SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 333-20095
ATRIUM COMPANIES, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2642488
------------------------------ ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1341 W. MOCKINGBIRD LANE, SUITE 1200W, DALLAS, TEXAS 75247, (214) 630-5757
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(Address of principal executive offices, including zip code and telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
ATRIUM COMPANIES, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
INDEX
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999..........................3
Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 1999........4
Consolidated Statement of Stockholder's Equity for Three Months
Ended March 31, 2000............................................................................5
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999.........................................................................6
Notes to Consolidated Financial Statements...................................................7-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................15-20
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings..............................................................................21
Items 2, 3, 4 and 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K...............................................................21
Signatures..............................................................................................21
Exhibit Index...........................................................................................22
2
ATRIUM COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 3,604 $ 1,294
Restricted cash ............................................. 1,788 869
Equity securities - available for sale ...................... 219 111
Accounts receivable, net .................................... 64,250 59,213
Inventories ................................................. 62,858 61,277
Prepaid expenses and other current assets ................... 10,863 12,441
Deferred tax asset .......................................... 2,359 2,359
----------- ------------
Total current assets ..................................... 145,941 137,564
PROPERTY, PLANT AND EQUIPMENT, net ............................... 34,899 35,165
GOODWILL, net .................................................... 286,117 287,873
DEFERRED FINANCING COSTS, net .................................... 17,054 17,607
OTHER ASSETS ..................................................... 6,851 5,927
----------- ------------
Total assets ............................................. $ 490,862 $ 484,136
=========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable ............................ $ 2,303 $ 2,297
Accounts payable ............................................ 42,728 26,737
Accrued liabilities ......................................... 25,905 25,055
----------- ------------
Total current liabilities ................................ 70,936 54,089
----------- ------------
LONG-TERM LIABILITIES:
Notes payable ............................................... 307,646 314,414
Deferred tax liability ...................................... 2,808 2,557
Other long-term liabilities ................................. 2,960 3,056
----------- ------------
Total long-term liabilities ........................... 313,414 320,027
----------- ------------
Total liabilities ..................................... 384,350 374,116
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock $.01 par value, 3,000 shares authorized,
100 shares issued and outstanding ........................ - -
Paid-in capital ............................................. 109,624 109,624
Retained earnings (accumulated deficit) ..................... (3,218) 398
Accumulated other comprehensive income ...................... 106 (2)
----------- ------------
Total stockholder's equity ............................ 106,512 110,020
----------- ------------
Total liabilities and stockholder's equity ...... $ 490,862 $ 484,136
=========== ============
The accompanying notes are an integral part of the consolidated
financial statements.
3
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2000 1999
--------- ---------
NET SALES ........................................................ $ 133,782 $ 106,842
COST OF GOODS SOLD ............................................... 96,706 74,708
--------- ---------
Gross profit ................................................. 37,076 32,134
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses ....... 31,087 23,151
Amortization expense ......................................... 2,347 1,889
Special charge ............................................... - 1,762
--------- ---------
33,434 26,802
--------- ---------
Income from operations .................................. 3,642 5,332
INTEREST EXPENSE ................................................. 8,757 4,346
OTHER INCOME, net ................................................ 233 32
--------- ---------
Income (loss) before income taxes ....................... (4,882) 1,018
PROVISION (BENEFIT) FOR INCOME TAXES ............................. (1,266) 828
--------- ---------
NET INCOME (LOSS) ................................................ $ (3,616) $ 190
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
4
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENT OF
STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
RETAINED ACCUMULATED
COMMON STOCK EARNINGS OTHER TOTAL
------------------ PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT) INCOME (LOSS) EQUITY
------ ------ --------- -------- ------------- -------------
Balance, December 31, 1999................ 100 $ - $109,624 $ 398 $ (2) $110,020
Other comprehensive income............. - - - - 108 108
Net loss............................... - - - (3,616) - (3,616)
------ ------ --------- -------- ------------- -------------
Balance, March 31, 2000................... 100 $ - $109,624 $(3,218) $106 $106,512
====== ====== ========= ======== ============= =============
The accompanying notes are an integral part of the consolidated
financial statements.
