<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
----------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission File Number: 333-20095
------------------------------------------------
ATRIUM COMPANIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2642488
- - ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1341 W. MOCKINGBIRD LANE, SUITE 1200W, DALLAS, TEXAS 75247, (214) 630-5757
- - -------------------------------------------------------------------------------
(Address of principal executive offices, including zip code and telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
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ATRIUM COMPANIES, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997......................3
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 1998 and 1997...................................................................4-5
Consolidated Statements of Comprehensive Income for the Three and Nine Months
Ended September 30, 1998 and 1997.............................................................6-7
Consolidated Statement of Stockholder's Equity (Deficit) for the Nine Months
Ended September 30, 1998........................................................................8
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997.....................................................................9
Notes to Consolidated Financial Statements..................................................10-16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................17-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................20
Items 2, 3, 4 and 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K...............................................................20
Signatures..............................................................................................21
Exhibit Index...........................................................................................22
</TABLE>
2
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ATRIUM COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 1 $ 1
Equity securities - available for sale...................... 113 27
Accounts receivable, net.................................... 32,838 24,376
Inventories................................................. 20,823 16,534
Prepaid expenses and other current assets................... 1,056 1,608
Deferred tax asset.......................................... 1,761 692
------------ -----------
Total current assets.................................. 56,592 43,238
PROPERTY, PLANT, AND EQUIPMENT, net........................... 18,391 16,388
GOODWILL, net................................................. 37,629 14,884
DEFERRED FINANCING COSTS, net................................. 4,977 4,961
OTHER ASSETS.................................................. 4,114 3,904
------------ -----------
Total assets.......................................... $ 121,703 $ 83,375
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of notes payable............................ $ 2,050 $ -
------------ -----------
Accounts payable............................................ 15,566 10,007
Accrued liabilities......................................... 12,787 7,102
------------ -----------
Total current liabilities............................. 30,403 17,109
LONG-TERM LIABILITIES:
Notes payable............................................... 116,935 100,000
Deferred tax liability...................................... 1,992 1,058
Other long-term liabilities................................. 300 -
------------ -----------
Total long-term liabilities........................ 119,227 101,058
------------ -----------
Total liabilities.................................. 149,630 118,167
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock $.01 par value, 3,000 shares authorized,
100 shares issued and outstanding......................... - -
------------ -----------
Paid-in capital............................................. 34,449 32,790
Accumulated deficit......................................... (62,383) (67,503)
Accumulated other comprehensive income (loss)............... 7 (79)
------------ -----------
Total stockholder's deficit........................ (27,927) (34,792)
------------ -----------
Total liabilities and stockholder's deficit.. $ 121,703 $ 83,375
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
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ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
NET SALES................................................. $ 60,937 $ 54,516
COST OF GOODS SOLD........................................ 38,710 35,276
---------- ----------
Gross profit............................................ 22,227 19,240
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses.. 13,328 12,300
Stock option compensation expense....................... 937 52
---------- ----------
14,265 12,352
---------- ----------
Income from operations.............................. 7,962 6,888
INTEREST EXPENSE.......................................... 3,303 2,947
OTHER INCOME (EXPENSE), net............................... (63) 89
---------- ----------
Income before income taxes.......................... 4,596 4,030
PROVISION FOR INCOME TAXES................................ 1,863 1,599
---------- ----------
NET INCOME ............................................... $ 2,733 $ 2,431
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
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ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
NET SALES................................................... $ 167,418 $ 139,793
COST OF GOODS SOLD.......................................... 109,235 89,656
---------- ----------
Gross profit............................................ 58,183 50,137
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses.. 37,704 33,114
Stock option compensation expense....................... 1,384 255
---------- ----------
39,088 33,369
---------- ----------
Income from operations........................ 19,095 16,768
