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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, 2001
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
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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 / /
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ATRIUM COMPANIES, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2001
INDEX
PAGE
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000........................................... 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 2001 and 2000............................... 4
Consolidated Statement of Stockholder's Equity for the Three
Months Ended March 31, 2001................................. 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2001 and 2000............................... 6
Notes to Consolidated Financial Statements.................. 7-19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20-22
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 22-24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 24
Items 2, 3, 4 and 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K............................ 24
Signatures............................................................ 25
Exhibit Index.........................................................
2
ATRIUM COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,525 $ 4,646
Accounts receivable, net.................................. 56,348 51,239
Inventories............................................... 48,011 45,955
Prepaid expenses and other current assets................. 2,157 2,958
Deferred tax asset........................................ 1,281 --
-------- --------
Total current assets.................................... 111,322 104,798
PROPERTY, PLANT AND EQUIPMENT, net.......................... 57,135 54,640
GOODWILL, net............................................... 353,778 356,674
DEFERRED FINANCING COSTS, net............................... 16,035 16,644
OTHER ASSETS................................................ 7,812 7,579
-------- --------
Total assets............................................ $546,082 $540,335
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable.......................... $ 6,143 $ 6,211
Accounts payable.......................................... 35,465 28,482
Accrued liabilities....................................... 32,704 33,104
-------- --------
Total current liabilities............................... 74,312 67,797
-------- --------
LONG-TERM LIABILITIES:
Notes payable............................................. 351,183 349,137
Deferred tax liability.................................... 1,281 --
Other long-term liabilities............................... 998 1,325
Swaps contract liability.................................. 5,416 --
-------- --------
Total long-term liabilities............................. 358,878 350,462
-------- --------
Total liabilities....................................... 433,190 418,259
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock $.01 par value, 3,000 shares authorized, 100
shares issued and outstanding........................... -- --
Paid-in capital........................................... 195,898 196,004
Retained earnings (accumulated deficit)................... (77,835) (73,928)
Accumulated other comprehensive income (loss)............. (5,171) --
-------- --------
Total stockholder's equity.............................. 112,892 122,076
-------- --------
Total liabilities and stockholder's equity............ $546,082 $540,335
======== ========
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, 2001 AND 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2001 2000
-------- --------
NET SALES................................................... $112,302 $133,782
COST OF GOODS SOLD.......................................... 76,074 96,706
-------- --------
Gross profit.............................................. 36,228 37,076
-------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses
(excluding stock compensation and amortization expense)... 26,380 31,087
Stock compensation expense.................................. 145 --
Amortization expense........................................ 3,535 2,347
-------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES...... 30,060 33,434
-------- --------
Income from operations.................................... 6,168 3,642
INTEREST EXPENSE............................................ 10,005 8,757
OTHER INCOME, net........................................... 144 233
-------- --------
Income (loss) before income taxes......................... (3,693) (4,882)
PROVISION (BENEFIT) FOR INCOME TAXES........................ 214 (1,266)
-------- --------
NET INCOME (LOSS)........................................... $ (3,907) $ (3,616)
======== ========
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, 2001
(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, 2000............. 100 $-- $196,004 $(73,928) $ -- $122,076
Net distribution to Atrium
Corporation........................ -- -- (106) -- -- (106)
Comprehensive income (loss):
Net loss........................... -- -- -- (3,907) -- (3,907)
Cumulative effect of change in
accounting principle, net of tax
of $0 (adoption of SFAS 133--see
note 2).......................... -- -- -- -- (2,319) (2,319)
Net fair market value adjustment of
derivative instruments, net of
tax of $0........................ -- -- -- -- (2,770) (2,770)
Accretion of deferred gain on
terminated interest rate swaps... -- -- -- -- (82) (82)
--- --- -------- -------- ------- --------
Balance, March 31, 2001................ 100 $-- $195,898 $(77,835) $(5,171) $112,892
=== === ======== ======== ======= ========
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, 2001 AND 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(3,907) $(3,616)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 5,787 3,933
Amortization of deferred financing costs................ 633 555
Accretion of discount................................... 44 40
Accretion of gain from interest rate collars............ (82) (82)
Amortization of gain from sale/leaseback of building.... (2) --
Gain on sales of assets................................. (6) (283)
Provision for bad debts................................. 190 243
Deferred tax provision (benefit)........................ (1,420) 251
Changes in assets and liabilities:
Accounts receivable, net.............................. (5,299) (5,280)
Inventories........................................... (2,055) (1,581)
Prepaid expenses and other current assets............. 778 1,329
Accounts payable...................................... 5,362 6,951
Accrued liabilities................................... 1,022 851
------- -------
Net cash provided by operating activities........... 1,045 3,311
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (4,769) (2,211)
Proceeds from sales of assets............................. 27 243
Increase in other assets.................................. (872) (1,231)
------- -------
Net cash used in investing activities............... (5,614) (3,199)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under revolving credit
facility................................................ 3,500 (6,270)
Scheduled principal payments on term loans................ (1,490) (500)
Distribution to Atrium Corporation........................ (106) --
Payments of other notes payable........................... (77) (70)
Increase in checks drawn in excess of bank balances....... 1,621 9,040
Capitalized deferred financing costs...................... -- (2)
------- -------
Net cash provided by financing activities........... 3,448 2,198
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (1,121) 2,310
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 4,646 1,294
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 3,525 $ 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, 2001 AND 2000
(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, 2001 and 2000, and
financial position as of March 31, 2001 and December 31, 2000 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 year
ended December 31, 2000 included in the Company's Form 10-K as filed with the
Securities and Exchange Commission on April 2, 2001. 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 September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of SFAS No. 125." SFAS No. 140 revised the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. This statement shall be applied prospectively, except as
provided in paragraphs 20, 21, 23 and 24. Earlier or retroactive application of
this statement is not permitted. Management does not anticipate SFAS No. 140
will have a material effect on our consolidated financial position or results of
operations.
