounts receivable, and
trade accounts payable are representative of fair value because of the
short-term maturity of these instruments. The carrying amount of notes payable,
other than the exchangeable subordinated note, approximate fair value due to the
floating nature of the interest rates. Management estimates that the effective
interest rate for the exchangeable subordinated note approximates market for
similar instruments with comparable maturities. The fair value of all derivative
financial instruments which, as of December 31, 1997, include only an interest
rate swap agreement, is the amount at which they could be settled, based on
estimates obtained from the lender.
On March 31, 1997, the Company entered into an interest rate swap agreement
with a lender. Under the agreement, the Company pays a fixed rate of 6.5% and
receives a floating rate based on LIBOR on the aggregate notional principal
amount as determined in three month intervals. The transaction effectively
changes a portion of the Company's interest rate exposure from a floating rate
to a fixed rate basis. At December 31, 1997, the aggregate notional principal
amount of the swap agreement was $2,938 with a fair value of $19.
F-46
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
3. INVENTORIES:
Inventories are valued at the lower of cost or market using the last-in,
first-out (LIFO) method of accounting. Work-in process and finished goods
inventories consist of materials, labor, and manufacturing overhead. Inventories
consisted of the following at December 31:
1997 1996
--------- ---------
Raw materials............................................................ $ 6,816 $ 4,492
Work-in-process.......................................................... 1,591 1,590
Finished goods........................................................... 5,247 1,947
--------- ---------
13,654 8,029
LIFO reserve............................................................. (97) (2)
--------- ---------
$ 13,557 $ 8,027
--------- ---------
--------- ---------
The change in the LIFO reserve for the year ended December 31, 1997 resulted
in an increase in cost of sales of $95 and a decrease in cost of sales for the
periods ended December 31, 1996 and October 25, 1996 and the year ended December
31, 1995 of $2, $360, and $340, respectively.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, stated at cost, consisted of the following at
December 31:
1997 1996
--------- ---------
Land...................................................................... $ 40 $ 40
Buildings and improvements................................................ 1,812 1,800
Machinery and equipment................................................... 6,204 4,646
Leased computer equipment and software.................................... 770 --
--------- ---------
Total................................................................. 8,826 6,486
Less accumulated depreciation............................................. (1,273) (165)
--------- ---------
$ 7,553 $ 6,321
--------- ---------
--------- ---------
Depreciation expense was $1,108, $165, $716 and $844 for the year ended
December 31, 1997, the periods ended December 31, 1996 and October 25, 1996 and
the year ended December 31, 1995, respectively.
5. OTHER ASSETS:
Other assets consisted of the following at December 31:
1997 1996
--------- ---------
Non-compete agreement, net.................................................... $ 292 $ --
Deposits and other............................................................ 160 110
--------- ---------
$ 452 $ 110
--------- ---------
--------- ---------
F-47
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
5. OTHER ASSETS: (CONTINUED)
The cost of the non-compete agreement is being amortized over the terms of
the related agreement, which is five years. Amortization expense for the year
ended December 31, 1997 was $8.
6. 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 year ended December 31, 1997 and for the period
ended December 31, 1996 was $390, and $30, respectively. No amortization expense
was recorded for the period ended October 25, 1996 or the year ended December
31, 1995.
7. ACCRUED LIABILITIES:
Accrued liabilities include the following at December 31:
1997 1996
--------- ---------
Accrued salaries and wages................................................. $ 804 $ 460
Accrued interest........................................................... 540 207
Accrued taxes payable...................................................... 446 270
Accrued professional fees.................................................. 542 --
Other...................................................................... 185 204
--------- ---------
$ 2,517 $ 1,141
--------- ---------
--------- ---------
F-48
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
8. NOTES PAYABLE:
Notes payable consisted of the following at December 31:
1997 1996
--------- ---------
$14,500 revolving line of credit with BHF-Bank, dated October 25, 1996, as amended and
restated as of November 10, 1997.......................................................... $ 4,448 $ 2,951
$6,750 note payable to BHF-Bank, due in quarterly installments of $219 through September 30,
2002 and $591 through maturity, November 6, 2003, plus interest at the base rate (which
approximates prime) plus 1.5 percentage points (10% at December 31, 1997). Under terms of
the agreement, a portion of the note balance can be transferred to different interest rate
contracts. $6,531 was transferred to different interest rates equal to the three month
LIBOR plus three percentage points during the period (8.9062% at December 15, 1997)....... 6,750 --
$3,960 exchangeable subordinated note payable to GE Investment Private Placement Partners II
("GEIPPPII"), payable interest only in quarterly installments at 11% on the unpaid face
amount, due November 10, 2004, exchangeable into approximately 22,048 shares of common
stock. Valuation assigned to common stock warrants (approximately 6,175 shares) issued in
conjunction with this note resulted in a discount of $345 resulting in an effective
interest of approximately 12.9052%........................................................ 3,960 --
$40 exchangeable subordinated note payable to Ardwing L.L.C., payable interest only in
quarterly installments at 11% on the unpaid face amount, due November 10, 2004
exchangeable into approximately 78 shares of common stock. Valuation assigned to common
stock warrants (approximately 62 shares) issued in conjunction with this note resulted in
a discount of $4 resulting in an effective interest of 12.893%............................ 40 --
$10,000 note payable to BHF-Bank, due in quarterly installments of $250 through September
30, 1997 and $562 through maturity, October 25, 2001, plus interest at the base rate
(which approximates prime) plus 1.5 percentage points (10% and 9.75% at December 31, 1997
and 1996, respectively). Under terms of the agreement, a portion of the note balance can
be transferred to different interest rate contracts. $4,000, $5,000 and $3,438 were
transferred to contracts with interest rates equal to the six month LIBOR plus three
percentage points during the period (8.5625% at November 8, 1996, 8.8750% at August 13,
1997 and 8.8438% at November 7, 1997)..................................................... 9,000 10,000
$8,500 exchangeable subordinated note payable to GEIPPPII, payable interest only in
quarterly installments at 11% on the unpaid face amount due October 25, 2003, exchangeable
into approximately 46,669 shares of common stock. Valuation assigned to common stock
warrants (approximately 17,141 shares) issued in conjunction with this note resulted in a
discount of $995 resulting in an effective interest of approximately 13.6%................ 8,500 8,500
--------- ---------
32,698 21,451
Less:
Unamortized discount on exchangeable subordinated notes payable........................... (1,230) (962)
Current maturities of long-term debt...................................................... (3,128) (1,313)
--------- ---------
Long-term debt.......................................................................... $ 28,340 $ 19,176
--------- ---------
--------- ---------
F-49
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
8. NOTES PAYABLE: (CONTINUED)
Under provisions of the revolving line of credit, the Company can borrow up
to $14,500 subject to a borrowing base equal to the sum of 85% of the aggregate
amount of eligible accounts receivable and 50% of the aggregate value of
eligible inventory, as defined. Approximately $448 and $2,451 at December 31,
1997 and 1996, respectively, of the outstanding borrowings bear interest at the
bank's base rate (which approximates prime) plus one and one-half basis points
(10% and 9.75% at December 31, 1997 and 1996, respectively). The remaining
borrowings of $1,300 and $2,700 for 1997 and $500 in 1996, bear interest at the
applicable LIBOR rates at the time of the agreements plus three percentage
points (8.9063% at December 18, 1997, 8.875% at August 14, 1997, and 8.5% at
December 9, 1996).
The revolving line of credit expires on December 25, 2001 and repayments are
only required if the borrowing base falls below amounts borrowed. There are no
current maturities under this agreement based upon management's expected future
borrowing base levels, the fact that the agreement extends through 2001 and
management intends to finance future receivables and inventory for more than one
year. At December 31, 1997 and 1996, the Company had approximately $10,000 and
$6,550 of available borrowing capacity under the revolving line of credit,
respectively.
The Company has the ability to issue letters of credit for up to $1,000.
Issuance of letters of credit are applied against availability under the
revolving line of credit. At December 31, 1997 and 1996, no letters of credit
had been issued in conjunction with this agreement.
The note agreements contain certain covenants, including, among others,
requirements that the Company comply with certain financial and operational
results and ratios. In addition, the loan agreements place certain limitations
on the ability to pay dividends, to incur indebtedness, to change its present
method of doing business, to make certain investments (including capital
expenditures) or to sell assets. Substantially all of the Company's assets and
capital stock are collateralized under the BHF-Bank agreements. The $10,000 and
$6,750 term loan contains an "excess cash flow" provision mandating additional
principal payments if certain cash flow targets are met during each fiscal year.
No additional principal payments are required as of December 31, 1997 as related
to this provision for fiscal 1997.
Principal payments due during the next five years on long-term notes payable
as of December 31, 1997 are as follows:
1998............................................................... $ 3,128
1999............................................................... 3,128
2000............................................................... 3,128
2001............................................................... 7,576
2002............................................................... 878
Thereafter......................................................... 14,860
---------
$ 32,698
---------
---------
F-50
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. FEDERAL INCOME TAX:
The components of the provision for income taxes are as follows:
THE COMPANY PREDECESSOR
------------------------ ------------------------
DECEMBER DECEMBER OCTOBER 25, DECEMBER
31, 1997 31, 1996 1996 31, 1995
----------- ----------- ----------- -----------
Current:
Federal................... $ 462 $ 153 $ 441 $ 348
State..................... 49 16 47 36
Deferred:
Federal................... 165 54 164 (156)
State..................... 19 6 18 (16)
----------- ----------- ----------- -----------
Provision for income
taxes................. $ 695 $ 229 $ 670 $ 212
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Reconciliation of the federal statutory income tax rate to the effective tax
rate, was as follows:
THE COMPANY PREDECESSOR
---------------------------- ----------------------------
DECEMBER 31, DECEMBER 31, OCTOBER 25, DECEMBER 31,
1997 1996 1996 1995
------------- ------------- ------------- -------------
Tax computed at statutory
rate...................... $ 473 $ 181 $ 606 $ 167
State taxes................. 67 22 40 20
Goodwill amortization....... 110 18 -- --
Other....................... 45 8 24 25
----- ----- ----- -----
Provision for income
taxes..................... $ 695 $ 229 $ 670 $ 212
----- ----- ----- -----
----- ----- ----- -----
F-51
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. FEDERAL INCOME TAX: (CONTINUED)
Temporary differences which give rise to the deferred income tax assets and
liabilities are as follows:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Deferred income tax assets:
Inventory reserves..................................................... $ 72 $ 123
Vacation accrual....................................................... 80 82
Accounts receivable reserve............................................ 52 285
Deferred rent.......................................................... 28 30
Other.................................................................. 31 24
--------- ---------
263 544
Deferred income tax liabilities:
Depreciation........................................................... (449) (478)
LIFO reserve........................................................... (829) (897)
--------- ---------
(1,278) (1,375)
--------- ---------
Net deferred income tax liability........................................ (1,015) (831)
Less current deferred tax liability...................................... (566) (353)
--------- ---------
Long-term deferred tax liability......................................... $ (449) $ (478)
--------- ---------
--------- ---------
SFAS 109 requires a valuation allowance 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,
1997 and 1996, no valuation reserve was recorded.
