<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 June 30, 1999
--------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission File Number: 333-20095
-----------------------------------------------
ATRIUM COMPANIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2642488
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1341 W. MOCKINGBIRD LANE, SUITE 1200W, DALLAS, TEXAS 75247, (214) 630-5757
- --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code
and telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
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ATRIUM COMPANIES, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION ----
<S> <C>
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998.....................................................3
Consolidated Statements of Income for the Three Months
June 30, 1999 and 1998................................................4
Consolidated Statements of Income for the Six Months
June 30, 1999 and 1998................................................5
Consolidated Statements of Comprehensive Income for the Six
Months Ended June 30, 1999 and 1998...................................6
Consolidated Statement of Stockholder's Equity for the Six
Months Ended June 30, 1999............................................7
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998................................................8
Notes to Consolidated Financial Statements.........................9-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................15-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................19
Items 2, 3, 4 and 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K.....................................19
Signatures....................................................................19
Exhibit Index.................................................................20
</TABLE>
2
<PAGE>
ATRIUM COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents .................................. $ -- $ --
Equity securities - available for sale ..................... 144 137
Accounts receivable, net ................................... 61,548 46,466
Inventories ................................................ 59,171 46,289
Prepaid expenses and other current assets .................. 8,822 7,756
Deferred tax asset ......................................... 2,343 1,249
--------- ---------
Total current assets .................................... 132,028 101,897
PROPERTY, PLANT, AND EQUIPMENT, net ............................. 39,367 26,760
GOODWILL, net ................................................... 287,396 214,749
DEFERRED FINANCING COSTS, net ................................... 17,325 11,058
OTHER ASSETS .................................................... 6,277 5,405
--------- ---------
Total assets ............................................ $ 482,393 $ 359,869
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable ........................... $ 2,216 $ 2,209
Accounts payable ........................................... 25,546 25,353
Accrued liabilities ........................................ 23,865 15,432
--------- ---------
Total current liabilities ............................... 51,627 42,994
LONG-TERM LIABILITIES:
Notes payable .............................................. 314,129 177,018
Deferred tax liability ..................................... 334 1
Other long-term liabilities ................................ 5,550 6,800
--------- ---------
Total long-term liabilities .......................... 320,013 183,819
--------- ---------
Total liabilities .................................... 371,640 226,813
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock $.01 par value, 3,000 shares authorized,
100 shares issued and outstanding ....................... -- --
Paid-in capital ............................................ 111,596 134,852
Accumulated deficit ........................................ (874) (1,820)
Accumulated other comprehensive income ..................... 31 24
--------- ---------
Total stockholder's equity ........................... 110,753 133,056
--------- ---------
Total liabilities and stockholder's equity ..... $ 482,393 $ 359,869
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
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ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
NET SALES ....................................................... $125,530 $ 32,399
COST OF GOODS SOLD .............................................. 86,858 25,732
-------- --------
Gross profit ................................................ 38,672 6,667
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses ...... 25,285 5,236
Amortization expense ........................................ 2,059 195
Special charge .............................................. 70 --
-------- --------
27,414 5,431
-------- --------
Income from operations ................................. 11,258 1,236
INTEREST EXPENSE ................................................ 6,353 1,115
OTHER INCOME, net ............................................... 115 5
-------- --------
Income before income taxes and extraordinary charge .... 5,020 126
PROVISION FOR INCOME TAXES ...................................... 2,356 120
-------- --------
Income before extraordinary charge ..................... 2,664 6
EXTRAORDINARY CHARGE ON EARLY RETIREMENT
OF DEBT ( net of income tax benefit of $1,170) ................. 1,908 --
-------- --------
NET INCOME ...................................................... $ 756 $ 6
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
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ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
NET SALES ....................................................... $232,372 $ 71,849
COST OF GOODS SOLD .............................................. 161,566 56,196
-------- --------
Gross profit ................................................ 70,806 15,653
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses ...... 48,435 11,842
Amortization expense ........................................ 3,948 341
Special charge .............................................. 1,832 --
-------- --------
54,215 12,183
-------- --------
Income from operations ................................. 16,591 3,470
INTEREST EXPENSE ................................................ 10,699 2,107
OTHER INCOME, net ............................................... 146 5
-------- --------
Income before income taxes and extraordinary charge .... 6,038 1,368
PROVISION FOR INCOME TAXES ...................................... 3,184 676
-------- --------
Income before extraordinary charge ..................... 2,854 692
EXTRAORDINARY CHARGE ON EARLY RETIREMENT