PRO FORMA RESULTS
The statement of operations for 2000 only includes the operations of certain
acquisitions and divestitures from the date they were acquired or divested by
the Company. The Ellison Company, Inc.'s Windows and Doors Division and Ellison
Extrusion Systems, Inc. (collectively "Ellison") are included since their date
of acquisition, October 25, 2000, and the Wing Industries, Inc. ("Wing") and
Atrium Wood Patio Door ("Wood") divestitures are excluded since their
dispositions on August 25, 2000 and August 30, 2000, respectively.
The following unaudited pro forma information presents consolidated
operating results as though the acquisition of Ellison (see note 3) and the
divestitures of the Wing and Wood divisions(see note 8) had occurred at the
beginning of the periods presented. For the three month period ended March 31,
2001, there is no difference between the actual and pro forma information
because the acquisitions have been
7
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION: (CONTINUED)
included in operations for the full period and the divestitures have been
excluded from operations for the full period.
THREE MONTHS
THREE MONTHS ENDED
ENDED MARCH 31, 2000
MARCH 31, 2001 -------------------------
ACTUAL ACTUAL PRO FORMA
--------------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
NET SALES................................................ $112,302 $133,782 $109,746
COST OF GOODS SOLD....................................... 76,074 96,706 73,424
-------- -------- --------
Gross profit........................................... 36,228 37,076 36,322
-------- -------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses
(excluding stock compensation, Ellison corporate
service charge and amortization expense)............... 26,380 31,087 26,619
Stock compensation expense............................... 145 -- --
Ellison corporate service charge......................... -- -- 423
Amortization expense..................................... 3,535 2,347 3,535
-------- -------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES... 30,060 33,434 30,577
-------- -------- --------
Income from operations................................. 6,168 3,642 5,745
INTEREST EXPENSE......................................... 10,005 8,757 10,005
OTHER INCOME, net........................................ 144 233 182
-------- -------- --------
Income (loss) before income taxes...................... (3,693) (4,882) (4,078)
PROVISION (BENEFIT) FOR INCOME TAXES..................... 214 (1,266) 463
-------- -------- --------
NET INCOME (LOSS)........................................ $ (3,907) $ (3,616) $ (4,541)
======== ======== ========
Other Information:
Depreciation Expense..................................... $ 2,253 $ 1,586 $ 1,889
======== ======== ========
LIFO reserve expense (benefit)........................... $ (151) $ 222 $ 222
======== ======== ========
2. ADOPTION OF SFAS NO. 133--ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES:
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and the corresponding amendments on January 1, 2001. In
accordance with the transition provisions of SFAS 133, the Company recorded a
cumulative-effect adjustment as of January 1, 2001 of $2,319 to other
comprehensive income. This adjustment represents the current fair-value of
hedging instruments related to interest rate swap agreements of $2,646 with an
offset of $327 related to the reclassification of deferred gains on previously
terminated interest rate swaps. There is no income tax effect considering there
is a full valuation allowance against deferred tax assets.
At March 31, 2001, the fair-value of the hedging instruments is a liability
of $5,416 and is included in other comprehensive income and long-term
liabilities. The Company expects that none of this liability will require
adjustment to expense within the next twelve months.
8
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ADOPTION OF SFAS NO. 133--ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES: (CONTINUED)
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments, but it expects all
counterparties to meet their obligations given their high credit ratings.
The Company, as part of its risk management program, is party to interest
rate swap agreements for the purpose of hedging its exposure to floating
interest rates on certain portions of its debt. As of March 31, 2001, the
Company had $141.9 million of notional amount in outstanding interest rate swaps
with third parties. The maximum length of the interest rate swaps currently in
place as of March 31, 2001 is approximately 3 years.