10. PREFERRED STOCK:
The Board of Directors is authorized to provide for the issuance of
preferred stock in one or more series and to determine the designation, relative
powers, preferences and rights, and the qualifications, limitations or
restrictions of all shares of any such series.
Certain of the authorized but unissued shares of preferred stock are
reserved for exchange under the exchangeable subordinated notes held by
GEIPPPII.
11. RELATED PARTIES:
MANAGEMENT AND INVESTMENT BANKING AGREEMENT
In November 1997, the Company amended its ten-year Management and Investment
Banking Agreement (the "Management Agreement") with Ardshiel, Inc. ("Ardshiel").
Pursuant thereto, the Company has agreed to pay Ardshiel an annual fee of $375
plus expenses for ongoing management advisory services to the Company. The
Management Agreement gives Ardshiel the first opportunity, in most instances, to
perform investment banking services for the Company until such time as Ardshiel
and certain of its affiliates cease to be affiliates of the Company.
F-52
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. RELATED PARTIES: (CONTINUED)
The Management Agreement makes available on an ongoing basis the resources
of Ardshiel concerning a variety of financial and operational matters. The
services that have been and will continue to be provided by Ardshiel could not
otherwise be obtained by the Company without the addition of personnel or the
engagement of outside professional advisors.
FINANCIAL ADVISORY FEE
Ardshiel received a financial advisory fee of $600 plus expenses on the
closing date of the Transaction as compensation for its services as financial
advisor to the Company in connection with the Transaction. 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 for the Transaction.
Ardshiel received an investment banking fee of $250 plus expenses on the
closing date of the Door Division of Super Millwork, Inc. acquisition as
compensation for its services to the Company in connection with the acquisition.
CAPITALIZATION
Ardshiel holds one share of the Class A voting common stock of the Company.
In addition, certain affiliates of Ardshiel control Ardwing L.L.C., which is the
General Partner of Wing Partners, L.P. Wing Partners, L.P. holds 6,152 shares of
Class A voting common stock. Also, J.O. Hambro holds 4,348 shares of Class A
voting common stock. Three officers of the Company hold 2,500 shares of Class A
voting common stock. Through agreements with the officers and agreements with
J.O. Hambro, Ardshiel has an irrevocable proxy to vote the 2,500 shares and the
4,348 shares, respectively. Through various agreements, Wing Partners, L.P. has
the right to designate a majority of the Company's Directors.
GEIPPPII holds 12,500 shares of Class A voting common stock, 54,500 shares
of Class B nonvoting common stock and warrants to obtain 17,141 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. These warrants were valued at $995 at
the Transaction date. In addition, Ardshiel has 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 stock at any time. The value of these
warrants has been included in the total purchase price for the Wing Industries,
Inc., as appropriate.
GEIPPPII and Ardwing L.L.C. received warrants to obtain 6,175 and 62 shares
of Class A voting common stock, respectively, at no additional cost. Such
warrants can be converted into Class A common stock at any time. These warrants
were valued at $349 at the date of the acquisition of the Door Division of Super
Millwork, Inc.
12. CAPITAL LEASES:
The Company leases computer hardware and software under capital leases which
expire in 2001.
F-53
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
12. CAPITAL LEASES: (CONTINUED)
Future minimum lease payments and their present value as of December 31,
1997 were as follows:
1998................................................................................. $ 259
1999................................................................................. 259
2000................................................................................. 259
2001................................................................................. 130
-----
Total minimum lease payments......................................................... 907
Less interest........................................................................ (137)
-----
Present value of minimum lease payments.............................................. $ 770
-----
-----
13. COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with three executives
including its President and Chief Executive Officer as well as two Vice
Presidents. The agreements generally provide for terms of employment, annual
salaries, bonuses, eligibility for stock option awards and severance benefits.
Severance benefits for termination without cause are equal to one year's salary.
The terms of the employment agreements are three years.
CONSULTING AGREEMENTS
In October 1997, the Company entered into agreements with related parties to
provide consulting services to the Company over a two year period. Annual
minimum payments under the agreements are $205.
LITIGATION
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.
OPERATING LEASES
The Company leases automobiles, machinery and equipment, three manufacturing
facilities and its corporate offices under noncancelable operating leases which
expire at various times from 1998 to 2009.
F-54
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
13. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Future minimum rentals due under operating leases with initial or remaining
terms greater than twelve months are as follows:
AUTOMOBILES,
MACHINERY AND
REAL ESTATE EQUIPMENT TOTAL
----------- --------------- ---------
1998................................................... $ 734 $ 211 $ 945
1999................................................... 630 114 744
2000................................................... 594 62 656
2001................................................... 416 45 461
2002................................................... 416 8 424
Thereafter............................................. 907 -- 907
----------- ------ ---------
$ 3,697 $ 440 $ 4,137
----------- ------ ---------
----------- ------ ---------
Rental expense for all operating leases was $1,189, $172, $691 and $1,007
for the year ended December 31, 1997 for the periods ended December 31, 1996 and
October 25, 1996 and the year ended December 31, 1995.
14. ACQUISITION:
On November 10, 1997, the Company purchased certain assets of the Door
Division of Super Millwork, Inc. (SMI), a New York corporation for $12,500,
including contingent payments of $2,500 based on future operating results. The
total cost of the acquisition including transaction costs incurred aggregated
$13,444. The purchase price was funded with borrowings under a line of credit of
approximately $194, term loan borrowings of $6,750, and the issuance of
exchangeable subordinated notes of $4,000 with warrants. The purchase price
allocation is as follows:
Accounts receivable................................................ $ 1,791
Inventories........................................................ 2,540
Other current assets............................................... 31
Property, plant and equipment, net................................. 215
Other noncurrent assets............................................ 300
Deferred financing costs........................................... 536
Goodwill........................................................... 9,945
Current liabilities................................................ (1,914)
---------
Total purchase price........................................... $ 13,444
---------
---------
F-55
WING INDUSTRIES HOLDINGS, INC. AND SUSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
14. ACQUISITION: (CONTINUED)
The Company's Consolidated Statement of Income for the year ended December
31, 1997 includes SMI's operations from the date of acquisition, November 10,
1997. The following table presents the historical consolidated operating results
of the Company for the year ended December 31, 1997, and the periods ended
December 31, 1996 and October 25, 1996, compared to pro forma operating results
for such year and periods. The unaudited pro forma information presents
consolidated operating results as though the acquisition of SMI had occurred at
the beginning of the year and periods presented.
THE COMPANY
----------------------
1997 ACTUAL PRO FORMA
- ----------------------------------------------------------------------- --------- -----------
Net sales.............................................................. $ 99,059 $ 122,410
Income before income taxes............................................. 1,391 2,001
Net income............................................................. 696 1,306
THE COMPANY
------------------------ PREDECESSOR
ACTUAL PRO FORMA ------------------------
PERIOD PERIOD ACTUAL PRO FORMA
ENDED ENDED PERIOD PERIOD
DECEMBER DECEMBER ENDED ENDED
1996 31, 31, OCTOBER 25, OCTOBER 25,
- ----------------------------- ----------- ----------- ----------- -----------
Net sales.................... $ 13,200 $ 15,444 $ 62,880 $ 87,568
Income before income taxes... 532 634 1,789 2,916
Net income................... 303 405 1,119 2,246
15. STOCK OPTIONS:
Wing Industries, Inc. adopted stock option plans in 1981 and 1994
(collectively referred to as the "Original Plan"). The total number of shares
available for grant under the Original Plan was 125,000. Option prices (ranging
from $3.93 to $8.40 per share) were not less than fair market value (as
determined by the Board of Directors) on the date of grant. Both Incentive Stock
Options and Nonqualified Stock Options were issued as part of the Original Plan
(see definitions below). In conjunction with the Ardshiel transaction on October
25, 1996, all remaining unexercised options as of that date were exercised and
the related shares of stock were sold thus terminating the Original Plan. No
compensation expense was recorded during the period ended October 25, 1996 or
the year ended December 31, 1995.
The Wing Industries Holdings, Inc. Stock Option Plan (the "Plan") was
adopted on October 25, 1996 to provide certain employees, officers and directors
of the Company an opportunity to purchase Class A voting common stock of
Holdings. Options that may be granted under this plan include (1) "Incentive
Stock Options" as such term is defined in Section 422 of the Internal Revenue
Code of 1986, as amended and (2) Nonqualified Stock Options which are options
which do not constitute Incentive Stock Options.
An aggregate of 18,500 shares of Holdings' authorized but unissued Class A
common stock, subject to adjustment, as defined, may be granted under the Plan.
The price for each share issuable pursuant to the exercise of an Incentive
Stock Option shall not be less than the fair market value of a share of the
stock on the date the option is granted. The price for each share issuable
pursuant to the exercise of a Nonqualified Stock Option may be less than, equal
to or greater than the fair market value of the stock on the date such option is
granted.
F-56
WING INDUSTRIES HOLDINGS, INC. AND SUSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
15. STOCK OPTIONS: (CONTINUED)
Unless specifically provided for in an individual participant's stock option
agreement, each Incentive Stock Option shall expire no later than ten years
after the date the option is granted. The term of Nonqualified Stock Options is
determined at the discretion of the Compensation Committee at the time of the
grant. Vesting periods are determined by the Compensation Committee at the time
options are granted.
As of December 31, 1997, Nonqualified Stock Options for a total of 11,415
shares of Class A common stock of Holdings had been granted to three executives
of the Company. The options granted consist of three traunches: (a) "Free
options"--options to purchase 3,805 shares at a strike price of $.01 per share.
These options are exercisable only upon the occurrence of a value event. A value
event is defined as: (1) Holdings sells common stock in an offering registered
with the Securities and Exchange Commission, (2) Holdings is merged or
consolidated with another corporation in a merger in which the surviving
corporation has freely tradeable common stock, or (3) substantially all assets
of Holdings and subsidiary, taken as a whole, are sold or otherwise transferred
(b) "15% options"--options to purchase 3,805 shares at a strike price of $115
per share to November 30, 1997 and then increasing 15% per year thereafter and
(c) "30% options"--options to purchase 3,805 shares at a strike price of $130
per share to November 30, 1997 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.