INTEREST EXPENSE....................................... 9,545 8,542
OTHER INCOME (EXPENSE), net............................ (286) 1,127
---------- ----------
Income before income taxes.................... 9,264 9,353
PROVISION FOR INCOME TAXES............................. 3,574 3,485
---------- ----------
NET INCOME............................................. $ 5,690 $ 5,868
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net income .......................................................... $ 2,733 $ 2,431
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period... -- (21)
-------- --------
Comprehensive income ............................................ $ 2,733 $ 2,410
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE>
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net income .......................................................... $ 5,690 $ 5,868
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period... 86 (11)
-------- --------
Comprehensive income ............................................ $ 5,776 $ 5,857
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
7
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ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENT OF
STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER TOTAL
----------------------- PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) DEFICIT
-------------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C> <C>
Balance, December 31, 1997............ 100 $ - $ 32,790 $ (67,503) $ (79) $ (34,792)
Contributions from Holding......... - - 275 - - 275
Distributions to Holding........... - - - (570) - (570)
Stock option compensation expense.. - - 1,384 - - 1,384
Other comprehensive income......... - - - - 86 86
Net income......................... - - - 5,690 - 5,690
-------- ------- --------- --------- ----------- -----------
Balance, September 30, 1998........... 100 $ - $ 34,449 $ (62,383) $ 7 $ (27,927)
-------- ------- --------- --------- ----------- -----------
-------- ------- --------- --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
8
<PAGE>
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................. $ 5,690 $ 5,868
Adjustments to reconcile net income to net cash provided by operating
activities: ................................................................
Depreciation and amortization............................................. 3,246 2,384
Amortization of deferred financing costs.................................. 493 482
Stock option compensation expense......................................... 1,384 255
Gain on retirement of assets.............................................. (41) (9)
Gain on sale of equity securities......................................... - (2)
Deferred tax provision (benefit).......................................... (135) 214
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net................................................ (5,364) (4,773)
Inventories............................................................. (2,654) (5,761)
Prepaid expenses and other current assets............................... 794 1,020
Accounts payable........................................................ 4,182 2,004
Accrued liabilities..................................................... 4,060 3,056
----------- -----------
Net cash provided by operating activities........................... 11,655 4,738
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.................................. (1,377) (2,326)
Proceeds from sale of assets................................................ 96 15
Purchases of equity securities.............................................. - (480)
Proceeds from sale of equity securities..................................... - 375
Payment for acquisition, net of cash acquired............................... (26,830) (6,505)
Increase in other assets.................................................... (1,374) (807)
----------- -----------
Net cash used in investing activities............................... (29,485) (9,728)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable...................................... 17,500 -
Payment on note payable..................................................... (800) -
Net borrowings under revolving credit facility.............................. 2,285 2,961
Checks drawn in excess of bank balances..................................... (352) 1,752
Deferred financing costs.................................................... (508) (425)
Contributions from Holding.................................................. 275 196
Distributions to Holding.................................................... (570) (110)
----------- -----------
Net cash provided by financing activities........................... 17,830 4,374
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... - (616)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................ 1 617
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD...................................... $ 1 $ 1
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE:
Cash paid (received) during the period for:
Interest............................................................ $ 6,314 $ 5,069
Income taxes, net of refunds........................................ (141) 1,512
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
9
<PAGE>
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION:
The unaudited consolidated results of operations and statements of comprehensive
income of Atrium Companies, Inc. (the "Company") for the three months and nine
months ended September 30, 1998 and 1997, cash flows and stockholder's equity
(deficit) for the nine months ended September 30, 1998 and 1997 and financial
position as of September 30, 1998 and December 31, 1997 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 RegulationS-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, 1997, 1996 and 1995 included in the Company's Form 10-K as
filed with the Securities and Exchange Commission on March 30, 1998. 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.