OF DEBT ( net of income tax benefit of $1,170) ................. 1,908 --
-------- --------
NET INCOME ...................................................... $ 946 $ 692
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
<PAGE>
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Net income ...................................................... $ 946 $ 692
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains arising during the period ....... 7 --
------ ------
Comprehensive income ........................................ $ 953 $ 692
====== ======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
6
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ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENT OF
STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(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 EQUITY
------ ------ -------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998................. 100 $ - $134,852 $ (1,820) $ 24 $133,056
Other comprehensive income.............. - - - - 7 7
Distributions to Atrium Corporation..... - - (23,256) - - (23,256)
Net income.............................. - - - 946 - 946
---- ---- -------- -------- ----- --------
Balance, June 30, 1999.................... 100 $ - $111,596 $ (874) $ 31 $110,753
==== ==== ======== ======== ===== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
7
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ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................... $ 946 $ 692
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ......................................... 6,339 913
Amortization of deferred financing costs .............................. 806 223
Accretion of discount ................................................. -- 67
Gain on sale of assets ................................................ (42) --
Changes in assets and liabilities, net of acquisitions in 1999:
Accounts receivable, net ............................................ (5,879) 2,711
Inventories ......................................................... (3,792) (5,191)
Prepaid expenses and other current assets ........................... 98 (103)
Accounts payable .................................................... (36) (1,692)
Accrued liabilities ................................................. 2,937 457
--------- ---------
Net cash provided by (used in) operating activities ............. 1,377 (1,923)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ............................... (6,115) (1,038)
Proceeds from sale of assets ............................................. 51 --
Payment for acquisitions, net of cash acquired ........................... (94,014) --
Increase in other assets ................................................. (2,099) (304)
--------- ---------
Net cash used in investing activities ............................... (102,177) (1,342)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of senior subordinated debt ................... 172,368 --
Net borrowings under revolving credit facility ........................... 9,612 4,737
Payments of senior subordinated notes .................................... (29,070) --
Payments on term loans B and C ........................................... (16,000) --
Distributions to Atrium Corporation ...................................... (23,256) --
Payment of other notes payable ........................................... (109) (1,563)
Payment of other long-term liabilities ................................... (2,003) (21)
Checks drawn in excess of bank balances .................................. (3,668) --
Deferred financing costs ................................................. (7,074) --
Proceeds from exercise of stock options .................................. -- 216
--------- ---------
Net cash provided by financing activities ........................... 100,800 3,369
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................................... -- 104
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................ -- 34
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................... $ -- $ 138
========= =========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest ............................................................ $ 7,318 $ 2,012
Income taxes, net of refunds ........................................ 1,142 400
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
8
<PAGE>
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION:
The unaudited consolidated financial statements of Atrium Companies, Inc.
(the "Company") for the three months and six months ended June 30, 1999 and
1998, and financial position as of June 30, 1999 and December 31, 1998 have
been prepared in accordance with generally accepted accounting principles for
interim financial reporting, the instructions to Form 10-Q, and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
These consolidated financial statements and footnotes should be read in
conjunction with the Company's audited financial statements for the fiscal
years ended December 31, 1998, 1997 and 1996 included in the Company's Form
10-K as filed with the Securities and Exchange Commission on April 15, 1999.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the interim
financial information have been included. The results of operations for any
interim period are not necessarily indicative of the results of operations
for a full year. Certain prior period amounts have been reclassified to
conform to the current period presentation.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("FAS 133") "Accounting for Derivative Instruments and Hedging
Activities" that is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will implement the provisions of
FAS 133 as required. The future adoption of FAS 133 is not expected to have a
material effect on the Company's consolidated financial position or results
of operations.
Prior to October 2, 1998, the Company's historical financial statements as
previously filed with the Securities and Exchange Commission included its
operations and the operations of its wholly-owned subsidiaries, Atrium Door
and Window Company of the Northeast, Atrium Door and Window Company of New
England, Atrium Door and Window Company of New York (collectively, "ADW-
Northeast"), Atrium Door and Window Company - West Coast ("ADW-West Coast)
and Atrium Door and Window Company of Arizona ("ADW-Arizona"). On October 2,
1998, pursuant to an acquisition and merger (the "Recapitalization" or
"reverse acquisition") as more fully described in the Company's Form 10-K as
filed with the Securities and Exchange Commission on April 15, 1999, the
Company's indirect Parent (D and W Holdings, Inc.) contributed the stock of
Wing Industries Holdings, Inc. and its subsidiary Wing Industries, Inc.