Vesting for the above compensatory variable options is one third per year for
three years.
As of December 31, 1997, Nonqualified Stock Options for a total of 3,068
shares of Class A common stock of Holdings had been granted to certain employees
(middle managers) of the Company. These options are exercisable only upon the
occurrence of a value event (see definition of value event in the preceding
paragraph; or (4) all of the common stock of the Company is sold or otherwise
transferred). The options vest at such time of occurrence of a value event. The
options carry a strike price of $228.
The following table summarizes the transactions of the Plan for the year
ended December 31, 1997 and the period ended December 31, 1996:
1997 1996
--------- ---------
Outstanding options, beginning of period................................ 11,415 --
Granted................................................................. 3,068 11,415
--------- ---------
Outstanding options, end of year........................................ 14,483 11,415
--------- ---------
--------- ---------
Weighted average exercise price of options exercised.................... $ -- $ --
Weighted average exercise price of options granted...................... $ 228.00 $ 81.67
Weighted average exercise price, end of period.......................... $ 112.67 $ 81.67
Options exercisable, end of period...................................... 2,537 --
Options available for future grant...................................... 4,017 4,585
The fair value of each option granted was estimated on the date of grant for
the 15% options and 30% options using the Black-Scholes option pricing model.
The following assumptions were used; dividend yield of 0%; expected volatility
0%; a range of risk free interest rates of 5.7% to 6.4% and expected lives of
between one and five years. Based on the above, the calculated weighted average
fair values were $0 on the grant date. The "Free" options and the options
granted to middle managers are only exercisable upon the occurrence of a value
event, which is not probable at this time.
F-57
WING INDUSTRIES HOLDINGS, INC. AND SUSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
15. STOCK OPTIONS: (CONTINUED)
If a value event were to become probable the difference between the option
price and the then fair market value would be charged to earnings at that time.
No compensation expense was recognized in income for stock based employee
compensation awards during fiscal year 1997 or the period ended December 31,
1996.
The following table summarizes information about stock options outstanding
at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING (MONTHS) PRICE EXERCISABLE PRICE
- ---------------------------------------- ------------ -------------- ------------- ----------- -------------
Options:
$.01 3,805 107 $ .01 -- $ --
$115-130 7,610 107 $ 122.50 2,537 $ 122.50
$228 3,068 119 $ 228.00 -- $ --
In 1995, the FASB issued FASB Statement No. 123 ("SFAS 123") "Accounting for
Stock-Based Compensation" which, if fully adopted by the Company, would change
the methods the Company applies in recognizing the cost of the stock based
plans. Adoption of the cost recognition provisions of SFAS 123 is optional and
the Company has decided not to elect the provisions of SFAS 123. However, pro
forma disclosures as if the Company adopted the cost recognition provisions of
SFAS 123 are required by SFAS 123; however, there is no pro forma effect of
adopting the cost provisions of SFAS 123 for the year ended December 31, 1997,
the periods ended December 31, 1996 and October 25, 1996 and the year ended
December 31, 1995. In 1997 and 1996, the Company granted only nonqualified stock
options and warrants under the plans.
16. EMPLOYEE BENEFIT PLANS:
Prior to the formation of the Company, management announced the curtailment
of the defined benefit pension plan covering substantially all employees. Upon
receipt of a favorable tax determination letter from the Internal Revenue
Service, settlement of the plan occurred during the period ended October 25,
1996, at which time a liquidating distribution of $2,789 was made to the
eligible employees based on years of service and the employee's compensation
during the five consecutive years of employment in which compensation was the
highest. In addition, management retired the two nonqualified, unfunded, and
noncontributory plans for the directors. Settlement of the plans occurred during
the period ended October 25, 1996 at which time a lump-sum payout of $801 was
made to the directors.
The Company maintains an employees' savings plan (the "Plan") under Section
401(k) of the Internal Revenue Code. The Plan covers substantially all
employees. Employees are eligible after one year of service and may enter the
Plan after such time on the quarterly enrollment dates. Under the Plan,
employees generally may elect to exclude up to 15% of their compensation from
amounts subject to income tax as a salary deferral contribution. The Company
makes a discretionary matching contribution to each employee in an amount equal
to 50% of the first 4% of each employee's contributions. The Plan runs on a
calendar year with contributions paid once a year. The Company's matching
contributions to the Plan
F-58
WING INDUSTRIES HOLDINGS, INC. AND SUSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
16. EMPLOYEE BENEFIT PLANS: (CONTINUED)
were approximately $85, $78 and $19 for the plan years ending December 31, 1997,
1996 and 1995, respectively.
17. SUBSEQUENT EVENT:
Pursuant to the terms of an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of August 3, 1998, the Company will become a wholly-owned
subsidiary of Atrium Companies, Inc. and an indirect wholly owned subsidiary of
D and W Holdings, Inc. ("D&W") (the "Merger"). D&W was formed to effect the
Merger by the principal equity holders of the Company and Door Holdings, Inc.
("Door"), an affiliate. Pursuant to the terms of the Merger Agreement, D&W is
also acquiring Atrium Companies, Inc. Transactions contemplated pursuant to the
Merger Agreement are expected to be consummated no later than September 30,
1998.
Immediately prior to the merger, GEIPPPII and Ardshiel, Inc., equity holders
of the Company are expected to increase their respective ownership in the Class
A voting common stock of the Company by converting their respective interests in
exchangeable subordinated notes payable, warrants and Class B nonvoting common
stock.
In connection with the Merger, Management will exchange all their options in
the Company for options to purchase stock in D&W. It is also expected that the
Management Agreement will be terminated and replaced by a new agreement with
D&W.
As a part of the Merger, the notes payable remaining after conversion will
be repaid and the deferred financing cost will be expensed.
F-59
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Wing Industries Holdings, Inc.
In our opinion, the accompanying carve-out balance sheets and the related
carve-out statements of income and changes in business unit equity and of
carve-out cash flows present fairly, in all material respects, the financial
position of the Door Division of Super Millwork, Inc. at November 10, 1997 and
December 31, 1996, and the results of its operations and its cash flows for the
period from January 1, 1997 to November 10, 1997 and the year ended December 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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
September 23, 1998
F-60
DOOR DIVISION OF SUPER MILLWORK, INC.
CARVE-OUT BALANCE SHEETS
(DOLLARS IN THOUSANDS)
NOVEMBER 10, DECEMBER 31,
1997 1996
------------- -------------
ASSETS
CURRENT ASSETS:
Accounts receivable, net........................................................... $ 1,891 $ 1,802
Inventories........................................................................ 2,567 1,720
Prepaid expenses................................................................... 31 91
------ ------
Total current assets............................................................... 4,489 3,613
PROPERTY AND EQUIPMENT, net.......................................................... 222 244
------ ------
Total assets....................................................................... $ 4,711 $ 3,857
------ ------
------ ------
LIABILITIES AND BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................... $ 1,650 $ 350
Accrued liabilities................................................................ 108 661
Payables to former affiliate....................................................... 1,430 1,933
------ ------
Total current liabilities.......................................................... 3,188 2,944
COMMITMENTS AND CONTINGENCIES
BUSINESS UNIT EQUITY:
Business unit equity............................................................... 1,523 913
------ ------
Total liabilities and business unit equity......................................... $ 4,711 $ 3,857
------ ------
------ ------
The accompanying notes are an integral part of the carve-out financial
statements.
F-61
DOOR DIVISION OF SUPER MILLWORK, INC.
CARVE-OUT STATEMENTS OF INCOME AND CHANGES IN BUSINESS UNIT EQUITY
FOR THE PERIOD FROM JANUARY 1, 1997 TO NOVEMBER 10, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
1997 1996
--------- ---------
NET SALES................................................................................... $ 23,351 $ 26,932
COST OF GOODS SOLD.......................................................................... 18,085 20,901
--------- ---------
Gross profit.............................................................................. 5,266 6,031
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses.................................... 4,487 5,433
--------- ---------
Income from operations.................................................................... 779 598
INTEREST EXPENSE............................................................................ 169 230
OTHER INCOME (EXPENSE), net................................................................. -- 861
--------- ---------
NET INCOME.................................................................................. 610 1,229
BUSINESS UNIT EQUITY (DEFICIT), BEGINNING OF PERIOD......................................... 913 (316)
--------- ---------
BUSINESS UNIT EQUITY, END OF PERIOD......................................................... $ 1,523 $ 913
--------- ---------
--------- ---------
The accompanying notes are an integral part of the carve-out financial
statements.
F-62
DOOR DIVISION OF SUPER MILLWORK, INC.
CARVE-OUT STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 TO NOVEMBER 10, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................... $ 610 $ 1,229
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of Octagon assets............................................................. -- (861)
Depreciation and amortization.............................................................. 44 93
Changes in assets and liabilities, in 1997 and 1996:
Accounts receivable, net................................................................... (89) (728)
Inventories................................................................................ (847) 690
Prepaid expenses........................................................................... 60 25
Accounts payable........................................................................... 1,300 (294)
Accrued liabilities........................................................................ (553) 317
--------- ---------
Net cash provided by operating activities................................................ 525 471
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................................................... (22) (120)
--------- ---------
Net cash used in investing activities...................................................... (22) (120)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in payables due to former affiliate................................................... (503) (351)
--------- ---------
Net cash used in financing activities...................................................... (503) (351)
NET CHANGE IN CASH AND CASH EQUIVALENTS........................................................ -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................................. -- --
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................................................... $ -- $ --
--------- ---------
--------- ---------
The accompanying notes are an integral part of the carve-out financial
statements.
F-63
DOOR DIVISION OF SUPER MILLWORK, INC
NOTES TO CARVE-OUT FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The Door Division of Super Millwork, Inc., (the "Company"), located in
Melville, NY, is engaged in the distribution, manufacture and sale of doors and
other millwork throughout the United States. The Company, along with Marvin
Windows, comprised the consolidated entity of Super Millwork, Inc.
The financial statements reflect the "carve-out" financial position of the
Company as of November 10, 1997 and December 31, 1996, and the results of its
operations and its cash flows for the period from January 1, 1997 to November
10, 1997 and the year ended December 31, 1996. The financial statements have
been prepared as if the Company had operated as a stand-alone entity for all
periods presented, and include those assets, liabilities, revenues and expenses
directly attributable to the Company's operations. Certain general and
administrative expenses were allocated to the Company on various bases,
including percentage of sales and others based on relative size of each entity.
