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 June 30, 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
- --------------------------------------------------------------------------------
(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 JUNE 30, 2000
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999...........................3
Consolidated Statements of Operations for the Three Months Ended June 30, 2000 and 1999.........4
Consolidated Statements of Operations for the Six Months Ended June 30, 2000 and 1999...........5
Consolidated Statement of Stockholder's Equity for Six Months
Ended June 30, 2000.............................................................................6
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999..........................................................................7
Notes to Consolidated Financial Statements...................................................8-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................15-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................20
Items 2, 3, 4 and 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K...............................................................20
Signatures..............................................................................................20
Exhibit Index...........................................................................................21
2
ATRIUM COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2000 1999
-------------------- --------------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents................................... $ 3,263 $ 1,294
Restricted cash............................................. - 869
Equity securities - available for sale...................... - 111
Assets held for sale........................................ 29,100 -
Accounts receivable, net.................................... 60,252 59,213
Inventories................................................. 44,122 61,277
Prepaid expenses and other current assets................... 8,308 12,441
Deferred tax asset.......................................... 3,118 2,359
------------ -----------
Total current assets..................................... 148,163 137,564
PROPERTY, PLANT AND EQUIPMENT, net............................... 28,027 35,165
GOODWILL, net.................................................... 263,701 287,873
DEFERRED FINANCING COSTS, net.................................... 16,910 17,607
DEFERRED TAX ASSET............................................... 5,899 -
OTHER ASSETS..................................................... 5,979 5,927
------------ -----------
Total assets............................................. $ 468,679 $ 484,136
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable............................ $ 2,355 $ 2,297
Accounts payable............................................ 39,662 26,737
Accrued liabilities......................................... 22,433 25,055
------------ -----------
Total current liabilities................................ 64,450 54,089
------------ -----------
LONG-TERM LIABILITIES:
Notes payable............................................... 323,545 314,414
Deferred tax liability...................................... - 2,557
Other long-term liabilities................................. 2,831 3,056
------------ -----------
Total long-term liabilities........................... 326,376 320,027
------------ -----------
Total liabilities..................................... 390,826 374,116
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock $.01 par value, 3,000 shares authorized,
100 shares issued and outstanding........................ - -
Paid-in capital............................................. 109,951 109,624
Retained earnings (accumulated deficit)..................... (32,098) 398
Accumulated other comprehensive income...................... - (2)
------------ ------------
Total stockholder's equity............................ 77,853 110,020
------------ -----------
Total liabilities and stockholder's equity...... $ 468,679 $ 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 JUNE 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2000 1999
---------- ----------
NET SALES......................................................... $ 136,291 $ 125,530
COST OF GOODS SOLD................................................ 103,472 86,858
---------- ----------
Gross profit.................................................. 32,819 38,672
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses........ 32,697 25,285
Amortization expense.......................................... 2,262 2,059
Special charges............................................... 25,584 70
---------- ----------
60,543 27,414
---------- ----------
Income (loss) from operations............................ (27,724) 11,258
INTEREST EXPENSE.................................................. 8,972 6,353
OTHER INCOME, net................................................. 601 115
---------- ----------
Income (loss) before income taxes and extraordinary charge... (36,095) 5,020
PROVISION (BENEFIT) FOR INCOME TAXES.............................. (7,214) 2,356
---------- ----------
Income (loss) before extraordinary charge.................. (28,881) 2,664
EXTRAORDINARY CHARGE ON EARLY RETIREMENT
OF DEBT (net of income tax benefit of $1,170)..................... - 1,908
---------- ----------
NET INCOME (LOSS) ................................................ $ (28,881) $ 756
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
4
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2000 1999
---------- ----------
NET SALES........................................................ $ 270,074 $ 232,372
COST OF GOODS SOLD............................................... 200,177 161,566
---------- ----------