All derivatives are recognized on the balance sheet at their fair-value. On
the date that the Company enters into a derivative contract, it designates the
derivative as a hedge of (a) a forecasted transaction or (b) the variability of
cash flows that are to be received or paid in connection with a recognized asset
or liability (a "cash flow" hedge). Changes in the fair-value of a derivative
that is highly effective as--and that is designated and qualifies as--a cash
flow hedge, to the extent that the hedge is effective, are recorded in other
comprehensive income, until earnings are affected by the variability of cash
flows of the hedged transaction (e.g., until periodic settlements of a
variable-rate asset or liability are recorded in earnings). Any hedge
ineffectiveness (which represents the amount by which the changes in the
fair-value of the derivative exceed the variability in the cash flows of the
forecasted transaction) is recorded in current-period earnings. As of March 31,
2001, all hedges outstanding were highly effective.
The Company formally documents all relationships between hedging instruments
and hedge items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair-value or cash flow hedges to
(1) specific assets and liabilities on the balance sheet or (2) specific firm
commitments or forecasted transactions. The Company also formally assesses (both
at the hedge's inception and on an ongoing basis) whether the derivatives that
are used in hedging transactions have been highly effective in offsetting
changes in the fair value or cash flows of hedged items and whether those
derivatives may be expected to remain highly effective in future periods. When
it is determined that a derivative is not (or has ceased to be) highly effective
as a hedge, the Company discontinues hedge accounting prospectively, as
discussed below.
The Company discontinues hedge accounting prospectively when (1) it
determines that the derivative is no longer effective in offsetting changes in
the fair-value or cash flows of a hedge item (including hedged items such as
firm commitments or forecasted transactions); (2) the derivative expires or is
sold, terminated, or exercised; (3) it is no longer probable that the forecasted
transaction will occur; or (4) management determines that designating the
derivative as a hedging instrument is no longer appropriate.
When the Company discontinues hedge accounting because it is no longer
probable that the forecasted transaction will occur in the originally expected
period, the gain or loss on the derivative remaining in accumulated other
comprehensive income is reclassified into earnings. In all situations in which
hedge accounting is discontinued and the derivative remains outstanding, the
Company will carry the derivative at its fair-value on the balance sheet,
recognizing changes in the fair-value in current-period earnings.
9
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION:
Ellison Acquisition:
On October 25, 2000, the Company completed the acquisition of the stock of
VES, Inc. doing business as Ellison Extrusion Systems, Inc. and substantially
all of the operating assets of The Ellison Company, Inc.'s Windows and Doors
Division. The transaction was valued at $125,466, excluding transaction fees and
expenses of $6,002.
The purchase price was comprised of $98,187 of cash and $27,279 (20,983,666
shares) of common stock in the Company's parent, Atrium Corporation. The cash
portion of the purchase price and transaction fees and expenses aggregating
$104,189 was funded through Atrium Corporation's issuance of $36,500 and $26,000
of Senior PIK Notes, due 2010, and common stock, respectively, $24,355 from the
divestiture of the Wing and Wood assets and $4,913 of cash acquired from
Ellison. The remaining portion was funded through additional borrowings under
the Company's Credit Facility.
The acquisition has been accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations" ("APB 16").
The aggregate purchase price has been allocated to the underlying assets and
liabilities based upon their respective estimated fair market values at the date
of acquisition. The excess of purchase price over the fair value of the net
assets acquired ("goodwill") was $97,503. The results of operations for the
acquired business were included in the Company's consolidated financial
statements beginning October 25, 2000.
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:
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
Raw materials............................................... $32,930 $31,785
Work-in-process............................................. 925 671
Finished goods.............................................. 14,817 14,312
------- -------
48,672 46,768
LIFO reserve................................................ (661) (813)
------- -------
$48,011 $45,955
======= =======
10
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE:
Notes payable consisted of the following:
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
Revolving credit facility................................... $ 22,500 $ 19,000
Term loan A................................................. 12,140 13,070
Term loan B................................................. 69,440 69,720
Term loan C................................................. 80,370 80,650
Senior subordinated notes................................... 175,000 175,000
Other....................................................... 203 279
-------- --------
359,653 357,719
Less:
Unamortized debt discount................................... (2,327) (2,371)
Current portion of notes payable............................ (6,143) (6,211)
-------- --------
Long-term debt............................................ $351,183 $349,137
======== ========
The Credit Agreement requires the Company to meet certain financial tests
pertaining to, interest coverage, fixed charge coverage and leverage. As of
March 31, 2001, the Company was in compliance with all related covenants.
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 effect on the consolidated
financial position, results of operations or liquidity of the Company.
In 1995, various Dallas-based factory employees became members of the
Amalgamated Clothing and Textile Workers Union. The Company has entered into a
collective bargaining agreement which expires in May 2001. In addition, in
connection with its Woodville, Texas operations, the Company is party to a
collective bargaining arrangement due to expire in September 2001.
