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 September 30, 1999
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 SEPTEMBER 30, 1999
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998......................3
Consolidated Statements of Income for the Three Months September 30, 1999 and 1998..............4
Consolidated Statements of Income for the Nine Months September 30, 1999 and 1998...............5
Consolidated Statements of Comprehensive Income for the Nine Months Ended
September 30, 1999 and 1998.....................................................................6
Consolidated Statement of Stockholder's Equity for Nine Months
Ended September 30, 1999........................................................................7
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998.....................................................................8
Notes to Consolidated Financial Statements...................................................9-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................15-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................19
Items 2, 3, 4 and 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K...............................................................19
Signatures..............................................................................................19
Exhibit Index...........................................................................................20
2
ATRIUM COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- --------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents .................................. $ -- $ --
Equity securities - available for sale ..................... 147 137
Accounts receivable, net ................................... 61,348 46,466
Inventories ................................................ 62,677 46,289
Prepaid expenses and other current assets .................. 5,820 7,756
Deferred tax asset ......................................... 2,343 1,249
--------- ---------
Total current assets .................................... 132,335 101,897
PROPERTY, PLANT, AND EQUIPMENT, net ............................. 42,401 26,760
GOODWILL, net ................................................... 289,166 214,749
DEFERRED FINANCING COSTS, net ................................... 17,012 11,058
OTHER ASSETS .................................................... 5,229 5,405
--------- ---------
Total assets ............................................ $ 486,143 $ 359,869
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable ........................... $ 2,216 $ 2,209
Accounts payable ........................................... 33,800 25,353
Accrued liabilities ........................................ 29,811 15,432
--------- ---------
Total current liabilities ............................... 65,827 42,994
LONG-TERM LIABILITIES:
Notes payable .............................................. 302,895 177,018
Deferred tax liability ..................................... 1,800 1
Other long-term liabilities ................................ 6,254 6,800
--------- ---------
Total long-term liabilities .......................... 310,949 183,819
--------- ---------
Total liabilities .................................... 376,776 226,813
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock $.01 par value, 3,000 shares authorized,
100 shares issued and outstanding ....................... -- --
Paid-in capital ............................................ 109,540 134,852
Retained earnings (accumulated deficit) .................... (207) (1,820)
3
Accumulated other comprehensive income ..................... 34 24
--------- ---------
Total stockholder's equity ........................... 109,367 133,056
--------- ---------
Total liabilities and stockholder's equity ..... $ 486,143 $ 359,869
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
4
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1999 1998
---------- ---------
NET SALES ....................................................... $133,812 $ 35,038
COST OF GOODS SOLD .............................................. 91,268 27,952
-------- --------
Gross profit ................................................ 42,544 7,086
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses ...... 29,763 6,358
Amortization expense ........................................ 2,376 158
Special charge .............................................. 18 --
Stock option compensation expense ........................... -- 352
-------- --------
32,157 6,868
-------- --------
Income from operations ................................. 10,387 218
INTEREST EXPENSE ................................................ 9,091 1,166
OTHER INCOME, net ............................................... 719 2
-------- --------
Income (loss) before income taxes ...................... 2,015 (946)
PROVISION FOR INCOME TAXES ...................................... 1,349 (241)
-------- --------
NET INCOME (LOSS) ............................................... $ 666 $ (705)
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
5
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1999 1998
--------- ---------
NET SALES....................................................... $ 366,184 $ 106,887
COST OF GOODS SOLD.............................................. 252,834 84,148
--------- ---------
Gross profit................................................ 113,350 22,739
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses...... 78,199 18,201
Amortization expense........................................ 6,324 499
Special charge.............................................. 1,849 --
Stock option compensation expense........................... -- 352
--------- ---------
86,372 19,052
--------- ---------
Income from operations................................. 26,978 3,687
INTEREST EXPENSE................................................ 19,790 3,273
OTHER INCOME, net............................................... 865 7
--------- ---------
Income before income taxes and extraordinary charge.... 8,053 421
PROVISION FOR INCOME TAXES...................................... 4,532 434
--------- ---------
Income before extraordinary charge..................... 3,521 (13)
EXTRAORDINARY CHARGE ON EARLY RETIREMENT
OF DEBT (net of income tax benefit of $1,170) 1,908 --
--------- ---------
NET INCOME (LOSS) .............................................. $ 1,613 $ (13)
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
6
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1999 1998
--------- ---------