In the opinion of management, the allocations are reasonable and reflect all
costs of doing business. However, such expenses are not necessarily indicative
of, and it is not practicable for management to estimate the level of expenses
that might have been incurred if the Company had been operating as a separate
entity.
REVENUE RECOGNITION
Revenue from the sale of doors and related components is recorded at the
time of delivery and billing to the customer. Allowances are established to
recognize the risk of sales returns from customers.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with original maturities
of three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are net of allowance for doubtful accounts of $40 as of
November 10, 1997 and December 31, 1996.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of trade accounts receivable.
The Company is a wholesale distributor and manufacturer of doors and related
products, which it sells to commercial end-users, generally on 30-day or less
terms. It performs periodic credit evaluations of its customers and has credit
insurance. The Company believes that any concentration of credit risk related to
trade accounts receivable is limited because of the large number of customers
included in its customer base, and the credit worthiness of its largest customer
which accounted for approximately 65% of sales during the period from January 1,
1997 to November 10, 1997.
INVENTORIES
Inventories consist of doors and other millwork and are valued at the lower
of cost (first-in, first-out or "FIFO") or market. Inventories consist primarily
of raw materials, however small amounts of work-in-process and finished goods
inventories are maintained. Work-in-process and finished goods inventories
consist of materials, labor, and manufacturing overhead.
F-64
DOOR DIVISION OF SUPER MILLWORK, INC
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation. The
Company provides for depreciation and amortization using straight-line and
accelerated methods.
ESTIMATED
USEFUL LIFE
-------------
Office equipment............................................................... 5 years
Machinery and equipment........................................................ 5 - 10 years
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.
INCOME TAXES
The Company's shareholders elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. As a result, there is no provision
for federal income taxes in the accompanying financial statements, as such taxes
are the responsibility of the individual shareholders.
USE OF ESTIMATES
The preparation of 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.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS:
In accordance with Statement of Financial Accounting Standards (SFAS) No.
107, "Disclosures About Fair Value of Financial Instruments," the Company
evaluates fair value disclosures for significant financial instruments. The
carrying amounts of accounts receivable, accounts payable, accrued expenses and
notes payable approximate fair value due to the short-term maturity of these
instruments.
The Company is not an active participant in financial derivative
transactions.
F-65
DOOR DIVISION OF SUPER MILLWORK, INC
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at November 10, 1997 and
December 31, 1996:
1997 1996
--------- ---------
Warehouse equipment...................................................... $ 874 $ 852
Office equipment......................................................... 492 492
--------- ---------
Total.................................................................. 1,366 1,344
Less accumulated depreciation and amortization........................... (1,144) (1,100)
--------- ---------
$ 222 $ 244
--------- ---------
--------- ---------
Depreciation expense was $44 and $93 for the period from January 1, 1997 to
November 10, 1997 and year ended December 31, 1996.
4. PAYABLES TO FORMER AFFILIATE:
Payables to former affiliate consisted of allocated amounts related to a
revolving credit line and cash overdraft for outstanding checks of Super
Millwork, Inc. The revolving credit line enabled the Company and Marvin Windows
to borrow up to $4,500 and bore interest at a rate based upon the lender's prime
rate plus two percent. The revolving credit line was collateralized by
substantially all assets of the Company, personally guaranteed by certain
shareholders, due on demand and contained various covenants that restricted the
Company from taking certain actions. Prior to the transaction described in Note
8, the revolving credit line of the Company of $1,333 was retired.
5. COMMITMENTS AND CONTINGENCIES:
The Company, along with its former affiliate, entered into operating lease
agreements for office and manufacturing space with unrelated third parties.
Total rent expense for the period from January 1, 1997 to November 10, 1997 and
year ended December 31, 1996 was $260 and $227, respectively. The lease remained
with the former affiliate following the sale of the Company as described in Note
8.
6. OTHER INCOME:
Other income consists of a gain on the sale of the Company's Octagon
Division during the year ended December 31, 1996. Assets sold included a
customer list, inventories, property and equipment and prepaid expenses. A
receivable of $598 from the sale was included in accounts receivable at December
31, 1996.
7. EMPLOYEE BENEFIT PLANS:
During 1993, the Company established an employee benefit plan in accordance
with Section 401(k) of the Internal Revenue Code for all employees who meet
certain eligibility criteria who are not covered under a collective bargaining
agreement. The Company matches 50% of each employee contributions up to a
maximum of 4%. During the period from January 1, 1997 to November 10, 1997 and
the year ended December 31, 1996, the Company incurred total expenses of $9 and
$6, respectively.
F-66
DOOR DIVISION OF SUPER MILLWORK, INC
NOTES TO CARVE-OUT FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. SUBSEQUENT EVENT:
On November 10, 1997, the net assets of the Company, excluding the revolving
credit line portion of payables to former affiliate (see Note 4) were acquired
by Wing Industries Holdings, Inc. for $12,500 including a contingent payment of
$2,500 based on future operating results.
F-67
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Door Holdings, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, stockholder's equity and of cash flows present
fairly, in all material respects, the financial position of R. G. Darby Company,
Inc. and Total Trim, Inc. (the "Companies") at December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years ended
December 31, 1997 and 1996, in conformity with generally accepted accounting
principles. These combined financial statements are the responsibility of the
Companies' management: our responsibility is to express an opinion on these
combined financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards 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
Birmingham, Alabama
September 24, 1998
F-68
R.G. DARBY COMPANY, INC. AND TOTAL TRIM, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1997 1996
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................................... $ 722 $ 1,650
Accounts receivable, net..................................................................... 1,807 1,744
Inventories.................................................................................. 1,275 947
Prepaid expenses and other current assets.................................................... 23 397
--------- ---------
Total current assets......................................................................... 3,827 4,738
PROPERTY AND EQUIPMENT, net.................................................................... 451 587
--------- ---------
Total assets................................................................................. $ 4,278 $ 5,325
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Line of credit............................................................................... $ 6 $ 690
Current portion of notes payable............................................................. -- 91
Accounts payable............................................................................. 684 569
Accrued liabilities.......................................................................... 874 832
--------- ---------
Total current liabilities.................................................................... 1,564 2,182
LONG-TERM LIABILITIES:
Notes payable................................................................................ -- 153
--------- ---------
Total liabilities............................................................................ 1,564 2,335
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, R.G. Darby Company, Inc.
(1,000 shares at $1 par value authorized and issued)....................................... 1 1
Common stock, Total Trim, Inc. (1,000 shares at $.01 par value authorized, issued and
outstanding)............................................................................... -- --
Retained earnings............................................................................ 2,813 3,089
R.G. Darby Company, Inc. treasury stock (125 shares at cost)................................. (100) (100)
--------- ---------
Total stockholder's equity................................................................... 2,714 2,990
--------- ---------
Total liabilities and stockholder's equity................................................... $ 4,278 $ 5,325
--------- ---------
--------- ---------
The accompanying notes are an integral part of these combined financial
statements.
F-69
R.G. DARBY COMPANY, INC. AND TOTAL TRIM, INC.
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1997 1996
--------- ---------
NET SALES................................................................................... $ 16,956 $ 15,777
COST OF GOODS SOLD.......................................................................... 10,227 9,561
--------- ---------
Gross profit.............................................................................. 6,729 6,216
OPERATING EXPENSES:
Selling, delivery, general and administrative expense..................................... 4,707 4,071
--------- ---------
Income from operations.................................................................... 2,022 2,145
--------- ---------
INTEREST INCOME............................................................................. 61 58
INTEREST EXPENSE............................................................................ (61) (78)
OTHER INCOME (EXPENSE), net................................................................. 29 9
--------- ---------
NET INCOME.................................................................................. $ 2,051 $ 2,134
--------- ---------
--------- ---------
The accompanying notes are an integral part of these combined financial
statements.
F-70
R.G. DARBY COMPANY, INC. AND TOTAL TRIM, INC.
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
R.G. DARBY COMPANY
TOTAL TRIM TOTAL
---------------------- ------------------------ RETAINED TREASURY STOCKHOLDER'S
SHARES AMOUNT SHARES AMOUNT EARNINGS STOCK EQUITY
----------- --------- ----------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1995............... 1,000 $ 1 1,000 $ -- $ 2,685 $ (100) $ 2,586
Stockholder distributions,
Total Trim, Inc........................ (506) (506)
Stockholder distributions,
R.G. Darby Company, Inc................ (1,224) (1,224)
Net income............................... 2,134 2,134
----- --------- ----- ----- ----------- ----- ------------
BALANCE, December 31, 1996............... 1,000 1 1,000 -- 3,089 (100) 2,990
Stockholder distributions,
Total Trim, Inc........................ (1,008) (1,008)
Stockholder distributions,
R.G. Darby Company, Inc................ (1,319) (1,319)
Net income............................... 2,051 2,051
----- --------- ----- ----- ----------- ----- ------------
BALANCE, December 31, 1997............... 1,000 $ 1 1,000 $ -- $ 2,813 $ (100) $ 2,714
----- --------- ----- ----- ----------- ----- ------------
----- --------- ----- ----- ----------- ----- ------------
The accompanying notes are an integral part of these combined financial
statements.
F-71
R.G. DARBY COMPANY, INC. AND TOTAL TRIM, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 2,051 $ 2,134
Adjustments to reconcile net income to net cash provided by operating activities:.......
Depreciation.......................................................................... 154 189
Loss on disposal of equipment......................................................... 21 --
Change in assets and liabilities:
Accounts receivable, net.............................................................. (63) 78
Inventories........................................................................... (328) (232)
Prepaid expenses and other current assets............................................. 374 (28)
Accounts payable...................................................................... 115 (105)
Accrued liabilities................................................................... 42 123
---------- ----------
Net cash provided by operating activities......................................... 2,366 2,159
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment..................................................... (133) (136)
Proceeds from disposal of property and equipment........................................ 94 --
---------- ----------
Net cash used in investing activities............................................. (39) (136)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement............................................. 15,784 15,264
Repayments under revolving credit agreement............................................. (16,468) (15,416)
Proceeds from the issuance of long term debt............................................ -- 32
Repayment of long-term debt............................................................. (244) (141)
Stockholder distributions............................................................... (2,327) (1,730)
---------- ----------
Net cash used in financing activities............................................. (3,255) (1,991)
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...................................... (928) 32
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.............................................. 1,650 1,618
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR.................................................... $ 722 $ 1,650
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for interest.................................................. $ 67 $ 78
The accompanying notes are an integral part of these combined financial
statements.