5
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2000 1999
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................................... $ (3,616) $ 190
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................................ 3,933 2,937
Amortization of deferred financing costs ............................. 555 381
Accretion of discount ................................................ 40 -
Accretion of gain from interest rate collars ......................... (82) -
Gain on sales of assets .............................................. (283) (31)
Deferred tax provision ............................................... 251 -
Changes in assets and liabilities, net of acquisition in 1999:
Accounts receivable, net ............................................ (5,037) (3,073)
Inventories ......................................................... (1,581) (2,735)
Prepaid expenses and other current assets ........................... 1,329 (225)
Accounts payable .................................................... 6,951 (29)
Accrued liabilities ................................................. 851 3,265
--------- ----------
Net cash provided by operating activities ...................... 3,311 680
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment .............................. (2,211) (1,059)
Proceeds from sales of assets ........................................... 243 32
Payment for acquisition, net of cash acquired ........................... - (1,737)
Increase in other assets ................................................ (1,231) (599)
--------- ----------
Net cash used in investing activities ............................... (3,199) (3,363)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facility .......................... (6,270) 6,582
Payments on term loans B and C .......................................... (500) (500)
Payment of other notes payable .......................................... (70) (49)
Payment of other long-term liabilities .................................. - (1,032)
Checks drawn in excess of bank balances ................................. 9,040 (2,255)
Deferred financing costs ................................................ (2) (63)
--------- ----------
Net cash provided by financing activities ........................... 2,198 2,683
--------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................................... 2,310 -
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................... 1,294 -
--------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................... $ 3,604 $ -
========= ==========
The accompanying notes are an integral part of the consolidated
financial statements.
6
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION:
The unaudited consolidated financial statements of Atrium Companies, Inc. (the
"Company") for the three months ended March 31, 2000 and 1999, and financial
position as of March 31, 2000 and December 31, 1999 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, 1999, 1998 and 1997 included in the Company's Form 10-K as
filed with the Securities and Exchange Commission on March 30, 2000. 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" amended by SFAS
No. 137 "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FAS No. 133--Amendment of FAS No. 133" (combined "SFAS
133"). SFAS 133 establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 2000 and earlier
is permitted as of the beginning of any fiscal quarter subsequent to June 15,
2000. SFAS 133 cannot be applied retroactively. SFAS 133 must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after December
31, 1997 (and, at the Company's election, before January 1, 1998).
The Company is in the process of quantifying the impact of adopting SFAS 133 on
its financial statements and has not determined the timing of or method of
adoption of SFAS 133.
7
The statement of income for 1999 only includes the operations of certain
acquisitions from the date they were acquired by the Company. The operations of
Delta Millwork, Inc. (renamed R.G. Darby Company-South and Total Trim-South,
collectively "Darby-South") are included since the date of acquisition, January
27, 1999. The operations of Heat, Inc. ("Heat") and Champagne Industries, Inc.
("Champagne") are included in the March 31, 2000 statement of income but are
excluded from the March 31, 1999 statement of income as they were acquired on
May 17, 1999, subsequent to the first quarter of 1999. The December 31, 1999 and
the March 31, 2000 balance sheet includes the accounts of all divisions and
subsidiaries.
8
The following unaudited pro forma information presents consolidated operating
results as though the acquisition of Darby-South (acquired January 27, 1999) and
Heat and Champagne (acquired May 17, 1999) had occurred at the beginning of the
periods presented. For the period ended March 31, 2000, there is no difference
between the actual and pro forma information as no acquisitions occurred during
2000.