Net income (loss) ............................................... $ 1,613 $ (13)
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains arising during the period ....... 10 --
--------- ---------
Comprehensive income (loss) ................................. $ 1,623 $ (13)
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
7
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENT OF
STOCKHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(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 EQUITY
------ ------ --------- ------------ ------------- -------------
Balance, December 31, 1998 .................. 100 $ -- $ 134,852 $ (1,820) $ 24 $ 133,056
Other comprehensive income ............... -- -- -- -- 10 10
Distributions to Atrium Corporation ...... -- -- (25,312) -- -- (25,312)
Net income ............................... -- -- -- 1,613 -- 1,613
------ ------ --------- --------- --------- ---------
Balance, September 30, 1999 ................. 100 $ -- $ 109,540 $ (207) $ 34 $ 109,367
====== ====== ========= ========= ========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
8
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................................... $ 1,613 $ (13)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization .......................................... 10,792 1,240
Amortization of deferred financing costs ............................... 1,184 366
Accretion of discount .................................................. 56 240
Stock option compensation expense ...................................... -- 352
Gain on sale of assets ................................................. (71) --
Deferred tax provision ................................................. 1,467 --
Changes in assets and liabilities, net of acquisitions in 1999:
Accounts receivable, net .............................................. (5,678) 488
Inventories ........................................................... (7,298) (7,744)
Prepaid expenses and other current assets ............................. 3,100 (156)
Accounts payable ...................................................... 8,561 2,679
Accrued liabilities ................................................... 9,640 457
---------- ----------
Net cash provided by (used in) operating activities .............. 23,366 (2,091)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ................................ (11,368) (1,586)
Proceeds from sale of assets .............................................. 90 --
Payment for acquisitions, net of cash acquired ............................ (94,709) --
Increase in other assets .................................................. (4,424) (394)
---------- ----------
Net cash used in investing activities ................................. (110,411) (1,980)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of senior subordinated debt .................... 172,368 --
Net borrowings under revolving credit facility ............................ (1,118) 6,327
Payments of senior subordinated notes ..................................... (29,070) --
Payments on term loans B and C ............................................ (16,500) --
Distributions to Atrium Corporation ....................................... (25,312) --
Payment of other notes payable ............................................ (169) (2,458)
Payment of other long-term liabilities .................................... (2,003) (21)
Checks drawn in excess of bank balances ................................... (4,012) --
Deferred financing costs .................................................. (7,139) --
Proceeds from exercise of stock options ................................... -- 216
---------- ----------
Net cash provided by financing activities ............................. 87,045 4,064
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... -- (7)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. -- 34
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ -- $ 27
========== ==========
SUPPLEMENTAL DISCLOSURE:
9
Cash paid during the period for:
Interest .............................................................. $ 10,544 $ 2,628
Income taxes, net of refunds .......................................... 1,543 675
The accompanying notes are an integral part
of the consolidated financial statements.
10
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(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 nine months ended September 30, 1999
and 1998, and financial position as of September 30, 1999 and December 31,
1998 have been prepared in accordance with generally accepted accounting
principles for interim financial reporting, the instructions to Form 10-Q,
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
These consolidated financial statements and footnotes should be read in
conjunction with the Company's audited financial statements for the fiscal
years ended December 31, 1998, 1997 and 1996 included in the Company's Form
10-K as filed with the Securities and Exchange Commission on April 15, 1999.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the interim
financial information have been included. The results of operations for any
interim period are not necessarily indicative of the results of operations
for a full year. Certain prior period amounts have been reclassified to
conform to the current period presentation.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("FAS 133") "Accounting for Derivative Instruments and Hedging
Activities" that is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will implement the provisions of
FAS 133 as required. The future adoption of FAS 133 is not expected to have a
material effect on the Company's consolidated financial position or results
of operations.
Prior to October 2, 1998, the Company's historical financial statements as
previously filed with the Securities and Exchange Commission included its
operations and the operations of its wholly-owned subsidiaries, Atrium Door
and Window Company of the Northeast, Atrium Door and Window Company of New
England, Atrium Door and Window Company of New York (collectively, "ADW-
Northeast"), Atrium Door and Window Company - West Coast ("ADW-West Coast)
and Atrium Door and Window Company of Arizona ("ADW-Arizona"). On October 2,
1998, pursuant to an acquisition and merger (the "Recapitalization" or
"reverse acquisition") as more fully described in the Company's Form 10-K as
filed with the Securities and Exchange Commission on April 15, 1999, the
Company's indirect Parent (D and W Holdings, Inc.) contributed the stock of
Wing Industries Holdings, Inc. and its subsidiary Wing Industries, Inc.
