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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MAY 17, 1999
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ATRIUM COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 333-20095 75-2642488
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of incorporation) Identification Number)
1341 W. MOCKINGBIRD LANE
SUITE 1200W 75247
DALLAS, TEXAS (Zip code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (214) 630-5757
N/A
(former address if changed since last report)
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INFORMATION TO BE INCLUDED IN THE REPORT
This Report on Form 8-K/A amends the Registrant's Report on Form 8-K dated May
17,1999, which was filed on June 1, 1999 to include the financial statements and
pro forma financial information required by Item 7 of Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Report of Independent Accountants (see page 4)
Consolidated Balance Sheets as of December 31, 1997 and 1998, and
March 31, 1999 (unaudited) (see page 5)
Consolidated Statement of Operations for the years ended December
31, 1996, 1997 and 1998, and the periods ended May 30, 1997 and
March 31, 1998 and 1999 (see page 6)
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1995, 1996, 1997 and 1998, and the periods ended May
30, 1997 and March 31, 1999 (see page 7)
Consolidated Statement of Cash Flows for the years ended December
31, 1996, 1997 and 1998, and the periods ended May 30, 1997 and
March 31, 1998 and 1999 (see page 8)
Notes to Financial Statements (see page 9)
(b) PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Consolidated Balance Sheet as of March 31,
1999 (see page 20)
Notes to Unaudited Pro Forma Consolidated Balance Sheet as of
March 31, 1999 (see page 21)
Unaudited Pro Forma Consolidated Statement of Operations for year
ended December 31, 1998 (see page 24)
Unaudited Pro Forma Consolidated Statement of Operations for the
three months ended March 31, 1999 (see page 25)
Notes to Unaudited Pro Forma Consolidated Statements of Operations
for the year ended December 31, 1998 and the three months ended
March 31, 1999 (see page 26)
(c) EXHIBITS
*2.1 Stock Purchase Agreement, dated as of April 20, 1999, among
Heat, Inc., 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;
*99.1 Press Release of Atrium Companies, Inc. dated May 19, 1999.
- ----------------------
*Incorporated by reference from the Registrant's Report on Form 8-K dated May
17,1999 and filed on June 1, 1999.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATRIUM CORPORATION
By: /s/ Jeff L. Hull
----------------------------------------------
Name: Jeff L. Hull
Title: Executive Vice President
Chief Financial Officer and Secretary
Date: July 30, 1999
3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Heat, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Heat, Inc.
and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the
results of their operations and their cash flows for the year ended December 31,
1998, the periods ended December 31, 1997 and May 30, 1997 and the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Dallas, Texas
July 9, 1999
4
HEAT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------
1998 1997
MARCH 31, --------- ---------
1999
-----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 1,143 $ 4,178 $ 1,708
Cash held in escrow.......................................................... -- -- 2,167
Accounts receivable, net of allowance of $221, $343 and $231, respectively... 5,227 6,176 5,109
Inventories.................................................................. 6,710 6,017 5,630
Prepaid expenses and other current assets.................................... 966 1,085 1,998
Deferred tax asset........................................................... 915 915 905
----------- --------- ---------
Total current assets....................................................... 14,961 18,371 17,517
PROPERTY, PLANT AND EQUIPMENT, net............................................. 8,339 8,407 7,747
GOODWILL, net.................................................................. 16,563 16,645 15,228
OTHER ASSETS................................................................... 673 760 1,024
DEFERRED FINANCING COSTS AND OTHER INTANGIBLES, net............................ 1,427 1,499 1,756
----------- --------- ---------
Total assets............................................................. $ 41,963 $ 45,682 $ 43,272
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt............................................ $ 3,568 $ 2,239 $ 1,624
Accounts payable............................................................. 1,775 843 892
Accrued liabilities.......................................................... 3,975 8,655 7,213
----------- --------- ---------
Total current liabilities.................................................. 9,318 11,737 9,729
Long-term debt................................................................. 20,468 20,805 24,869
Deferred tax liability......................................................... 468 468 203
Other long-term liabilities.................................................... 309 152 --
----------- --------- ---------
Total liabilities.......................................................... 30,563 33,162 34,801
----------- --------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock--authorized 5,000,000 shares at $.01 par value; issued
and outstanding 1,312,500 shares........................................... 13 13 13
Class B common stock--authorized 1,000,000 shares at $.01 par value; no
shares issued and outstanding.............................................. -- -- --
Warrants outstanding......................................................... 146 146 146
Paid-in capital.............................................................. 5,239 5,239 5,239
Retained earnings............................................................ 6,002 7,122 3,073
----------- --------- ---------
Total stockholders' equity................................................. 11,400 12,520 8,471
----------- --------- ---------
Total liabilities and stockholders' equity............................... $ 41,963 $ 45,682 $ 43,272
----------- --------- ---------
----------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
5
HEAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
THE COMPANY THE COMPANY PREDECESSOR
---------------------------- ---------------------------- ----------------------------
PERIOD ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, MAY 30, DECEMBER 31,
1999 1998 1998 1997 1997 1996
------------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED)
NET SALES........................ $ 13,642 $ 12,841 $ 73,458 $ 45,549 $ 16,970 $ 45,459
COST OF GOODS SOLD............... 8,970 7,587 41,780 26,501 10,345 25,959
------------- ------------- ------------- ------------- ------------- -------------
Gross profit................. 4,672 5,254 31,678 19,048 6,625 19,500
------------- ------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES:
Selling, delivery, general and
administrative............... 5,769 4,895 21,680 12,352 6,595 15,682
Special charges................ -- -- -- -- 785 --
Amortization expense........... 182 162 685 391 -- --
------------- ------------- ------------- ------------- ------------- -------------
Total operating expenses..... 5,951 5,057 22,365 12,743 7,380 15,682
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) from
operations................. (1,279) 197 9,313 6,305 (755) 3,818
INTEREST EXPENSE, net............ 530 645 2,330 1,039 92 84
OTHER INCOME (EXPENSE)........... 29 52 (415) (176) 166 446
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before income
taxes...................... (1,780) (396) 6,568 5,090 (681) 4,180
Provision (benefit) for
income taxes............... (660) (120) 2,519 2,017 (298) 1,634
------------- ------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS)................ $ (1,120) $ (276) $ 4,049 $ 3,073 $ (383) $ 2,546
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
6
HEAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ISSUED(A)