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
-------------- -----------------------------
Actual Actual Pro Forma
--------- --------- ---------
NET SALES ................................... $ 133,782 $ 106,842 $ 123,261
COST OF GOODS SOLD .......................... 96,706 74,708 86,649
--------- --------- ---------
Gross profit .............................. 37,076 32,134 36,612
OPERATING EXPENSES:
Selling, delivery, general and
administrative expenses...................... 31,087 23,151 29,532
Amortization expense ........................ 2,347 1,889 2,347
Special charge .............................. - 1,762 1,762
--------- --------- ---------
33,434 26,802 33,641
--------- --------- ---------
Income from operations .................... 3,642 5,332 2,971
INTEREST EXPENSE ............................ 8,757 4,346 8,757
OTHER INCOME, net ........................... 233 32 69
--------- --------- ---------
Income (loss) before income taxes ........... (4,882) 1,018 (5,717)
PROVISION (BENEFIT) FOR
INCOME TAXES ............................... (1,266) 828 (1,612)
--------- --------- ---------
Net income (loss) from continuing
operations ................................ $ (3,616) $ 190 $ (4,105)
========= ========= =========
Other Information:
Depreciation expense ....................... $ 1,586 $ 1,048 $ 1,413
========= ========= =========
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:
9
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:
MARCH 31, DECEMBER 31,
2000 1999
-------- ------------
Raw materials ......... $ 26,213 $ 32,481
Work-in-process ....... 4,126 4,688
Finished goods ........ 32,704 24,071
-------- ------------
63,043 61,240
LIFO reserve .......... (185) 37
-------- ------------
$ 62,858 $ 61,277
======== ============
4. NOTES PAYABLE:
Notes payable consisted of the following:
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
Revolving credit facility .............. $ 9,000 15,270
Term loan B ............................ 58,500 58,750
Term loan C ............................ 69,430 69,680
Senior subordinated notes .............. 175,000 175,000
Other .................................. 516 548
------------ ------------
312,446 319,248
Less:
Unamortized debt discount .............. (2,497) (2,537)
Current portion of notes payable ....... (2,303) (2,297)
------------ ------------
Long-term debt ...................... $ 307,646 $ 314,414
============ ============
10
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
consolidated financial position, results of operations or liquidity of the
Company.
During 1993, the Company's Dallas, Texas based factory employees voted to
unionize and become members of the Amalgamated Clothing and Textile Workers
Union. A three-year union contract was executed during 1995 and extended for
three additional years in 1998. In addition, in connection with its
Woodville, Texas operations, the Company is party to collective bargaining
arrangements due to expire in 2001.
The Company is involved in various stages of investigation and cleanup related
to environmental protection matters, some of which relate to waste disposal
sites. The potential costs related to such matters and the possible impact
thereof on future operations are uncertain due in part to: the uncertainty as to
the extent of pollution; the complexity of Government laws and regulations and
their interpretations; the varying costs and effectiveness of alternative
cleanup technologies and methods; the uncertain level of insurance or other
types of recovery; and the questionable level of the Company's involvement. The
Company was named in 1988 as a potentially responsible party ("PRP") in two
superfund sites pursuant to the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended (the Chemical Recycling, Inc.
site in Wylie, Texas, and the Diaz Refinery site in Little Rock, Arkansas). The
Company believes that based on the information currently available, including
the substantial number of other PRP's and relatively small share allocated to it
at such sites, its liability, if any, associated with either of these sites will
not have a material adverse effect on the Company's financial position, results
of operations or liquidity.
6. INTEGRATION ACTIVITIES:
In connection with the acquisition of Atrium, certain integration activities
were undertaken in the acquired business. These activities included the
elimination of certain product lines and the associated inventory, severance
paid to employees terminated through the elimination of redundant positions,
costs associated with plant closings and rent expenses related to the idle
facilities. In connection with these integration activities the Company recorded
accrued provisions using the purchase method of accounting. The activity
impacted by these provisions is summarized as follows:
11
Balance at Balance at
December 31, Expenditures March 31,
1999 in 2000 2000
------------ ------------ ----------
Product line rationalization ...... $ 198 $ - $ 198
Idle facility expenses ............ 748 (203) 545
------------ ------------ ----------
$ 946 $(203) $ 743
============ ============ ==========
12
7. SUBSIDIARY GUARANTORS:
In connection with the issuance of the Notes, the Company's payment
obligations under the Notes are fully and unconditionally guaranteed, jointly
and severally (collectively, the Subsidiary Guarantees) on a senior
subordinated basis by its wholly-owned subsidiaries: ADW-Northeast, ADW-West
Coast, ADW-Arizona, Wing, Darby, Darby-South, Heat and Champagne
(collectively, the Subsidiary Guarantors). The Company has no non-guarantor
direct or indirect subsidiaries. The operations related to the assets of Wing,
ADW-Northeast, ADW-West Coast, ADW-Arizona and Darby are included for all
periods presented. The operations of Darby-South are included since their date
of acquisition, January 27, 1999, and the operations of Heat and Champagne are
included since their date of acquisition, May 17, 1999. The balance sheet
information includes all subsidiaries and divisions for the December 31, 1999
and March 31, 2000 periods. 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:
March 31, December 31,
2000 1999
--------- ------------
Current assets............................................. $ 59,442 $ 59,658
Noncurrent assets.......................................... 204,410 206,938
Current liabilities........................................ 25,974 26,118
Noncurrent liabilities..................................... 194,867 200,620
13
Three Months Ended March 31,
-----------------------------
2000 1999
------- --------
Net sales.................................................. $87,555 $59,279
Gross profit............................................... 20,723 15,601
Net income (loss) from continuing operations............... (4,867) 295
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.