(collectively "Wing") and Door Holdings, Inc. and its subsidiaries R.G. Darby
Company, Inc. and Total Trim, Inc. (collectively "Darby") to the Company.
As Wing was determined to be the acquiror in a "reverse acquisition", the
historical financial statements of the Company (prior to October 3, 1998)
were replaced with the historical financial statements of Wing. As a result,
the statement of income for 1998 only includes the operations of the Company
and Darby from October 3, 1998 through December 31, 1998. The statements of
income for all periods prior to October 3, 1998 only include the operations
and accounts of Wing. Additionally, the operations of Delta Millwork, Inc.
(renamed R.G. Darby Company-South and Total Trim-South, collectively
"Darby-South") are included since the date of acquisition, January 27, 1999
and the operations of Heat, Inc. ("Heat") and Champagne Industries, Inc.
("Champagne") are included since their date of acquisition, May 17, 1999. The
September 30, 1999 balance sheet includes the accounts of the Company, Wing,
Darby, Darby-South, Heat, Champagne and each of their respective
subsidiaries, while the December 31, 1998 balance sheet includes the accounts
of the Company, Wing, Darby and each of their respective subsidiaries.
11
The following unaudited pro forma information presents consolidated operating
results as though the Recapitalization and the acquisitions of ADW-Arizona
(which was acquired March 27, 1998), Darby-South, Heat and Champagne (see
Note 6) had occurred at the beginning of the periods presented:
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------------ -------------------------
Actual Pro Forma Actual Pro Forma
--------- --------- --------- ---------
NET SALES ......................... $ 366,184 $ 394,659 $ 106,887 $ 364,200
COST OF GOODS SOLD ................ 252,834 270,923 84,148 249,994
--------- --------- --------- ---------
Gross profit .................... 113,350 123,736 22,739 114,206
OPERATING EXPENSES:
Selling, delivery, general and
administrative expenses ........... 78,199 88,033 18,201 77,490
Amortization expenses ............. 6,324 7,017 499 7,017
Special charge .................... 1,849 1,849 352 --
--------- --------- --------- ---------
86,372 96,899 19,052 84,507
Income from operations .......... 26,978 26,837 3,687 29,699
INTEREST EXPENSE .................. 19,790 24,344 3,273 24,344
OTHER INCOME, net ................. 865 930 7 (213)
--------- --------- --------- ---------
Income before income taxes ....... 8,053 3,423 421 5,142
PROVISION FOR INCOME TAXES ........ 4,532 3,156 434 3,810
--------- --------- --------- ---------
Net income (loss) from
continuing operations ........... $ 3,521 $ 267 $ (13) $ 1,332
========= ========= ========= =========
Other Information:
Depreciation expense .............. $ 3,843 $ 4,382 $ 975 $ 4,135
========= ========= ========= =========
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------------ -------------------------
Actual Pro Forma Actual Pro Forma
--------- --------- --------- ---------
NET SALES ......................... $ 133,812 $ 133,812 $ 35,038 $ 127,544
COST OF GOODS SOLD ................ 91,268 91,268 27,952 85,809
--------- --------- --------- ---------
Gross profit .................... 42,544 42,544 7,086 41,735
OPERATING EXPENSES:
12
Selling, delivery, general and
administrative expenses ........... 29,763 29,763 6,358 27,195
Amortization expenses ............. 2,376 2,376 158 2,376
Special charge .................... 18 18 352 --
--------- --------- --------- ---------
32,157 32,157 6,868 29,571
Income from operations .......... 10,387 10,387 218 12,164
INTEREST EXPENSE .................. 9,091 9,091 1,166 9,091
OTHER INCOME, net ................. 719 719 2 (59)
--------- --------- --------- ---------
Income (loss) before income taxes . 2,015 2,015 (946) 3,014
PROVISION FOR INCOME TAXES ........ 1,349 1,349 (241) 1,765
--------- --------- --------- ---------
Net income from continuing
operations ...................... $ 666 $ 666 $ (705) $ 1,249
========= ========= ========= =========
Other Information:
Depreciation expense ............. $ 1,452 $ 1,452 $ 326 $ 1,345
========= ========= ========= =========
2. EQUITY SECURITIES - AVAILABLE FOR SALE:
Investments in equity securities - available for sale are carried at market
based on quoted market prices, with unrealized gains (losses) recorded as
other comprehensive income in stockholder's equity.
3. INVENTORIES:
Inventories are valued at the lower of cost or market using the last-in,
first-out (LIFO) method of accounting. Work-in-process and finished goods
inventories consist of materials, labor, and manufacturing overhead.