(collectively "Wing") and Door Holdings, Inc. and its subsidiaries R.G. Darby
Company, Inc. and Total Trim, Inc. (collectively "Darby") to the Company.
As Wing was determined to be the acquiror in a "reverse acquisition", the
historical financial statements of the Company (prior to October 3, 1998)
were replaced with the historical financial statements of Wing. As a result,
the statement of income for 1998 only includes the operations of the Company
and Darby from October 3, 1998 through December 31, 1998. The statements of
income for all periods prior to October 3, 1998 only include the operations
and accounts of Wing. Additionally, the operations of Delta Millwork, Inc.
(renamed R.G. Darby Company-South and Total Trim-South, collectively
"Darby-South") are included since the date of acquisition, January 27, 1999
and the operations of Heat, Inc. ("Heat") and Champagne Industries, Inc.
("Champagne") are included since their date of acquisition, May 17, 1999. The
June 30, 1999 balance sheet includes the accounts of the Company, Wing,
Darby, Darby-South, Heat, Champagne and each of their respective
subsidiaries, while the December 31, 1998 balance sheet includes the accounts
of the Company, Wing, Darby and each of their respective subsidiaries.
9
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The following unaudited pro forma information presents consolidated operating
results as though the Recapitalization and the acquisitions of ADW-Arizona
(which was acquired March 27, 1998), Darby-South, Heat and Champagne (see
Note 6) had occurred at the beginning of the periods presented:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
----------------------- -----------------------
Actual Pro Forma Actual Pro Forma
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES ......................... $ 232,372 $ 260,873 $ 71,849 $ 236,664
COST OF GOODS SOLD ................ 161,566 179,681 56,196 164,549
---------- ---------- ---------- ----------
Gross profit .................... 70,806 81,192 15,653 72,115
OPERATING EXPENSES:
Selling, delivery, general and .... 48,435 57,847 11,842 49,805
administrative expenses
Amortization expenses ............. 3,948 4,678 341 4,678
Special charge .................... 1,832 1,832 -- --
---------- ---------- ---------- ----------
54,215 64,357 12,183 54,483
Income from operations .......... 16,591 16,835 3,470 17,632
INTEREST EXPENSE .................. 10,699 15,739 2,107 15,739
OTHER INCOME, net ................. 146 211 5 (237)
---------- ---------- ---------- ----------
Income before income taxes ...... 6,038 1,307 1,368 1,656
PROVISION FOR INCOME TAXES ........ 3,184 1,675 676 1,807
---------- ---------- ---------- ----------
Net income (loss) from
continuing operations ........... $ 2,854 $ (368) $ 692 $ (151)
========== ========== ========== ==========
Other Information:
Depreciation expense .............. $ 2,391 $ 2,929 $ 636 $ 3,140
========== ========== ========== ==========
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
----------------------- -----------------------
Actual Pro Forma Actual Pro Forma
---------- ---------- ---------- ----------
NET SALES ......................... $ 125,530 $ 137,586 $ 32,399 $ 126,703
COST OF GOODS SOLD ................ 86,858 93,756 25,732 86,818
---------- ---------- ---------- ----------
Gross profit .................... 38,672 43,830 6,667 39,885
OPERATING EXPENSES:
Selling, delivery, general and .... 25,285 28,391 5,236 25,237
administrative expenses
Amortization expenses ............. 2,059 2,339 195 2,339
Special charge .................... 70 70 -- --
---------- ---------- ---------- ----------
27,414 30,800 5,431 27,576
Income from operations .......... 11,258 13,030 1,236 12,309
INTEREST EXPENSE .................. 6,353 7,870 1,115 7,870
OTHER INCOME, net ................. 115 142 5 (288)
---------- ---------- ---------- ----------
Income before income taxes ........ 5,020 5,302 126 4,151
PROVISION FOR INCOME TAXES ........ 2,356 2,604 120 2,166
---------- ---------- ---------- ----------
Net income from continuing
operations ...................... $ 2,664 $ 2,698 $ 6 $ 1,985
========== ========== ========== ==========
Other Information:
Depreciation expense ............. $ 1,342 $ 1,518 $ 294 $ 1,393
========== ========== ========== ==========
</TABLE>
10
<PAGE>
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>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Raw materials ...................... $ 31,507 $ 27,362
Work-in-process .................... 5,419 4,129
Finished goods ..................... 21,363 14,686
-------- --------
58,289 46,177
LIFO reserve ....................... 882 112
-------- --------
$ 59,171 $ 46,289
======== ========
</TABLE>
4. NOTES PAYABLE:
Notes payable consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- -----------
<S> <C> <C>
Revolving credit facility .......... $ 13,730 $ 4,118
Term loan B ........................ 59,250 74,750
Term loan C ........................ 70,180 70,680
Senior subordinated notes .......... 175,000 29,070
Other .............................. 817 609
--------- ---------
318,977 179,227
Less:
Unamortized debt discount .......... (2,632) --
Current portion of notes payable ... (2,216) (2,209)
--------- ---------
Long-term debt ................... $ 314,129 $ 177,018
========= =========
</TABLE>
On May 17, 1999, the Company issued $175,000 of Senior Subordinated Notes
(the"Notes") due May 1, 2009. The notes are non-callable for five years, have
a 10.50% stated rate paid semi-annually and were issued at a discount of
98.496 to yield 10.75% to maturity. In connection with the issuance of the
notes, the Company retired its $29,070 of senior subordinated notes due
November 15, 2006 and paid down $15,000 on its Term Loan B. Additionally,
approximately $2,180 was paid as a tender premium to retire the notes due
November 15, 2006 and $898 of deferred financing fees related to these
paydowns were written-off. These amounts are recorded as extraordinary
items in the income statement.
