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, 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
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ATRIUM COMPANIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 75-2642488
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1341 W. MOCKINGBIRD LANE, SUITE 1200W, DALLAS, TEXAS 75247, (214) 630-5757
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(Address of principal executive offices, including zip code
and telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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ATRIUM COMPANIES, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998........3
Consolidated Statements of Income for the Quarters Ended
March 31, 1999 and 1998.......................................................4
Consolidated Statements of Comprehensive Income for the Quarters Ended
March 31, 1999 and 1998.......................................................5
Consolidated Statement of Stockholder's Equity for the Quarter
Ended March 31, 1999..........................................................6
Consolidated Statements of Cash Flows for the Quarters Ended
March 31, 1999 and 1998.......................................................7
Notes to Consolidated Financial Statements.................................8-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................13-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................17
Items 2, 3, 4 and 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K.............................................17
Signatures.............................................................................17
Exhibit Index..........................................................................18
2
ATRIUM COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents................................... $ - $ -
Equity securities - available for sale...................... 144 137
Accounts receivable, net.................................... 50,718 46,466
Inventories................................................. 49,973 46,289
Prepaid expenses and other current assets................... 8,020 7,756
Deferred tax asset.......................................... 1,249 1,249
---------- ----------
Total current assets..................................... 110,104 101,897
PROPERTY, PLANT, AND EQUIPMENT, net.............................. 26,907 26,760
GOODWILL, net.................................................... 213,902 214,749
DEFERRED FINANCING COSTS, net.................................... 10,740 11,058
OTHER ASSETS..................................................... 5,113 5,405
---------- ----------
Total assets............................................. $ 366,766 $ 359,869
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable............................ $ 2,206 $ 2,209
Accounts payable............................................ 23,703 25,353
Accrued liabilities......................................... 18,581 15,432
---------- ----------
Total current liabilities................................ 44,490 42,994
LONG-TERM LIABILITIES:
Notes payable............................................... 183,054 177,018
Deferred tax liability...................................... 1 1
Other long-term liabilities................................. 5,968 6,800
---------- ----------
Total long-term liabilities........................... 189,023 183,819
---------- ----------
Total liabilities..................................... 233,513 226,813
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock $.01 par value, 3,000 shares authorized,
100 shares issued and outstanding........................ - -
Paid-in capital............................................. 134,852 134,852
Accumulated deficit......................................... (1,630) (1,820)
Accumulated other comprehensive income...................... 31 24
---------- ----------
Total stockholder's equity............................ 133,253 133,056
---------- ----------
Total liabilities and stockholder's equity...... $ 366,766 $ 359,869
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
3
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1999 1998
--------- ---------
NET SALES.................................................... $ 106,842 $ 39,450
COST OF GOODS SOLD........................................... 74,708 30,464
--------- ---------
Gross profit............................................. 32,134 8,986
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses... 23,151 6,606
Amortization expense..................................... 1,889 146
Special charge........................................... 1,762 -
--------- ---------
26,802 6,752
--------- ---------
Income from operations.............................. 5,332 2,234
INTEREST EXPENSE............................................. 4,346 992
OTHER INCOME, net............................................ 32 -
--------- ---------
Income before income taxes.......................... 1,018 1,242
PROVISION FOR INCOME TAXES................................... 828 556
--------- ---------
NET INCOME................................................... $ 190 $ 686
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
4
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1999 1998
---------- ----------
Net income.................................................. $ 190 $ 686
Other comprehensive income:.................................
Unrealized gains on securities:...........................
Unrealized holding gains arising during the period..... 7 -
---------- ----------
Comprehensive income...................................... $ 197 $ 686
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
5
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENT OF
STOCKHOLDER'S EQUITY
FOR THE QUARTER ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ACCUMULATED
COMMON STOCK 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............. - - - - 7 7
Net income............................. - - - 190 - 190
-------- ------- --------- --------- ----------- -----------
Balance, March 31, 1999................... 100 $ - $ 134,852 $ (1,630) $ 31 $ 133,253
======== ======= ========= ========= =========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
6
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 190 $ 686
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:....................................
Depreciation and amortization.................................... 2,937 468
Amortization of deferred financing costs......................... 381 111
Gain on sale of assets........................................... (31) -
Changes in assets and liabilities, net of acquisition in 1999: ..