Inventories consisted of the following:
September 30, December 31,
1999 1998
------------- ------------
Raw materials ................ $ 34,382 $ 27,362
Work-in-process .............. 2,847 4,129
Finished goods ............... 24,566 14,686
-------- --------
61,795 46,177
LIFO reserve ................. 882 112
-------- --------
$ 62,677 $ 46,289
======== ========
4. NOTES PAYABLE:
13
Notes payable consisted of the following:
September 30, December 31,
1999 1998
------------- ------------
Revolving credit facility .............. $ 3,000 $ 4,118
Term loan B ............................ 59,000 74,750
Term loan C ............................ 69,930 70,680
Senior subordinated notes .............. 175,000 29,070
Other .................................. 757 609
--------- ---------
307,687 179,227
Less:
Unamortized debt discount .............. (2,576) --
Current portion of notes payable ....... (2,216) (2,209)
--------- ---------
Long-term debt ...................... $ 302,895 $ 177,018
========= =========
On May 17, 1999, the Company issued $175,000 of Senior Subordinated Notes
(the "Notes") due May 1, 2009. The notes are non-callable for five years,
have a 10.50% stated rate paid semi-annually and were issued at a discount of
98.496 to yield 10.75% to maturity. In connection with the issuance of the
notes, the Company retired its $29,070 of senior subordinated notes due
November 15, 2006 and paid down $15,000 on its Term Loan B. Additionally,
approximately $2,180 was paid as a tender premium to retire the notes due
November 15, 2006 and $898 of deferred financing fees related to these
paydowns were written-off. These amounts are recorded as extraordinary items
in the income statement.
In connection with the Recapitalization, the Company entered into a Credit
Agreement providing for a Revolving Credit Facility in the amount of $30,000.
The Revolving Credit Facility was subsequently increased to $40,000 in June
1999.
5. CONTINGENCIES:
The Company is party to various claims, legal actions, and complaints arising
in the ordinary course of business. In the opinion of management, all such
matters are without merit or are of such kind, or involve such amounts, that
an unfavorable disposition would not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company.
During 1993, 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
14
relatively small share allocated to it at such sites, its liability, if any,
associated with either of these sites will not have a material adverse effect
on the Company's financial position, results of operations or liquidity.
6. ACQUISITIONS:
DELTA ASSET PURCHASE:
On January 27, 1999, the Company acquired certain assets of Delta Millwork,
Inc., a privately held door pre-hanger located in Orlando, Florida, for
approximately $1,749 including fees and other transaction expenses of $149
and $200 to be paid upon the achievement of certain financial targets. The
Company financed the acquisition through its revolving credit facility.
The acquisition of Delta Millwork, Inc. has been accounted for as a purchase
in accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16"). The aggregate purchase price has been allocated to
the underlying assets and liabilities based upon their respective estimated
fair market values at the date of acquisition, with the remainder allocated
to goodwill, which will be amortized over 40 years. The results of operations
for the acquired business are included in the Company's consolidated
financial statements beginning January 27, 1999. The purchase price
allocation, preliminary in nature and subject to change, is as follows:
Accounts receivable, net................................... $ 1,178
Inventories................................................ 949
Prepaid expenses and other current assets.................. 40
Property, plant and equipment, net......................... 137
Other noncurrent assets.................................... 5
Goodwill................................................... 157
Current liabilities........................................ (717)
-------
Total purchase price................................. $ 1,749
=======
HEAT STOCK PURCHASE
On May 17, 1999, the Company acquired the stock of Heat, Inc.
("Heat"), a privately held vinyl window and door company located in Yakima,
Washington and Pittsburgh, Pennsylvania, pursuant to a stock purchase
agreement (the "Purchase Agreement"), dated as of April 20, 1999, among Heat,
its shareholders and optionholders, H.I.G. Vinyl, Inc., a Cayman Island
corporation, H.I.G. Investment Fund, L.P., a Cayman Island limited
partnership and H.I.G. Capital Management, Inc., a Delaware corporation. The
Company paid $85,000, which included $693 of assumed indebtedness.
Additionally, a post closing adjustment of $4,095 was paid on May 17, 1999
related to working capital and cash delivered in excess of the target defined
in the Purchase Agreement. The Company financed the acquisition with a
portion of the proceeds raised in a $175,000 bond offering (see Note 4).