TREASURY STOCK
---------------------- PAID-IN ------------------------ WARRANTS RETAINED
SHARES AMOUNT CAPITAL SHARES AMOUNT OUTSTANDING EARNINGS
--------- ----------- ----------- ----------- ----------- --------------- -----------
PREDECESSOR
BALANCE, December 31, 1995........ 2,011,088 $ 41 $ 430 57,876 $ (25) $ -- $ 17,684
Stock options exercised......... -- -- -- (5,300) 2 -- --
Net income...................... -- -- -- -- -- -- 2,546
--------- --- ----------- ----------- --- ----- -----------
BALANCE, December 31, 1996........ 2,011,088 41 430 52,576 (23) -- 20,230
Stock options exercised......... -- -- -- (4,463) 2 --
Net loss........................ -- -- -- -- -- -- (383)
--------- --- ----------- ----------- --- ----- -----------
BALANCE, May 30, 1997............. 2,011,088 $ 41 $ 430 48,113 $ (21) $ -- $ 19,847
--------- --- ----------- ----------- --- ----- -----------
--------- --- ----------- ----------- --- ----- -----------
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
THE COMPANY
BALANCE, May 31, 1997............. -- $ -- $ -- -- $ -- $ -- $ --
Issuance of common stock........ 1,312,500 13 5,239 -- -- -- --
Issuance of warrants............ -- -- -- -- -- 146 --
Net income...................... -- -- -- -- -- -- 3,073
--------- --- ----------- ----------- --- ----- -----------
BALANCE, December 31, 1997........ 1,312,500 13 5,239 -- -- 146 3,073
Net income...................... 4,049
--------- --- ----------- ----------- --- ----- -----------
Balance, December 31, 1998........ 1,312,500 13 5,239 -- -- 146 7,122
Net loss (unaudited)............ -- -- -- -- -- -- (1,120)
--------- --- ----------- ----------- --- ----- -----------
Balance, March 31, 1999
(unaudited)..................... 1,312,500 $ 13 $ 5,239 -- $ -- $ 146 $ 6,002
--------- --- ----------- ----------- --- ----- -----------
--------- --- ----------- ----------- --- ----- -----------
TOTAL
STOCKHOLDER'S
EQUITY
-------------
PREDECESSOR
BALANCE, December 31, 1995........ $ 18,130
Stock options exercised......... 2
Net income...................... 2,546
-------------
BALANCE, December 31, 1996........ 20,678
Stock options exercised......... 2
Net loss........................ (383)
-------------
BALANCE, May 30, 1997............. $ 20,297
-------------
-------------
- ----------------------------------
- ----------------------------------
THE COMPANY
BALANCE, May 31, 1997............. $ --
Issuance of common stock........ 5,252
Issuance of warrants............ 146
Net income...................... 3,073
-------------
BALANCE, December 31, 1997........ 8,471
Net income...................... 4,049
-------------
Balance, December 31, 1998........ 12,520
Net loss (unaudited)............ (1,120)
-------------
Balance, March 31, 1999
(unaudited)..................... $ 11,400
-------------
-------------
7
HEAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THE COMPANY THE COMPANY PREDECESSOR
---------------------------- ---------------------------- ------------------------------
PERIOD ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, MAY 30, DECEMBER 31,
1999 1998 1998 1997 1997 1996
------------- ------------- ------------- ------------- ------------- ---------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (1,120) $ (276) $ 4,049 $ 3,073 $ (383) $ 2,546
Depreciation and amortization...... 519 482 2,008 1,057 703 1,782
Amortization of deferred debt
discount......................... 5 5 21 12 -- --
Loss/(gain) on disposal of
property, plant and equipment.... -- 5 31 -- 44 (14)
Changes in assets and liabilities:
Accounts receivable.............. 949 (60) (1,067) 1,003 (391) (272)
Inventories...................... (694) (990) (387) 1,814 (784) (740)
Prepaid expenses and other
current assets................. 119 110 1,177 (1,115) (355) (341)
Deferred taxes, net.............. -- -- 255 (21)
Investments...................... -- -- -- -- 5,393 (251)
Other noncurrent assets.......... 65 -- -- -- (122) (391)
Accounts payable................. 932 521 (50) (1,405) 411 507
Accrued liabilities.............. (4,679) (400) 294 (67) 431 440
Other, net....................... (2) (70) (29) (22) --
------------- ------------- ------------- ------------- ------------- ------
Net cash (used in) provided by
operating activities......... (3,906) (673) 6,302 4,329 4,947 3,266
------------- ------------- ------------- ------------- ------------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment, net................... (271) (365) (1,700) (992) (683) (1,696)
Acquisition of Thermal and Best
Built............................ -- -- -- (30,122) -- --
Additional payment to seller....... -- (830) -- -- --
------------- ------------- ------------- ------------- ------------- ------
Net cash used in investing
activities................... (271) (365) (2,530) (31,114) (683) (1,696)
------------- ------------- ------------- ------------- ------------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Liquidation of consolidated escrow
balances......................... -- 2,167 2,167 -- -- --
Proceeds from borrowings in
connection with acquisition of
Thermal and Best Built........... -- -- -- 24,870 -- --
Borrowing/(repayment) of debt...... 1,142 (308) (3,469) (2,883) (28) (172)
Issuance of common stock........... -- -- -- 5,252 -- --
------------- ------------- ------------- ------------- ------------- ------
Net cash (used in) provided by
financing activities......... 1,142 1,859 (1,302) 27,239 (28) (172)
------------- ------------- ------------- ------------- ------------- ------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (3,035) 821 2,470 454 4,236 1,398
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... 4,178 1,708 1,708 1,254 5,070 3,672
------------- ------------- ------------- ------------- ------------- ------
END OF PERIOD...................... $ 1,143 $ 2,529 $ 4,178 $ 1,708 $ 9,306 5,070
------------- ------------- ------------- ------------- ------------- ------
------------- ------------- ------------- ------------- ------------- ------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for--
Interest......................... 532 595 $ 2,325 $ 1,574 $ 40 $ 84
Income taxes..................... $ 921 $ 112 $ 1,282 $ 2,202 $ 404 $ 1,255
Noncash investing and financing
activities--
Capital expenditures included in
accrued expenses............... -- $ 312 $ -- $ $ --
The accompanying notes are an integral part of these consolidated financial
statements.
8
HEAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION:
Heat, Inc. (the "Company"), a Delaware corporation, was incorporated on
January 2, 1997 by HIG Capital Management and affiliated companies ("HIG") for
the purpose of acquiring and owning Thermal Industries, Inc. ("Thermal"), based
in Pittsburgh, Pennsylvania, and Best Built, Inc. ("Best Built"), based in Union
Gap, Washington. The acquisitions were consummated effective May 30, 1997. The
statements of operations for the period from January 1, 1997 to May 30, 1997 and
the year ended December 31, 1996 only include the operations of Thermal as
Thermal was deemed to be the predecessor company. The Company is engaged in the
manufacture of vinyl-framed, made-to-order windows, replacement sliding doors,
patio enclosures, vinyl porch decks and boat docks. The products are primarily
sold to remodeling or home improvement contractors for use in residential
remodeling through the Company's twenty-one branch locations. In addition,
products are also sold to wholesale distributors for use in new construction.
The purchase price of the acquisitions exceeded the fair value of the net
assets acquired by approximately $17,273. Pursuant to the terms of the Best
Built purchase agreement, the Company made an additional payment of $830 during
1998. In addition, in January 1999, the Company reached a settlement with
shareholders dissenting to the merger. The settlement amount exceeded the
previously recorded liability by approximately $673. Refer to Note 9 for further
discussion.
2. SIGNIFICANT ACCOUNTING POLICIES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results may differ from previously estimated amounts.