Gross profit................................................. 69,897 70,806
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses...... 63,785 48,435
Amortization expense........................................ 4,609 3,948
Special charges............................................. 25,584 1,832
---------- ----------
93,978 54,215
---------- ----------
Income (loss) from operations.......................... (24,081) 16,591
INTEREST EXPENSE................................................. 17,729 10,699
OTHER INCOME, net................................................ 833 146
---------- ----------
Income (loss) before income taxes and extraordinary charge... (40,977) 6,038
PROVISION (BENEFIT) FOR INCOME TAXES............................. (8,481) 3,184
---------- ----------
Income (loss) before extraordinary charge.................... (32,496) 2,854
EXTRAORDINARY CHARGE ON EARLY RETIREMENT
OF DEBT (net of income tax benefit of $1,170).................... - 1,908
---------- ----------
NET INCOME (LOSS) ............................................... $ (32,496) $ 946
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
5
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENT OF
STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 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............. - - - - 2 2
Net contribution from Atrium Corp...... - - 327 - - 327
Net loss............................... - - - (32,496) - (32,496)
-------- ------- --------- ---------- ----------- ------------
Balance, June 30, 2000.................... 100 $ - $ 109,951 $ (32,098) $ - $ 77,853
======== ======= ========= ========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
6
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2000 1999
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................... $ (32,496) $ 946
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:...................................................
Depreciation and amortization........................................ 7,806 6,339
Amortization of deferred financing costs............................. 1,125 806
Accretion of discount................................................ 81 -
Accretion of gain from interest rate collars......................... (164) -
Gains on sales of assets............................................. (251) (42)
Write-down of assets................................................. 33,522 -
Gain on sale of equity securities.................................... (507) -
Changes in assets and liabilities, net of acquisition in 1999: ......
Accounts receivable, net............................................ (2,982) (5,879)
Inventories......................................................... (12,142) (3,792)
Prepaid expenses and other current assets........................... 4,135 98
Deferred taxes...................................................... (9,214) -
Accounts payable.................................................... 6,316 (36)
Accrued liabilities................................................. (4,457) 2,937
------------- ------------
Net cash provided by (used in) operating activities............ (9,228) 1,377
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.............................. (4,318) (6,115)
Proceeds from sales of assets........................................... 1,876 51
Payment for acquisition, net of cash acquired........................... - (94,014)
Proceeds from sale of equity securities................................. 620 -
Increase in other assets................................................ (2,558) (2,099)
------------- -------------
Net cash used in investing activities.......................... (4,380) (102,177)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of senior subordinated debt...................... - 172,368
Net borrowings under revolving credit facility.......................... 10,230 9,612
Payments on senior subordinated notes................................... - (29,070)
Payments on term loans B and C.......................................... (1,000) (16,000)
Distributions to Atrium Corporation .................................... (173) (23,256)
Contribution from Atrium Corporation ................................... 500 -
Payments of other notes payable......................................... (161) (109)
Payment of other long-term liabilities.................................. - (2,003)
Checks drawn in excess of bank balances................................. 6,609 (3,668)
Deferred financing costs................................................ (428) (7,074)
------------- -------------
Net cash provided by financing activities...................... 15,577 100,800
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................... 1,969 -
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................... 1,294 -
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................................... $ 3,263 $ -
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
7
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 and six months ended June 30, 2000 and 1999, and
financial position as of June 30, 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.
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
application 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.
ACQUISITIONS
The statement of operations 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 since the date of acquisition, May 17, 1999. The
balance sheets include the accounts of Darby-South, Heat and Champagne as of
June 30, 2000 and December 31, 1999.
8
The following unaudited pro forma information presents consolidated operating
results as though the acquisiton 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 three and six month periods ended June 30, 2000,
there is no difference between the actual and pro forma information as no
acquisitions occurred during 2000.