The acquisition of Heat has been accounted for as a purchase in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16"). The aggregate purchase price has been allocated to
the underlying assets and liabilities based upon their respective estimated
fair market values at the date of acquisition, with the remainder allocated
to goodwill, which will be amortized over 40 years. The results of operations
for the acquired business are included in the Company's consolidated
financial statements beginning May 17, 1999. The purchase price allocation,
preliminary in nature and subject to change, is as follows:
Cash........................................................ $ 1,158
Accounts receivable, net.................................... 6,540
Inventories................................................. 7,104
15
Prepaid expenses and other current assets................... 983
Deferred tax assets......................................... 1,094
Property, plant and equipment, net.......................... 7,655
Other noncurrent assets..................................... 791
Goodwill.................................................... 73,068
Current liabilities......................................... (6,792)
Long-term liabilities....................................... (405)
--------
Total purchase price.................................. $ 91,196
========
CHAMPAGNE STOCK PURCHASE:
On May 17, 1999, the Company acquired stock of Champagne Industries, Inc., a
privately held vinyl window and door company located in Denver, Colorado, for
approximately $4,565, including assumed indebtedness, transaction fees and
$500 to be paid upon the achievement of certain financial targets. The
Company financed the acquisition with a portion of the proceeds raised in a
$175,000 bond offering (see Note 4).
The acquisition of Champagne Industries, Inc. has been accounted for as a
purchase in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations" ("APB 16"). The aggregate purchase price has been
allocated to the underlying assets and liabilities based upon their
respective estimated fair market values at the date of acquisition, with the
remainder allocated to goodwill, which will be amortized over 40 years. The
results of operations for the acquired business are included in the Company's
consolidated financial statements beginning May 17, 1999. The purchase price
allocation, preliminary in nature and subject to change, is as follows:
Cash........................................................ $ 251
Accounts receivable, net.................................... 1,484
Inventories................................................. 1,037
Prepaid expenses and other current assets................... 142
Property, plant and equipment, net.......................... 343
Other noncurrent assets..................................... 27
Goodwill.................................................... 2,716
Current liabilities......................................... (1,416)
Notes payable............................................... (19)
--------
Total purchase price.................................. $ 4,565
========
7. SUBSIDIARY GUARANTORS:
In connection with the issuance of the Notes, the Company's payment
obligations under the Notes are fully and unconditionally guaranteed, jointly
and severally (collectively, the Subsidiary Guarantees) on a senior
subordinated basis by its wholly-owned subsidiaries: ADW-Northeast, ADW-West
Coast, ADW-Arizona, Wing, Darby, Darby-South, Heat and Champagne
(collectively, the Subsidiary Guarantors). The Company has no non-guarantor
direct or indirect subsidiaries. The operations related to the assets of
ADW-Northeast, ADW-West Coast, ADW-Arizona and Darby are included since the
reverse acquisition on October 2, 1998. The operations of Darby-South are
included since the date of acquisition, January 27, 1999, and the operations
of Heat and Champagne are included since their date of acquisition, May 17,
1999. The operations of Wing are presented for all periods covered. The
balance sheet information includes all subsidiaries as of September 30, 1999
and ADW-Northeast, ADW-West Coast, ADW-Arizona, Wing and Darby as of December
31, 1998. In the opinion of management, separate financial
16
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:
September 30, December 31,
1999 1998
-------------- ------------
Current assets............................................. $ 45,417 $ 42,887
Noncurrent assets.......................................... 200,218 106,684
Current liabilities........................................ 26,105 16,666
Noncurrent liabilities..................................... 182,391 76,826
Three Months Ended September 30,
----------------------------------
1999 1998
-------------- ------------
Net sales.................................................. $ 80,866 $ 13,192
Gross profit............................................... 24,562 4,678
Net income (loss) from continuing operations............... (1,886) 1,058
Nine Months Ended September 30,
----------------------------------
1999 1998
-------------- ------------
Net sales.................................................. $ 202,091 $ 30,232
Gross profit............................................... 55,506 10,797
Net income (loss) from continuing operations............... (3,802) 2,054
The Notes and the Subsidiary Guarantees are subordinated to all existing and
future Senior Indebtedness of the Company. The indenture governing the Notes
contains limitations on the amount of additional indebtedness (including
Senior Indebtedness) which the Company may incur.