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
11
<PAGE>
such amounts, that an unfavorable disposition would not have a material
adverse effect on the consolidated financial position, results of operations
or liquidity of the Company.
During 1993, factory employees voted to unionize and become members of the
Amalgamated Clothing and Textile Workers Union. A three-year union contract
was executed during 1995 and extended for three additional years in 1998. In
addition, in connection with its Woodville, Texas operations, the Company is
party to collective bargaining arrangements due to expire in 2001.
The Company is involved in various stages of investigation and cleanup
related to environmental protection matters, some of which relate to waste
disposal sites. The potential costs related to such matters and the possible
impact thereof on future operations are uncertain due in part to: the
uncertainty as to the extent of pollution; the complexity of Government laws
and regulations and their interpretations; the varying costs and
effectiveness of alternative cleanup technologies and methods; the uncertain
level of insurance or other types of recovery; and the questionable level of
the Company's involvement. The Company was named in 1988 as a potentially
responsible party ("PRP") in two superfund sites pursuant to the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended
(the Chemical Recycling, Inc. site in Wylie, Texas, and the Diaz Refinery
site in Little Rock, Arkansas). The Company believes that based on the
information currently available, including the substantial number of other
PRP's and relatively small share allocated to it at such sites, its
liability, if any, associated with either of these sites will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
6. ACQUISITIONS:
DELTA ASSET PURCHASE:
On January 27, 1999, the Company acquired certain assets of Delta Millwork,
Inc., a privately held door pre-hanger located in Orlando, Florida, for
approximately $1,746 including fees and other transaction expenses of $146
and $200 to be paid upon the achievement of certain financial targets. The
Company financed the acquisition through its revolving credit facility.
The acquisition of Delta Millwork, Inc. has been accounted for as a purchase
in accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16"). The aggregate purchase price has been allocated to
the underlying assets and liabilities based upon their respective estimated
fair market values at the date of acquisition, with the remainder allocated
to goodwill, which will be amortized over 40 years. The results of operations
for the acquired business are included in the Company's consolidated
financial statements beginning January 27, 1999. The purchase price
allocation, preliminary in nature and subject to change, is as follows:
<TABLE>
<S> <C>
Accounts receivable, net..................................... $ 1,178
Inventories.................................................. 949
Prepaid expenses and other current assets.................... 40
Property, plant and equipment, net........................... 137
Other noncurrent assets...................................... 5
Goodwill..................................................... 154
Current liabilities.......................................... (717)
--------
Total purchase price....................................... $ 1,746
========
</TABLE>
HEAT STOCK PURCHASE
On May 17, 1999, the Company acquired the stock of Heat, Inc.
("Heat"), a privately held vinyl window and door company located in Yakima,
Washington and Pittsburgh, Pennsylvania, pursuant to a stock purchase
agreement (the "Purchase Agreement"), dated as of April 20, 1999, among Heat,
its
12
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shareholders and optionholders, H.I.G. Vinyl, Inc., a Cayman Island
corporation, H.I.G. Investment Fund, L.P., a Cayman Island limited
partnership and H.I.G. Capital Management, Inc., a Delaware corporation. The
Company paid $85,000, which included $693 of assumed indebtedness.
Additionally, a post closing adjustment of $4,095 was paid on May 17, 1999
related to working capital and cash delivered in excess of the target defined
in the Purchase Agreement. The Company financed the acquisition with a portion
of the proceeds raised in a $175,000 bond offering (see Note 4).