The Company is involved in various stages of investigation and cleanup
related to environmental protection matters, some of which relate to waste
disposal sites. The potential costs related to such matters and the possible
impact thereof on future operations are uncertain due in part to: the
uncertainty as to the extent of pollution; the complexity of Government laws and
regulations and their interpretations; the varying costs and effectiveness of
alternative cleanup technologies and methods; the uncertain level of insurance
or other types of recovery; and the questionable level of the Company's
involvement. The Company was named in 1988 as a potentially responsible party
("PRP") in two superfund sites pursuant to the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended (the Chemical
Recycling, Inc. site in Wylie, Texas, and the Diaz Refinery site in Little Rock,
Arkansas). The Company believes that based on the information currently
available, including the substantial number of other PRP's and relatively small
share allocated to it at such sites, its liability, if any, associated with
either of these sites will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
11
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CONTINGENCIES: (CONTINUED)
Atrium previously owned one parcel of real estate that requires future costs
related to environmental clean-up. The estimated costs of clean-up have been
reviewed by third-party sources and are expected not to exceed $150. The
previous owner of the property has established an escrow of $400 to remediate
the associated costs. This property was sold by Atrium in December 1999. The
Company has established a letter of credit of $250 to cover any costs of
remediation exceeding the previous owner's escrow. The Company believes the
existing escrow amount is adequate to cover costs associated with this clean-up.
No additional liabilities are believed to exist in regards to the Company's
remaining operations.
7. SUBSIDIARY GUARANTORS:
The term Wing refers to Wing Industries and its direct parent, Wing
Industries Holdings. The term Darby refers to R.G. Darby Company, R.G. Darby
Company-South, Total Trim and Total Trim-South. The term Heat refers to Heat,
H.I.G. Vinyl, Thermal Industries and Best Built.
In connection with the Company's Senior Subordinated Notes due 2009, the
Company's payment obligations under the Notes are fully and unconditionally
guaranteed, jointly and severally (collectively, the "Subsidiary Guarantees") on
a senior subordinated basis by its wholly-owned subsidiaries: ADW-Northeast,
ADW-Arizona, ADW-West Coast, ADW-New England, ADW-New York, Heat, Champagne
(doing business as ADW of the Rockies), Wing, Darby and VES, Inc, (doing
business as Ellison Extrusion Systems, Inc.) The Company has no non-guarantor
direct or indirect subsidiaries. The operations related to the assets of
ADW-Northeast, ADW-Arizona, ADW-West Coast, ADW-New England, ADW New York, Heat,
Champagne, and Darby are included for all periods covered. The operations of
Ellison Extrusion Systems, Inc. are included since their date of acquisition on
October 25, 2000. The balance sheet information includes all subsidiaries as of
December 31, 2000 and March 31, 2001. 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 subject to subordination to senior indebtedness.
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.
12
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUBSIDIARY GUARANTORS: (CONTINUED)
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2001
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $(30,703) $ 25,177 $9,051 $ 3,525
Accounts receivable, net...................... 20,463 35,885 -- 56,348
Inventories................................... 20,477 28,235 (701) 48,011
Prepaid expenses and other current assets..... 978 1,179 -- 2,157
Deferred tax asset............................ -- 1,281 -- 1,281
-------- -------- ------ --------
Total current assets.......................... 11,215 91,757 8,350 111,322
PROPERTY, PLANT AND EQUIPMENT, net.............. 23,542 33,596 (3) 57,135
GOODWILL, net................................... 171,822 181,956 -- 353,778
DEFERRED FINANCING COSTS, net................... -- 16,035 -- 16,035
OTHER ASSETS, net............................... 1,420 6,392 -- 7,812
-------- -------- ------ --------
Total assets.................................. $207,999 $329,736 $8,347 $546,082
======== ======== ====== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable.............. $ 2,640 $ 3,503 $ -- $ 6,143
Accounts payable.............................. 8,652 17,763 9,050 35,465
Accrued liabilities........................... 10,226 22,478 -- 32,704
-------- -------- ------ --------
Total current liabilities..................... 21,518 43,744 9,050 74,312
-------- -------- ------ --------
LONG-TERM LIABILITIES:
Notes payable................................. 150,934 200,249 -- 351,183
Deferred tax liability........................ -- 1,281 -- 1,281
Other long-term liabilities................... -- 998 -- 998
Fair value of derivative instruments.......... -- 5,416 -- 5,416
-------- -------- ------ --------
Total long-term liabilities................... 150,934 207,944 -- 358,878
-------- -------- ------ --------
Total liabilities............................. 172,452 251,688 9,050 433,190
-------- -------- ------ --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock.................................. -- -- -- --
Paid-in capital............................... 36,014 159,884 195,898
Retained earnings (accumulated deficit)....... (467) (76,665) (703) (77,835)
Accumulated other comprehensive loss.......... -- (5,171) -- (5,171)
-------- -------- ------ --------
Total stockholder's equity.................... 35,547 78,048 (703) 112,892
-------- -------- ------ --------
Total liabilities and stockholder's
equity.................................... $207,999 $329,736 $8,347 $546,082
======== ======== ====== ========
The accompanying notes are an integral part of the consolidated financial
statements.