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:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
Raw materials ............................... $ 15,896 $ 13,653
Work-in-process ............................. 707 705
Finished goods .............................. 4,631 4,056
------------ -----------
21,234 18,414
LIFO reserve ................................ (411) (1,880)
------------ -----------
$ 20,823 $ 16,534
------------ -----------
------------ -----------
</TABLE>
10
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4. NOTES PAYABLE:
Notes payable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
Senior subordinated notes ................... $ 100,000 $ 100,000
Senior term loan facility ................... 16,700 --
Revolving credit facility ................... 2,285 --
------------ -----------
118,985 100,000
Current portion of notes payable ............ 2,050 --
------------ -----------
$ 116,935 $ 100,000
------------ -----------
------------ -----------
</TABLE>
In connection with the acquisition of Masterview Window Company, LLC (the
"Acquisition"), the Company entered into an amended and restated credit
agreement (the "Credit Agreement") with Bankers Trust Company, dated as of March
27, 1998. The Credit Agreement provided for a $17,500 senior term loan facility
and a $20,000 revolving credit facility (collectively, the "Credit Facility").
Annual unused commitment fees are 0.5% of the unborrowed portion of the $20,000
revolving credit facility. Borrowing rates are based upon the lender's prime
rate plus a margin of 1.25% or a Euro-dollar based rate plus a margin of 2.25%.
The term loan is payable in equal quarterly installments aggregating $1,200 in
1998, $2,200 in 1999, $3,000 in 2000, $3,200 in 2001, $3,400 in 2002, $3,600 in
2003, with the remaining payment of $900 due and payable on March 31, 2004.
The Company is required to make mandatory prepayments of the term loan and,
after repayment in full of the term loan, reductions of the revolving credit
commitments (along with a corresponding repayment of revolving loans in excess
of the reduced commitment), at times and subject to certain exceptions, in
respect of (a) 100% of the net proceeds of issuances of equity and debt, sales
of assets, and condemnations and casualty proceeds, and (b) with respect to the
term loans only, 75% of excess cash flow (subject to reductions to 50% based on
the Company meeting a certain leverage ratio). The Credit Facility terminates on
March 31, 2004.
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
financial position, results of operations or liquidity of the Company.
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 PRPs 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. ACQUISITIONS:
MASTERVIEW ASSET PURCHASE:
On March 27, 1998, through its newly-formed subsidiary, Atrium Door and Window
Company of Arizona ("ADW-Arizona"), the Company acquired substantially all of
the assets of Masterview Window Company, LLC ("Masterview"), a privately held
window and door company located in Phoenix, Arizona, for
11
<PAGE>
approximately $26,800 including fees and other transaction expenses. The
Company financed the Acquisition through its Credit Facility, which included
a $17,500 senior term loan with the remainder of the purchase price of
approximately $9,300 being drawn from the $20,000 revolving credit facility.
The Acquisition has been accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations." 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. The purchase price
allocation is as follows:
<TABLE>
<S> <C>
Cash and cash equivalents........................ $ 3
Accounts receivable, net......................... 3,099
Inventories...................................... 1,635
Prepaid expenses and other current assets........ 251
Property, plant and equipment, net............... 2,702
Goodwill......................................... 22,797
Current liabilities.............................. (3,354)
Long-term liabilities............................ (300)
-----------
Total purchase price......................... $ 26,833
-----------
-----------
</TABLE>
The Company's Consolidated Statements of Operations for the three months and
nine months ended September 30, 1998 and 1997 include the operations of Atrium
Door and Window Company-West Coast ("ADW-West Coast") and ADW-Arizona from the
dates of acquisition, July 1, 1997 and March 27, 1998, respectively. The
following table presents the historical consolidated operating results of the
Company for the three months and nine months ended September 30, 1998 and 1997,
compared to pro forma operating results for such periods. The following
unaudited pro forma information presents consolidated operating results as
though the acquisitions of ADW-West Coast and ADW-Arizona had occurred at the
beginning of the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
------------------------- --------------------------
Actual Pro Forma Actual Pro Forma
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales........ $ 60,937 $ 60,937 $ 54,516 $ 60,468
Net income....... 2,733 2,733 2,431 2,418
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------------- --------------------------
Actual Pro Forma Actual Pro Forma
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales........ $ 167,418 $ 173,638 $ 139,793 $ 164,676
Net income....... 5,690 5,820 5,868 6,436
</TABLE>
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 on a senior subordinated basis by its
wholly-owned subsidiaries: Atrium Door and Window Company of the Northeast,
Atrium Door and Window Company of New York and Atrium Door and Window Company
of New England
12
<PAGE>
(collectively, "ADW-Northeast"), ADW-West Coast and ADW-Arizona (collectively,
the Subsidiary Guarantors). The Company has no non-guarantor direct or indirect
subsidiaries. The operations related to the assets of ADW-West Coast and
ADW-Arizona are included since July 1, 1997 and March 27, 1998, respectively,
the dates of acquisition. 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:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Current assets................................. $ 18,353 $ 12,399
Noncurrent assets.............................. 42,375 17,148
Current liabilities............................ 3,894 1,906
Noncurrent liabilities......................... 300 -
<CAPTION>
Three Months Ended September 30,
--------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Net sales...................................... $ 13,192 $ 7,085
Gross profit................................... 4,678 2,862
Net income from continuing operations.......... 1,058 555
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Net sales...................................... $ 30,232 $ 13,279
Gross profit................................... 10,797 5,402
Net income from continuing operations.......... 2,054 869
</TABLE>
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. As of September 30, 1998, the maximum
amount of Senior Indebtedness the Company and its Subsidiary Guarantors
collectively, and in the aggregate, could incur was $45,000.
