ATRIUM COMPANIES INC - 10-Q Quarterly Report

UNITED STATES 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, 2004

( ) 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 incorporation or organization)		(I.R.S. Employer Identification Number)

3890 West Northwest Highway, Suite 500 Dallas, Texas 75220, (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 ( )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ( ) No (X)

As of August 16, 2004, the registrant had 100 shares of Common Stock, par value $.01 per share outstanding.

ATRIUM COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)


	June 30,			December 31,
	2004			2003
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	4,480		$	7,713
Accounts receivable, net of allowance of $292 and $284, respectively		13,918			8,387
Retained interest in sold accounts receivable		20,498			24,461
Inventories		60,601			48,989
Prepaid expenses and other current assets		5,137			8,007
Deferred tax asset		2,418			2,595

Total current assets		107,052			100,152
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $49,919 and $41,184, respectively		101,324			95,921
GOODWILL		382,830			376,763
INTANGIBLE ASSETS, net		16,959			12,900
DEFERRED FINANCING COSTS, net		14,813			16,298
OTHER ASSETS, net		5,875			5,442

Total assets	$	628,853		$	607,476

LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable	$	3,736		$	3,302
Accounts payable		41,917			28,036
Accrued liabilities		36,546			34,261

Total current liabilities		82,199			65,599

LONG-TERM LIABILITIES:
Notes payable		411,987			411,890
Deferred tax liability		2,418			2,595
Other long-term liabilities		1,849			2,341

Total long-term liabilities		416,254			416,826

Total liabilities		498,453			482,425

COMMITMENTS AND CONTINGENCIES STOCKHOLDER’S EQUITY:
Common stock $.01 par value, 3,000 shares authorized, 100 shares issued and outstanding		—			—
Paid-in capital		186,119			183,601
Accumulated deficit		(55,719	)		(58,550	)

Total stockholder’s equity		130,400			125,051

Total liabilities and stockholder’s equity	$	628,853		$	607,476

The accompanying notes are an integral part of the consolidated financial statements.

ATRIUM COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2004 and 2003
(dollars in thousands)
(unaudited)


	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,831		$	6,904
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		12,631			8,189
Non-cash stock compensation expense		—			200
Amortization of deferred financing costs		1,584			1,385
Write-off of deferred financing costs		—			29
Amortization of premium on notes payable		(132	)		111
Amortization of gain from sale-leaseback of building		(15	)		(15	)
Non-cash special charges		2,654			—
Provision for bad debts		68			—
Loss on sale of receivables		423			335
Loss on sales of assets		58			40
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		(4,115	)		(2,522	)
Retained interest in sold accounts receivable		(9,612	)		(15,150	)
Sale of accounts receivable		13,100			21,700
Inventories		(10,388	)		(6,892	)
Prepaid expenses and other current assets		2,970			160
Accounts payable		8,180			12,376
Accrued liabilities and other long-term liabilities		968			1,386

Net cash provided by operating activities		21,205			28,236

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(13,205	)		(8,768	)
Proceeds from sales of assets		1			12
Acquisitions		(13,576	)		(9,081	)
Other assets		(1,420	)		(1,206	)

Net cash used in investing activities		(28,200	)		(19,043	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of other notes payable and capital lease obligations		(816	)		(16	)
Net borrowings under revolving credit facility		300			—
Deferred financing costs		(99	)		(7	)
Scheduled principal payments on term loans		(900	)		(2,733	)
Additional principal payments on term loans		—			(1,058	)
Distributions to Atrium Corporation		(167	)		(25	)
Issuance of Atrium Corporation warrants for purchase of Robico Shutters		300			—
Checks drawn in excess of bank balances		5,144			1,488

Net cash provided by (used in) financing activities		3,762			(2,351	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(3,233	)		6,842
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		7,713			1,131

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	4,480		$	7,973

The accompanying notes are an integral part of the consolidated financial statements.

ATRIUM COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
(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 and six months ended June 30, 2004 and 2003, and financial position as of June 30, 2004 and December 31, 2003 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 year ended December 31, 2003 included in the Company’s amended annual report on Form 10-K/A as filed with the Securities and Exchange Commission on April 9, 2004. 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.

The Transactions or Merger

On December 10, 2003, Atrium Corporation was acquired by a newly formed affiliate of Kenner & Company, Inc., KAT Holdings, Inc., pursuant to which KAT Holdings, Inc. merged with and into Atrium Corporation with Atrium Corporation as the surviving corporation. As a result of the Merger, the investor group described below now controls the Company and Atrium Corporation.