F-72
R. G. DARBY COMPANY, INC. AND TOTAL TRIM, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. ORGANIZATION:
DESCRIPTION OF THE COMPANY AND REPORTING ENTITY
R. G. Darby Company, Inc. ("R. G. Darby Company") and Total Trim, Inc.
("Total Trim") (the "Companies"), founded in 1983, provide interior and exterior
doors, vanity mirrors, door knobs and locks, shelving, molding, and related
installation to contractors of apartment buildings and hotels. The Companies are
based in Florence, Alabama and operate out of one facility. The Companies supply
materials and/ or provide contract labor to install purchased materials.
Material requirements, with the exception of doors, are shipped directly from
the manufacturer to the contractor's location. Doors are assembled and shipped
from the Companies' production facility. The Companies consist of three
entities--R. G. Darby Company is the sales company for materials; Darby Doors, a
division of R. G. Darby Company, is the manufacturing division that produces the
doors that are sold through R. G. Darby Company; and Total Trim is responsible
for contracting labor for any installation work. These entities perform work in
approximately 28 states, mainly in the South, Mid-Atlantic and Northeast.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of R. G. Darby
Company and Total Trim after elimination of all significant intercompany
accounts and transactions. Combined financial statements are presented as the
Companies are under the common control of their sole stockholder, R. G. Darby.
See Note 9.
CASH AND CASH EQUIVALENTS
The Companies consider all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Companies hold
cash and cash equivalents primarily in one major banking institution.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are net of allowances for doubtful accounts of $175 and
$66 as of December 31, 1997 and 1996, respectively.
REVENUE RECOGNITION
The Companies record sales of materials upon delivery of the materials to
the contractor's location. Revenue relating to the installation services is
recorded as the services are provided.
INVENTORIES
Inventories are stated at the lower of cost ( first-in, first-out or "FIFO")
or market and consist primarily of raw materials. Finished goods include direct
materials, labor and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Major renewals and betterments
are capitalized, while maintenance and repairs are expensed as incurred. Upon
disposition of an asset, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is included in income.
F-73
R. G. DARBY COMPANY, INC. AND TOTAL TRIM, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Depreciation is provided principally on the straight-line method for financial
reporting purposes, using the following estimated useful lives of the respective
assets:
Furniture and fixtures.................. 7 - 10 years
Vehicles................................ 3 - 5 years
Machinery and equipment................. 7 - 10 years
INCOME TAXES
The combined financial statements reflect the Companies' S corporation
income tax status. Their taxable income or loss and tax credits are included in
the personal income tax returns of their stockholder and the resulting tax
liabilities or benefits are those of the stockholder.
ACCOUNTING ESTIMATES
The preparation of combined 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 at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
3. INVENTORIES:
The inventories for R. G. Darby Company at December 31, 1997 and 1996,
respectively, consisted of the following:
1997 1996
--------- ---------
Raw materials.............................................................. $ 1,146 $ 900
Finished goods............................................................. 129 47
--------- ---------
$ 1,275 $ 947
--------- ---------
--------- ---------
4. PROPERTY AND EQUIPMENT:
The property and equipment for R.G. Darby Company at December 31, 1997 and
1996, respectively, consisted of the following:
1997 1996
--------- ---------
Furniture and fixtures..................................................... $ 118 $ 138
Vehicles................................................................... 559 670
Machinery and equipment.................................................... 428 470
--------- ---------
Total.................................................................... 1,105 1,278
Less accumulated depreciation.............................................. (654) (691)
--------- ---------
$ 451 $ 587
--------- ---------
--------- ---------
Depreciation expense was $154 and $189 for the years ended December 31, 1997
and 1996, respectively.
F-74
R. G. DARBY COMPANY, INC. AND TOTAL TRIM, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
5. LINE OF CREDIT AND NOTES PAYABLE:
Under R. G. Darby Company's credit facility, which expires in June 1998,
available borrowings are determined by the amounts of eligible assets of R. G.
Darby Company, as defined in the agreement, including accounts receivable and
inventories, with maximum borrowings of $2,000. The interest rate is based upon
the lender's prime rate plus 1% (9.5% and 9.25% at December 31, 1997 and 1996,
respectively). As of December 31, 1997 and 1996, R. G. Darby Company had $6 and
$690, respectively, outstanding under the credit facility. The credit facility
was terminated in connection with the transaction discussed in Note 9.
At December 31, 1996, the Companies had certain notes payable to banks as
follows:
Note payable for various loans collateralized by vehicles with
monthly payments of $6, interest rates from 7.9% to 9%, due
April 1997 through March 1998................................... $ 44
Note payable collateralized by plant equipment with annual
payments of $50, interest rate of 9.08%, due May 2000........... 200
---------
$ 244
---------
---------
Each of the notes payable were repaid in full by R.G. Darby Company in 1997.
As of December 31, 1997, the Company had no other outstanding indebtedness.
6. RELATED PARTY TRANSACTIONS:
The Companies lease their facilities directly from their stockholder. The
lease agreement, as amended on January 8, 1998, requires annual payments of $137
through December 31, 2011. The Companies have the option to extend the lease
agreement for up to three additional five year terms. In addition, the lease
agreement was subsequently amended effective June 1, 1998 to increase the annual
payments to $185 in connection with the lease of additional warehouse and office
space by the Companies. Facility lease payments to the stockholder amounted to
$137 during 1997 and 1996.
The stockholder was paid bonuses of $1,356 and $1,063 from R. G. Darby
Company for the years ended December 31, 1997 and 1996, respectively.
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Companies are 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 a kind, or involve such amounts
that an unfavorable disposition would not have a material effect on the combined
financial position or results of operations of the Companies.
F-75
R. G. DARBY COMPANY, INC. AND TOTAL TRIM, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
OPERATING LEASES
The Companies lease automobiles, trucks, and office equipment under
noncancelable operating leases which expire at various times through 2001.
Future minimum lease payments under operating leases having noncancelable terms
of more than one year at December 31, 1997 are as follows:
1998................................................................. $ 100
1999................................................................. 99
2000................................................................. 23
2001................................................................. 2
---------
$ 224
---------
---------
Rental expense for all operating leases was approximately $83 and $61 for
the years ended December 31, 1997 and 1996, respectively. See Note 6 for
discussion of the Companies' related party operating lease agreement.
8. RETIREMENT PLAN:
The Companies maintain an Integrated Profit Sharing Plan (the Plan) under
Section 401 of the Internal Revenue Code. All employees are eligible to
participate in the Plan after six months of service and may enter the Plan after
such time on the annual enrollment date of January 1st. Under the Plan, the
Companies will contribute to the Plan an amount determined at their discretion
and may choose not to contribute to the Plan for a particular plan year. The
Plan does not permit employees to make contributions. The Companies'
contribution to the Plan was approximately $58 for each of the years ended
December 31, 1997 and 1996, respectively.
9. SUBSEQUENT EVENTS:
Effective January 8, 1998, the Companies were sold to Door Holdings, Inc.
("Door"). As specified in the agreement, the sales price was $24,000 plus or
minus any adjustment resulting from the Companies' combined working capital, as
defined in the sale agreement, being above or below $2,323 as of the closing
date. Included in the $24,000 is a contingent payment of $4,000 to be paid to
the former stockholder based on future operating results. An additional $2,000
payment, which has not been recorded in the purchase price, may be paid to the
Seller if these financial targets are substantially exceeded. The purchase price
was funded primarily with $5,700 equity contributions, $16,000 of long-term
debt, and accrual of the deferred payment. Door did not have any significant
activity prior to this transaction.
Pursuant to the terms of an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of August 3, 1998, Door will become a wholly-owned
subsidiary of Atrium Companies, Inc. and an indirect wholly owned subsidiary of
D and W Holdings, Inc. ("D&W") (the "Merger"). D&W was formed to effect the
Merger by the principal equity holders of Door and Wing Industries Holdings,
Inc., an affiliate of Door. Pursuant to the terms of the Merger Agreement, D&W
is also acquiring Atrium Companies, Inc. Transactions contemplated pursuant to
the Merger Agreement are expected to be consummated no later than September 30,
1998.
F-76
ATRIUM COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
JUNE 30,
1998
----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................................... $ 1
Equity securities--available for sale............................................................... 113
Accounts receivable, net............................................................................ 34,005
Inventories......................................................................................... 19,091
Prepaid expenses and other current assets........................................................... 988
Deferred tax asset.................................................................................. 692
----------
Total current assets................................................................................ 54,890
PROPERTY, PLANT AND EQUIPMENT, net.................................................................... 18,540
GOODWILL, net......................................................................................... 37,550
DEFERRED FINANCING COSTS, net......................................................................... 5,143
OTHER ASSETS.......................................................................................... 4,067
----------
Total assets........................................................................................ $ 120,190
----------
----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of notes payable.................................................................... $ 1,900
Accounts payable.................................................................................... 17,350
Accrued liabilities................................................................................. 8,122
----------
Total current liabilities........................................................................... 27,372
LONG-TERM LIABILITIES:
Notes payable....................................................................................... 123,058
Deferred tax liability.............................................................................. 1,058
Other long-term liabilities......................................................................... 300
----------
Total long-term liabilities......................................................................... 124,416
----------
Total liabilities................................................................................... 151,788
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock $.01 par value, 3,000 shares authorized,
100 shares issued and outstanding................................................................. --
Paid-in capital..................................................................................... 33,512
Accumulated deficit................................................................................. (65,117)
Accumulated other comprehensive income.............................................................. 7
----------
Total stockholder's deficit......................................................................... (31,598)
----------
Total liabilities and stockholder's deficit......................................................... $ 120,190
----------
----------
The accompanying notes are an integral part of the consolidated financial
statements.
F-77
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1998 1997
---------- ----------
NET SALES................................................................................. $ 106,482 $ 85,277
COST OF GOODS SOLD........................................................................ 70,526 54,379
---------- ----------
Gross profit............................................................................ 35,956 30,898
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses.................................. 24,377 20,815
Stock option compensation expense....................................................... 447 203
---------- ----------
24,824 21,018
---------- ----------
Income from operations.................................................................. 11,132 9,880
INTEREST EXPENSE.......................................................................... 6,241 5,594
OTHER INCOME (EXPENSE), net............................................................... (223) 1,037
---------- ----------
Income before income taxes.............................................................. 4,668 5,323
PROVISION FOR INCOME TAXES................................................................ 1,711 1,886
---------- ----------
NET INCOME................................................................................ $ 2,957 $ 3,437
---------- ----------
---------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
F-78
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1998 1997
--------- ---------
Net income..................................................................................... $ 2,957 $ 3,437
Other comprehensive income:....................................................................
Unrealized gains on securities:..............................................................