The consolidated financial information as of March 31, 1999 and for the
three months ended March 31, 1998 and 1999 is unaudited. In the opinion of
management, the accompanying unaudited consolidated financial information and
related notes thereto contain all adjustments consisting only of normal
recurring adjustments, necessary to present fairly the consolidated financial
information as of March 31, 1999 and the operating results and cash flows for
the three months ended March 31, 1999 and 1998. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year.
BASIS OF CONSOLIDATION
The accounts of the Company and its wholly-owned subsidiaries are included
in the consolidated financial statements. All significant intercompany accounts
and transactions have been eliminated in consolidation. The reference to the
periods ended December 31, 1997 and May 30, 1997 used throughout these
consolidated financial statements, refer to the periods May 31, 1997 through
December 31, 1997 and January 1, 1997 through May 30, 1997, respectively.
9
HEAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INDUSTRY SEGMENT
The Company operates in a single industry segment, the fabrication and
distribution windows and related components.
REVENUE RECOGNITION
The Company manufactures the products noted above and provides separate
installation services for customers that request such services under sales
contracts that may require cash deposits. The Company records the sale of
products upon transfer of title to the customer, which typically occurs upon
shipment, and records revenue from installation projects when the projects are
complete.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
ninety days or less when purchased to be cash equivalents.
ADVERTISING COSTS
Advertising costs are expensed when incurred and were $185, $68, $61, and
$80 for the year ended December 98, the periods ended December 31, 1997 and May
30, 1997, and the year ended December 31, 1996, respectively.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of trade accounts receivable.
The Company's customers are located in various regions of the United States. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information. No customers
accounted for approximately 10% of gross sales for the year ended December 31,
1998, the periods ended December 31, 1997 and May 30, 1997 and the year ended
December 31, 1996.
INVENTORIES
Inventories are carried at the lower of first-in, first-out (FIFO) cost or
market and consist of the following:
DECEMBER 31,
MARCH 31, --------------------
1999 1998 1997
----------- --------- ---------
(UNAUDITED)
Raw materials................................ $ 4,012 $ 3,948 $ 3,586
Work-in-process.............................. 69 69 73
Finished goods............................... 2,629 2,000 1,971
----------- --------- ---------
$ 6,710 $ 6,017 $ 5,630
----------- --------- ---------
----------- --------- ---------
10
HEAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
DECEMBER 31,
MARCH 31, --------------------
1999 1998 1997
----------- --------- ---------
(UNAUDITED)
Accrued payroll and benefits..................... $ 2,125 $ 2,339 $ 1,781
Accrued income taxes............................. 92 900 56
Reserve for litigation settlement................ -- 2,840 2,167
Other accrued liabilities........................ 1,758 2,576 3,209
----------- --------- ---------
$ 3,975 $ 8,655 $ 7,213
----------- --------- ---------
----------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions and improvements
of significant items are capitalized while expenditures for maintenance and
repairs are charged to operations as incurred. Provisions for depreciation are
computed principally by the straight-line method based upon the estimated useful
lives of the assets. Property, plant and equipment balances and useful lives are
as follows:
DECEMBER 31,
DEPRECIATION --------------------
PERIOD 1998 1997
-------------- --------- ---------
Land.................................. N/A $ 334 $ 334
Buildings and improvements............ 39.5 years 1,522 1,522
Furniture and office equipment........ 3-7 years 643 471
Machinery and equipment............... 5-20 years 5,170 4,055
Autos and trucks...................... 3-10 years 1,082 934
Leasehold improvements................ Life of lease 703 634
Construction-in-progress.............. N/A 912 459
--------- ---------
10,366 8,409
Less accumulated depreciation......... (1,959) (662)
--------- ---------
Property, plant and equipment, net.... $ 8,407 $ 7,747
--------- ---------
--------- ---------
Depreciation expense for the year ended December 31, 1998, the periods ended
December 31, 1997 and May 30, 1997, and the year ended December 31, 1996 was
$1,321, $662, $703 and $1,782, respectively.
NONCOMPETE AND CONSULTING AGREEMENTS
In connection with the acquisition of Best Built, the seller agreed not to
compete with the Company for a period of five years in exchange for an initial
payment of $150 and an additional payment of $125 during 1998. The cost of this
agreement is being amortized using the straight-line method over its five-year
contractual life. Additionally, the seller is being retained as a consultant for
the Company through May 29, 1999, subject to extension upon mutual agreement of
the Company and the seller.
11
HEAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
GOODWILL
Goodwill is being amortized over forty years on a straight-line basis.
Accumulated amortization was approximately $628 and $229 at December 31, 1998
and 1997, respectively. It is the Company's policy to review goodwill (and other
intangible assets) for possible impairment on the basis of whether the carrying
amount of such assets is fully recoverable from projected undiscounted net cash
flows from the related business. If such review indicates that the carrying
amount of goodwill and other intangible assets is not recoverable, then the
Company's policy is to reduce the carrying amount of such assets to fair value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting Standards (SFAS) No.
107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, the following
methods have been used in estimating fair value disclosures for significant
financial instruments of the Company.
Estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. Since
considerable judgment is required to interpret market data to develop the
estimates of fair value, the estimates presented are not necessarily indicative
of the amounts that could be realized in a current market exchange.
Cash and cash equivalents, accounts receivable, accounts payable, and other
current liabilities--The carrying amounts reported in the balance sheet for
these accounts approximate the fair value due to their short maturities.
Long-term debt--The fair value of the Company's debt approximates the
carrying value since interest rates are variable for the maturity of the
debt. Management believes the fixed rate debt is consistent with other
financial instruments of similar rating and risk.
TREASURY STOCK
Treasury stock represents stock held principally for sale and issuance to
employees. Purchases of treasury stock are recorded at cost. Sales of treasury
stock are valued using the weighted average method. All treasury stock was
eliminated as part of the acquisition of Thermal and Best Built by the Company.
12
HEAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
3. LONG-TERM DEBT:
Long-term debt outstanding consisted of the following at December 31:
1998 1997
--------- ---------
Unsecured note payable, 8.00% interest, principal payable
in its entirety on May 29, 2000................................. $ 1,500 $ 1,500
Pennsylvania Economic Development Financing Authority ("PEDFA")
bonds, variable interest rate (recent interest rates ranging
from 2.40% to 3.15%), principal payable $100 annually through
November 2004, with a $500 payment due November 2005............ 1,100 1,200
Pennsylvania Industrial Development Authority ("PIDA") mortgage
note, 3% interest, principal and interest payable in monthly
installments of $8 through July 2006............................ 653 723
Nations Credit Term Loan A, variable interest rate of 4.25% plus
the Commercial Paper Rate (total rate of 9.17% at December 31,
1998), principal payable in quarterly installments through
May 30, 2003.................................................... 14,941 18,212
Nations Credit Term Loan B, variable interest rate of 6.50% plus
the Commercial Paper Rate (total rate of 11.42% at December 31,
1998), principal payable in its entirety throughout the 12
months ended May 30, 2004....................................... 4,700 4,700
Various capital lease obligations at interest rates ranging
from 10.91% to 24.20% due in installments through 2003.......... 263 292
--------- ---------
23,157 26,627
Less--
Deferred debt discount.......................................... (113) (134)
Current portion of long-term debt............................... (2,239) (1,624)
--------- ---------
$ 20,805 $ 24,869
--------- ---------
--------- ---------
Annual principal payments required under long-term debt obligations are as
follows:
1999...................................................... $ 2,239
2000...................................................... 4,266
2001...................................................... 3,426
2002...................................................... 4,124
2003...................................................... 4,163
Thereafter................................................ 4,939
---------
$ 23,157
---------
---------
Debt issuance costs of approximately $1,204 were incurred in 1997 in
connection with the Nations Credit agreement. In connection with the borrowings,
warrants were issued to the lender to purchase 98,790 shares. The estimated
value of those warrants of approximately $146 has been recorded as deferred debt
discount and warrants outstanding. Amortization of the Nations Credit deferred
financing costs and other intangible assets approximated $286 and $165 for the
year ended December 31, 1998 and the period ended December 31, 1997,
respectively.