The acquisition of Atrium Corporation was made by an investor group led by Kenner & Company, Inc., a New York based private investment firm, and certain members of our management, including Jeff L. Hull, our Chairman, President and Chief Executive Officer. The investor group included: KAT Holdings, L.P. and KAT Group, L.P., special purpose Kenner investment partnerships; UBS Capital Americas II, LLC; ML IBK Positions, Inc. and Merrill Lynch Ventures L.P. 2001 and management. At the closing of the Merger, $12,396 of equity securities owned by Atrium Corporation’s existing stockholders were exchanged for similar securities in KAT Holdings, Inc. and the investor group contributed an additional $251,604 to KAT Holdings, Inc., including $251,454 from ATR Acquisition, LLC, the unitholders of which are KAT Holdings, L.P., KAT Group, L.P., UBS Capital Americas II, LLC, ML IBK Positions, Inc. and Merrill Lynch Ventures L.P. 2001.

In connection with the Merger, we renewed our existing accounts receivable securitization facility for a period of five years and refinanced our existing senior revolving credit and term loan facilities, with a new revolving credit facility of $50,000, which was undrawn at the close of the merger, and a new $180,000 term loan facility. We also issued an additional $50,000 of 10½% senior subordinated notes, or “add-on notes”, and left the existing $175,000 of 10½% senior subordinated notes outstanding. $40,000 of the new term loan facility was funded into escrow upon closing of the Merger and was released to fund a portion of the acquisition of Superior Engineered Products Corporation on December 31, 2003.

On November 18, 2003, in connection with the Merger, we received consents from holders representing approximately 97% of the aggregate principal amount of our outstanding 10½% senior subordinated notes to:

• waive our obligations under the Indenture to make a change of control offer in connection with the merger and amend the Indenture to replace the definition of permitted holders with certain direct and indirect equity holders of ATR Acquisition, LLC and their affiliates,

• modify certain restrictions on affiliate transactions set forth in the indenture governing the notes; and

• allow for the issuance of additional notes.

Additionally, in connection with the Merger, Atrium Corporation repurchased its outstanding 15% Senior Pay-In-Kind Notes, with a portion of the cash proceeds of the equity contribution to KAT Holdings, Inc.

Each of the foregoing transactions, along with the Merger, is referred to herein collectively as “the Transactions.”

Presentation

The operations of MD Casting, Inc. (“MD Casting”), Danvid Window Company (“Danvid”), Aluminum Screen Manufacturers, Inc., Superior Engineered Products Corporation (“Superior”) and Atrium Shutters, Inc. (“Atrium Shutters”) are included since their dates of acquisition, January 31, 2003, April 1, 2003, October 1, 2003, December 31, 2003 and June 1, 2004, respectively. Collectively, the acquisitions of MD Casting, Danvid, Aluminum Screen, Superior and Atrium Shutters are referred to as the “Acquisitions.”

The following unaudited pro forma information presents consolidated operating results as though the Acquisitions had occurred at the beginning of the periods presented.


	Three Months Ended				Three Months Ended
	June 30, 2004				June 30, 2003
	Atrium		Combined		Atrium		Combined
	Actual		Pro Forma		Actual		Pro Forma
Net sales	$	187,952	$	190,385	$	161,810	$	185,305
Net income		8,486		8,497		9,473		12,093


	Six Months Ended				Six Months Ended
	June 30, 2004				June 30, 2003
	Atrium		Combined		Atrium		Combined
	Actual		Pro Forma		Actual		Pro Forma
Net sales	$	338,418	$	344,302	$	275,364	$	328,230
Net income		2,831		2,774		6,904		9,788

Reclassifications

Certain items in the prior period presentation have been reclassified to conform to the current period presentation.

2. Stock-Based Compensation

As of June 30, 2004, the Company had several stock-based compensation plans. The Company accounts for these plans under the recognition and measurement principles of the Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. Stock-based employee compensation costs related to the issuance of stock options is not reflected in the Company’s earnings when the options granted under those plans have an exercise price equal to or in excess of the estimated market value of the underlying common stock on the date of grant.

The Merger resulted in certain of the previously outstanding options being purchased from the holders. The cancellation and issuance of new options along with the buy/sell agreements resulted in the majority of the 2003 option grants warranting variable accounting treatment.

The Financial Accounting Standards Board (“FASB”) has recently indicated that it expects to issue a proposal to change the recognition and measurement principles for equity-based compensation granted to employees. The proposed rules could be implemented as early as the end of the 2004 calendar year. Under the proposed rules, the Company would be required to recognize compensation expense related to stock options granted to employees after December 15, 2004. The compensation expense would be calculated based on the expected number of options expected to vest and would be recognized over the stock options’ vesting period. If this proposal is passed, the Company would be required to recognize compensation expense related to stock options granted to its employees, which may have a material effect on its consolidated financial position or results of operations.

The following table illustrates the effect on the Company’s reported net loss if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-based Compensation,” to stock-based compensation plans and warrants.