Unrealized holding gains arising during the period......................................... 86 10
--------- ---------
Comprehensive income......................................................................... $ 3,043 $ 3,447
--------- ---------
--------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-79
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ACCUMULATED
COMMON STOCK OTHER TOTAL
------------------------ PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT INCOME DEFICIT
----------- ----------- --------- ------------ ----------------- ------------
BALANCE, December 31, 1997..................... 100 $ -- $ 32,790 $ (67,503) $ (79) $ (34,792)
Contributions from Holding................... -- -- 275 -- -- 275
Distributions to Holding..................... -- -- -- (571) -- (571)
Stock option compensation expense............ -- -- 447 -- -- 447
Other comprehensive income................... -- -- -- -- 86 86
Net income................................... -- -- -- 2,957 -- 2,957
--- ----- --------- ------------ --- ------------
BALANCE, June 30, 1998......................... 100 $ -- $ 33,512 $ (65,117) $ 7 $ (31,598)
--- ----- --------- ------------ --- ------------
--- ----- --------- ------------ --- ------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-80
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 2,957 $ 3,437
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................................... 2,154 1,533
Amortization of deferred financing costs.............................................. 326 322
Stock option compensation expense..................................................... 447 203
Gain on retirement of assets.......................................................... (37) (9)
Gain on sale of equity securities..................................................... -- (2)
Deferred tax provision................................................................ -- 214
Changes in assets and liabilities, net of acquisition in 1998:
Accounts receivable, net.............................................................. (6,531) (4,824)
Inventories........................................................................... (922) (6,245)
Prepaid expenses and other current assets............................................. 818 (122)
Accounts payable...................................................................... 3,838 3,575
Accrued liabilities................................................................... (299) 1,009
---------- ----------
Net cash provided by (used in) operating activities............................... 2,751 (909)
---------- ----------
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.............................................. (877) (1,259)
Proceeds from sale of assets............................................................ 56 11
Purchases of equity securities.......................................................... -- (480)
Proceeds from sale of equity securities................................................. -- 375
Payment for acquisition, net of cash acquired........................................... (26,780) --
Increase in other assets................................................................ (1,082) (1,168)
---------- ----------
Net cash used in investing activities............................................. (28,683) (2,521)
---------- ----------
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable.................................................. 17,500 --
Payment on note payable................................................................. (400) --
Net borrowings under revolving credit facility.......................................... 7,858 2,447
Checks drawn in excess of bank balances................................................. 1,777 807
Deferred financing costs................................................................ (507) (419)
Contributions from Holding.............................................................. 275 196
Distributions to Holding................................................................ (571) (110)
---------- ----------
Net cash provided by financing activities............................................. 25,932 2,921
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... -- (509)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................................ 1 617
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................................. $ 1 $ 108
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE:
Cash paid (received) during the period for:
Interest.............................................................................. $ 5,795 $ 4,915
Income taxes, net of refunds.......................................................... (209) (1,229)
The accompanying notes are an integral part of the consolidated financial
statements.
F-81
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION:
The unaudited consolidated results of operations and cash flows of Atrium
Companies, Inc. (the "Company") for the six months ended June 30, 1998 and 1997,
and financial position as of June 30, 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial reporting, the
instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
These consolidated financial statements and footnotes should be read in
conjunction with the Company's audited financial statements for the fiscal years
ended December 31, 1997, 1996 and 1995 included in the Company's Form 10-K as
filed with the Securities and Exchange Commission on March 30, 1998. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the interim
financial information have been included. The results of operations for any
interim period are not necessarily indicative of the results of operations for a
full year. Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. 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 as other
comprehensive income in stockholder's equity.
3. INVENTORIES:
Inventories are valued at the lower of cost or market using the last-in,
first-out (LIFO) method of accounting. Work-in-process and finished goods
inventories consist of materials, labor, and manufacturing overhead. Inventories
consisted of the following:
JUNE 30,
1998
---------
Raw materials...................................................................... $ 15,293
Work-in-process.................................................................... 681
Finished goods..................................................................... 4,456
---------
20,430
LIFO reserve....................................................................... (1,339)
---------
$ 19,091
---------
---------
F-82
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
4. NOTES PAYABLE:
Notes payable consisted of the following:
JUNE 30,
1998
----------
Senior subordinated notes......................................................... $ 100,000
Senior term loan facility......................................................... 17,100
Revolving credit facility......................................................... 7,858
----------
124,958
Current portion of notes payable.................................................. 1,900
----------
$ 123,058
----------
----------
In connection with the acquisition of Masterview Window Company, LLC (the
"Acquisition"), the Company entered into an amended and restated credit
agreement (the "Credit Agreement") with Bankers Trust Company, dated as of March
27, 1998. The Credit Agreement provided for a $17,500 senior term loan facility
and a $20,000 revolving credit facility (collectively, the "Credit Facility").
Annual unused commitment fees are 0.5% of the unborrowed portion of the $20,000
revolving credit facility. Borrowing rates are based upon the lender's prime
rate plus a margin of 1.25% or a Euro-dollar based rate plus a margin of 2.25%.
The term loan is payable in equal quarterly installments aggregating $1,200 in
1998, $2,200 in 1999, $3,000 in 2000, $3,200 in 2001, $3,400 in 2002, $3,600 in
2003, with the remaining payment of $900 due and payable on March 31, 2004.
The Company is required to make mandatory prepayments of the term loan and,
after repayment in full of the term loan, reductions of the revolving credit
commitments (along with a corresponding repayment of revolving loans in excess
of the reduced commitment), at times and subject to certain exceptions, in
respect of (a) 100% of the net proceeds of issuances of equity and debt, sales
of assets, and condemnations and casualty proceeds, and (b) with respect to the
term loans only, 75% of excess cash flow (subject to reductions to 50% based on
the Company meeting a certain leverage ratio). The Credit Facility terminates on
March 31, 2004.
5. 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 adverse effect on the
financial position, results of operations or liquidity of the Company.
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 financial position, results
of operations or liquidity.
F-83
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
6. ACQUISITION:
MASTERVIEW ASSET PURCHASE
On March 27, 1998, through its newly-formed subsidiary, Atrium Door and
Window Company of Arizona ("ADW-Arizona"), the Company acquired substantially
all of the assets of Masterview Window Company, LLC ("Masterview"), a privately
held window and door company located in Phoenix, Arizona, for approximately
$26,800 including fees and other transaction expenses. The Company financed the
Acquisition through its Credit Facility, which included a $17,500 senior term
loan with the remainder of the purchase price of approximately $9,300 being
drawn from the $20,000 revolving credit facility.
The Acquisition has been accounted for under the purchase method in
accounting. 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. The
purchase price allocation, preliminary in nature and subject to change, is as
follows:
Cash and cash equivalents.......................................... $ 3
Accounts receivable, net........................................... 3,099
Inventories........................................................ 1,635
Prepaid expenses and other current assets.......................... 206
Property, plant and equipment, net................................. 2,702
Goodwill........................................................... 22,485
Current liabilities................................................ (3,047)
Long-term liabilities.............................................. (300)
---------
Total purchase price............................................. $ 26,783
---------
---------
The Company's Consolidated Statements of Operations for the six months ended
June 30, 1998 and 1997 include the operations of Atrium Door and Window
Company-West Coast ("ADW-West Coast") and ADW-Arizona from the dates of
acquisition, July 1, 1997 and March 27, 1998, respectively. The following table
presents the historical consolidated operating results of the Company for the
six months ended June 30, 1998 and 1997, compared to pro forma operating results
for such periods. The following unaudited pro forma information presents
consolidated operating results as though the acquisitions of ADW-West Coast and
ADW-Arizona had occurred at the beginning of the periods presented:
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
----------------------- -----------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
---------- ----------- ---------- -----------
Net sales.................................... $ 106,482 $ 112,701 $ 85,277 $ 104,208
Net income................................... 2,957 3,087 3,437 4,018
7. SUBSIDIARY GUARANTORS:
In connection with the issuance of the Senior Subordinated Notes (the
"Notes"), the Company's payment obligations under the Notes are fully and
unconditionally guaranteed, jointly and severally on a senior subordinated basis
by its wholly-owned subsidiaries: Atrium Door and Window Company of the
F-84
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
7. SUBSIDIARY GUARANTORS: (CONTINUED)
Northeast ("ADW-Northeast"), ADW-West Coast and ADW-Arizona (collectively, the
Subsidiary Guarantors). The Company has no non-guarantor direct or indirect
subsidiaries. The operations related to the assets of ADW-West Coast and
ADW-Arizona are included since July 1, 1997 and March 27, 1998, respectively,
the dates of acquisition. 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:
JUNE 30,
1998
---------
Current assets..................................................................... $ 17,067
Noncurrent assets.................................................................. 42,251
Current liabilities................................................................ 3,457
Noncurrent liabilities............................................................. 300
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- ---------
Net sales................................................................ $ 17,040 $6,194
Gross profit............................................................. 6,118 2,541
Net income from continuing operations.................................... 996 314
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. As of June 30, 1998, the maximum
amount of Senior Indebtedness the Company and its Subsidiary Guarantors
collectively, and in the aggregate, could incur was $45,000.
8. SUBSEQUENT EVENT:
Atrium Corporation ("Holding"), parent company of Atrium Companies, Inc.,
entered into an Agreement and Plan of Merger (the "Merger Agreement"), dated as
of August 3, 1998, by and among D and W Holdings, Inc. ("Parent"), D and W
Acquisition Corp. ("Sub") and the Securityholders named therein, pursuant to
which Sub would merge with and into Holding and Holding would become a wholly-
owned subsidiary of Parent (the "Merger"). The Parent and Sub are both newly
formed companies of Ardshiel, Inc., a New York based investment firm and GE
Investment Private Placement Partners II, ("GEIPPPII"), a wholly-owned
investment management subsidiary of General Electric Company, (affiliates of
General Electric Corporation). The transactions contemplated in the Merger
Agreement value the Company at approximately $225,000. The closing of the Merger
is dependent upon the expiration of the Hart-Scott-Rodino waiting period and
other customary closing conditions as set forth in the Merger Agreement.