Accounts receivable, net....................................... (3,073) (4,539)
Inventories.................................................... (2,735) (45)
Prepaid expenses and other current assets...................... (225) 62
Accounts payable............................................... (29) (2,756)
Accrued liabilities............................................ 3,265 5,527
---------- ----------
Net cash provided by (used in) operating activities..... 680 (486)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment......................... (1,059) (287)
Proceeds from sale of assets....................................... 32 -
Payment for acquisition, net of cash acquired...................... (1,737) -
Increase in other assets........................................... (599) (343)
---------- ----------
Net cash used in investing activities........................ (3,363) (630)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facility..................... 6,582 1,928
Scheduled principal payments on term notes......................... (500) (782)
Payment of capital lease obligations............................... (49) -
Payment of other long-term liabilities............................. (1,032) -
Checks drawn in excess of bank balances............................ (2,255) -
Deferred financing costs........................................... (63) -
Proceeds from exercise of stock options............................ - 216
---------- ----------
Net cash provided by financing activities.................... 2,683 1,362
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................. - 246
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................ - 34
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............................. $ - $ 280
========== ==========
SUPPLEMENTAL DISCLOSURE:
Cash paid (received) during the period for:
Interest......................................................... $ 1,222 $ 881
Income taxes, net of refunds..................................... (502) 400
The accompanying notes are an integral part of the
consolidated financial statements.
7
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 quarters ended March 31, 1999 and 1998, and as of March 31,
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. The March 31, 1999
balance sheet includes the accounts of the Company, Wing, Darby, Darby-South and
each of their respective subsidiaries, while the December 31, 1999 balance sheet
includes the accounts of the Company, Wing, Darby and each of their respective
subsidiaries.
8
The following unaudited pro forma information presents consolidated operating
results as though the Recapitalization and the acquisition of Delta Millwork,
Inc. (see Note 6) had occurred at the beginning of the periods presented:
Quarter Ended March 31, 1999 Quarter Ended March 31, 1998
---------------------------------- ----------------------------------
Actual Pro Forma Actual Pro Forma
--------------- --------------- -------------- ---------------
Net sales................... $ 106,842 $ 107,350 $ 39,450 $ 95,192
Gross profit................ 32,134 32,225 8,986 26,833
Operating expenses.......... 25,040 25,158 6,752 21,588
Special charge.............. 1,762 1,762 - -
Income from operations...... 5,332 5,305 2,234 5,245
Net income from continuing
operations................ 190 152 686 236
Depreciation and
amortization.............. 2,937 2,946 468 3,226
Interest expense............ 4,346 4,358 992 4,381
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:
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
Raw materials................ $ 27,461 $ 27,362
Work-in-process.............. 4,680 4,129
Finished goods............... 17,068 14,686
------------ -----------
49,209 46,177
LIFO reserve................. 764 112
------------ -----------
$ 49,973 $ 46,289
============ ===========
9
4. NOTES PAYABLE:
Notes payable consisted of the following:
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
Revolving credit facility........... $ 10,700 $ 4,118
Term loan B......................... 74,500 74,750
Term loan C......................... 70,430 70,680
Senior subordinated notes........... 29,070 29,070
Other............................... 560 609
----------- -----------
185,260 179,227
Current portion of notes payable.... (2,206) (2,209)
----------- -----------
$ 183,054 $ 177,018
=========== ===========
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 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. ACQUISITION:
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 $1,737 including fees and other transaction expenses. 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
10
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...................................... 145
Current liabilities........................... (717)
---------
Total purchase price................. $ 1,737
=========
7. SUBSIDIARY GUARANTORS:
In connection with the issuance of the Senior Subordinated Notes (the "Notes"),
the Company's payment obligations under the Notes are fully and unconditionally
guaranteed, jointly and severally (collectively, the Subsidiary Guarantees) on a
senior subordinated basis by its wholly-owned subsidiaries: ADW-Northeast,
ADW-West Coast, ADW-Arizona, Wing, Darby and Darby-South (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. The operations of Wing are presented for all
periods covered. The balance sheet information includes all subsidiaries as of
March 31, 1999 and ADW-Northeast, ADW-West Coast, ADW-Arizona and Darby as of
December 31, 1998. In the opinion of management, separate financial statements
of the respective Subsidiary Guarantors would not provide additional material
information, which would be useful in assessing the financial composition of the
Subsidiary Guarantors. No single Subsidiary Guarantor has any significant legal
restrictions on the ability of investors or creditors to obtain access to its
assets in event of default on the Subsidiary Guarantee other than its
subordination to senior indebtedness.
Following is summarized combined financial information pertaining to these
Subsidiary Guarantors:
March 31, December 31,
1999 1998
------------ ------------
Current assets................................ $ 43,320 $ 42,887
Noncurrent assets............................. 106,324 106,684
Current liabilities........................... 16,375 16,666
Noncurrent liabilities........................ 79,445 76,826
Quarter Ended March 31,
------------------------------
1999 1998
------------ ------------
Net sales..................................... $ 59,279 $ 39,450
Gross profit.................................. 15,601 8,986
Net income from continuing operations......... 295 686
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.