13
HEAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
3. LONG-TERM DEBT: (CONTINUED)
The Company maintains a $1,300 letter of credit and a $7,500 working capital
facility with Nations Credit. At December 31, 1998 and 1997, no amounts were
outstanding under these facilities.
The Company is required to meet certain financial and other covenants in
connection with the above obligations, including, among others, restrictions on
new indebtedness, liens, minimum earnings before interest, taxes, depreciation
and amortization, debt coverage and capital expenditures. The Company was in
compliance with all of these covenants as of December 31, 1998. In addition, the
obligations contain mandatory incremental prepayments if certain conditions are
met such as, excess cash flow requirements (as defined), an equity transaction,
or an asset sale. In connection therewith, the company paid $0, $1,853, $0 and
$0 under these provisions for the year ended December 31, 1998, the periods
ended December 31, 1997 and May 30, 1997 and the year ended December 31, 1996,
respectively.
4. EMPLOYEE BENEFIT PLAN:
Thermal maintains a qualified 401(k) and profit-sharing plan covering
substantially all of its employees. Under the terms of the plan, the Company may
contribute up to 25% of the first 8% of each employee's compensation contributed
and may also make discretionary contributions to the plan. Total expense
recorded by the Company was approximately $710, $687, $278 and $534 for the year
ended December 31, 1998, the periods ended December 31, 1997 and May 30, 1997
and the year ended December 31, 1996, respectively.
During 1998, Best Built implemented a qualified 401(k) plan. Under the terms
of the plan, the Company may contribute up to 25% of the first 8% of each
employee's compensation contributed. The total expense recorded by Best Built
was $8 for the year ended December 31, 1998.
5. INCOME TAXES:
The Company records the effect of income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109 (SFAS No.
109), ACCOUNTING FOR INCOME TAXES. Taxes on income, as shown in the accompanying
consolidated statements of operations, include the following components:
THE COMPANY PREDECESSOR
------------------------ --------------------------
PERIOD
YEAR ENDED ENDED YEAR ENDED
DECEMBER DECEMBER PERIOD ENDED DECEMBER
31, 31, MAY 30, 31,
1998 1997 1997 1996
----------- ----------- ------------- -----------
Current provision (benefit):
Federal.................................. $ 2,202 $ 1,765 $ 15 $ 1,403
State.................................... 254 273 95 227
----------- ----------- ----- -----------
Total current provision................ 2,456 2,038 110 1,630
Deferred provision (benefit)............... 63 (21) (408) 4
----------- ----------- ----- -----------
Total provision (benefit).............. $ 2,519 $ 2,017 $ (298) $ 1,634
----------- ----------- ----- -----------
----------- ----------- ----- -----------
14
HEAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
5. INCOME TAXES: (CONTINUED)
The income tax rate on income before taxes differs from the federal
statutory rate for the following reasons:
THE COMPANY PREDECESSOR
------------------------ ------------------------
PERIOD
YEAR ENDED ENDED PERIOD YEAR ENDED
DECEMBER DECEMBER ENDED DECEMBER
31, 31, MAY 30, 31,
1998 1997 1997 1996
----------- ----------- ----------- -----------
Tax provision based on the federal
statutory rate........................... $ 2,235 $ 1,715 $ (231) $ 1,421
State income taxes, net of federal
benefit.................................. 168 232 (27) 150
Nondeductible goodwill..................... 101 58 -- --
Other...................................... 15 12 (40) 63
----------- ----------- ----------- -----------
Total provision........................ $ 2,519 $ 2,017 (298) $ 1,634
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The components of the Company's deferred tax accounts are as follows at
December 31:
1998 1997
--------- ---------
Depreciation............................................. $ (368) $ (163)
Vacation accrual......................................... 318 151
Accrued bonuses.......................................... 75 136
Warranty accrual......................................... 257 225
Inventory and bad debt reserve........................... 199 143
Amortization of goodwill................................. (100) (40)
Other nondeductible accruals............................. 66 250
---------
Net deferred tax asset................................... $ 447 $ 702
---------
---------
Deferred tax asset, current.............................. $ 915 $ 905
Deferred tax liability, long-term........................ (468) (203)
--------- ---------
$ 447 $ 702
--------- ---------
--------- ---------
6. STOCKHOLDERS' EQUITY:
VOTING RIGHTS
The holders of the Class A Common Stock are entitled to one vote for each
share of stock held. The holders of Class B Common Stock are not entitled to
vote, except as otherwise required by applicable law, in which case holders of
Class B Common Stock shall vote as a single class.
DIVIDENDS AND LIQUIDATION RIGHTS
The Board of Directors of the Company may pay dividends to both the Class A
and Class B holders out of funds legally available for payments of dividends. In
the event of liquidation, the holders of Class A and Class B stock shall be
entitled to share ratably, according to the number of shares of Common Stock
held by them, in all assets of the Company available for distribution to its
stockholders.
15
HEAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
6. STOCKHOLDERS' EQUITY: (CONTINUED)
CONVERSION
Each share of Class A Common Stock is convertible into one share of Class B
Common Stock, and vice versa.
7. STOCK OPTION PLANS:
In October 1984, Thermal adopted an incentive stock option plan (the "Old
Plan") for its key employees. Options granted under the Old Plan were granted
with an exercise price that equaled or exceeded fair market value of Thermal's
common stock at the date of grant.
Ten years from the date the Old Plan was adopted, the Old Plan was
terminated. However, all rights created under options granted continued until
such options were excercised or expired. In connection with acquisition of
Thermal and Best Built by the Company, all options under the Old Plan were
exercised.
On May 30, 1997, the Company adopted a stock option plan pursuant to the
Heat, Inc. 1997 Stock Purchase and Option Plan (the "Plan") for its key
employees, directors, consultants and advisers. The option plan provides for the
grant of up to 250,000 shares of common stock. Under the Plan, certain employees
have received incentive options under the Internal Revenue Service Code Section
422, while others have received nonqualified stock options in accordance with
the Plan.