F-85
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
JUNE 30,
1998
---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................................ $ 139
Accounts receivable, net............................................................................. 6,476
Inventories.......................................................................................... 18,748
Prepaid expenses and other current assets............................................................ 935
---------
Total current assets................................................................................. 26,298
PROPERTY, PLANT AND EQUIPMENT, net..................................................................... 7,942
GOODWILL, net.......................................................................................... 22,130
DEFERRED FINANCING COSTS, net.......................................................................... 1,151
OTHER ASSETS........................................................................................... 756
---------
Total assets......................................................................................... $ 58,277
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable..................................................................... $ 3,127
Current portion of capital lease obligation.......................................................... 240
Accounts payable..................................................................................... 4,746
Accrued liabilities.................................................................................. 2,976
Deferred tax liability............................................................................... 566
---------
Total current liabilities............................................................................ 11,655
LONG-TERM LIABILITIES:
Notes payable........................................................................................ 31,582
Capital lease obligation............................................................................. 509
Deferred tax liability............................................................................... 449
Other long-term liabilities.......................................................................... 2,500
---------
Total long-term liabilities.......................................................................... 35,040
---------
Total liabilities.................................................................................... 46,695
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock; $.01 par value; 2,000 shares authorized; none issued................................ --
Class A voting common stock; $.01 par value; 225,000 shares authorized; 27,267 shares issued and
outstanding........................................................................................ --
Class B nonvoting common stock; $.01 par value; 100,000 shares authorized; 54,500 shares issued and
outstanding (convertible at option of holder into Class A voting common stock)..................... 1
Paid-in capital...................................................................................... 9,891
Retained earnings.................................................................................... 1,690
---------
Total stockholders' equity........................................................................... 11,582
---------
Total liabilities and stockholders' equity........................................................... $ 58,277
---------
---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-86
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1998 1997
--------- ---------
NET SALES................................................................................... $ 71,848 $ 47,338
COST OF GOODS SOLD.......................................................................... 56,197 37,070
--------- ---------
Gross profit.............................................................................. 15,651 10,268
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses.................................... 12,180 8,111
--------- ---------
Income from operations.................................................................... 3,471 2,157
INTEREST EXPENSE............................................................................ 2,105 1,416
--------- ---------
Income before income taxes................................................................ 1,366 741
PROVISION FOR INCOME TAXES.................................................................. 675 350
--------- ---------
NET INCOME.................................................................................. $ 691 $ 391
--------- ---------
--------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
F-87
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
CLASS A VOTING CLASS B VOTING
COMMON STOCK COMMON STOCK TOTAL
-------------------- -------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- --------- --------- --------- --------- --------- ------------
BALANCE, December 31, 1997............. 25,501 $ -- 54,500 $ 1 $ 9,675 $ 999 $ 10,675
Net income........................... -- -- -- -- -- 691 691
Exercise of stock options............ 1,766 -- -- -- 216 -- 216
--------- --------- --------- --------- --------- --------- ------------
BALANCE, June 30, 1998................. 27,267 $ -- 54,500 $ 1 $ 9,891 $ 1,690 $ 11,582
--------- --------- --------- --------- --------- --------- ------------
--------- --------- --------- --------- --------- --------- ------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-88
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................. $ 691 $ 391
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization............................................................ 913 754
Amortization of deferred financing costs................................................. 223 210
Provision for bad debt................................................................... 1,301 820
Deferred tax provision................................................................... -- 141
Accretion of discount.................................................................... 67 57
Changes in assets and liabilities:
Accounts receivable, net................................................................. 1,410 (61)
Inventories.............................................................................. (5,191) (2,958)
Prepaid expenses and other current assets................................................ (103) (261)
Accounts payable......................................................................... (1,692) (244)
Accrued liabilities...................................................................... 459 543
Other assets............................................................................. (304) (96)
--------- ---------
Net cash used in operating activities.................................................. (2,226) (704)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................................................. (1,038) (653)
--------- ---------
Net cash used in investing activities.................................................... (1,038) (653)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on notes payable................................................................... (1,563) (530)
Net borrowings under revolving credit facility............................................. 4,737 1,951
Payment of capital lease obligation........................................................ (21) --
Proceeds from exercise of stock options.................................................... 216 --
--------- ---------
Net cash provided by financing activities.............................................. 3,369 1,421
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................................... 105 64
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................................... 34 40
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................................................... $ 139 $ 104
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest................................................................................. $ 2,012 $ 1,200
Income taxes............................................................................. 400 265
The accompanying notes are an integral part of the consolidated financial
statements.
F-89
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION:
The unaudited consolidated results of operations and cash flows of Wing
Industries Holdings, Inc. and Subsidiary (the "Company") for the six months
ended June 30, 1998 and 1997, and financial position as of June 30, 1998 have
been prepared in accordance with generally accepted accounting principles for
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
interim financial information have been included. The results of operations for
any interim period are not necessarily indicative of the results of operations
for a full year. Certain prior period amounts have been reclassified to conform
to the current period presentation.
2. INVENTORIES:
Inventories are valued at the lower of cost or market using the last-in,
first-out (LIFO) method of accounting. Work-in-process and finished goods
inventories consist of materials, labor, and manufacturing overhead. Inventories
consisted of the following:
JUNE 30,
1998
---------
Raw materials...................................................................... $ 9,662
Work-in-process.................................................................... 2,221
Finished goods..................................................................... 6,685
---------
18,568
LIFO reserve....................................................................... 180
---------
$ 18,748
---------
---------
3. NOTES PAYABLE:
Notes payable consisted of the following:
JUNE 30,
1998
---------
Subordinated notes................................................................. $ 12,500
Term loan facility................................................................. 14,186
Revolving credit facility.......................................................... 9,186
---------
35,872
Less: unamortized discount on exchangeable subordinated notes payable.............. (1,163)
current portion of notes payable.............................................. (3,127)
---------
$ 31,582
---------
---------
4. 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
F-90
WING INDUSTRIES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
4. CONTINGENCIES: (CONTINUED)
such amounts, that an unfavorable disposition would not have a material adverse
effect on the financial position, results of operations or liquidity of the
Company.
5. STOCK OPTIONS:
In February 1998, certain officers of the Company exercised 1,766 stock
options with exercise prices ranging from $115 to $130.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company entered into two interest rate swap agreements with a lender.
The Company pays a fixed rate of 6.25% and receives a floating rate based on
LIBOR on the aggregate notional principal amount as determined in three month
intervals. These transactions effectively change a portion of the Company's
interest rate exposure from a floating rate to a fixed rate basis. At June 30,
1998, the aggregate notional principal amount of the swap agreement was $3,156
and $2,250 with a fair value of $42 and $15.
7. SUBSEQUENT EVENT:
Pursuant to the terms of an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of August 3, 1998, the Company will become a wholly-owned
subsidiary of Atrium Companies, Inc. and an indirect wholly owned subsidiary of
D and W Holdings, Inc. ("D&W") ("the Merger"). D&W was formed to effect the
Merger by the principal equity holders of the Company and Door Holdings, Inc.
("Door"), an affiliate. Pursuant to the terms of the Merger Agreement, D&W ("the
Merger") is also acquiring Atrium Companies, Inc. Transactions contemplated
pursuant to the Merger Agreement are expected to be consummated no later than
September 30, 1998.
Immediately prior to the merger, GE Investment Private Placement II
("GEIPPPI") and Ardshiel, Inc. are expected to increase their respective
ownership in the Class A voting common stock of the Company by converting their
respective interests in exchangeable subordinated notes payable, warrants and
Class B nonvoting common stock.
In connection with the Merger, Management will exchange all options in the
Company for options to purchase stock in D&W. The Company has a ten year
Management and Investment Banking Agreement (the "Management Agreement") with
Ardshiel, Inc. for on-going management advisory services to the Company. It is
also expected that the Management agreement will be terminated and replaced by a
new agreement with D&W.
As a part of the Merger, the notes payable remaining after conversion will
be repaid and the deferred financing cost will be expensed.
F-91
DOOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
THE COMPANY
JUNE 30,
1998
-------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................................ $ 182
Accounts receivable, net......................................................................... 3,487
Inventories...................................................................................... 1,448
Prepaid expenses and other current assets........................................................ 175
-------------
Total current assets............................................................................. 5,292
PROPERTY AND EQUIPMENT, net........................................................................ 585
GOODWILL, net...................................................................................... 22,220
DEFERRED FINANCING COSTS........................................................................... 198
OTHER ASSETS....................................................................................... 3
-------------
Total assets..................................................................................... $ 28,298
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of note payable.................................................................. $ 500
Accounts payable................................................................................. 1,166
Accrued liabilities.............................................................................. 1,245
-------------
Total current liabilities........................................................................ 2,911
LONG-TERM LIABILITIES:
Notes payable.................................................................................... 14,285
Other long-term liabilities...................................................................... 4,000
-------------
Total liabilities................................................................................ 21,196
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 100,000 shares authorized, 58,952 issued and outstanding........... 1
Paid-in capital.................................................................................. 6,468
Retained earnings................................................................................ 633
-------------
Total stockholders' equity....................................................................... 7,102
-------------
Total liabilities and stockholders' equity....................................................... $ 28,298
-------------
-------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-92
DOOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THE COMPANY PREDECESSOR
1998 1997
----------- -----------
NET SALES........................................................... $ 10,432 $ 8,894
COST OF GOODS SOLD.................................................. 6,386 5,380
----------- -----------
Gross profit...................................................... 4,046 3,514
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses............ 2,043 2,202
----------- -----------
Income from operations.......................................... 2,003 1,312
INTEREST EXPENSE.................................................... (789) (20)
OTHER INCOME (EXPENSE), net......................................... 5 (9)
----------- -----------
Income before income taxes...................................... 1,219 1,283
PROVISION FOR INCOME TAXES.......................................... 586 --
----------- -----------
NET INCOME.......................................................... $ 633 $ 1,283
----------- -----------
----------- -----------
The accompanying notes are an integral part of the consolidated financial
statements.
F-93
DOOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
COMMON STOCK TOTAL
---------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ----------- --------- ----------- -------------
Balance, January 1, 1998................................... -- $ -- $ -- $ -- $ --
Initial issuance of common stock......................... 58,952 1 5,699 5,700
Issuance of warrants..................................... 769 769
Net income............................................... 633 633
--------- ----- --------- ----- ------
Balance, June 30, 1998..................................... 58,952 $ 1 $ 6,468 $ 633 $ 7,102
--------- ----- --------- ----- ------
--------- ----- --------- ----- ------
The accompanying notes are an integral part of the consolidated financial
statements.
F-94
DOOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THE COMPANY PREDECESSOR
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 633 $ 1,283
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:........................................
Depreciation.................................................... 45 71
Amortization of deferred financing costs........................ 15 --
Amortization of goodwill........................................ 283 --
Amortization of discount of note payable........................ 55 --
Loss on retirement of assets.................................... -- 29
Changes in assets and liabilities:................................