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------------- ---------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
ACTUAL ACTUAL PRO FORMA
------------------- ------------ --------------
NET SALES.............................. $ 270,074 $ 232,372 $ 260,873
COST OF GOODS SOLD..................... 200,177 161,566 179,681
----------- ----------- ----------
Gross profit......................... 69,897 70,806 81,192
OPERATING EXPENSES:
Selling, delivery, general and
administrative expenses................ 63,785 48,435 57,847
Amortization expense................... 4,609 3,948 4,678
Special charges........................ 25,584 1,832 1,832
----------- ----------- ----------
93,978 54,215 64,357
----------- ----------- ----------
Income (loss) from operations........ (24,081) 16,591 16,835
INTEREST EXPENSE....................... 17,729 10,699 15,739
OTHER INCOME, net...................... 833 146 211
----------- ----------- ----------
Income (loss) before income taxes...... (40,977) 6,038 1,307
PROVISION (BENEFIT) FOR INCOME TAXES... (8,481) 3,184 1,675
----------- ----------- ----------
Net income (loss) from continuing
operations........................... $ (32,496) $ 2,854 $ (368)
=========== =========== ==========
Other Information:
Depreciation expense.................. $ 3,197 $ 2,391 $ 2,929
=========== =========== ==========
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------------- ---------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
ACTUAL ACTUAL PRO FORMA
------------------- ------------ --------------
NET SALES.............................. $ 136,291 $ 125,530 $ 137,586
COST OF GOODS SOLD..................... 103,472 86,858 93,756
----------- ----------- ----------
Gross profit......................... 32,819 38,672 43,830
OPERATING EXPENSES:
Selling, delivery, general and
administrative expenses................ 32,697 25,285 28,391
Amortization expense................... 2,262 2,059 2,339
Special charges........................ 25,584 70 70
----------- ----------- ----------
60,543 27,414 30,800
----------- ----------- ----------
Income (loss) from operations........ (27,724) 11,258 13,030
INTEREST EXPENSE....................... 8,972 6,353 7,870
OTHER INCOME, net...................... 601 115 142
----------- ----------- ----------
Income (loss) before income taxes...... (36,095) 5,020 5,302
PROVISION (BENEFIT) FOR INCOME TAXES... (7,214) 2,356 2,604
----------- ----------- ----------
Net income (loss) from continuing
operations........................... $ (28,881) $ 2,664 $ 2,698
=========== =========== ==========
Other Information:
9
Depreciation expense.................. $ 1,611 $ 1,342 $ 1,518
=========== =========== ==========
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. ASSETS HELD FOR SALE:
As described in Note 9, the Company intends to sell its Wing and Atrium Wood
patio door operations to unrelated third parties. These sales are expected to
be completed by August 31, 2000. At June 30, 2000, the carrying value of the
net assets subject to these sales was reduced to fair value based on the
estimated selling prices less the costs to sell. The assets, as described
below, pertaining to these sales have been segregated on the June 30, 2000
consolidated balance sheet. The components of such assets held for sale as of
June 30, 2000 are as follows:
WING:
Inventory.................................................. $ 19,660
Property, plant and equipment.............................. 5,573
-----------
$ 25,233
ATRIUM WOOD PATIO DOOR OPERATIONS:
Accounts receivable........................................ $ 1,500
Inventory.................................................. 1,699
Property, plant and equipment.............................. 668
-----------
$ 3,867
---------
Total Assets held for sale $ 29,100
=========
4. 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, DECEMBER 31,
2000 1999
----------------- -----------------
(UNAUDITED)
Raw materials................................. $ 27,935 $ 32,481
Work-in-process............................... 630 4,688
Finished goods................................ 16,112 24,071
-------------- --------------
44,677 61,240
LIFO reserve.................................. (555) 37
--------------- --------------
$ 44,122 $ 61,277
============== ==============
10
5. NOTES PAYABLE:
Notes payable consisted of the following:
JUNE 30, DECEMBER 31,
2000 1999
----------------- -----------------
(UNAUDITED)
Revolving credit facility..................... $ 25,500 $ 15,270
Term loan B................................... 58,250 58,750
Term loan C................................... 69,180 69,680
Senior subordinated notes..................... 175,000 175,000
Other......................................... 426 548
-------------- --------------
328,356 319,248
Less:
Unamortized debt discount..................... (2,456) (2,537)
Current portion of notes payable.............. (2,355) (2,297)
--------------- ---------------
Long-term debt $ 323,545 $ 314,414
============== ==============
The Credit Agreement requires the Company to meet certain financial tests
pertaining to, interest coverage, fixed charge coverage, and leverage. On August
14, 2000, effective June 30, 2000, the Company amended its Credit Agreement with
regards to certain financial covenants. After giving effect to the amendment,
the Company is in compliance with all related covenants at June 30, 2000.