13
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUBSIDIARY GUARANTORS: (CONTINUED)
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $(34,019) $ 31,236 $ 7,429 $ 4,646
Accounts receivable, net...................... 21,652 29,587 -- 51,239
Inventories................................... 19,401 27,570 (1,016) 45,955
Prepaid expenses and other current assets..... 1,611 1,347 -- 2,958
-------- -------- ------- --------
Total current assets.......................... 8,645 89,740 6,413 104,798
PROPERTY, PLANT AND EQUIPMENT, net.............. 23,983 30,660 (3) 54,640
GOODWILL, net................................... 173,198 183,476 -- 356,674
DEFERRED FINANCING COSTS, net................... -- 16,644 -- 16,644
OTHER ASSETS, net............................... 1,484 6,095 -- 7,579
-------- -------- ------- --------
Total assets.................................. $207,310 $326,615 $ 6,410 $540,335
======== ======== ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable.............. $ 2,621 $ 3,590 $ -- $ 6,211
Accounts payable.............................. 6,714 14,339 7,429 28,482
Accrued liabilities........................... 12,601 20,503 -- 33,104
-------- -------- ------- --------
Total current liabilities..................... 21,936 38,432 7,429 67,797
-------- -------- ------- --------
LONG-TERM LIABILITIES:
Notes payable................................. 147,308 201,829 -- 349,137
Other long-term liabilities................... -- 1,325 -- 1,325
-------- -------- ------- --------
Total long-term liabilities................... 147,308 203,154 -- 350,462
-------- -------- ------- --------
Total liabilities............................. 169,244 241,586 7,429 418,259
-------- -------- ------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock.................................. -- -- -- --
Paid-in capital............................... 36,013 159,991 -- 196,004
Retained earnings (accumulated deficit)....... 2,053 (74,962) (1,019) (73,928)
-------- -------- ------- --------
Total stockholder's equity.................... 38,066 85,029 (1,019) 122,076
-------- -------- ------- --------
Total liabilities and stockholder's
equity.................................... $207,310 $326,615 $ 6,410 $540,335
======== ======== ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
14
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUBSIDIARY GUARANTORS: (CONTINUED)
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(DOLLARS IN THOUSANDS)
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
NET SALES........................................ $44,237 $74,844 $ (6,779) $112,302
COST OF GOODS SOLD............................... 29,132 54,089 (7,147) 76,074
------- ------- -------- --------
Gross profit..................................... 15,105 20,755 368 36,228
------- ------- -------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative
expenses (excluding stock compensation and
amortization expense).......................... 12,067 14,392 (79) 26,380
Stock compensation expense..................... -- 145 -- 145
Amortization expense........................... 1,649 1,886 -- 3,535
------- ------- -------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE
EXPENSES....................................... 13,716 16,423 (79) 30,060
------- ------- -------- --------
Income from operations......................... 1,389 4,332 447 6,168
INTEREST EXPENSE................................. 4,300 5,705 -- 10,005
OTHER INCOME, net................................ 16 261 (133) 144
------- ------- -------- --------
Income (loss) before income taxes and
extraordinary charge........................... (2,895) (1,112) 314 (3,693)
PROVISION (BENEFIT) FOR INCOME TAXES............. (376) 590 -- 214
------- ------- -------- --------
NET INCOME (LOSS)................................ $(2,519) $(1,702) $ 314 $ (3,907)
======= ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
15
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUBSIDIARY GUARANTORS: (CONTINUED)
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(DOLLARS IN THOUSANDS)
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
NET SALES........................................ $87,837 $55,902 $ (9,957) $133,782
COST OF GOODS SOLD............................... 67,114 39,602 (10,010) 96,706
------- ------- -------- --------
Gross profit..................................... 20,723 16,300 53 37,076
------- ------- -------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative
expenses (excluding amortization expense)...... 21,604 9,563 (80) 31,087
Amortization expense............................. 1,322 1,025 -- 2,347
------- ------- -------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE
EXPENSES....................................... 22,926 10,588 (80) 33,434
------- ------- -------- --------
Income (loss) from operations.................. (2,203) 5,712 133 3,642
INTEREST EXPENSE................................. 5,750 3,007 -- 8,757
OTHER INCOME, net................................ 25 341 (133) 233
------- ------- -------- --------
Income (loss) before income taxes and
extraordinary charge........................... (7,928) 3,046 -- (4,882)
PROVISION (BENEFIT) FOR INCOME TAXES............. (2,056) 790 -- (1,266)
------- ------- -------- --------
NET INCOME (LOSS)................................ $(5,872) $ 2,256 $ -- $ (3,616)
======= ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
16
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUBSIDIARY GUARANTORS: (CONTINUED)
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(DOLLARS IN THOUSANDS)
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES............. $ 4,010 $(4,587) $1,622 $ 1,045
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..... (694) (4,075) -- (4,769)
Proceeds from sales of assets.................. -- 27 -- 27
Other assets................................... -- (872) -- (872)
-------- ------- ------ -------
Net cash used in investing activities........ (694) (4,920) -- (5,614)
-------- ------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under term notes...... -- 3,500 -- 3,500
Payment of other notes payable................. -- (77) -- (77)
Scheduled principal payments on term notes..... -- (1,490) -- (1,490)
Distributions to Atrium Corp................... -- (106) -- (106)
Checks drawn in excess of bank balances........ -- 1,621 -- 1,621
-------- ------- ------ -------
Net cash provided by financing activities.... -- 3,448 -- 3,448
-------- ------- ------ -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 3,316 (6,059) 1,622 (1,121)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD... (34,019) 31,236 7,429 4,646
-------- ------- ------ -------
CASH AND CASH EQUIVALENTS, END OF PERIOD......... $(30,703) $25,177 $9,051 $ 3,525
======== ======= ====== =======
The accompanying notes are an integral part of the consolidated financial
statements.