The acquisition of Heat has been accounted for as a purchase in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16"). The aggregate purchase price has been allocated to
the underlying assets and liabilities based upon their respective estimated
fair market values at the date of acquisition, with the remainder allocated
to goodwill, which will be amortized over 40 years. The results of operations
for the acquired business are included in the Company's consolidated
financial statements beginning May 17, 1999. The purchase price allocation,
preliminary in nature and subject to change, is as follows:
<TABLE>
<S> <C>
Cash......................................................... $ 1,158
Accounts receivable, net..................................... 6,540
Inventories.................................................. 7,104
Prepaid expenses and other current assets.................... 983
Deferred tax assets.......................................... 1,094
Property, plant and equipment, net........................... 8,412
Other noncurrent assets...................................... 824
Goodwill..................................................... 72,062
Current liabilities.......................................... (6,845)
Long-term liabilities........................................ (405)
-------
Total purchase price....................................... $90,927
=======
</TABLE>
CHAMPAGNE STOCK PURCHASE:
On May 17, 1999, the Company acquired stock of Champagne Industries, Inc., a
privately held vinyl window and door company located in Denver, Colorado, for
approximately $3,643, including assumed indebtedness and transaction fees,
but excluding $500 to be paid upon the achievement of certain financial
targets. The Company financed the acquisition with a portion of the proceeds
raised in a $175,000 bond offering (see Note 4).
The acquisition of Champagne Industries, Inc. has been accounted for as a
purchase in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations" ("APB 16"). The aggregate purchase price has been
allocated to the underlying assets and liabilities based upon their
respective estimated fair market values at the date of acquisition, with the
remainder allocated to goodwill, which will be amortized over 40 years. The
results of operations for the acquired business are included in the Company's
consolidated financial statements beginning May 17, 1999. The purchase price
allocation, preliminary in nature and subject to change, is as follows:
<TABLE>
<S> <C>
Cash......................................................... $ 251
Accounts receivable, net..................................... 1,484
Inventories.................................................. 1,037
Prepaid expenses and other current assets.................... 142
Property, plant and equipment, net........................... 343
Other noncurrent assets...................................... 27
Goodwill..................................................... 2,294
Current liabilities.......................................... (1,416)
Notes payable................................................ (19)
-------
Total purchase price....................................... $ 4,143
=======
</TABLE>
13
<PAGE>
7. SUBSIDIARY GUARANTORS:
In connection with the issuance of the Notes, the Company's payment
obligations under the Notes are fully and unconditionally guaranteed, jointly
and severally (collectively, the Subsidiary Guarantees) on a senior
subordinated basis by its wholly-owned subsidiaries: ADW-Northeast, ADW-West
Coast, ADW-Arizona, Wing, Darby, Darby-South, Heat and Champagne
(collectively, the Subsidiary Guarantors). The Company has no non-guarantor
direct or indirect subsidiaries. The operations related to the assets of
ADW-Northeast, ADW-West Coast, ADW-Arizona and Darby are included since the
reverse acquisition on October 2, 1998. The operations of Darby-South are
included since the date of acquisition, January 27, 1999, and the operations
of Heat and Champagne are included since their date of acquisition, May 17,
1999. The operations of Wing are presented for all periods covered. The
balance sheet information includes all subsidiaries as of June 30, 1999 and
ADW-Northeast, ADW-West Coast, ADW-Arizona, Wing and Darby as of December 31,
1998. In the opinion of management, separate financial 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>
June 30, December 31,
1999 1998
--------- ----------
<S> <C> <C>
Current assets................................ $ 28,977 $ 42,887
Noncurrent assets............................. 198,704 106,684
Current liabilities........................... 22,116 16,666
Noncurrent liabilities........................ 180,238 76,826
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net sales..................................... $ 61,946 $ 32,399
Gross profit.................................. 15,343 6,667
Net income (loss) from continuing operations.. (2,211) 6
<CAPTION>
Six Months Ended June 30,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Net sales..................................... $ 121,225 $ 71,849
Gross profit.................................. 30,944 15,653
Net income (loss) from continuing operations.. (1,916) 692
</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.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN FORWARD-LOOKING STATEMENTS
This 10-Q contains certain forward looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties relating to the Company that are based on
the beliefs of management. When used in this 10-Q, the words "anticipate",
"believe", "estimate", "expect", "intend", and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to the risks and uncertainties regarding the operations and the
results of operations of the Company as well as its customers and suppliers,
including as a result of the availability of consumer credit, interest rates,
employment trends, changes in levels of consumer confidence, changes in
consumer preferences, national and regional trends in new housing starts, raw
material costs, pricing pressures, shifts in market demand, and general
economic conditions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions or estimates prove incorrect,
actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended.