6. 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.
11
7. INTEGRATION ACTIVITIES:
In connection with the acquisition of Atrium in 1998, 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:
BALANCE AT BALANCE AT
DECEMBER 31, EXPENDITURES JUNE 30,
1999 IN 2000 2000
------------- -------------- ------------
Product line rationalization... $ 198 $ (198) $ 0
Idle facility expenses......... 748 (355) 393
----------- ----------- ----------
$ 946 $ (553) $ 393
=========== =========== ==========
8. 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. 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 as of June 30, 2000 and December 31, 1999. 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, DECEMBER 31,
2000 1999
------------- -------------
(UNAUDITED)
Current assets.................................. $ 32,289 $ 59,658
Noncurrent assets............................... 172,497 206,938
Current liabilities............................. 26,244 26,118
Noncurrent liabilities.......................... 183,825 200,620
SIX MONTHS ENDED JUNE 30,
------------------------------
2000 1999
------------- -------------
(UNAUDITED) (UNAUDITED)
Net sales....................................... $ 173,787 $ 121,225
Gross profit.................................... 44,303 30,944
Net income (loss) from continuing operations.... (26,290) (1,916)
12
THREE MONTHS ENDED JUNE 30,
------------------------------
2000 1999
------------- -------------
(UNAUDITED) (UNAUDITED)
Net sales....................................... $ 86,232 $ 61,946
Gross profit.................................... 23,580 15,343
Net income (loss) from continuing operations.... (21,423) (2,211)
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.
9. SPECIAL CHARGES AND DIVESTITURES ("WOOD DIVESTITURES"):
WING DIVESTITURE:
On June 30, 2000, the Company signed a definitive agreement to sell
substantially all of the assets of Wing Industries, Inc., its wood interior door
subsidiary ("Wing") to Premdor Corporation, a subsidiary of Premdor Inc.
(NYSE:PI ) (Toronto: PDI). The transaction is expected to close by August 31,
2000, assuming receipt of necessary regulatory approvals and is subject to a
Hart-Scott-Rodino Act filing. In connection with the sale, the Company expects
to receive approximately $25 million in proceeds. As such, the Company has
recorded a special charge related to this divestiture as follows:
WING SPECIAL CHARGE:
NON-CASH CHARGES:
Goodwill write-off............................................ $ 21,087
Capitalized software costs writedown.......................... 1,662
-----------
Total non-cash charges........................................ $ 22,749
FUTURE CASH CHARGES:
Expense associated with operating leases of idle facilities... $ 1,334
Expense associated with operating leases of idle equipment.... 237
-----------
Total future cash charges..................................... 1,571
-----------
Total special charge - Wing divestiture $ 24,320
===========
ATRIUM WOOD PATIO DOOR DIVESTITURE:
During the second quarter of 2000, the Company also committed to sell its
Atrium wood patio door division. On August 10, 2000, the Company reached an
agreement in principle to sell substantially all of its Atrium wood patio
door division assets to an unrelated third-party. Although a definitive
purchase and sale agreement has not been signed, the Company expects to
complete this transaction by August 31, 2000, upon the completion of a
definitive agreement. In connection with the sale, the Company expects to
receive approximately $3.9 million in proceeds. As such, the Company has
recorded a special charge related to this divestiture as follows:
ATRIUM WOOD PATIO DOOR DIVESTITURE:
NON-CASH CHARGES:
Property, plant and equipment writedown....................... $ 1,000
FUTURE CASH CHARGES:
Expense associated with operating leases of idle facilities... 264
-----------
Total special charge - Atrium wood patio door divestiture..... $ 1,264
===========
13
In addition to the above charges, the Company recorded writedowns related to
the sale of inventory of $5,338 and $2,600, respectively, related to the Wing
and Atrium Wood Patio Door divestitures, that is included in cost of goods
sold.