17
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUBSIDIARY GUARANTORS: (CONTINUED)
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(DOLLARS IN THOUSANDS)
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES............ $(102,820) $ 97,050 $ 9,081 $ 3,311
--------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.... (1,024) (1,187) -- (2,211)
Proceeds from sales of assets................. -- 243 -- 243
Other assets.................................. -- (1,231) -- (1,231)
--------- -------- ------- -------
Net cash used in investing activities....... (1,024) (2,175) -- (3,199)
--------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of other notes payable................ -- (70) -- (70)
Net borrowings under revolving credit
facility.................................... -- (6,270) -- (6,270)
Deferred financing costs...................... -- (2) -- (2)
Scheduled principal payments on term notes.... -- (500) -- (500)
Checks drawn in excess of bank balances....... -- 9,040 -- 9,040
--------- -------- ------- -------
Net cash provided by financing activities... -- 2,198 -- 2,198
--------- -------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (103,844) 97,073 9,081 2,310
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD........................................ (23,144) 19,956 4,482 1,294
--------- -------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD........ $(126,988) $117,029 $13,563 $ 3,604
========= ======== ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
18
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DIVESTITURES:
WING DIVESTITURE:
On August 25, 2000, the Company completed the sale of 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).
In connection with the sale, the Company received $20,570 in proceeds.
ATRIUM WOOD PATIO DOOR DIVESTITURE:
On August 30, 2000, the Company completed the sale of substantially all of
its Atrium Wood Patio Door division assets to Woodgrain Millwork, Inc. In
connection with the sale, the Company received $3,785 in proceeds.
9. SUBSEQUENT EVENTS:
The Company is currently contemplating an amendment to the Credit Agreement
that would permit an accounts receivable securitization, changes in future
financial covenants and allow for the potential divestiture of certain assets.
The Company expects the amendment to be effective on or about May 17, 2001.
However, there can be no assurance the Company will receive the amendment.
19
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 first
quarter ended March 31, 2001 are not necessarily indicative of results expected
for the full year.
The operations of Ellison are included since their date of acquisition,
October 25, 2000. The balance sheet information includes all subsidiaries and
divisions as of March 31, 2001 and December 31, 2000.
NET SALES. Net sales decreased by $21,480 from $133,782 during the first
quarter of 2000 to $112,302 during the first quarter of 2001. The decrease
during the first quarter was the result of the divestiture of the Company's Wing
and the Wood Patio Door operations during the third quarter of 2000. As the
operations of these divisions ceased, Wing and Wood's net sales decreased by
$43,123 and $2,907, respectively, compared to 2000. The decreases were partially
offset by $27,368 in net sales from the acquisition of Ellison during
October 2000. The Company also experienced decreases during the first quarter of
2001 from its aluminum window operations as a result of inclement weather. These
operations net sales decreased $4,213, or 8.2%, compared to the first quarter of
2000. The decreases experienced during the first quarter were partially offset
by increases that included $566, or a 1.9% growth rate, from the Company's vinyl
window operations.