RESULTS OF OPERATIONS
The operations of the Company are cyclical in nature and generally result in
increases during the peak building season which coincides with the second and
third quarters of the year. Accordingly, results of operations for the
quarter ended June 30, 1999 are not necessarily indicative of results
expected for the full year.
Prior to October 2, 1998, the Company's historical financial statements as
previously filed with the Securities and Exchange Commission included its
operations and the operations of its subsidiaries. On October 2, 1998,
pursuant to the Recapitalization, D and W Holdings, Inc. contributed the
stock of Wing and Darby to the Company.
As Wing was determined to be the acquiror in a "reverse acquisition", the
historical financial statements of the Company (prior to October 3, 1998)
were replaced with the historical financial statements of Wing. As a result,
the statement of income for 1998 only includes the operations of the Company
and Darby from October 3, 1998 through December 31, 1998. The statements of
income for all periods prior to October 3, 1998 only include the operations
and accounts of Wing. Additionally, the operations of Delta Millwork, Inc.
(Darby-South) are included since the date of acquisition, January 27, 1999,
and the operations of Heat, Inc. and Champagne Industries, Inc. are included
since their date of acquisition, May 17, 1999. The June 30, 1999 balance
sheet includes the accounts of the Company, Wing, Darby, Darby-South, Heat
and Champagne and each of their respective subsidiaries, while the December
31, 1998 balance sheet includes the accounts of the Company, Wing, Darby and
each of their respective subsidiaries.
NET SALES. Net Sales increased by $93,131 from $32,399 during the second
quarter of 1998 to $125,530 during the second quarter of 1999 and $160,523
from $71,849 during the first six months of 1998 to $232,372 during the first
six months of 1999. The increase was primarily due to a combined increase in
net sales from the addition of the Company and Darby in connection with the
Recapitalization and the acquisitions of Delta Millwork, Inc., Champagne
Industries, Inc. and Heat, Inc.
COST OF GOODS SOLD. Cost of goods sold decreased from 79.4% of net sales
during the second quarter of 1998 to 69.2% of net sales during the second
quarter of 1999 and from 78.2% of net sales during the first six months of
1998 to 69.5% of net sales during the first
15
<PAGE>
six months of 1999. The decrease was due largely to the addition of the
Company, Darby and Heat, as these divisions operate at higher gross profit
margins than Wing.
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, delivery,
general and administrative expenses increased $20,049 from $5,236 (16.2% of
net sales during the second quarter of 1998) to $25,285 (20.1% of net sales
during the second quarter of 1999) and $36,593 from $11,842 (16.5% of net
sales during the first six months of 1998) to $48,435 (20.8% of net sales
during the first six months of 1999). The increase was primarily due to the
inclusion of selling, delivery, general and administrative expenses of the
Company, Darby and Heat. Additionally, delivery and selling expenses
increased due to the increase in sales.
AMORTIZATION EXPENSE. Amortization expense increased $1,864 from $195 during
the second quarter of 1998 to $2,059 during the second quarter of 1999 and
$3,607 from $341 during the first six months of 1998 to $3,948 during the
first six months of 1999. The increase was largely due to the amortization of
goodwill recorded in connection with the Recapitalization and the
acquisitions of Heat and Champagne. In addition, amortization expense
increased due to the amortization of capitalized software implementation
costs of the Company.
SPECIAL CHARGE. The Company recorded a one-time charge of $1,832 for
severance benefits incurred in connection with the separation agreement
entered into by the Company and the former President and Chief Executive
Officer.
INTEREST EXPENSE. Interest expense increased $5,238 from $1,115 during the
second quarter of 1998 to $6,353 during the second quarter of 1999 and $8,592
from $2,107 during the first six months of 1998 to $10,699 during the first
six months of 1999. The increase in interest expense was due primarily to an
increase in average outstanding debt related to the issuance of Term Loan B
and Term Loan C, and the senior subordinated notes assumed in connection with
the Recapitalization. Interest expense also increased as of May 17, 1999, as
the Company issued $175,000 of senior subordinated notes due May 1, 2009. The
notes are non-callable for five years, have a 10.50% stated rate paid
semi-annually and were issued at a discount of 98.496 to yield 10.75% to
maturity. In addition, interest expense included the amortization of deferred
financing costs recorded in connection with the Recapitalization and the
discount associated with the $175,000 senior subordinated notes.