8. SUBSEQUENT EVENTS
On May 6, 2000, the Company learned that The Home Depot ("THD") plans to shift
its interior wood door business to two integrated door manufacturers who have
committed to make significant capital and resource investments to serve the
majority of THD's interior wood doors needs. The timing of the transition is
expected to be completed in 2000.
Atrium will continue to sell exterior patio doors and exterior entry doors to
THD, and will also continue to sell interior wood door products to the West
Coast and Pacific Northwest regions served by THD. Window sales by Atrium's
Aluminum Window Division are unaffected by THD's reported change in door
operations.
Due to the significance of the changes discussed above, management performed an
evaluation of the recoverability of all of the assets of the interior wood doors
division as described in Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Management concluded from the undiscounted cash flow analysis
that there is no impairment to the long-lived assets at the present time.
The Company is currently exploring several opportunities and what impact this
future loss of business, if not replaced with other customers, may have on the
operations in the future. If the Company decides to divest certain assets and
operations in its wood door operations, the net proceeds from the sale could
be less than the net book value, including the related intangible assets, and
could result in a loss upon disposition.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN FORWARD-LOOKING STATEMENTS
This 10-Q contains certain forward looking statements (as such term is defined
in the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties relating to the Company that are based on
the beliefs of management. When used in this 10-Q, the words "anticipate",
"believe", "estimate", "expect", "intend", and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to the risks and uncertainties regarding the operations and the results
of operations of the Company as well as its customers and suppliers, including
as a result of the availability of consumer credit, interest rates, employment
trends, changes in levels of consumer confidence, changes in consumer
preferences, national and regional trends in new housing starts, raw material
costs, pricing pressures, shifts in market demand, and general economic
conditions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions or estimates prove incorrect, actual results may
vary materially from those described herein as anticipated, believed, estimated,
expected or intended.
RESULTS OF OPERATIONS
The operations of the Company are cyclical in nature and generally result in
increases during the peak building season which coincides with the second and
third quarters of the year. Accordingly, results of operations for the quarter
ended March 31, 2000 are not necessarily indicative of results expected for the
full year.
The operations of Darby-South are included since their date of acquisition,
January 27, 1999, and the operations of Heat and Champagne are included since
their date of acquisition, May 17, 1999. The balance sheet information includes
all subsidiaries and divisions for the December 31, 1999 and March 31, 2000
periods.
NET SALES. Net Sales increased by $26,940 from $106,842 during the first quarter
of 1999 to $133,782 during the first quarter of 2000. The increase was primarily
15
due to a combined increase in net sales of $20,446 from the acquisitions of
Heat and Champagne during the second quarter of 1999. Atrium (previous
registrant) sales volume grew approximately $3,515, or 5.9%. This increase
included approximately $5,219 from its aluminum and vinyl window operations,
or a 9.5% growth rate, offset by a decline of $1,704, or 37.0% from its wood
patio door operations due to the Company's efforts to eliminate
less-profitable sales territories. Darby grew $1,290, or 22.5% during the
first quarter of 2000 and net sales at Wing increased $1,690, or 4.1% over
prior year due to increased sales to the large home center retail chains,
however this was offset by the loss of sales from Hechinger's Inc. due to its
bankruptcy which occurred in the third quarter of 1999.
COST OF GOODS SOLD. Cost of goods sold increased from 69.9% of net sales during
the first quarter of 1999 to 72.3% of net sales during the first quarter of
2000. The increase as a percentage of net sales was due largely to the
operations of Wing, which increased from 76.8% of net sales during the first
quarter of 1999 to 83.0% of net sales during the first quarter of 2000. The
increase at Wing was primarily due to increased material costs during 2000. The
increase at Wing was partially offset by the acquisitions of Heat and Champagne,
which had combined cost of goods sold of 67.6% of net sales during the first
quarter of 2000. Overall, changes in the cost of goods sold as a percentage of
net sales for one period as compared to another period may reflect a number of
factors, including changes in the relative mix of products sold and, the effects
of changes in sales prices, material costs and changes in productivity levels.