COST OF GOODS SOLD. Cost of goods sold improved from 72.3% of net sales
during the first quarter of 2000 to 67.7% of net sales during the first quarter
of 2001. The improvement over prior year is partially attributable to the
divestitures of Wing and Wood during 2000. During the first quarter of 2000,
Wing and Wood had cost of goods sold as a percent of net sales of 82.9% and
82.7%, respectively. Additionally, the vinyl window divisions (excluding the
Ellison acquisition in October 2000) had favorable costs of goods sold of 66.2%
of net sales during the first quarter of 2001 compared to 66.9% of net sales
during the first quarter of 2000. These improvements are the result of material
costs, specifically declines related to favorable vinyl resin pricing. These
improvements were partially offset by changes at the aluminum divisions. The
aluminum divisions had costs of goods sold of 72.3% of net sales during the
first quarter of 2000 compared to 74.8% of net sales during the first quarter of
2001. The increase at the aluminum divisions was the result of higher insurance
and lease costs at new facilities that were recently sold. The LIFO reserve
expense during the first quarter of 2000 was $222 and the LIFO reserve benefit
was $152 through the first quarter of 2001. 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
20
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 decreased $4,707 from $31,087 (23.2% of net
sales during the first quarter of 2000) to $26,380 (23.5% of net sales during
the first quarter of 2001). The first quarter of 2000 included $9,440 and $731
from the divested divisions of Wing and Wood, respectively. The first quarter of
2001 included $5,984 from the acquisition of Ellison. If the Wood Divestitures
and the Ellison acquisition had both occurred on January 1, 2000, total selling,
delivery, general and administrative expenses would have improved from 24.6% of
net sales during the first quarter of 2000 to 23.5% of net sales during the
first quarter of 2001. More specifically, delivery expense increased from 6.2%
of net sales during the first quarter of 2000 to 6.5% of net sales during the
first quarter of 2001 primarily due to higher fuel costs, general and
administrative expenses improved from 9.8% of net sales during the first quarter
of 2000 to 8.0% of net sales during the first quarter of 2001 as the Company
continues to gain operating leverage from its sales growth and absorbs its
acquisitions without further administrative costs, and selling expenses
increased from 8.6% of net sales during the first quarter of 2000 to 8.9% of net
sales during the first quarter of 2001, primarily as a result of additional
customer rebates and various higher commission rates.
AMORTIZATION EXPENSE. Amortization expense increased $1,188 from $2,347
during the first quarter of 2000 to $3,535 during the first quarter of 2001. The
year to date increase was largely due to the amortization of goodwill recorded
in connection with the acquisition of Ellison during October 2000.
INTEREST EXPENSE. Interest expense increased $1,248 from $8,757 during the
first quarter of 2000 to $10,005 during the first quarter of 2001. The increase
in interest expense was due primarily to the additional debt of $38,000, under
the Credit Facility, in connection with the acquisition of Ellison during
October 2000. In addition, the increase in interest expense includes the
amortization of additional deferred financing costs. The interest expense was
partially offset from gains of $82 for the first quarter ended March 31, 2001
from interest rate collars.
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 2001, cash was primarily used for increases in
working capital, capital expenditures and debt payments. Net cash provided by
operating activities was $1,045 during the first quarter of 2001 compared to
$3,311 during the first quarter of 2000. The decrease in cash provided by
operating activities is largely due to changes in deferred taxes. Net cash used
in investing activities during the first quarter of 2001 was $5,614 compared to
$3,199 during the first quarter of 2000. The increase in cash used in investing
activities was due primarily to capital expenditures to increase plant capacity
and automation. Cash provided by financing activities during the first quarter
of 2001 was $3,448 compared to $2,198 during the first quarter of 2000. The
increase from prior year was due to additional borrowings on the Company's
credit facility.
OTHER CAPITAL RESOURCES
In connection with the recapitalization, the Company entered into a Credit
Agreement providing for a revolving facility in the amount of $30,000, which was
increased to $40,000 in June 1999. In connection with the acquisition of
Ellison, the Revolving Credit Facility was increased to $47,000, of which
$10,000 is available under a letter of credit sub-facility. The revolving
facility has a maturity date of June 30, 2004. At March 31, 2001, we had $19,087
of availability under the revolving facility, net of borrowings of $22,500 and
outstanding letters of credit totaling $5,413. As of May 15, 2001, the Company
had cash of $3,130 and $4,587 of availability under the Revolving Credit
Facility, net of borrowings of $37,500 and outstanding letters of credit
totaling $4,913.
21
CAPITAL EXPENDITURES
The Company had cash capital expenditures of $4,769 during the first quarter
of 2001 compared to $2,211 during the quarter of 2000. Capital expenditures
during the first quarter of 2001 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 Dallas-based
aluminum and vinyl operations. The Company expects capital expenditures,
including capitalization of software implementation costs (exclusive of
acquisitions) in 2001 to be approximately $15,000, 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.
NEW ACCOUNTING PRONOUNCEMENT
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of SFAS No. 125." SFAS No. 140 revised the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. This statement shall be applied prospectively, except as
provided in paragraphs 20, 21, 23 and 24. Earlier or retroactive application of
this statement is not permitted. Management does not anticipate SFAS No. 140
will have a material effect on our consolidated financial position or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 including interest rate protection
agreements and forward commodity delivery agreements. The Company does not enter
into derivative financial instruments or other financial instruments for
speculative trading purposes.
On November 1, 2000, the Company entered into a $100,000 interest rate swap
agreement to limit the effect of changes in interest rates on long-term
borrowings. Under the agreement, the Company pays interest at a fixed rate of
6.66% on the notional amount and receives interest therein at the three-month
LIBOR on a quarterly basis. This swap expires in November 2003.