8. SUBSEQUENT EVENT:
On August 3, 1998, D and W Holdings, Inc. ("Parent"), entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Atrium Corporation
("Holding"), D and W Acquisition Corp. ("Merger Sub") and the securityholders
listed therein, to acquire all of the outstanding capital stock of Holding
for $225.0 million, through a series of transactions (the "Transactions")
described below. Holding owns 100% of the outstanding capital stock of the
Company. GE Investment Private Placement Partners II, a limited partnership
("GEIPPPII"), and Ardatrium L.L.C. ("Ardatrium") formed Parent by acquiring
all of its outstanding common stock for an aggregate purchase price of $50.0
million (the "Merger Sub Contribution"). GEIPPPII is a private equity
partnership affiliated with GE Investments, a wholly-owned
13
<PAGE>
investment management subsidiary of General Electric Company. Ardatrium is an
affiliate of Ardshiel, Inc. ("Ardshiel"), a private equity investment firm
based in New York.
The acquisition of Holding by Parent was effected through the merger on
October 2, 1998 of Merger Sub, a wholly owned subsidiary of Parent, with and
into Holding (the "Merger") pursuant to the terms of the Merger Agreement.
Prior to the Merger, Parent contributed the Merger Sub Contribution to Merger
Sub in exchange for all of Merger Sub's outstanding common stock. As a result
of the Merger, Holding became a direct wholly owned subsidiary of Parent, and
the Company became an indirect wholly owned subsidiary of Parent. Upon
completion of the Transactions, GEIPPPII and Ardshiel and its affiliates
beneficially own approximately 96.7% of the outstanding common stock of
Parent.
Pursuant to the terms of the Merger Agreement, all of the outstanding equity
securities of Holding were converted into the right to receive the merger
consideration of $93.9 million (the "Merger Consideration") in cash, net of
transaction costs of $5.7 million, assumed indebtedness of $122.7 million and
$2.7 million of equity securities of Holding, owned by certain members of
management of Holding, which were converted into comparable equity securities
of Parent. The Merger Consideration was funded with (i) $50.0 million in cash
comprising the Merger Sub Contribution that became an asset of Holding in the
Merger, (ii) $20.0 million in cash proceeds from the issuance of Senior Discount
Debentures due 2010 by Holding to GEIPPPII and Ardatrium (the "Discount
Debentures"), (iii) approximately $23.7 million in cash proceeds from a loan
from the Company (the "Intercompany Loan") which was funded by a portion of the
proceeds of a term loan to the Company under the Credit Facility (as defined
below), and (iv) $0.2 million in cash proceeds from the issuance of common
stock of Parent to certain members of management of Holding followed by a
capital contribution of such proceeds by Parent to Holding.