8. DISTRIBUTIONS TO ATRIUM CORPORATION:
In connection with the issuance of the $175,000 of Senior Subordinated Notes
in May 1999, the Company utilized $21,500 of the proceeds to pay a
distribution to Atrium Corporation. Atrium Corporation, in turn, repaid
$21,500 (of which $1,500 represented accretion of discount) of the $45,000
Discount Debentures issued in connection with the October 2, 1998
recapitalization. The Company had previously recorded the $45,000 as a
capital contribution, therefore the payment was treated as a return of
capital. Additionally, the Company made a payment to Atrium Corporation for
the buyback of stock and the exercise of certain options by the former CEO
and others. All payments have been reflected in the Consolidated Statement of
Stockholder's Equity as a decrease to paid-in capital. The Company has no
commitments to make any further distributions to Atrium Corporation, except
for amounts required under its tax sharing agreement.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN FORWARD-LOOKING STATEMENTS
This 10-Q contains certain forward looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties relating to the Company that are based on
the beliefs of management. When used in this 10-Q, the words "anticipate",
"believe", "estimate", "expect", "intend", and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to the risks and uncertainties regarding the operations and the
results of operations of the Company as well as its customers and suppliers,
including as a result of the availability of consumer credit, interest rates,
employment trends, changes in levels of consumer confidence, changes in
consumer preferences, national and regional trends in new housing starts, raw
material costs, pricing pressures, shifts in market demand, and general
economic conditions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions or estimates prove incorrect,
actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended.
RESULTS OF OPERATIONS
The operations of the Company are cyclical in nature and generally result in
increases during the peak building season which coincides with the second and
third quarters of the year. Accordingly, results of operations for the
quarter ended September 30, 1999 are not necessarily indicative of results
expected for the full year.
Prior to October 2, 1998, the Company's historical financial statements as
previously filed with the Securities and Exchange Commission included its
operations and the operations of its subsidiaries. On October 2, 1998,
pursuant to the Recapitalization, D and W Holdings, Inc. contributed the
stock of Wing and Darby to the Company.
As Wing was determined to be the acquiror in a "reverse acquisition", the
historical financial statements of the Company (prior to October 3, 1998)
were replaced with the historical financial statements of Wing. As a result,
the statement of income for 1998 only includes the operations of the Company
and Darby from October 3, 1998 through December 31, 1998. The statements of
income for all periods prior to October 3, 1998 only include the operations
and accounts of Wing. Additionally, the operations of Delta Millwork, Inc.
("Darby-South") are included since the date of acquisition, January 27, 1999,
and the operations of Heat, Inc. ("Heat") and Champagne Industries, Inc.
("Champagne") are included since their date of acquisition, May 17, 1999. The
September 30, 1999 balance sheet includes the accounts of the Company, Wing,
Darby, Darby-South, Heat and Champagne and each of their respective
subsidiaries, while the December 31, 1998 balance sheet includes the accounts
of the Company, Wing, Darby and each of their respective subsidiaries.
NET SALES. Net Sales increased by $98,774 from $35,038 during the third
quarter of 1998 to $133,812 during the third quarter of 1999 and $259,297
from $106,887 during the first nine months of 1998 to $366,184 during the
first nine months of 1999. The increase was primarily due to a combined
increase in net sales from the addition of the Company and Darby in
connection with the Recapitalization and the acquisitions of Darby-South,
Heat and Champagne.
COST OF GOODS SOLD. Cost of goods sold decreased from 79.8% of net sales
during the third quarter of 1998 to 68.2% of net sales during the third
quarter of 1999 and from 78.7% of net sales during the first nine months of
1998 to 69.0% of net sales during the first nine months of 1999. The decrease
as a percentage of net sales was due largely to the addition of the Company,
Darby and Heat, as these divisions operate at higher gross profit margins
than Wing.
18
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, delivery,
general and administrative expenses increased $23,405 from $6,358 (18.1% of
net sales during the third quarter of 1998) to $29,763 (22.2% of net sales
during the third quarter of 1999) and $59,996 from $18,201 (17.0% of net
sales during the first nine months of 1998) to $78,199 (21.4% of net sales
during the first nine months of 1999). The increase was primarily due to the
inclusion of selling, delivery, general and administrative expenses of the
Company, Darby, Darby-South, Heat and Champagne. Additionally, delivery and
selling expenses increased due to the increase in sales.
AMORTIZATION EXPENSE. Amortization expense increased $2,218 from $158 during
the third quarter of 1998 to $2,376 during the third quarter of 1999 and
$5,825 from $499 during the first nine months of 1998 to $6,324 during the
first nine months of 1999. The increase was largely due to the amortization
of goodwill recorded in connection with the Recapitalization and the
acquisitions of Heat and Champagne. In addition, amortization expense
increased due to the amortization of capitalized software implementation
costs of the Company.