Accounts receivable, net........................................ (1,836) (934)
Inventories..................................................... (151) (364)
Prepaid expenses, deferred taxes, and other assets.............. (80) (3)
Accounts payable................................................ 338 288
Accrued liabilities............................................. 6 357
----------- -----------
Net cash (used in) provided by operating activities......... (692) 727
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition, net of cash acquired................... (19,945) --
Purchases of property and equipment............................... (168) (75)
Proceeds from sale of assets...................................... -- 94
----------- -----------
Net cash (used in) provided by investing activities............. (20,113) 19
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable............................ 16,000 27
Payment on note payable........................................... (73)
Borrowings under revolving credit facility........................ 500 7,687
Payments on revolving credit facility............................. (500) (7,897)
Payments on short term debt....................................... (500) --
Stockholder distributions......................................... -- (1,228)
Proceeds from issuance of common stock............................ 5700 --
Cash paid for financing costs..................................... (213) --
----------- -----------
Net cash (used in) provided by financing activities............. 20,987 (1,484)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ 182 (738)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................... -- 1,650
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................ $ 182 $ 912
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest........................................................ $ 734 $ 39
Payable to Seller............................................... 4,000 --
The accompanying notes are an integral part of the consolidated financial
statements.
F-95
DOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION:
The unaudited consolidated results of operations and cash flow of Door
Holdings, Inc. (formerly known as R.G. Darby Company, Inc. and Total Trim, Inc.
See Note 2.) for the six months ended June 30, 1998 and 1997, and financial
position as of June 30, 1998 have been prepared in accordance with generally
accepted accounting principles for interim financial reporting. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
These consolidated financial statements and footnotes should be read in
conjunction with the audited combined financial statements of R.G. Darby
Company, Inc. and Total Trim, Inc. for the years ended December 31, 1997 and
1996 included herein. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation of
the interim financial information have been included. The results of operations
for any interim period are not necessarily indicative of the results of
operations for a full year.
2. BASIS OF ACCOUNTING AND CHANGE IN OWNERSHIP:
R.G. Darby Company, Inc. ("R.G. Darby Company") and Total Trim, Inc. ("Total
Trim") (the "Companies") (the "Predecessor"), founded in 1983, provide interior
and exterior doors, vanity mirrors, door knobs and locks, shelving, molding, and
related installation to contractors of apartment buildings and hotels. The
Companies are based in Florence, Alabama and operate out of one facility. The
Companies supply materials and/or provide contract labor to install purchased
materials. Material requirements, with the exception of doors, are shipped
directly from the manufacturer to the contractor's location. Doors are assembled
and shipped from the Companies' production facility. The Companies consist of
three entities-- R.G. Darby Company is the sales company for materials; Darby
Doors, a division of R.G. Darby Company, is the manufacturing division that
produces the doors that are sold through R.G. Darby Company; and Total Trim is
responsible for contracting labor for any installation work. These entities
perform work in approximately 28 states, mainly in the South, Mid-Atlantic and
Northeast.
Effective January 8, 1998, the Companies were sold to Door Holdings, Inc.
("Door"). As specified in the agreement, the sales price was $24,000 plus or
minus any adjustments resulting from the Companies' combined working capital, as
defined in the sale agreement, being above or below $2,323 as of the closing
date. Included in the $24,000 is a contingent payment of $4,000 to be paid to
the former stockholder based on future operating results. An additional $2,000
which has not been recorded in the purchase price may be paid to the seller if
these financial targets are substantially exceeded. The purchase price was
funded primarily with $5,700 equity contributions, $16,000 of long-term debt,
and accrual of the deferred payment. Door did not have any significant activity
prior to this transaction. For the purpose of financial statement presentation,
the change in ownership occurring on January 8, 1998 was considered effective
January 1, 1998.
The Acquisition has been accounted for under the purchase method of
accounting. The aggregate purchase price of $24,520, (which includes $520 of
transaction related expenses) has been allocated to the underlying assets and
liabilities based upon their respective estimated fair market values at the date
of
F-96
DOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
2. BASIS OF ACCOUNTING AND CHANGE IN OWNERSHIP: (CONTINUED)
acquisition, with the remainder allocated to goodwill, being amortized on a
straight line basis over forty years. The preliminary purchase price allocation
is as follows:
Cash and cash equivalents.......................................... $ 575
Accounts receivable, net........................................... 1,651
Inventories........................................................ 1,297
Prepaid expenses and other assets.................................. 101
Property and equipment, net........................................ 462
Goodwill........................................................... 22,503
Accounts payable and accrued liabilities........................... (2,069)
---------
Total purchase price............................................. $ 24,520
---------
---------
The financial statements for the six months ended June 30, 1997 were
prepared for the Companies on their predecessor basis. No tax provision was
recorded for the six months ended June 30, 1997 as the Companies were S
corporations for income tax purposes. The financial statements for the six
months ended June 30, 1998 reflect the purchase adjustments discussed above.
Door is a C corporation for income tax purposes and therefore an income tax
provision has been recorded for the 1998 period. The primary differences between
the 1998 presentation and the 1997 presentation are the additional amortization
expense, interest expense, and income tax expense reflected in 1998 due to the
purchase transaction discussed above.
3. INVENTORIES:
Inventories, which are valued at the lower of cost or market using the
first-in, first-out (FIFO) method of accounting consisted of the following at
June 30, 1998:
Raw materials................................................... $ 1,303
Finished goods.................................................. 145
------
$ 1,448
------
------
4. NOTES PAYABLE:
In connection with the acquisition discussed in Note 2 above, Door entered
into a $6,000 subordinated note payable to GE Investment Private Placement
Partners II ("GEIPPPII"), payable interest only in quarterly installments at
11.5% on the unpaid face amount, due January 9, 2004. The valuation assigned to
common stock warrants of 11,712 issued in conjunction with this note resulted in
a discount of $769 and an effective interest of approximately 16.78%. The
unamortized discount at June 30, 1998 was $714.
Also, in connection with the acquisition discussed in Note 2 above, Door
entered into a Credit Agreement providing for a $5,000 revolving credit facility
(the "Revolving Credit Facility") and a $10,000 Senior secured term loan
facility (the "Term Loan"). The Revolving Credit Facility and the Term Loan bear
interest at a rate based upon the lender's prime rate plus a borrowing margin of
1.5% or a EURO-based rate plus a borrowing margin of 2.5%. Door pays a
commitment fee of .375% based on the unused portion of both credit facilities.
The Revolving Credit Facility terminates on January 7, 2003. Door had
F-97
DOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
4. NOTES PAYABLE: (CONTINUED)
$5,000 of availability under the Revolving Credit Facility as of June 30, 1998.
In connection with the acquisition discussed in Note 2 above, Door borrowed
$10,000 under the Term Loan. Principal payments on the Term Loan are due
quarterly at amounts ranging from $250 to $400 through December 31, 2004.
Outstanding borrowings on the Term Loan at June 30, 1998 were $9,500 at an
approximate interest rate of 8.2%. The Credit Agreement contains various
covenants that restrict Door from taking various actions and requires Door to
achieve and maintain certain financial covenants. All tangible and intangible
assets of Door collateralize these credit facilities.
Principal payments due during the next fiscal five years on notes payable as
of June 30, 1998 are as follows:
1999............................................................................... $ 1,100
2000............................................................................... 1,300
2001............................................................................... 1,500
2002............................................................................... 1,600
2003............................................................................... 1,600
Thereafter......................................................................... 8,399
---------
15,499
Less unamortized discount.......................................................... (714)
---------
$ 14,785
---------
---------
5. CONTINGENCIES:
Door 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 adverse effect on the
consolidated financial position, results of operations or liquidity of Door.
6. COMMON STOCK PLAN:
Effective January 9, 1998, the Board of Directors of Door approved the Door
Stock Option Plan (the Plan) that provides for the grant of incentive stock
options and nonqualified stock options to certain employees, officers and
directors of Door and its affiliates, as defined in the Plan. Under the Plan,
10,000 shares of Door's common stock have been reserved for issuance. Incentive
stock options granted under the Plan provide for the purchase of Door's common
stock at not less than fair value on the date the option is granted. However,
incentive stock options granted to any employee owning stock possessing more
than 10% of the total combined voting power of all classes of stock of Door
shall be at least 110% of the fair market value of Door's common stock on the
date the option is granted. Nonqualified stock options granted under the Plan
provide for the purchase of Door's common stock at a price specified by the
Stock Option Committee, which may be less than, equal to, or greater than the
fair market value of the common stock on the date such option is granted.
As of June 30, 1998, incentive stock options for approximately 5,900 shares
of common stock were granted at approximately $117 per share. The option price
of $117 per share will increase annually by 15% for 2,000 shares and 30% for
3,900 shares as defined by the Plan. These options become exercisable over a
F-98
DOOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
6. COMMON STOCK PLAN: (CONTINUED)
three-year period and expire in January 2008. In addition, nonqualified stock
options for approximately 1,600 shares of common stock were granted at
approximately $235 per share. These options become exercisable upon the
happening of a "Value Event" as described in the Plan and expire in January
2008. As of June 30, 1998, there has been no Value Event.
7. RELATED PARTIES:
On January 9, 1998, Door entered into a ten-year Management and Investment
Banking Agreement (the "Management Agreement") with Ardshiel, Inc., ("Ardshiel")
a related party of Arddoor, L.L.C., an equityholder of Door Holdings, Inc.
Pursuant thereto, Door has agreed to pay Ardshiel an annual fee of $200 plus
expenses for on-going management advisory services to Door. The management
agreement also gives Ardshiel the first opportunity, in most instances, to
perform investment banking services for Door, for a fee equal to 2% of the total
transaction price related to any such sale/acquisition under the services
provided. The agreement is terminated in the event Ardshiel and Arddoor, L.L.C.
cease to be affiliates of Door.
8. SUBSEQUENT EVENTS:
Pursuant to the terms of an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of August 3, 1998, Door will become a wholly-owned
subsidiary of Atrium Companies, Inc. and an indirect wholly owned subsidiary of
D and W Holdings, Inc. ("D&W") (the "Merger"). D&W was formed to effect the
Merger by the principal equity holders of Door and Wing Industries Holdings,
Inc., an affiliate. Pursuant to the terms of the Merger Agreement, D&W is also
acquiring Atrium Companies, Inc. Transactions contemplated pursuant to the
Merger Agreement are expected to be consummated no later than September 30,
1998.
Immediately prior to the merger, the subordinated note payable and related
warrants are expected to be converted into common stock of Door.
In connection with the Merger, management will exchange all options in Door
for options to purchase stock in D&W. It is expected that the management
agreement will be terminated and replaced by a new agreement with D&W upon
consummation with the Merger.
As a part of the Merger, the notes payable remaining after conversion will
be repaid and the deferred financing cost will be expensed.
F-99