Generally, all options issued under the Plan vest equally in 25% annual
increments over the four-year period subsequent to the grant date. All options
become fully vested upon a sale of the Company and must be exercised in
connection with the sale of the Company or they shall be forfeited. Options were
granted with an exercise price that equalled or exceed fair value of the
Company's common stock. Options for 22,500 shares were granted at the time of
acquisition, which vest between 1998 and 2005 based upon the Company's future
operating results. The outstanding stock options under the Plan have an average
remaining contractual life of ten years at December 31, 1998.
Stock option transactions are summarized as follows:
THE COMPANY PREDECESSOR
------------------------ ------------------------
PERIOD PERIOD
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER DECEMBER MAY 30, DECEMBER
31, 1998 31, 1997 1997 31, 1996
----------- ----------- ----------- -----------
Outstanding options, beginning of period... 86,555 -- 35,500 15,900
Granted.................................... 17,500 86,555 -- 20,000
Exercised.................................. -- -- (800) (400)
----------- ----------- ----------- -----------
Outstanding options, end of period......... 104,055 86,555 34,700 35,500
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average exercise price of options
exercised................................ $ -- $ -- $ 3.00 $ 3.00
Weighted average exercise price of options
granted.................................. $ 18.29 $ 4.64 $ -- $ 8.75
Weighted average exercise price, end of
period................................... $ 6.93 $ 4.64 $ 6.31 $ 6.24
Options exercisable, end of period......... 21,639 -- 28,434 29,234
Options available for future grant......... 145,945 163,445 -- --
16
HEAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
7. STOCK OPTION PLANS: (CONTINUED)
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following range of assumptions
used for option grants occurring during the year ended December 31, 1998 and the
period ended December 31, 1997:
1998 1997
--------- ---------
Volatility............................................... 0% 0%
Risk-free interest rate.................................. 5.27% 5.81%
Expected life in years................................... 5.0 5.0
Dividend yield........................................... 0% 0%
The following table summarizes information about stock options outstanding
at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -----------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (MONTHS) PRICE EXERCISABLE PRICE
- --------------- ----------- ---------------- ----------- ---------- -----------
$4.00 79,055 101 $ 4.00 19,764 $ 4.00
$10.00-$12.00 17,500 107-119 $ 11.71 750 $ 11.33
$20.00 2,500 119 $ 20.00 -- --
$30.00 5,000 116 $ 30.00 -- --
-----------
104,055
In October 1995, the Financial Accounting Standards Board issued STATEMENT
OF FINANCIAL ACCOUNTING STANDARD ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. SFAS No. 123 encourages a fair-value based method of accounting
for employee stock options and similar equity instruments. SFAS No. 123 also
allows an entity to continue to account for stock-based employee compensation
using the intrinsic value for equity instruments using APB Opinion No. 25. As
provided for in SFAS No. 123, the Company elected to continue the intrinsic
value method of expense recognition. Accordingly, no compensation cost has been
recognized for the stock option plans. Had compensation expense for the stock
option plans been determined consistent with the provisions of SFAS No. 123, the
Company's net income for the year ended December 31, 1998, the periods ended
December 31, 1997 and May , 1997 and the year ended December , 1996 would not
have been materially different.
In connection with acquisition transactions discussed in Note 1, the Company
also sold 45,000 shares (Class A) to certain employees, at the fair market value
as determined by management and based on the value of the merger transaction.
These shares and any shares issued under the stock option plan, as described
above, are subject to certain terms and conditions including, among others,
restrictions on transfer, repurchase rights and a put feature.
In connection with the sale of the Company (see Note ), all options
outstanding under the Plan were exercised and the Plan was terminated.
8. RELATED PARTY TRANSACTIONS:
In connection with the merger, the Company agreed to pay a management fee to
HIG. These fees totaled approximately $400 and $239 for the year ended December
31, 1998 and the period ended
17
HEAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
8. RELATED PARTY TRANSACTIONS: (CONTINUED)
December 31, 1997, respectively, and are classified as management fees in the
accompanying consolidated statements of operations.
The Company leases certain facilities in Pittsburgh, Pennsylvania from two
members of the board of directors of the Company. Rental expense for these
facilities totaled approximately $137, $78, $56 and $134 for the year ended
December 31, 1998, the periods ended December 31, 1997 and May 30, 1997 and the
year ended December 31, 1996, respectively.
9. FUTURE LEASE OBLIGATIONS:
Future minimum lease payments under operating leases for the Company's main
locations and twenty-one branch locations that have initial or remaining
noncancelable lease terms in excess of one year at December 31, 1998 are:
1999........................................ $ 1,399
2000........................................ 1,329
2001........................................ 766
2002........................................ 528
2003........................................ 350
Thereafter.................................. 725
---------
$ 5,097
---------
---------
Rental expense amounted to approximately $1,523, $685, $426 and $867 for the
year ended December 31, 1998, the periods ended December 31, 1997 and May 30,
1997 and the year ended December 31, 1996, respectively.
10. COMMITMENTS AND CONTINGENCIES:
The Company is currently a defendant in a lawsuit claiming that the Company
is liable and negligent in the design and manufacture of windows installed in a
large condominium project. The case is currently in mediation with a scheduled
trial date of May 1999. Management is of the opinion that the ultimate
resolution of this matter, after considering its insurance coverage and based on
discussions with outside legal counsel, will not have a material adverse effect
on the Company's financial condition or its results of operation.
The Company is involved in various other claims and litigation incidental to
the conduct of its business. Based on consultation with legal counsel,
management does not believe that any claims or litigation to which the Company
is a party will have a material adverse effect on the Company" financial
condition or results of operations.
11. SPECIAL CHARGES:
Included in special charges in the Consolidated Statement of Operations for
the period ended May , 1997 are transportation expenses (primarily consisting of
legal and investment banker fees) paid by Thermal totaling $785.
18
HEAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
12. THERMAL AND BEST BUILT TRANSACTIONS:
On May 30, 1997, the Company acquired all of the common stock of Thermal and
Best Built. The components of the purchase price are as follows:
Cash and cash equivalents.......................................................... $ 1,254
Accounts receivable, net........................................................... 6,212
Inventories........................................................................ 7,344
Prepaid expenses and other current assets.......................................... 1,542
Property, plant and equipment...................................................... 7,050
Goodwill........................................................................... 15,960
Other long term assets............................................................. 1,301
Current liabilities................................................................ (7,467)
Long-term liabilities.............................................................. (3,074)
---------
Total purchase price............................................................. $ 30,122
---------
---------
The purchase price of $30,122 was financed with net debt proceeds of
$24,870.
13. SUBSEQUENT EVENT:
In connection with the acquisition of Thermal by the Company, certain
shareholders of Thermal exercised their rights to dissent from the merger and to
demand payment of the fair value of their shares. Pursuant to the terms of the
merger, each share of Thermal stock was converted into the right to receive a
cash payment per share, based on the price per share accepted by the
nondissenting shareholders. The dissenting shareholders asserted that they have
certain rights to seek appraisals of the fair value of their shares. In the
aggregate, the dissenting shareholders were the beneficial owners of 144,186
shares of Thermal. On January 22, 1999, the Company entered into a Settlement
and Release Agreement with the dissenting shareholders to pay $2,840 in exchange
for all their shares held. A liability for $2,167 reflecting the anticipated
settlement amount had been previously recorded in the accompanying consolidated
balance sheet at December 31, 1997. As a result of the final settlement of this
matter, the liability was increased to $2,840 and was paid out in January 1999.