SPECIAL CHARGE. The Company recorded a one-time charge of $1,849 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 $7,925 from $1,166 during the
third quarter of 1998 to $9,091 during the third quarter of 1999 and $16,517
from $3,273 during the first nine months of 1998 to $19,790 during the first
nine months of 1999. The increase in interest expense was due primarily to an
increase in average outstanding debt related to the issuance of Term Loan B
and Term Loan C, and the senior subordinated notes assumed in connection with
the Recapitalization. Interest expense also increased as of May 17, 1999, as
the Company issued $175,000 of senior subordinated notes due May 1, 2009. The
notes are non-callable for five years, have a 10.50% stated rate paid
semi-annually and were issued at a discount of 98.496 to yield 10.75% to
maturity. In addition, interest expense included the amortization of deferred
financing costs recorded in connection with the Recapitalization and the
issuance of $175,000 of senior subordinated notes, and the discount
associated with the $175,000 senior subordinated notes.
INCOME TAXES. The Company's effective tax rate was 67.0% during the third
quarter of 1999 and 56.3% during the first nine months of 1999 due largely to
non-deductible goodwill amortization expense of approximately $1,621 and
$4,045, respectively. Excluding non-deduible amortization expense, the
Company's effective tax rate would have been approximately 37.1% during the
third quarter of 1999 and 37.5% during the first nine months of 1999.
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 three quarters of 1999, cash was primarily used for increases in
working capital, capital expenditures and debt payments. Net cash provided by
operating activities was $23,366 during first nine months of 1999 ($21,989
during the third quarter of 1999) compared to cash used in operating
activities of $2,091 during the first nine months of 1998 ($168 used during
the third quarter of 1998). The increase in cash provided by operating
activities is largely due to an increase in income before depreciation and
amortization and an increase in current liabilities. Net cash used in
investing activities during the first nine months of 1999 was $110,411
($8,234 during the third quarter of 1999) compared to $1,980 during the first
nine months of 1998 ($638 provided during the third quarter of 1998). The
increase in cash used in investing activities was due primarily to the
acquisition of Delta Millwork, Inc. during the first quarter of 1999, as well
as the acquisition of Heat, Inc. and Champagne Industries, Inc. during the
second quarter of 1999 and the purchase of property, plant
19
and equipment of $11,368 during the first nine months of 1999 and $5,253
during the third quarter of 1999. Cash provided by financing activities
during the first nine months of 1999 was $87,045 ($13,754 during the third
quarter of 1999) compared to $4,064 during the first nine months of 1998
($677 during the third quarter of 1998), primarily due to proceeds from the
bond offering (see note 4), which was partially offset by payments on
existing debt.
During the first nine months of 1999, the Company made returns of capital to
Atrium Corporation totaling $25,312 (refer to Note 8). The funds for the
return of capital were obtained from the proceeds of the $175,000 Senior
Subordinated Notes. The payment of this distribution to Atrium Corporation
reduces the cash available for payments of principal and interest on the
Senior Subordinated Debt. The Company has no further commitment to make any
further distributions to Atrium Corporation, except for amounts required
under its tax sharing agreement.
OTHER CAPITAL RESOURCES
In connection with the Recapitalization, the Company entered into a Credit
Agreement providing for a Revolving Credit Facility in the amount of $30,000.
The Revolving Credit Facility was subsequently increased to $40,000 in June
1999. The Revolving Credit Facility has a maturity date of September 30,
2004. At September 30, 1999, the Company had $33,741 of availability under
the Revolving Credit Facility, net of borrowings of $3,000 and outstanding
letters of credit totaling $3,259, relating to workers' compensation benefits
and utility deposits.
CAPITAL EXPENDITURES
The Company had cash capital expenditures of $11,368 during the first nine
months of 1999 ($5,253 for the third quarter of 1999) compared to $1,586
during the first nine months of 1998 ($548 during the third quarter of 1998).
The increase is largely due to capital expenditures at the Company and Wing.
The Company expects capital expenditures, including capitalization of
software implementation costs (exclusive of acquisitions) in 1999 to be
approximately $12,000, however, actual capital requirements may change,
particularly as a result of acquisitions the Company may make.
The ability of the Company to meet its debt service and working capital
obligations and capital expenditure requirements is dependant, however, upon
the future performance of the Company and its subsidiaries which, in turn,
will be subject to general economic conditions and to financial, business and
other factors, including factors beyond the Company's control.
MARKET RISK
The Company is exposed to market risk from changes in interest rates and
commodity pricing. The Company uses derivative financial instruments on a
limited basis to hedge economic exposures. The Company does not enter into
derivative financial instruments or other financial instruments for
speculative trading purposes.