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, delivery,
general and administrative expenses increased $7,936 from $23,151 (21.7% of
net sales during the first quarter of 1999) to $31,087 (23.2% of net sales
during the first quarter of 2000). The increase was primarily due to the
inclusion of selling, delivery, general and administrative expenses as a
result of the Heat and Champagne acquisitions, which have higher selling
expenses as a percentage of net sales. The combined Heat and Champagne
selling, delivery, general and administrative expenses were $7,113 (34.3% of
net sales) during the first quarter of 2000. If the acquisitions had been
included for the entire quarter of 1999, selling, delivery, general and
administrative expenses would have been 23.9% in 1999. Additionally, delivery
and selling expenses increased due to the increase in sales.
AMORTIZATION EXPENSE. Amortization expense increased $458 from $1,889 during the
first quarter of 1999 to $2,347 during the first quarter of 2000. The increase
was largely due to the amortization of goodwill recorded in connection the
acquisitions of Heat and Champagne.
SPECIAL CHARGE. During the first quarter of 1999, the Company recorded a
one-time charge of $1,762 for severance benefits incurred in connection with
the separation agreement entered into by the Company and its former President
and Chief Executive Officer.
INTEREST EXPENSE. Interest expense increased $4,411 from $4,346 during the first
quarter of 1999 to $8,757 during the first quarter of 2000. The increase in
interest expense was due primarily to the $175,000 senior subordinated notes the
Company issued on May 17, 1999. The notes were issued in connection with the
acquisitions of Heat and Champagne and are
16
due May 1, 2009. In addition, the increase in interest expense included the
amortization of deferred financing costs and accretion of the discount
recorded in connection with the issuance of $175,000 of senior subordinated
notes.
INCOME TAXES. The Company's effective tax rate was 25.9% during the first
quarter of 2000 due largely to non-deductible goodwill amortization expense of
approximately $1,468. Excluding non-deductible amortization expense, the
Company's effective tax rate would have been approximately 39.0% during the
first quarter of 2000.
RECENT DEVELOPMENTS
On May 6, 2000, the Company learned that The Home Depot ("THD") plans to shift
its interior wood door business to two integrated door manufacturers who have
committed to make significant capital and resource investments to serve the
majority of THD's interior wood doors needs. The timing of the transition is
expected to be completed in 2000.
Atrium will continue to sell exterior patio doors and exterior entry doors to
THD, and will also continue to sell interior wood door products to the West
Coast and Pacific Northwest regions served by THD. Window sales by Atrium's
Aluminum Window Division are unaffected by THD's reported change in door
operations.
Due to the significance of the changes discussed above, management performed
an evaluation of the of the recoverability of all of the assets of the
interior wood doors division as described in Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived assets to be Disposed of." Management concluded from the
undiscounted cash flow analysis that there is no impairment to the long-lived
assets at the present time.
The Company is currently exploring several opportunities and what impact this
future loss of business, if not replaced with other customers, may have on the
operations in the future. If the Company decides to divest certain assets and
operations in its wood door operations, the net proceeds from the sale could
be less than the net book value, including the related intangible assets, and
could result in a loss upon disposition.