This additional amount was reflected as an increase to goodwill.
In connection with the Best Built acquisition, the Company paid the seller
an additional $830 in 1998 as a result of Best Built achieving a defined gross
profit level for the 12-month period ended May 31, 1998. This additional amount
was reflected as an increase to goodwill.
On April 20, 1999, the Company was acquired by Atrium Companies, Inc., a
company engaged in the manufacture and sales of doors, windows, and various
building materials throughout the United States, for approximately $85,000.
19
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(DOLLARS IN THOUSANDS)
HISTORICAL PRO FORMA
---------------------------------- ---------------------------
ATRIUM HEAT CHAMPAGNE ADJUSTMENTS CONSOLIDATED
---------- --------- ----------- ----------- ------------
Current assets:
Cash and cash equivalents...................... $ -- $ 1,143 $ 25 $ (1,168)(a) $ --
Equity securities-available for sale........... 144 144
Accounts receivable, net....................... 50,718 5,227 1,505 -- 57,450
Inventories.................................... 49,973 6,710 1,108 -- 57,791
Prepaid expenses and other current
assets....................................... 8,020 966 146 -- 9,132
Deferred tax asset............................. 1,249 915 -- -- 2,164
---------- --------- ----------- ----------- ---------
Total current assets......................... 110,104 14,961 2,784 (1,168) 126,681
Property, plant and equipment, net............... 26,907 8,339 338 35,584
Goodwill, net.................................... 213,902 16,563 -- 57,244(b) 287,709
Deferred financing costs, net.................... 10,740 1,427 -- 4,673(c) 16,840
Other assets..................................... 5,113 673 33 1,739(d) 7,558
---------- --------- ----------- ----------- ---------
Total assets................................. $ 366,766 $ 41,963 $ 3,155 $ 62,488 $ 474,372
---------- --------- ----------- ----------- ---------
---------- --------- ----------- ----------- ---------
Current liabilities:
Current portion of notes payable............... $ 2,206 $ 3,568 $ 450 $ (4,018)(c) $ 2,206
Accounts payable............................... 23,703 1,775 941 -- 26,419
Accrued liabilities............................ 18,581 3,975 365 (1,287)(e) 21,634
---------- --------- ----------- ----------- ---------
Total current liabilities.................... 44,490 9,318 1,756 (5,305) 50,259
Long-term liabilities:
Notes payable.................................. 183,054 20,468 194 102,734(c) 306,450
Deferred tax liability......................... 1 468 -- -- 469
Other liabilities.............................. 5,968 309 -- 500(f) 6,777
---------- --------- ----------- ----------- ---------
Total long-term liabilities.................. 189,023 21,245 194 103,234 313,696
---------- --------- ----------- ----------- ---------
Total liabilities............................ 233,513 30,563 1,950 97,929 363,955
Stockholder's equity:
Common stock................................... -- 13 125 (138)(g) --
Paid-in-capital................................ 134,852 5,239 -- (5,239)(h) 134,852
Retained earnings (accumulated deficit)........ (1,630) 6,002 1,080 (29,918)(i) (24,466)
Accumulated other comprehensive income......... 31 -- -- -- 31
Outstanding warrants........................... -- 146 -- (146)(j) --
---------- --------- ----------- ----------- ---------
Total stockholder's equity................... 133,253 11,400 1,205 (35,441) 110,417
---------- --------- ----------- ----------- ---------
Total liabilities and stockholder's
equity..................................... $ 366,766 $ 41,963 $ 3,155 $ 62,488 $ 474,372
---------- --------- ----------- ----------- ---------
---------- --------- ----------- ----------- ---------
20
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(DOLLARS IN THOUSANDS)
(a) Represents adjustments to cash of $1,168 in connection with the acquisitions of Heat and
Champagne.
--------
Cash not purchased in the acquisition of Champagne................... $ (25)
Cash purchased in the acquisition of Heat utilized to pay down a
portion of the revolving credit facility borrowed to purchase
such cash.......................................................... (1,143)
--------
Net eliminated cash.................................................. $ (1,168)
--------
--------
(b) Represents the excess of cost over the fair value of the net assets
in the acquisitions of Heat and Champagne.
Purchase price for Heat acquisition.................................. $ 85,000
Book value of the net assets of Heat, which approximates fair
value (net assets excludes cash and deferred financing fees to
be retired and all current and long-term notes payable)............ 15,603
---------
Excess of cost over fair value of assets acquired.................... $ 69,397
Purchase price for Champagne acquisition (includes $0.5 million to
be paid upon achievement of certain operational targets)........... 4,144
Book value of the net assets of Champagne, which approximates fair
value (net assets excludes cash and all current and long-term
notes payable)..................................................... 1,824
---------
Excess of cost over fair value of assets acquired.................... 2,320
Fees and expenses related to the Heat and Champagne acquisitions..... 2,090
--------
Total excess of cost over fair value of assets acquired in the
acquisitions of Heat and Champagne................................. 73,807
Elimination of existing goodwill at Heat............................. (16,563)
--------
Net increase to goodwill............................................. $ 57,244
--------
--------
(c) Represents the issuance of the outstanding notes, including
related deferred financing costs, repayment of existing debt and
the write-off of deferred financing costs.
Issuance of the outstanding notes, net of unamortized debt
discount of $2,632................................................. $172,368
--------
LESS: EXISTING DEBT REPAYMENTS
Atrium's revolving credit facility................................. $ 5,602
Atrium's term loan B............................................... 15,000
Atrium's existing senior subordinated notes........................ 29,070
---------
(49,672)
21
ELIMINATION OF EXISTING INDEBTEDNESS OF ACQUIRED COMPANIES
(LONG-TERM PORTION ONLY)
Heat............................................................... 19,768
Champagne.......................................................... 194
---------
(19,962)
--------
Net increase to notes payable...................................... $102,734
--------
--------
ELIMINATION OF CURRENT PORTION OF INDEBTEDNESS OF ACQUIRED
COMPANIES
Heat............................................................... 3,568
Champagne.......................................................... 450
---------
Net decrease in current portion of notes payable................... $ 4,018
--------
--------
DEFERRED FINANCING COSTS
Financing cost related to this offering.............................. $ 6,995
Write-off of financing costs and expenses related to debt to be
retired:
Atrium's pro rata portion of term loan B........................... (895)
Heat notes payable................................................. (1,427)
---------
(2,322)
--------
Net increase in deferred financing costs........................... $ 4,673
--------
--------
(d) Represents the tax benefit of $1,739 resulting from (1) the accreted discount paid on the
Atrium Corporation discount debentures of $570, (2) the extraordinary charge related to
the repurchase premium on the existing senior subordinated notes of $828 and (3) the
extraordinary charge related to the write-off of deferred financing costs of $341.
(e) Represents the elimination of accrued interest related to the retirement of a portion of
Atrium's term loan B and retirement of Atrium's existing senior subordinated notes.