Prior to the Merger, GEIPPPII and Ardshiel held investments in debt and equity
securities of Wing Industries Holdings, Inc. and its subsidiary, Wing
Industries, Inc. (collectively, "WIH") and Door Holdings, Inc. and its
subsidiaries, R.G. Darby Company, Inc. and Total Trim, Inc. (collectively,
"Door"). Immediately prior to the consummation of the Merger, all of the
outstanding subordinated debt and associated warrants to purchase common stock
of WIH and Door were converted into common stock of WIH and Door, respectively.
The stockholders of WIH and Door contributed their common stock in WIH and Door
to Parent in exchange for common stock of Parent. Immediately after the
consummation of the Merger, Parent contributed all of the common stock of WIH
and Door to Holding, which in turn contributed the common stock of WIH and Door
to the Company.
Consummation of the Merger constituted a change of control (the "Change of
Control") under Section 4.8 of the indenture (the "Indenture"), dated as of
November 27, 1996, as amended, by and among the Company, the Subsidiary
Guarantors (as defined in the Indenture) and the United States Trust Company
of New York, as trustee. Such Change of Control allowed the holders of the
Company's Notes due November 15, 2006, to cause the Company to purchase the
Notes at a purchase price in cash equal to 101% of the outstanding principal
plus accrued and unpaid interest to the date of purchase (the "Change of
Control Offer"). The Change of Control Offer expired on November 6, 1998 and
approximately $70.9 million of the Notes were tendered, leaving approximately
$29.1 million of the Notes outstanding.
To finance the payment of a portion of the Merger Consideration, the
repayment of certain indebtedness of each of WIH, Door and the Company, a
portion of the Change of Control Offer and related fees and expenses, the
Company entered into the $205.0 million Credit Agreement, dated as of October
2, 1998 (the "Credit Facility"). The Credit Facility is comprised of two term
loan facilities in the amounts of $75.0 million and $100.0 million and a
revolving credit facility and letter of credit sub facility in the amounts of
$30.0 million and $5.0 million, respectively. $75.0 million of the $100.0
million term loan facility was originally placed in an escrow account (the
"Escrow") to fund a portion of the amounts payable in the Change of Control
Offer. In addition, GEIPPPII and Ardatrium deposited into escrow $25.0
million through the additional issuance of Discount Debentures by Holding to
fund a portion of the amounts payable in the Change of Control Offer. The
$70.9 million of Notes tendered were redeemed by the $25.0 million of
Discount Debentures (at 12.0%) and $45.9 million of borrowings under the
Credit Facility. The
14
<PAGE>
remaining $29.1 of the $75.0 million portion of the Credit
Facility was repaid and the Credit Facility in Escrow was reduced by this
amount.
Borrowings under the Credit Facility bear interest at the Issuer's option at
either (a) the greater of (i) the Administrative Agent's corporate base rate and
(ii) the federal funds rate plus 0.5% per annum, plus in each case, the
applicable margin, as defined in the Credit Facility or (b) LIBOR plus the
applicable margin.
The acquisition of Holding by Parent and the merger of Merger Sub, with and
into Holding was accounted for under the purchase method of accounting as a
reverse acquisition. Accordingly, the assets acquired and liabilities assumed
of the Company will be recorded at their estimated fair values during the
fourth quarter as the transactions were completed on October 2, 1998 and any
excess of purchase price over fair value of the assets acquired will be
recorded as goodwill. The following table presents the historical
consolidated operating results of the Company for the nine months ended
September 30, 1998 and 1997, compared to the pro forma operating results for
such periods. The following unaudited pro forma information presents
consolidated operating results of the Company, WIH and Door as through the
transactions had occurred at the beginning of the periods presented. The pro
forma information also includes the effects of the following events which
were accounted for under the purchase method of accounting if they had
occurred at the beginning of the periods presented:
On July 1, 1998, the Company purchased the assets of the Western Window
Division of Gentek (ADW-West Coast).
On November 10, 1997, WIH purchased certain assets of the Door Division
of Super Millwork, Inc.
On January 8, 1998, Door acquired all of the outstanding common stock
of Darby.
On March 27, 1998, the Company purchased substantially all of the
assets of Masterview (ADW - Arizona.