Following is the summarized combined results of operations pertaining to these
Wood Divestitures including the writedown of assets of $33,522 in 2000:
SIX MONTHS ENDED JUNE 30,
----------------------------------------
2000 1999
------------------- -------------------
(UNAUDITED) (UNAUDITED)
Net sales.................................................. $ 82,611 $ 88,483
Gross profit............................................... 5,228 17,684
Net income (loss) from continuing operations............... (40,812) 892
THREE MONTHS ENDED JUNE 30,
----------------------------------------
2000 1999
------------------- -------------------
(UNAUDITED) (UNAUDITED)
Net sales.................................................. $ 36,433 $ 42,285
Gross profit............................................... (2,694) 7,543
Net income (loss) from continuing operations............... (39,593) (238)
10. SUBSEQUENT EVENTS:
ELLISON ACQUISITION:
On March 29, 2000, and amended on July 28, 2000, the Company announced the
signing of a definitive purchase and sale agreement to acquire the assets of
Ellison Window and Door and the stock of Ellison Extrusion Systems, Inc.
(collectively "Ellison") for a combined purchase price of $126,750. The
acquisition proceeds include approximately $100,000 of cash, $500 of assumed
indebtedness and $26,250 of D and W Holdings, Inc. ("D and W") stock. The
cash portion of the acquisition will be funded through a combination of
approximately $76,000 new equity from D and W in the form of common equity
and/or discount notes, $20,000 from the proceeds of the Wing divestiture and
the remainder coming from an additional borrowing on the Company's existing
Credit Agreement.
The acquisition will be accounted for as a purchase in accordance with APB 16.
The aggregate purchase price will be allocated to the underlying assets and
liabilities based upon their respective estimated fair market values at the date
of acquisition. Based on preliminary estimates which will be finalized at a
later date, the excess of purchase price over the fair value of the net assets
acquired ("goodwill") will be approximately $93,000, which will be amortized
over 40 years. The results of operations for the acquired business will be
included in the Company's operations subsequent to the completion of the
transaction, which is expected to be on or about August 31, 2000.
MT. PLEASANT FACILITY:
On July 17, 2000, the Company exercised its right to purchase the Mt. Pleasant,
Texas facility, which was previously used by Wing for $454. On August 11, 2000,
the Company sold the facility to an unrelated party for $907. The Company will
record a gain related to the sale of approximately $453 during the third
quarter.
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 second
quarter ended and six months ended June 30, 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 as of June 30, 2000 and December 31, 1999.
NET SALES. Net Sales increased by $10,761 from $125,530 during the second
quarter of 1999 to $136,291 during the second quarter of 2000 and $37,702 from
$232,372 during the first six months of 1999 to $270,074 during the first six
months of 2000. The increase was primarily due to a combined increase in net
sales of $14,140 during the second quarter of 2000 and $34,587 during the first
six months of 2000 from the acquisitions of Heat and Champagne, which were
acquired during the second quarter of 1999. Excluding the acquisitions during
1999, the increase included approximately $3,608 from its aluminum window
operations, or a 7.2% growth rate, for the second quarter of 2000, and $7,890,
or a 8.1% growth rate, for the first six months of 2000 and the vinyl window
operations included approximately $570, or a 5.6% growth rate, for the second
quarter of 2000, and $1,506, or a 8.3% growth rate, for the first six months of
2000. These increases were partially offset by a decline of $3,849 (or 54.7%)
during the second quarter of 2000 and $5,554 (or 47.7%) during the first six
months of 2000 from its wood patio door operations due to the Company's efforts
to eliminate less-profitable sales territories. During the second quarter of
2000, the net sales from the Wing operations declined $2,010 (or 5.7%) as their
largest customer, The Home Depot, began shifting their business to other
interior door manufacturers.