Term loan B accrued interest......................................... $ 134
Existing senior subordinated notes accrued interest.................. 1,153
---------
Net decrease to accrued interest..................................... $ 1,287
--------
--------
(f) Represents contingent portion of Champagne purchase price of $500, to be paid in 1999
related to the achievement of certain operational targets.
(g) Represents the elimination of the historical common stock of Heat and Champagne of $138.
(h) Represents the elimination of the historical additional paid-in capital of Heat of
$5,239.
(i) Represents the elimination of the historical retained earnings of Heat and Champagne, a
distribution to Atrium Corporation to repurchase $20,000 of the discount debentures,
elimination of deferred finance charges related to the repayment of existing debt and an
extraordinary charge related to a repurchase premium on the retirement of existing senior
subordinated notes.
Heat retained earnings............................................... 6,002
Champagne retained earnings.......................................... 1,080
---------
Total eliminated historical retained earnings........................ 7,082
22
Distribution to Atrium Corporation to repurchase a portion of
discount debentures................................................ 20,000
Distribution to Atrium Corporation to pay accreted discount on
discount debentures (net of tax)................................... 930
Extraordinary charge related to a tender premium on retirement of
existing senior subordinated notes (net of tax).................... 1,352
---------
22,282
Write-off of financing costs and expenses related to a pro rata
portion of Atrium's term loan B (net of tax)....................... 554
--------
Net decrease to retained earnings.................................... $ 29,918
--------
--------
(j) Represents the elimination of outstanding warrants at Heat retired in
connection with the acquisition of Heat.
23
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
PREVIOUS
ATRIUM AS REGISTRANT
REPORTED ATRIUM MASTERVIEW DARBY
JAN. 1, JAN. 1, JAN. 1, 1998 JAN. 1, DELTA
1998 TO 1998 TO TO 1998 TO YEAR ENDED
DEC. 31, OCT. 2, MARCH 27, OCT. 2, DECEMBER 31, PRO FORMA PRO FORMA
1998 1998 1998 1998 1998 ADJUSTMENTS(1) ATRIUM(1)
----------- ----------- ------------- ----------- --------------- --------------- -----------
Net sales.................... $ 211,059 $ 167,418 $ 6,219 $ 16,081 $ 8,832 -- $ 409,609
Cost of goods sold........... 159,140 109,235 4,687 9,679 6,039 -- 288,780
----------- ----------- ------ ----------- ------ ------- -----------
Gross profit............... 51,919 58,183 1,532 6,402 2,793 -- 120,829
Operating expenses:
Selling, delivery, general
and administrative
expenses................. 39,754 36,310 646 2,430 2,539 (409)(a) 81,270
Amortization expense....... 2,133 1,394 188 586 -- 1,068(c) 5,369
Special charges............ -- 7,452 -- -- -- (7,452)(e) --
Stock option compensation
expense.................. 3,851 5,265 -- 141 -- -- 9,257
----------- ----------- ------ ----------- ------ ------- -----------
45,738 50,421 834 3,157 2,539 (6,793) 95,896
----------- ----------- ------ ----------- ------ ------- -----------
Income (loss) from
operations............. 6,181 7,762 698 3,245 254 6,793 24,933
Interest expense............. 9,081 9,545 158 1,277 155 (4,222)(f) 15,994
Other income (expense),
net........................ 571 (286) (173) 8 (108) 171(i) 183
----------- ----------- ------ ----------- ------ ------- -----------
Income before income
taxes.................. (2,329) (2,069) 367 1,976 (9) 11,186 9,122
Provision (benefit) for
income taxes............... (149) (732) -- 995 -- 4,529(j) 4,643
Extraordinary items.......... 639 3,525 -- 116 -- (4,280)(k) --
----------- ----------- ------ ----------- ------ ------- -----------
Net income (loss)............ $ (2,819) $ (4,862) $ 367 $ 865 $ (9) $ 10,937 $ 4,479
----------- ----------- ------ ----------- ------ ------- -----------
----------- ----------- ------ ----------- ------ ------- -----------
HEAT CHAMPAGNE
YEAR ENDED YEAR ENDED ATRIUM AFTER
DECEMBER 31, DECEMBER 31, PRO FORMA ATRIUM
1998 1998 ADJUSTMENTS TRANSACTIONS
------------- ------------- ----------- ------------
Net sales.................... $ 73,458 10,012 -- $ 493,079
Cost of goods sold........... 41,780 6,152 -- 336,712
------------- ------------- ----------- ------------
Gross profit............... 31,678 3,860 -- 156,367
Operating expenses:
Selling, delivery, general
and administrative
expenses................. 21,680 3,295 200(b) 106,445
Amortization expense....... 685 -- 1,494(d) 7,548
Special charges............ -- -- -- --
Stock option compensation
expense.................. -- -- -- 9,257
------------- ------------- ----------- ------------
22,365 3,295 1,694 123,250
------------- ------------- ----------- ------------
Income (loss) from
operations............. 9,313 565 (1,694) 33,117
Interest expense............. 2,330 59 11,787(g) 31,902
1,732(h)
Other income (expense),
net........................ (415) -- -- (232)
------------- ------------- ----------- ------------
Income before income
taxes.................. 6,568 506 (15,213) 983
Provision (benefit) for
income taxes............... 2,519 173 (5,213)(j) 2,122
Extraordinary items.......... -- -- -- --
------------- ------------- ----------- ------------
Net income (loss)............ $ 4,049 $ 333 $ (10,000) $ (1,139)
------------- ------------- ----------- ------------
------------- ------------- ----------- ------------
- ------------------------------
(1) Prior to the Heat and Champagne acquisitions and the offering of the
outstanding notes.
24
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS)
ATRIUM HEAT
THREE THREE CHAMPAGNE
MONTHS DELTA MONTHS THREE MONTHS
ENDED FROM JANUARY 1, ENDED ENDED ATRIUM AFTER
MARCH 31, 1999 TO JANUARY MARCH 31, MARCH 31, PRO FORMA ATRIUM
1999(1) 27, 1999 1999 1999 ADJUSTMENTS TRANSACTIONS
----------- --------------- ----------- ------------- ------------- ------------
Net sales........................... $ 106,842 $ 508 $ 13,642 $ 2,295 $ -- $ 123,287
Cost of goods sold.................. 74,708 417 8,970 1,830 -- 85,925
----------- ----- ----------- ------ ------------- ------------
Gross profit...................... 32,134 91 4,672 465 -- 37,362
Operating expenses:
Selling, delivery, general and
administrative expenses......... 23,151 118 5,769 484 (16)(b) 29,506
Amortization expense.............. 1,889 -- 182 12 1,708(d) 3,791
Special charges................... 1,762 -- -- -- (1,762)(e) --
----------- ----- ----------- ------ ------------- ------------
26,802 118 5,951 496 (70) 33,297
----------- ----- ----------- ------ ------------- ------------
Income (loss) from operations... 5,332 (27) (1,279) (31) 70 4,065
Interest expense.................... 4,346 12 530 16 2,489(g) 7,870
477(h) --
Other income (expense), net......... 32 -- 29 8 -- 69
----------- ----- ----------- ------ ------------- ------------
Income before income taxes...... 1,018 (39) (1,780) (39) (2,896) (3,736)
Provision (benefit) for income
taxes............................. 828 -- (660) -- (451)(j) (283)
----------- ----- ----------- ------ ------------- ------------
Net income (loss)................... $ 190 $ (39) $ (1,120) $ (39) $ (2,445) $ (3,453)
----------- ----- ----------- ------ ------------- ------------
----------- ----- ----------- ------ ------------- ------------
- ------------------------------
(1) Prior to the Heat and Champagne acquisitions and the offering of the
outstanding notes.