In computing the pro forma information, net income has been reduced by the
additional interest expense, including related debt issuance costs, and
amortization expense, relating to goodwill, that will be incurred as a result
of the Merger. These pro forma adjustments have been recorded net of the
income tax effect using the federal statutory income tax rate of 34%.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------------- --------------------------
Actual Pro Forma Actual Pro Forma
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales............... $ 167,418 $ 296,374 $ 139,793 $ 267,270
Net income.............. 5,690 1,862 5,868 3,392
EBITDA(1)............... 23,439 32,996 20,534 29,686
</TABLE>
(1) EBITDA, defined as income before interest, income taxes, depreciation and
amortization, is not intended to represent cash flows from operations as
defined by GAAP and should not be considered as an indicator of operating
performance or an alternative to cash flow or operating income (as measured
by GAAP) or as a measure of liquidity, it is included herein to provide
additional information with respect to the ability of the combined company
to meet its future debt service, capital expenditures and working capital
requirements. The Company believes EBITDA provides investors and analysts
in the building materials industry the necessary information to analyze and
compare historical results of the Company on a comparable basis with other
companies on the basis of operating performance, leverage and liquidity.
Additionally, as EBITDA is not defined by GAAP, it may not be calculated
or comparable to other similarly titled measures within the building
materials industry.
15
<PAGE>
The pro forma information presented is based upon available information and
certain assumptions that the Company believes are reasonable. The pro forma
information does not purport to be indicative of the results which would have
been reported if the transaction had occurred at the beginning of the periods
presented, or which may be reported in the future. On October 2, 1998, in
accordance with Items 1 and 2 of Form 8-K, the Company filed a Current Report
on Form 8-K discussing the Change of Control of the Company and provided
additional information, including complete pro forma financial statements as
required, dated as of June 30, 1998 and the six months ended June 30, 1998
and the year ended December 31, 1997.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
FORWARD LOOKING STATEMENTS AND RISK FACTORS
From time to time, the Company issues statements in public filings (including
this Form 10-Q) or press releases, or officers of the Company make public
oral statements with respect to the Company that may be considered forward
looking within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Act of 1934, as amended. This
Quarterly Report on Form 10-Q contains certain forward looking statements,
which are identified by words such as "believes," "anticipates," "expects,"
and words of similar import. The Company disclaims any obligation to update
any such statements or publicly announce any updates or revisions to adjust
the forward looking statements contained herein to reflect any change in the
Company's expectation with regards thereto or any change in events,
conditions, circumstances or assumptions underlying such statements. Actual
results could differ materially from those projected in the forward-looking
statements due to a number of factors, including but not limited to the
demand for new home construction, interest rates, job formation, migration of
the inter/intra-U.S. population, the competitive environment for the
Company's products and services, the timing of new orders, the degree of
market penetration of the Company's new products and other factors set forth
herein or in other documents filed by the Company with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
The operations of the Company are cyclical in nature and generally result in
significant increases during the peak building season which coincides with
the second and third quarters of the year. Accordingly, results of operations
for the three months and nine months ended September 30, 1998 are not
necessarily indicative of results expected for the full year.
NET SALES. Net sales increased by $6,421 from $54,516 during the third
quarter of 1997 to $60,937 during the third quarter of 1998 and $27,625 from
$139,793 during the first nine months of 1997 to $167,418 during the first
nine months of 1998. The increase was primarily due to sales from ADW-West
Coast and ADW-Arizona, acquired in July of 1997 and March of 1998,
respectively. Additionally, the Company (i) experienced growth at the Atrium
Wood division, which was selected to be the supplier in a national patio door
sales program beginning the third quarter of 1997, (ii) the addition of a
significant customer at Extruders, and (iii) continued growth at Kel-Star
Building Products.
COST OF SALES. Cost of sales decreased from 64.7% of net sales during the
third quarter of 1997 to 63.5% during the third quarter of 1998 and increased
from 64.1% of net sales during the first nine months of 1997 to 65.2% during
the first nine months of 1998. The decrease in cost of sales as a percentage
of net sales during the third quarter of 1998 was due primarily to a decrease
in overall raw material costs and improvements in material usage at the
Atrium Wood division, due to product reengineering which occurred during
1997. These decreases were partially offset by an increase in direct labor
costs. The increase in cost of sales as a percentage of net sales during the
first nine months of 1998 was primarily due to an increase in raw material
and direct labor costs, which offset material usage improvements at Atrium
Wood.