11
8. SUBSEQUENT EVENTS:
HEAT ACQUISITION
On April 20, 1999, the Company entered into a stock purchase agreement to
acquire Heat, Inc., a privately held vinyl window and door company located in
Pittsburgh, Pennsylvania, for approximately $85,000. The Company expects to
finance the acquisition with a portion of the proceeds from the issuance of
$175,000 of senior subordinated notes (see below).
The acquisition will be accounted for as a purchase in accordance with APB 16.
The aggregate purchase price will be allocated to the underlying assets and
liabilities based upon their respective estimated fair market values at the date
of acquisition. Based on preliminary estimates which will be finalized at a
later date, the excess of purchase price over the fair value of the net assets
acquired ("goodwill") will be approximately $72,000, which will be amortized
over 40 years. The results of operations for the acquired business will be
included in the Company's operations subsequent to the completion of the
transaction, which is expected to be on or about May 17, 1999.
CHAMPAGNE ACQUISITION
On May 10, 1999, the Company entered into a stock purchase agreement to acquire
Champagne Industries, Inc., a privately held vinyl window and door company
located in Denver, Colorado for approximately $3,500, excluding $500 to be paid
upon achievement of certain operational targets. The Company expects to finance
the acquisition with a portion of the proceeds from the issuance of $175,000 of
senior subordinated notes (see below).
The acquisition will be accounted for as a purchase in accordance with APB 16.
The aggregate purchase price will be allocated to the underlying assets and
liabilities based upon their respective estimated fair market values at the date
of acquisition. Based on preliminary estimates which will be finalized at a
later date, the excess of purchase price over the fair value of the net assets
acquired ("goodwill") will be approximately $2,300, which will be amortized over
40 years. The results of operations for the acquired business will be included
in the Company's operations subsequent to the completion of the transaction,
which is expected to be on or about May 17, 1999.
$175,000 SENIOR SUBORDINATED NOTES
On May 10, 1999, 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. The proceeds will be used to fund the acquisitions of Heat, Inc.
and Champagne Industries, Inc., refinance certain indebtedness and pay fees and
expenses.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN FORWARD-LOOKING STATEMENTS
This 10-Q contains certain forward looking statements (as such term is defined
in the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties relating to the Company that are based on
the beliefs of management. When used in this 10-Q, the words "anticipate",
"believe", "estimate", "expect", "intend", and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to the risks and uncertainties regarding the operations and the results
of operations of the Company as well as its customers and suppliers, including
as a result of the availability of consumer credit, interest rates, employment
trends, changes in levels of consumer confidence, changes in consumer
preferences, national and regional trends in new housing starts, raw material
costs, pricing pressures, shifts in market demand, and general economic
conditions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions or estimates prove incorrect, actual results may
vary materially from those described herein as anticipated, believed, estimated,
expected or intended.
RESULTS OF OPERATIONS
The operations of the Company are cyclical in nature and generally result in
increases during the peak building season which coincides with the second and
third quarters of the year. Accordingly, results of operations for the quarter
ended March 31, 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. The
March 31, 1999 balance sheet includes the accounts of the Company, Wing, Darby,
Darby-South and each of their respective subsidiaries, while the December 31,
1999 balance sheet includes the accounts of the Company, Wing, Darby and each of
their respective subisidiaries.
NET SALES. Net Sales increased by $67,392 from $39,450 during the first quarter
of 1998 to $106,842 during the first quarter of 1999. The increase was primarily
due to a combined increase in net sales of $65,400 from the addition of the
Company and Darby in connection with the Recapitalization and the acquisition of
Delta Millwork, Inc.
COST OF GOODS SOLD. Cost of goods sold decreased from 77.2% of net sales during
the first quarter of 1998 to 69.9% of net sales during the first quarter of
1999. The decrease was due largely to the addition of the Company and Darby, as
these divisions operate at higher gross profit margins than Wing.
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, delivery,
general and administrative expenses increased $16,545 from $6,606 (16.7% of net
sales during the first quarter of 1998) to $23,151 (21.7% of net sales during
the first quarter of 1999). The increase was primarily due to the inclusion of
selling, delivery, general and administrative expenses of the Company and Darby.
Additionally, delivery and selling expenses increased due to the increase in
sales.
13
AMORTIZATION EXPENSE. Amortization expense increased $1,743 from $146 during the
first quarter of 1998 to $1,889 during the first quarter of 1999. The increase
was largely due to the amortization of goodwill recorded in connection with the
Recapitalization. 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 $1,762 for severance
benefits incurred in connection with the separation agreement entered into by
the Company and the former President and Chief Executive Officer.