INCOME TAXES. The Company's effective tax rate decreased from 95.2% during
the second quarter of 1998 to 46.9% during the second quarter of 1999 and
increased from 49.4% during the first six months of 1998 to 52.7% during the
first six months of 1999 due largely to non-deductible goodwill amortization
expense of approximately $1,274 and $2,432, respectively. Excluding
non-deductible amortization expense, the Company's effective tax rate would
have been approximately 37.4% during the second quarter of 1999 and 37.6%
during the first six months of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations and availability under the Company's Revolving
Credit Facility are the Company's principal sources of liquidity. During the
first two quarters of 1999, cash was primarily used for increases in working
capital, capital expenditures and debt payments. Net cash provided by
operating activities was $1,377 during first six months of 1999 ($697 during
the second quarter of 1999) compared to cash used in operating activities of
$1,923 during the first six months of 1998 ($1,437 used during the second
quarter of 1998). The increase in cash provided by operating activities is
largely due to an increase in income before depreciation and amortization.
Net cash used in investing activities during the first six months of 1999 was
$102,177 ($98,814 during the second quarter of 1999) compared to $1,342
during the first six months of 1998 ($712 during the second quarter of 1998).
The increase in cash used in investing activities was due primarily to the
acquisition of Delta Millwork, Inc. during the first quarter of 1999 and the
acquisition of Heat, Inc. and Champagne Industries, Inc. during the second
quarter of 1999, as well as the purchase of property, plant and equipment of
$6,115 during the first six months of 1999 and $5,056 during the second
quarter of 1999. Cash provided by financing activities during the first six
months of 1999 was
16
<PAGE>
$100,800 ($98,117 during the second quarter of 1999) compared to $3,369
during the first six months of 1998 ($2,007 during the second quarter of
1998), primarily due to proceeds from the bond offering (see note 4), which
was partially offset by payments on existing debt.
OTHER CAPITAL RESOURCES
In connection with the Recapitalization, the Company entered into a Credit
Agreement providing for a Revolving Credit Facility in the amount of $30,000.
The Revolving Credit Facility was subsequently increased to $40,000 in June
1999. The Revolving Credit Facility has a maturity date of June 30, 2004. At
June 30, 1999, the Company had $23,336 of availability under the Revolving
Credit Facility, net of borrowings of $13,730 and outstanding letters of
credit totaling $2,934, relating to workers' compensation benefits and
utility deposits.
CAPITAL EXPENDITURES
The Company had cash capital expenditures of $5,056 during the second quarter
of 1999 ($6,115 for the first six months of 1999) compared to $565 during the
second quarter of 1998 ($852 during the first six months of 1998). The
increase is largely due to capital expenditures at the Company and Wing. The
Company expects capital expenditures, including capitalization of software
implementation costs (exclusive of acquisitions) in 1999 to be approximately
$10,000, however, actual capital requirements may change, particularly as a
result of acquisitions the Company may make.
The ability of the Company to meet its debt service and working capital
obligations and capital expenditure requirements is dependant, however, upon
the future performance of the Company and its subsidiaries which, in turn,
will be subject to general economic conditions and to financial, business and
other factors, including factors beyond the Company's control.
YEAR 2000
Many existing computer systems and applications and other control devices are
coded to use only two digits (rather than four) to identify a year in the
date code field. These date code fields will need to accept four digit
entries to distinguish the 21st century dates from 20th century dates. Many
computer programs and systems, including certain programs and systems
utilized by us, are highly dependant on financial and other data that, based
on the program's or system's inability to distinguish between the Year 2000
and the other century-end dates, could be misreported or misinterpreted and
cause significant errors. If not corrected, many computer applications could
fail when processing data related to the Year 2000. In addition, two
interacting systems, applications or devices, each of which has individually
been fixed so that it will individually handle Year 2000 issues, could
nonetheless suffer "integration failure" because their method of dealing with
the problem is not compatible.
This Year 2000 issue impacts our owned or licensed computer systems and
equipment and the computer systems and equipment of third parties upon which
we rely. The Year 2000 problem could cause these systems to fail, err, and,
in the case of third party systems, become incompatible with our systems.
Therefore, if we, or a significant third party fail to become Year 2000
ready, or if the Year 2000 problem causes our systems to become internally
incompatible or incompatible with any key third party systems, our business
could suffer material disruptions.
We are assessing the impact of the Year 2000 problem and have or intend to
modify portions of our hardware and software so that our computer systems
will function properly with respect to date in the Year 2000 and thereafter.