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, delivery,
general and administrative expenses increased $1,028 from $12,300 (22.6% of
net sales) during the third quarter of 1997 to $13,328 (21.9% of net sales)
during the third quarter of 1998 and $4,590 from $33,114 (23.7% of net sales)
during the first nine months of 1997 to $37,704 (22.5% of net sales) during
the first nine months of 1998. The increase was primarily due to the
inclusion of selling, delivery, general and administrative expenses of
ADW-Arizona and ADW-West Coast for six and nine months, respectively, as well
as an increase in amortization expense related to software implementation
costs, resulting from additional amounts capitalized during 1997.
Additionally, selling and delivery expenses increased due to the increase in
sales.
17
<PAGE>
STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense
increased $885 from $52 during the third quarter of 1997 to $937 during the
third quarter of 1998 and $1,129 from $255 during the first nine months of
1997 to $1,384 during the first nine months of 1998. The increase in stock
option compensation expense was due primarily to the increase in the
underlying stock value associated with certain variable options.
INTEREST EXPENSE. Interest expense increased $356 from $2,947 during the
third quarter of 1997 to $3,303 during the third quarter of 1998 and $1,003
from $8,542 during the first nine months of 1997 to $9,545 during the first
nine months of 1998. The increase was due to an increase in average
outstanding debt related to the $17,500 senior term loan issued in connection
with the Acquisition, which took place on March 27, 1998.
OTHER INCOME (EXPENSE). Other income (expense) decreased $152 from other
income of $89 during the third quarter of 1997 to other expense of $63 during
the third quarter of 1998 and $1,413 from other income of $1,127 during the
first nine months of 1997 to other expense of $286 during the first nine
months of 1998. The first nine months of 1997 include an insurance settlement
of $1,193 from the business interruption portion of the Company's insurance
claim filed as a result of the January 1997 fire at the Extruders facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $20,000 revolving credit facility with Bankers Trust
Company, which expires March 2004. Borrowings under the revolving credit
facility were $2,285 at September 30, 1998, excluding outstanding letters of
credit, totaling $1,809. Letters of credit secure workers compensation
benefit payments and certain other obligations. At September 30, 1998 the
Company had additional borrowing capacity of approximately $15,906. The
Company believes that the combination of cash generated from operations and
borrowings available under the revolving credit facility will provide
sufficient funds for its capital requirements for the time period.
Cash provided by operations was $11,655 for the first nine months of 1998 as
compared to cash provided by operations of $4,738 for the same period in
1997. The increase in cash provided by operations in the 1998 period was
primarily due to a significant build-up in inventories at Atrium Wood, which
occurred during the second quarter of 1997. This increase was due to the
selection of Atrium Wood to be the supplier of a national patio door sales
program, which began during the third quarter of 1997. Cash used in investing
activities increased from $9,728 during the first nine months of 1997 to
$29,485 during the first nine months of 1998, primarily due to the
Acquisition, which totaled approximately $26,800. Cash provided by financing
activities increased from $4,374 during the first nine months of 1997 to
$17,830 during the first nine months of 1998, largely due to the Acquisition,
which was financed with a $17,500 term loan.
Capital expenditures totaled $1,377 during the first nine months of 1998
compared to $2,326 during the 1997 period. Expenditures during the 1998
period were primarily used to increase capacity of and further automate the
Company's extrusion and window manufacturing plants, and to further enhance
the Company's management information systems.
Pursuant to the Credit Facility, the Company, after giving effect to the
transaction described in Note 8 (the "Combined Company") has two term loan
facilities in the amounts of $75,000 and $100,000 and a revolving credit
facility and letter of credit-sub facility in the amounts of $30,000 and
$5,000, respectively. Borrowings under the Credit Facility were $100,000 at
October 2, 1998, excluding the proceeds from the term loan placed in Escrow
of $75,000 and outstanding letters of credit totalling $2,600. At October 2,
1998, the Combined Company had additional borrowing capacity of $27,400.