INTEREST EXPENSE. Interest expense increased $3,354 from $992 during the first
quarter of 1998 to $4,346 during the first quarter 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. In addition,
interest expense included the amortization of deferred financing costs recorded
in connection with the Recapitalization.
INCOME TAXES. The Company's effective tax rate increased from 44.8% to 81.3% due
largely to non-deductible goodwill amortization expense of approximately $1,150.
Excluding non-deductible amortization expense, the Company's effective tax rate
would have been approximately 38.2%.
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 1999, cash was primarily used for increases in working capital,
capital expenditures and scheduled principal payments. Net cash provided by
operating activities was $680 during first quarter of 1999 compared to cash used
in operating activities of $486 during the first quarter of 1998. The increase
in cash provided by operating activities is largely due to an increase in income
before depreciation and amortization. Net cash used in investing activities
during the first quarter of 1999 was $3,363 compared to $630 during the first
quarter of 1998. The increase in cash used in investing activities was due
primarily to the acquisition of Delta Millwork, Inc. and increased capital
expenditures. Cash provided by financing activities during the first quarter of
1999 was $2,683 compared to $1,363 during the first quarter of 1998, primarily
due to increased borrowings under the Revolving Credit Facility.
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 has a maturity date of June 30, 2004. At March 31,
1999, the Company had $16,691 of availability under the Revolving Credit
Facility, net of borrowings of $10,700 and outstanding letters of credit
totaling $2,609.
CAPITAL EXPENDITURES
The Company had cash capital expenditures of $1,059 during the first quarter of
1999 compared to $287 during the first quarter of 1998. The increase is largely
due to capital expenditures at the Company and Darby. Actual capital
expenditures during the first quarter of 1999 exclude $158 in capitalized costs
related to the implementation of the Company's new management information
system. The Company expects capital expenditures, including capitalization of
software implementation costs (exclusive of acquisitions) in 1999 to be
approximately $9,500, 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.
14
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 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 are assessing 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 upgrade.
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 has been certified by
the manufacturer as being 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 by the third quarter of 1999.
We have inquired of our major suppliers and customers as to their Year 2000
compliance. Substantially all of our major suppliers and customers have
indicated that their Year 2000 testing and remediation programs are complete or
will be complete by the end of the third quarter. We have not, however, tested
or independently verified the Year 2000 compliance of our major suppliers and
customers.
We face certain risks related to the Year 2000 problem including potential
disruptions in our operations due to Year 2000 problems with our systems,
potential disruptions in material supply due to Year 2000 problems with our
suppliers' systems and potential loss of sales or delayed cash collections in
the event of Year 2000 problems with our customers' systems. Although we have
not formalized a contingency plan to address the problems associated with these
risks, there are several factors that we believe may mitigate potential Year
2000 problems. Because our business has only recently been computerized, we
believe we can run our business without significant interruptions using manual
labor and "paper" systems in the event of a Year 2000 problem with our systems.
In addition, because we source our materials from several suppliers, we believe
we have decreased the likelihood that a Year 2000 disruption at one of our
suppliers will materially interrupt our material supply. Finally, because many
of our customers use "paper" systems, we believe a Year 2000 problem with a
customer's systems would not materially impact our sales. Although we believe
these factors mitigate our Year 2000 risks, we cannot assure you that problems
arising from these risks will not have a material adverse effect on our
business, operating results or financial condition.
15
We believe that with our strategy and completed installations, the Year 2000
problem will not pose significant operational problems for us. We can not assure
you, however, that our computer systems, or the computer systems of companies we
acquire 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.
The total amount of costs to be incurred by the Company to address these system
enhancements is estimated at $1,500. The Company has expensed approximately
$1,100 through March 31, 1999.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various claims, legal actions, and complaints arising in
the ordinary course of business. In the opinion of management, all such matters
are without merit or are of such kind, or involve such amounts, that an
unfavorable disposition would not have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits listed on the accompanying Exhibit Index are
filed as part of this report.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATRIUM COMPANIES, INC.
(Registrant)
Date: May 14, 1999 By: /s/ Jeff L. Hull
-------------------------------------
Jeff L. Hull
Executive Vice President,
Chief Financial Officer, Secretary,
Treasurer and Director
(Principal Financial Officer)
Date: May 14, 1999 By: /s/ Eric W. Long
-------------------------------------
Eric W. Long
Vice President and
Corporate Controller
(Principal Accounting Officer)
17
EXHIBIT INDEX
Exhibit Description
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27 Financial Data Schedule
18