25
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS)
(a) Represents the adjustment of $409 of certain general and administrative expenses that
were eliminated in connection with the 1998 recapitalization related to insurance,
professional fees and transportation costs.
(b) Represents the net change in management fees payable by Atrium as a result of the
acquisition of Heat and Champagne.
(c) Represents the net increase in amortization expense relating to goodwill for Atrium as
a result of the 1998 recapitalization:
Amortization of $214,749 of goodwill being amortized over
40 years............................................... $ 5,369
Elimination of historical goodwill amortization:
Atrium................................................... $ 2,133
Atrium (previous registrant)............................. 1,394
Masterview............................................... 188
Darby.................................................... 586
---------
Total.................................................... (4,301)
---------
Net increase in goodwill amortization expense as a result
of the 1998 recapitalization........................... $ 1,068
---------
---------
(d) Represents increase in amortization expense on goodwill associated with the acquisition
of Delta, Heat and Champagne.
THREE
YEAR ENDED MONTHS
DECEMBER 31, ENDED MARCH
1998 31, 1999
--------------- -----------
Amortization over 40 years of goodwill associated with
the Delta, Heat and Champagne acquisitions............. $ 1,903 $ 1,845
Elimination of historical goodwill amortization of
Heat................................................... (409) (137)
------- -----------
Net increase in amortization of goodwill................. $ 1,494 $ 1,708
------- -----------
------- -----------
(e) Represents decrease in special charges from one-time expenses for management bonuses,
transaction expenses and non-compete fees as a result of the 1998 recapitalization, as
follows:
THREE
YEAR ENDED MONTHS
DECEMBER 31, ENDED MARCH
1998 31, 1999
--------------- -----------
Management bonuses....................................... $ 3,885 $ --
Transaction expenses..................................... 2,780 --
Write-off of non-compete fees............................ 787 --
Severance benefits....................................... -- 1,762
--------- ---------
Net decrease in special charges.......................... $ 7,452 $ 1,762
--------- ---------
--------- ---------
26
(f) Represents the adjustment to interest expense had Atrium's December 31, 1998 capital
structure been in place as of January 1, 1998, and the elimination of Darby, Delta and
Masterview historical interest expense.
Interest expense resulting from the borrowing of $29,070
at 10.500% on Atrium's existing senior subordinated
notes.................................................. $ 3,052
Interest expense resulting from the borrowing of $4,118
at 9.125% on Atrium's revolving credit facility........ 376
Interest expense resulting from the borrowing of $74,750
at 8.499% on Atrium's term loan B...................... 6,353
Interest expense resulting from the borrowing of $70,680
at 8.708% on Atrium's term loan C...................... 6,155
Interest expense resulting from the borrowing of $609 at
9.500% on other notes payable.......................... 58
-------
Total pro forma interest expense on capital structure as
of December 31, 1998................................... $ 15,994
Elimination of historic interest expense of Atrium,
Darby, Delta and Masterview............................ (20,216)
---------
Net decrease to interest expense as a result of the 1998
Recapitalization....................................... $ (4,222)
---------
---------
(g) Represents net increase in interest expense resulting from the offering of the
outstanding notes and the repayment of existing debt.
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1999
--------------- -----------
Interest expense resulting from the borrowing of $175,000
at 10.500% on the outstanding notes.................... $ 18,375 $ 4,594
Interest expense resulting from the borrowing of $59,750
and $59,500 at 8.624% and 8.085%, respectively, on
Atrium's term loan B................................... 5,152 1,202
Interest expense resulting from the borrowing of $70,680
and $70,430 at 8.833% and 8.345%, respectively, on
Atrium's term loan C................................... 6,243 1,469
Interest expense resulting from the borrowing of $1,309
and $6,358 at 9.500% and 8.053%, respectively, on other
notes payable.......................................... 124 128
--------- ---------
Total pro forma interest expense......................... 29,894 7,393
Elimination of Atrium pro forma interest expense before
Atrium transactions.................................... (15,994) (4,346)
Elimination of historic interest expense of Delta, Heat
and Champagne.......................................... (2,113) (558)
--------- ---------
Net increase in interest expense as a result of the
Atrium transactions.................................... $ 11,787 $ 2,489
--------- ---------
--------- ---------
27
(h)> Represents increase in amortization expense on deferred finance costs associated with
the acquisition of Heat and Champagne and the retirement of the existing senior
subordinated notes and a portion of the term loan B.
THREE
YEAR ENDED MONTHS
DECEMBER 31, ENDED MARCH
1998 31, 1999
--------------- -----------
Amortization of deferred finance costs associated with
the Heat and Champagne acquisitions.................... $ 700 $ 175
Amortization of unamortized debt discount on the
outstanding notes...................................... 157 39
Amortization of historical deferred finance costs not
written off............................................ 1,151 308
Amortization of historical Heat deferred finance costs... (276) (45)
--------- ---------
Net increase in amortization expense of deferred finance
costs.................................................. $ 1,732 $ 477
--------- ---------
--------- ---------
(i) Represents decrease in other expense through the elimination of one-time bonuses and
associated payroll taxes, totaling $171, paid to certain members of senior management
of Masterview in connection with the Masterview acquisition on March 27, 1998.
(j) Represents the income tax effect of the pro forma adjustments reflected above assuming
an effective income tax rate of 38%, adjusting for additional goodwill which is not
deductible for tax purposes.
(k) Represents the decrease in extraordinary credit charges incurred in connection with the
write-off of deferred finance costs on the retirement of certain credit facilities in
the 1998 recapitalization as follows:
ATRIUM (PREVIOUS REGISTRANT)
Revolving credit facility and certain term loans
deferred finance costs................................. $ 955
Existing senior subordinated notes deferred finance
costs.................................................. 4,022
Repurchase premium on existing senior subordinated
notes.................................................. 709
Tax effect at 38%........................................ (2,161)
---------
$ 3,525
WING
Existing notes payable-deferred finance costs............ 1,031
Tax effect at 38%........................................ (392)
---------
639
DARBY
Existing notes payable deferred finance costs............ 190
Tax effect at 38%........................................ (74)
---------
116
---------
Net decrease to extraordinary charges.................... $ 4,280
---------
---------
28
INDEX TO EXHIBITS
EXHIBIT
NUMBER
-------
*2.1 Stock Purchase Agreement, dated as of April 20, 1999,
among Heat, Inc., 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;
*99.1 Press Release of Atrium Companies, Inc. dated May 19,
1999.
- ----------------------
* Incorporated by reference from the Registrant's Report on Form 8-K dated May
17,1999 and filed on June 1, 1999.