18
<PAGE>
The Combined Company believes that the combination of cash generated from
operations and borrowings available under the revolving credit facility will
provide sufficient funds for its capital requirements for the time period.
YEAR 2000
Many existing computer programs use only two digits to identify a year in the
date filed. These programs were designed and developed without considering
the impact of the upcoming century change in the Year 2000. Moreover, these
programs often are highly dependent upon financial and other data that, based
on the program's inability to distinguish between the Year 2000 and other
century-end dates, could be misreported or misinterpreted and cause
significant resulting errors. If not corrected, many computer applications
could fail when processing data related to the Year 2000.
The analysis of the Year 2000 implications includes (i) the Company's
information technology such as software and hardware, (ii) the Company's
non-information systems or embedded technology such as microcontrollers
contained in various equipment safety systems, facilities and utilities and
(iii) the readiness of key third-party suppliers (collectively, the "Year
2000 Issue").
The Company is assessing the impact of the Year 2000 Issue and has or intends
to modify portions of its hardware and software so that its computer systems
will function properly with respect to date in the Year 2000 and thereafter.
The Company has reviewed and continues to review each operating unit for the
appropriate information system enhancements, with respect to both the Year
2000 Issue as well as strategic system upgrade. For acquired businesses, this
assessment begins during the acquisition process as part of the Company's due
diligence analysis.
To achieve its overall operating strategy, management intends to enhance its
information technology by installing new software to implement a fully
integrated manufacturing system (a "Software System") for its operating
units. The Software Systems that the Company intends to install are intended
to be Year 2000 compliant. Each operating unit was prioritized for
installation of the system based on any Year 2000 Issues, with approximately
70% of the operating units being completed as of June 30, 1998. After
determining which operating units would be prioritized, the operating units
were separated into multiple installation phases, with each phase having its
own implementation timeline. Management believes that the final phase of
implementation and installation of the Software Systems will be completed by
the second quarter of 1999.
The total amount of costs to be incurred by the Company to address these
system enhancements is estimated at $750. The Company has expensed
approximately $500 through September 30, 1998.
19
<PAGE>
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. See
Note 5 to the Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On August 12, 1998, in accordance with Items 5 and 7 of Form
8-K, the Company filed a Current Report on Form 8-K announcing
that Atrium Corporation entered into an Agreement and Plan of
Merger (the "Merger Agreement), dated as of August 3, 1998, by
and among D and W Holdings, Inc. ("Parent"), D and W
Acquisition Corp. ("Sub") and the Securityholders named
therein, pursuant to which Sub would merge with and into the
Company and the Company would become a wholly-owned subsidiary
of Parent (the "Merger").
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATRIUM COMPANIES, INC.
(Registrant)
Date: November 16, 1998 By: /s/ JEFF L. HULL
------------------- -------------------------------------
Jeff L. Hull
Chief Financial Officer and Secretary
(Principal Financial Officer)
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1
<SECURITIES> 113
<RECEIVABLES> 33,629
<ALLOWANCES> 791
<INVENTORY> 20,823
<CURRENT-ASSETS> 56,592
<PP&E> 28,701
<DEPRECIATION> 10,310
<TOTAL-ASSETS> 121,703
<CURRENT-LIABILITIES> 30,403
<BONDS> 116,935
0
0
<COMMON> 0
<OTHER-SE> (27,927)
<TOTAL-LIABILITY-AND-EQUITY> 121,703
<SALES> 167,418
<TOTAL-REVENUES> 167,418
<CGS> 109,235
<TOTAL-COSTS> 109,235
<OTHER-EXPENSES> 286
<LOSS-PROVISION> 195
<INTEREST-EXPENSE> 9,545
<INCOME-PRETAX> 9,264
<INCOME-TAX> 3,574
<INCOME-CONTINUING> 5,690
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,690
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