YEAR 2000
Many existing computer systems and applications and other control devices are
coded to use only two digits (rather than four) to identify a year in the
date code field. These date code fields will need to accept four digit
entries to distinguish the 21st century dates from 20th century dates. Many
computer programs and systems, including certain programs and systems
utilized by us, are highly dependant on financial and other data that, based
on the program's or system's inability to distinguish between the Year 2000
and the other century-end dates, could be misreported or misinterpreted and
cause significant errors. If not corrected, many computer applications could
fail when processing data related to the Year 2000. In addition, two
interacting systems, applications or devices, each of which has individually
been fixed so that
20
it will individually handle Year 2000 issues, could nonetheless suffer
"integration failure" because their method of dealing with the problem is not
compatible.
This Year 2000 issue impacts our owned or licensed computer systems and
equipment and the computer systems and equipment of third parties upon which
we rely. The Year 2000 problem could cause these systems to fail, err, and,
in the case of third party systems, become incompatible with our systems.
Therefore, if we, or a significant third party fail to become Year 2000
ready, or if the Year 2000 problem causes our systems to become internally
incompatible or incompatible with any key third party systems, our business
could suffer material disruptions.
We have assessed the impact of the Year 2000 problem and have or intend to
modify portions of our hardware and software so that our computer systems
will function properly with respect to date in the Year 2000 and thereafter.
We have reviewed and continue to review each operating unit for the
appropriate information system enhancements, with respect to both Year 2000
problems as well as strategic system upgrades.
To achieve our overall operating strategy, we are enhancing our information
technology by installing new software to implement a fully integrated
manufacturing system for our operating units. This system is intended to be
Year 2000 compliant. Each operating unit was prioritized for installation of
the system based on any Year 2000 issues, with the final phase of
implementation and installation of this system scheduled to be completed
during the fourth quarter of 1999. We believe that with this strategy and
completed installations, the Year 2000 problem will not pose significant
operational problems for us. We cannot assure you, however, that our computer
systems, or other companies acquired in the future or the computer systems of
other companies with whom we conduct business, will be Year 2000 compliant
prior to December 31, 1999 or that the inability of any such systems to
process accurately Year 2000 data will not have a material adverse effect on
our business, operating results or financial condition.
Additionally, significant suppliers and customers that we believe are
critical to our business operations have been contacted to attempt to
reasonably ascertain their stage of readiness for Year 2000 compliance. We
are in the process of evaluating the Year 2000 issue as it relates to these
suppliers and customers. We are also assessing the Year 2000 issue with other
third parties on which we rely, including banking institutions. Some of these
suppliers, customers and other third parties have informed us that they are
already Year 2000 compliant or will be by December 31, 1999. However, we
cannot assure you that the systems of all third parties on which we rely will
be made compliant in a timely manner. Should one or more of these significant
suppliers, customers or other third parties on which we rely fail to become
Year 2000 compliant in a timely manner, our business and results of
operations could be materially adversely affected.
21
The total amount of costs to be incurred by the Company to address the Year
2000 issues is estimated at $2,000. The Company has expensed approximately
$1,500 through September 30, 1999.
Due to the general uncertainty inherent in the Year 2000 process, a worse
case scenario is difficult to determine at this time period. We have not
developed a contingency plan to handle a worse case scenario and we do not
currently believe that a contingency plan is necessary. We do not, however,
anticipate more than temporarily isolated disruptions attributed to Year 2000
issues. If our customers experience Year 2000 issues, our sales levels may be
negatively impacted. To the extent our suppliers are unable to deliver
products, due to their own Year 2000 issues, this may impact our production
cycle and therefore our ability to fulfill sales orders. Although considered
unlikely, the failure of public utility companies to provide services such as
electricity and telephone service will have a material impact on our business.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("FAS 133") "Accounting for Derivative Instruments and Hedging
Activities" that is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will implement the provisions of
FAS 133 as required. The future adoption of FAS 133 is not expected to have a
material effect on the Company's consolidated financial position or results
of operations.
22
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 July 30, 1999, the Company filed a Report on Form 8-K/A to
amend the Company's Report on Form 8-K dated May 17, 1999 and
filed June 1, 199, to include the financial statements and pro
forma financial information related to the acquisition of Heat,
Inc., required by Item 7 of Form 8-K.
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: November 14, 1999 By: /s/ Jeff L. Hull
---------------------------
Jeff L. Hull
President,
Chief Financial Officer, Treasurer
and Director
(Principal Executive Officer and
Principal Financial Officer)
Date: November 14, 1999 By: /s/ Eric W. Long
---------------------------
Eric W. Long
Vice President and
Corporate Controller
(Principal Accounting Officer)
23
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
24