We have reviewed and continue to review each operating unit for the
appropriate information system enhancements, with respect to both Year 2000
problems as well as strategic system upgrade.
17
<PAGE>
To achieve our overall operating strategy, we are enhancing our information
technology by installing new software to implement a fully integrated
manufacturing system for our operating units. This system has been certified
by the manufacturer as being Year 2000 compliant. Each operating unit was
prioritized for installation of the system based on any Year 2000 issues,
with the final phase of implementation and installation of this system
scheduled to be completed by the third quarter of 1999.
We have inquired of our major suppliers and customers as to their Year 2000
compliance. Substantially all of our major suppliers and customers have
indicated that their Year 2000 testing and remediation programs are complete
or will be complete by the end of the third quarter. We have not, however,
tested or independently verified the Year 2000 compliance of our major
suppliers and customers.
We face certain risks related to the Year 2000 problem including potential
disruptions in our operations due to Year 2000 problems with our systems,
potential disruptions in material supply due to Year 2000 problems with our
suppliers' systems and potential loss of sales or delayed cash collections in
the event of Year 2000 problems with our customers' systems. Although we have
not formalized a contingency plan to address the problems associated with
these risks, there are several factors that we believe may mitigate potential
Year 2000 problems. Because our business has only recently been computerized,
we believe we can run our business without significant interruptions using
manual labor and "paper" systems in the event of a Year 2000 problem with our
systems. In addition, because we source our materials from several suppliers,
we believe we have decreased the likelihood that a Year 2000 disruption at
one of our suppliers will materially interrupt our material supply. Finally,
because many of our customers use "paper" systems, we believe a Year 2000
problem with a customer's systems would not materially impact our sales.
Although we believe these factors mitigate our Year 2000 risks, we cannot
assure you that problems arising from these risks will not have a material
adverse effect on our business, operating results or financial condition.
We believe that with our strategy and completed installations, the Year 2000
problem will not pose significant operational problems for us. We can not
assure you, however, that our computer systems, or the computer systems of
companies we acquire or the computer systems of other companies with whom we
conduct business will be Year 2000 compliant prior to December 31, 1999 or
that the inability of any such systems to process accurately Year 2000 data
will not have a material adverse effect on our business, operating results or
financial condition.
The total amount of costs to be incurred by the Company to address these
system enhancements is estimated at $1,500. The Company has expensed
approximately $1,300 through June 30, 1999.
18
<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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits listed on the accompanying Exhibit Index are
filed as part of this report.
(b) Reports on Form 8-K
On May 4, 1999, in accordance with Items 5 and 7 of Form 8-K,
the Company filed a Report on Form 8-K announcing that the Company entered
into a stock purchase agreement, dated as of April 20, 1999, among Heat Inc.
("Heat"), its shareholders and optionholders, H.I.G. Vinyl, Inc., H.I.G.
Investment Fund, L.P. and H.I.G. Capital Management, Inc. pursuant to which
the Company would acquire Heat.
On June 1, 1999, in accordance with Items 2 and 7 of Form 8-K,
the Company filed a Report on Form 8-K announcing the completion of the
acquisition of Heat on May 17, 1999. The report also included the stock
purchase agreement.
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: August 16, 1999 By: /s/ Jeff L. Hull
--------------- -----------------------------------------
Jeff L. Hull
Executive Vice President,
Chief Financial Officer, Secretary,
Treasurer and Director
(Principal Financial Officer and
Principal Executive Officer)
Date: August 16, 1999 By: /s/ Eric W. Long
--------------- -----------------------------------------
Eric W. Long
Vice President and
Corporate Controller
(Principal Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 144
<RECEIVABLES> 63,150
<ALLOWANCES> 1,602
<INVENTORY> 59,171
<CURRENT-ASSETS> 132,028
<PP&E> 48,445
<DEPRECIATION> 9,078
<TOTAL-ASSETS> 482,393
<CURRENT-LIABILITIES> 51,627
<BONDS> 314,129
0
0
<COMMON> 0
<OTHER-SE> 110,753
<TOTAL-LIABILITY-AND-EQUITY> 482,393
<SALES> 232,372
<TOTAL-REVENUES> 232,372
<CGS> 161,566
<TOTAL-COSTS> 161,566
<OTHER-EXPENSES> (146)
<LOSS-PROVISION> 508
<INTEREST-EXPENSE> 10,699
<INCOME-PRETAX> 6,038
<INCOME-TAX> 3,184
<INCOME-CONTINUING> 2,854
<DISCONTINUED> 0
<EXTRAORDINARY> 1,908
<CHANGES> 0
<NET-INCOME> 946
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