If the Company were to sell the entire wood door division, the pro forma
summary financial results (including the acquisitions of Darby-South, Heat and
Champagne) for the quarters ending March 31, 2000 and 1999 would have been as
follows:
Three Months Ended
March 31,
-----------------------------
2000 1999
------- --------
(in thousands)
Net sales.................................................. $87,605 $77,063
Gross profit............................................... 29,166 26,469
Income from Operations..................................... $ 4,862 $ 2,115
======= ========
EBITDA(1) $ 8,550 $ 6,941
======= ========
(1) EBITDA represents income before interest, income taxes, extraordinary
charge, depreciation and amortization, special charges, stock option
compensation expense and certain non-recurring expenses related to
one-time expenses. While EBITDA is not intended to represent cash flow
from operations as defined by GAAP and should not be considered as an
indicator of operating performance or an alternative to cash flow or
operating income (as measured by GAAP) or as a measure of liquidity,
it is included herein to provide additional information with respect
to the ability of Atrium to meet its future debt service, capital
expenditures and working capital requirements. Atrium believes EBITDA
provides investors and analysts in the building materials industry
the necessary information to analyze and compare historical results
of Atrium on a comparable basis with other companies on the basis of
operating performance, leverage and liquidity. However, as EBITDA is
not defined by GAAP, it may not be calculated or comparable to other
similarly titled measures within the building materials industry.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations and availability under the Company's Revolving
Credit Facility are the Company's principal sources of liquidity. During the
first quarter of 2000, cash was primarily used for increases in working
capital, capital expenditures and debt payments. Net cash provided by
operating activities was $3,311 during first three months of 2000 compared to
$680 during the first three months of 1999. The increase in cash provided by
operating activities is largely due to an increase accounts payable and a
decrease in accounts receivable. Net cash used in investing activities during
the first three months of 2000 was $3,199 compared to $3,363 during the first
three months of 1999. The decrease in cash used in investing activities was
due primarily to the acquisition of Delta Millwork, Inc. during the first
quarter of 1999. The decrease was partially offset by higher purchases of
property, plant and equipment during the first quarter of 2000. Cash provided
by financing activities during the first three months of 2000 was $2,198
compared to $2,683 during the first three months of 1999, primarily due to
$6,270 of payments on the revolver during the first quarter of 2000 versus
$6,582 of borrowing on the revolver in the first quarter of 1999.
OTHER CAPITAL RESOURCES
The Revolving Credit Facility, which was increased to $40,000 in June of
1999, has a maturity date of September
17
30, 2004. At March 31, 2000, the Company had $26,560 of availability under the
Revolving Credit Facility, net of borrowings of $9,000 and outstanding letters
of credit totaling $4,440, relating to workers' compensation benefits and
utility deposits. As of May 11, 2000, the Company had $10,610 of availability
under the Revolving Credit Facility, net of borrowings of $25,200 and
outstanding letters of credit totalling $4,190, related to workers'
compensation benefits and utility deposits.
CAPITAL EXPENDITURES
The Company had cash capital expenditures of $2,211 during the first three
months of 2000 compared to $1,059 during the first three months of 1999. The
first quarter capital expenditures were largely a result of the Company's
continued efforts to increase efficiency through automation at its various
divisions as well as to increase plant capacity at the Company's Extriders
division. The increase was primarily related to capital expenditures at Heat
and Champagne, acquired in May 1999. The Company expects capital expenditures,
including capitalization of software implementation costs (exclusive of
acquisitions) in 2000 to be approximately $11,000, however, actual capital
requirements may change, particularly as a result of acquisitions the Company
may make.
The ability of the Company to meet its debt service and working capital
obligations and capital expenditure requirements is dependant, however, upon the
future performance of the Company and its subsidiaries which, in turn, will be
subject to general economic conditions and to financial, business and other
factors, including factors beyond the Company's control.
MARKET RISK
The Company is exposed to market risk from changes in interest rates and
commodity pricing. The Company uses derivative financial instruments on a
limited basis to hedge economic exposures. The Company does not enter into
derivative financial instruments or other financial instruments for speculative
trading purposes.
YEAR 2000 COMPLIANCE
The Company encountered no significant Year 2000 problems. The Company continues
to maintain and assess its Year 2000 contingency plans in the event that Year
2000 problems occur. No further expenditures for year 2000 compliance are
expected.
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NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" amended by SFAS
No. 137 "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FAS No. 133--Amendment of FAS No. 133" (combined "SFAS
133"). SFAS 133 establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 2000 and earlier
is permitted as of the beginning of any fiscal quarter subsequent to June 15,
2000. SFAS 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 (and, at the Company's
election, before January 1, 1998).
The Company is in the process of quantifying the impact of adopting SFAS 133 on
its financial statements and has not determined the timing of or method of
adoption of SFAS 133.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits listed on the accompanying Exhibit Index are
filed as part of this report.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and 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.
(Registrant)
Date: May 15, 2000 By: /s/ Jeff L. Hull
---------------- ---------------------------------------
Jeff L. Hull
President,
Chief Financial Officer, Treasurer and
Director
(Principal Executive Officer and
Principal Financial Officer)
Date: May 15, 2000 By: /s/ Eric W. Long
---------------- ---------------------------------------
Eric W. Long
Vice President, Corporate Controller
and Secretary
(Principal Accounting Officer)
20
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
21