COST OF GOODS SOLD. Cost of goods sold increased from 69.2% of net sales during
the second quarter of 1999 to 75.9% of net sales during the second quarter of
2000 and 69.5% of net sales during the first six
15
months of 1999 to 74.1% of net sales during the first six months of 2000. The
increase as a percentage of net sales was due largely to the Wing and wood
patio door operations. Wing experienced increases in material costs, up from
59.5% of net sales during the second quarter and first six months of 1999 to
69.2% of net sales during the first six months of 2000 (78.6% during the
second quarter of 2000), primarily the result of a $5,338 write-down of
inventory that was recorded during the second quarter of 2000 relating to
their divestiture. The wood patio door operations increased from 75.0% of net
sales during the second quarter of 1999 to 166.6% of net sales during the
second quarter of 2000 and 75.6% of net sales during the first six months of
1999 to 126.8% of net sales during the first six months of 2000. The increase
at the wood patio door division was primarily due to material costs as a
$2,600 write-down of inventory was recorded during the second quarter of 2000
relating to the pending divestiture of the division. These increases were
partially offset by the aluminum and vinyl window divisions which had
favorable material costs during the second quarter and six month period ended
June 30, 2000. The LIFO reserve expense during the first six months of 2000
was $593 ($222 during the second quarter of 2000) and the LIFO reserve
benefit was $552 during the second quarter and first six months of 1999.
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 $7,412 from $25,285 (20.1% of net
sales during the second quarter of 1999) to $32,697 (24.0% of net sales during
the second quarter of 2000) and increased $15,350 from $48,435 (20.8% of net
sales during the first six months of 1999) to $63,785 (23.6% of net sales during
the first six months of 2000). Wing's selling, delivery, general and
administrative expenses were up from 20.2% of net sales during the first six
months of 1999 (19.8% during the second quarter of 1999) to 27.1% of net sales
during the first six months of 2000 (33.8% during the second quarter of 2000),
due to increased labor and freight expense. The remaining increase is also
largely due to the inclusion of selling, delivery, general and administrative
expenses at Heat and Champagne, which have higher selling expenses as a
percentage of net sales. The combined Heat and Champagne selling, delivery,
general and administrative expenses were $7,930 (28.1% of net sales) during the
second quarter of 2000, an increase of $4,262 over the second quarter of 1999
(26.0% of net sales) and $15,044 (30.9% of net sales) during the first six
months of 2000, an increase of $11,376 over the first six months of 1999 (26.0%
of net sales). If the acquisitions had been included for the entire first six
months of 1999, selling, delivery general and administrative expenses would have
been 22.3% in 1999. Excluding the acquisitions during 1999, the aluminum windows
operations improved from 21.0% of net sales during the first six months of 1999
(20.6% of net sales during the second quarter of 1999) to 19.3% of net sales
during the first six months of 2000 (18.8% of net sales during the second
quarter of 2000) and the vinyl window operations improved from 26.9% of net
sales during the first six months of 1999 (24.9% of net sales during the second
quarter of 1999) to 26.4% of net sales during the first six months of 2000
(24.1% of net sales during the second quarter of 2000). Additionally, delivery
and selling expenses increased due to the increase in sales and increased fuel
costs.
AMORTIZATION EXPENSE. Amortization expense increased $203 from $2,059 during the
second quarter of 1999 to $2,262 during the second quarter of 2000 and $661 from
$3,948 during the first six months of 1999 to $4,609 during the six months of
2000. The increase was largely due to the amortization of goodwill recorded in
connection the acquisitions of Heat and Champagne.
SPECIAL CHARGES. During the second quarter of 2000, the Company recorded a
one-time charge of $25,584, of which $24,320 related to the write-off of certain
intangible assets and the write-down of certain assets related to the sale of
Wing and $1,264 related to the write-down of certain assets at the wood patio
door operations. 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 the former President and
Chief Executive Officer.