On December 8, 2000, the Company entered into a $40,000 interest rate swap
agreement to limit the effect of changes in interest rates on long-term
borrowings. Under the agreement, the Company pays interest at a fixed rate of
6.15% on the notional amount and receives interest therein at the three-month
LIBOR on a quarterly basis. This swap expires in December 2002.
ADOPTION OF SFAS NO. 133
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and the corresponding amendments on January 1, 2001. In
accordance with the transition provisions of SFAS 133, the Company recorded a
cumulative-effect adjustment as of January 1, 2001 of $2.3 million to other
comprehensive income. This adjustment represents the current fair-value of
hedging instruments related to interest rate swap agreements of $2.6 million
with an offset of $.3 million related to the reclassification of deferred gains
on previously terminated interest rate swaps. There is no income tax effect
considering there is a full valuation allowance against deferred tax assets.
22
At March 31, 2001, the fair-value of the hedging instruments is a liability
of $5.4 million and is included in other comprehensive income and other
long-term liabilities. The Company expects that none of this liability will
require adjustment to expense within the next twelve months.
The Company is exposed to credit-related losses in the event of
nonperformance by counterpaties to financial instruments, but it expects all
counterparties to meet their obligations given their high credit ratings.
The Company, as part of its risk management program, is party to interest
rate swap agreements for the purpose of hedging its exposure to floating
interest rates on certain portions of its debt. As of March 31, 2001, the
Company had $141.9 million of notional amount in outstanding interest rate swaps
with third parties. The maximum length of the interest rate swaps currently in
place as of March 31, 2001 is approximately 3 years.
All derivatives are recognized on the balance sheet at their fair-value. On
the date that the Company enters into a derivative contract, it designates the
derivative as a hedge of (a) a forecasted transaction or (b) the variability of
cash flows that are to be received or paid in connection with a recognized asset
or liability (a "cash flow" hedge). Changes in the fair-value of a derivative
that is highly effective as--and that is designated and qualifies as--a cash
flow hedge, to the extent that the hedge is effective, are recorded in other
comprehensive income, until earnings are affected by the variability of cash
flows of the hedged transaction (e.g., until periodic settlements of a
variable-rate asset or liability are recorded in earnings). Any hedge
ineffectiveness (which represents the amount by which the changes in the
fair-value of the derivative exceed the variability in the cash flows of the
forecasted transaction) is recorded in current-period earnings. As of March 31,
2001, all hedges outstanding were highly effective.
The Company formally documents all relationships between hedging instruments
and hedge items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair-value or cash flow hedges to
(1) specific assets and liabilities on the balance sheet or (2) specific firm
commitments or forecasted transactions. The Company also formally assesses (both
at the hedge's inception and on an ongoing basis) whether the derivatives that
are used in hedging transactions have been highly effective in offsetting
changes in the fair value or cash flows of hedged items and whether those
derivatives may be expected to remain highly effective in future periods. When
it is determined that a derivative is not (or has ceased to be) highly effective
as a hedge, the Company discontinues hedge accounting prospectively, as
discussed below.
The Company discontinues hedge accounting prospectively when (1) it
determines that the derivative is no longer effective in offsetting changes in
the fair-value or cash flows of a hedge item (including hedged items such as
firm commitments or forecasted transactions); (2) the derivative expires or is
sold, terminated, or exercised; (3) it is no longer probable that the forecasted
transaction will occur; or (4) management determines that designating the
derivative as a hedging instrument is no longer appropriate.
When the Company discontinues hedge accounting because it is no longer
probable that the forecasted transaction will occur in the originally expected
period, the gain or loss on the derivative remaining in accumulated other
comprehensive income is reclassified into earnings. In all situations in which
hedge accounting is discontinued and the derivative remains outstanding, the
Company will carry the derivative at its fair-value on the balance sheet,
recognizing changes in the fair-value in current-period earnings.
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
23
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
None
(b) Reports on Form 8-K
On January 8, 2001, in accordance with Item 5 of Form 8-K, the Company
filed a Report on Form 8-K to announce management changes.
On January 8, 2001, in accordance with Item 7 of Form 8-K, the Company
filed a Report on Form 8-K/A to amend the Company's Report on Form 8-K,
dated October 24, 2000 and filed on November 9, 2000, to include the
financial statements and pro forma financial information related to the
acquisition of VES, Inc., doing business as Ellison Extrusion
Systems, Inc., and The Ellison Company, Inc.'s Window and Door division.
24
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, 2001 By: /s/ JEFF L. HULL
-----------------------------------------
Jeff L. Hull
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
Date: May 15, 2001 By: /s/ ERIC W. LONG
-----------------------------------------
Eric W. Long
CHIEF FINANCIAL OFFICER, TREASURER AND
SECRETARY (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
25