INTEREST EXPENSE. Interest expense increased $2,619 from $6,353 during the
second quarter of 1999 to $8,972 during the second quarter of 2000 and $7,030
from $10,699 during the first six months of 1999 to $17,729 during the first six
months 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
16
connection with the acquisitions of Heat and Champagne and are 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 20.0% during the second
quarter of 2000 and 20.7% during the first six months of 2000 due largely to
non-deductible goodwill amortization expense of approximately $1,468 and $2,937,
respectively and the write-off of non-deductible goodwill of $13,060, related to
the sale of Wing. Excluding the effects of non-deductible expenses, the
Company's effective tax rate would have been approximately 33.4% during the
second quarter of 2000 and 34.0% during the first six months of 2000.
RECENT DEVELOPMENTS
ELLISON ACQUISITION:
On March 29, 2000, and amended on July 28, 2000, the Company announced the
signing of a definitive purchase and sale agreement to acquire the assets of
Ellison Window and Door and the stock of Ellison Extrusion Systems, Inc.
(collectively "Ellison") for a combined purchase price of $126,750. The
acquisition proceeds include approximately $100,000 of cash, $500 of assumed
indebtedness and $26,250 of D and W stock. The cash portion of the acquisition
will be funded through a combination of approximately $76,000 new equity from D
and W in the form of common equity and/or discount notes, $20,000 from the
proceeds of the Wing divestiture and the remainder coming from an additional
borrowing on the Company's existing Credit Agreement.
The acquisition will be accounted for as a purchase in accordance with APB 16.
The aggregate purchase price will be allocated to the underlying assets and
liabilities based upon their respective estimated fair market values at the date
of acquisition. Based on preliminary estimates which will be finalized at a
later date, the excess of purchase price over the fair value of the net assets
acquired ("goodwill") will be approximately $93,000, which will be amortized
over 40 years. The results of operations for the acquired business will be
included in the Company's operations subsequent to the completion of the
transaction, which is expected to be on or about August 31, 2000.
"WOOD DIVESTITURES":
WING DIVESTITURE:
On June 30, 2000, the Company signed a definitive agreement to sell
substantially all of the assets of Wing Industries, Inc., its wood interior door
subsidiary ("Wing") to Premdor Corporation, a subsidiary of Premdor Inc.
(NYSE:PI ) (Toronto: PDI). The transaction is expected to close by August 31,
2000, assuming receipt of necessary regulatory approvals and is subject to a
Hart-Scott-Rodino Act filing. In connection with the sale, the Company expects
to receive approximately $25 million in proceeds. As such, the Company has
recorded a one-time special charge of $24,320, of which included non-cash
charges of $22,749 related to the write-off of certain intangible assets and the
write-down of capitalized software costs and cash charges of $1,571, relating to
operating leases of idle facilities and equipment. Additionally, the Company
recorded a writedown of inventory of $5,338 that is included in cost of goods
sold.
ATRIUM WOOD PATIO DOOR DIVESTITURE:
During the second quarter of 2000, the Company also committed to sell its
Atrium wood patio door division. On August 10, 2000, the Company reached an
agreement in principle to sell substantially all of its Atrium wood patio
door division assets to a third-party. Although a definitive purchase and
sale agreement has not been signed, the Company expects to complete this
transaction by August 31, 2000, upon the completion of a definitive purchase
and sale agreement. In connection with the sale, the Company expects to
receive
17
approximately $3.9 million in proceeds. As such, the Company has recorded a
one-time special charge of $1,264, of which included non-cash charges of
$1,000 related to the write-down of property, plant and equipment and cash
charges of $264, relating to operating leases of idle facilities.
Additionally, the Company recorded a writedown of inventory of $2,600 that is
included in cost of goods sold.
Had the Company completed the Wood Divestitures as of January 1, 1999, the pro
forma summary financial results (including the acquisitions of Darby-South, Heat
and Champagne) for the six month period ending June 30, 2000 and 1999 would have
been as follows:
SIX MONTHS ENDED JUNE 30,
----------------------------------------
2000 1999
------------------- -------------------
Net sales.................................................. $ 187,463 $ 172,364
Gross profit............................................... 64,669 63,507
Income from operations..................................... $ 16,731 $ 12,568
============== ==============
EBITDA (1)................................................. $ 25,373 $ 25,055
============== ==============
LIFO reserve expense (benefit)............................. $ 593 $ (522)
============== ==============
EBITDA excluding LIFO reserve expense (benefit)............ $ 25,966 $ 24,533
============== ==============
(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 six months of 2000, cash was primarily used for increases in working
capital, capital expenditures and debt payments. Net cash used in operating
activities was $9,228 during first six months of 2000 ($12,539 during the second
quarter of 2000) compared to cash provided by operating activities of $1,377
during the first six months of 1999 ($697 during the second quarter of 1999).
The increase in cash used in operating activities is largely due to increases in
inventory. Net cash used in investing activities during the first six months of
2000 was $4,380 ($1,181 during the second quarter of 2000 compared to $102,177
during the first six months of 1999 ($98,814 during the second quarter of 1999).
The decrease in cash used in investing activities was due primarily to the
acquisition of Heat and Champagne during the second quarter of 1999 and Delta
Millwork, Inc. during the first quarter of 1999. Cash provided by financing
activities during the first six months of 2000 was $15,577 ($13,379 during the
second quarter of 2000) compared to $100,800 during the first six months of 1999
($98,117 during the second quarter of 1999). The decrease from prior year was
due to the $175,000 senior subordinated notes the Company issued on May 17, 1999
(due May 1, 2009) in connection with the acquisitions of Heat and Champagne.
18
OTHER CAPITAL RESOURCES
The Revolving Credit Facility, which was increased to $40,000 in June of
1999, has a maturity date of September 30, 2004. At June 30, 2000, the
Company had $10,190 of availability under the Revolving Credit Facility, net
of borrowings of $25,500 and outstanding letters of credit totaling $4,310,
relating to workers' compensation benefits and utility deposits. As of August
18, 2000, the Company had cash of $2,283 and $10,190 of availability under
the Revolving Credit Facility, net of borrowings of $25,500 and outstanding
letters of credit totaling $4,310. Additionally, in connection with the
divestitures of Wing and Atrium Wood and the acquisition of Ellison, the
Company intends to pay down approximately $21,000 of its Revolving Credit
Facility. These transactions are expected to be completed on or about August
31, 2000.
CAPITAL EXPENDITURES
The Company had cash capital expenditures of $4,318 during the first six months
of 2000 ($2,107 during the second quarter of 2000) compared to $6,115 during the
first six months of 1999 ($5,056 during the second quarter of 1999). Capital
expenditures during the first six months 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 extruders
division. 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.
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
application 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
On May 17, 2000, in accordance with Items 5 and 7 of Form 8-K,
the Company filed a Report on Form 8-K announcing that the
Company has been notified by The Home Depot that the retailer
plans to shift its interior door business from the Wing
interior wood door division to two integrated full-line door
manufacturers.
On July 11, 2000, in accordance with Items 5 and 7 of Form
8-K, the Company filed a Report on Form 8-K announcing the
signing of a definitive agreement to sell substantially all
the assets of Wing Industries, Inc., its wood interior door
subsidiary to Premdor Corporation, a subsidiary of Premdor
Inc.
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: August 21, 2000 By: /s/ Jeff L. Hull
------------------- -----------------------------------------
Jeff L. Hull
President,
Chief Financial Officer, Treasurer and
Director
Date: August 21, 2000 By: /s/ Eric W. Long
------------------- -----------------------------------------
Eric W. Long
Vice President, Corporate Controller
and Secretary
20
EXHIBIT INDEX
EXHIBIT DESCRIPTION
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27 Financial Data Schedule
21