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2004			2003		2004			2003
Net income, as reported	$	8,486		$	9,473	$	2,831		$	6,904
Adjustments:
Stock-based employee compensation expense included in reported net income, net of related tax effects		—			252		—			252
Stock-based employee compensation determined under fair value method for all awards, net of related tax effects		(477	)		37		(901	)		(2	)

Adjusted net income	$	8,009		$	9,762	$	1,930		$	7,154

The above pro forma disclosures are not representative of pro forma effects for future periods because the determination of the fair value of all options granted excludes an expected volatility factor and additional option grants are expected.

3. Recently Issued Accounting Standards

FIN No. 46 — “Consolidation of Variable Interest Entities”:

During January 2003, the FASB issued Financial Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 is effective for variable interest entities created after January 31, 2003 and is required to be adopted for variable interest entities that existed prior to February 1, 2003 by December 31, 2003. FIN 46 is an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities and is entitled to receive a majority of the entity’s residual returns or both. In December 2003, the FASB issued a revision to FIN 46 to clarify some of the provisions and to exempt certain entities from its requirements. Adoption of FIN 46 has not had a material effect on the Company’s consolidated financial position or results of operations.

FIN No. 46R — “Consolidation of Variable Interest Entities”:

During December 2003, the FASB issued a revision to FIN 46, FIN No. 46R (“FIN 46R”), to clarify some of the provisions and to exempt certain entities from its requirements. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied FIN 46 prior to issuance of the revised interpretation. Otherwise, application of FIN 46R is required in financial statements of public entities that have interests in structures that are commonly referred to as special purpose entities (“SPE’s”) for periods ending after December 15, 2003. Application by public entities, other than business issuers, for all other types of variable interest

entities other than SPE’s is required in financial statements for periods ending after March 15, 2004. Adoption of FIN 46R has not had a material effect on the Company’s consolidated financial position or results of operations.

4. Operating Segment Information

The Company is engaged in the manufacture and sale of windows, doors and various other building materials throughout North America and is organized within two principal operating segments, including the Windows and Doors Segment and the Components Segment. Individual subsidiary companies are included in each of the Company’s two principal operating segments based on the way the chief operating decision maker manages the business and on the similarity of products, production processes, customers and expected long-term financial performance. In the tables below, Corporate and Other include corporate overhead costs and certain income and expense items not allocated to reportable operating segments, including expenses incurred in connection with the Merger.

The Windows and Doors Segment fabricates, distributes and installs products primarily for the residential new construction and repair and remodel markets. The principal products sold by the segment include aluminum and vinyl windows and patio doors. The Components Segment principally manufactures component parts utilized in the fabrication of aluminum and vinyl windows and patio doors, including aluminum and vinyl extrusion, zinc die-casted hardware and fiberglass and aluminum screens.

The Company evaluates operating segment performance based on operating earnings before allocations of corporate overhead costs. All material intrasegment sales are eliminated within each respective segment. The income statement impact of all purchase accounting adjustments, including the amortization of intangible assets, is reflected in the operating earnings of the applicable operating segment.

Identifiable assets by operating segment are those used in operations by each segment. Corporate and Other assets are principally cash and cash equivalents, deferred tax assets, certain property, plant and equipment, deferred financing costs and retained interest in sold accounts receivable.

Summarized financial information for the Company’s reportable operating segments is presented in the following tables:


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2004			2003			2004			2003
Net Sales:
Windows and Doors	$	167,892		$	148,332		$	302,659		$	249,742
Components		36,657			25,374			66,677			46,977
Intersegment Eliminations		(16,597	)		(11,896	)		(30,918	)		(21,355	)

Consolidated net sales	$	187,952		$	161,810		$	338,418		$	275,364

Income from Operations:
Windows and Doors	$	14,471		$	16,441		$	20,758		$	22,254
Components		4,833			2,366			7,237			3,880
Corporate and Other		(1,697	)		(786	)		(7,140	)		(2,391	)

Consolidated income from operations		17,607			18,021			20,855			23,743
Interest expense		8,812			8,417			17,502			16,696
Other expense (income), net		95			(191	)		282			(164	)

Income before income taxes	$	8,700		$	9,795		$	3,071		$	7,211


	June 30,		December 31,
	2004		2003
Segment Assets:
Windows and Doors	$	458,408	$	445,314
Components		93,796		91,807
Corporate and Other		76,649		70,355

	$	628,853	$	607,476

Segment Goodwill:
Windows and Doors	$	306,807	$	300,567
Components		66,646		66,819
Corporate and Other		9,377		9,377

	$	382,830	$	376,763


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2004		2003		2004		2003
Depreciation and Amortization:
Windows and Doors	$	4,063	$	2,934	$	8,007	$	5,750
Components		977		641		1,918		1,284
Corporate and Other		1,358		589		2,706		1,155

Consolidated depreciation and amortization	$	6,398	$	4,164	$	12,631	$	8,189

Capital Expenditures(1):
Windows and Doors	$	4,350	$	1,900	$	7,015	$	4,854
Components		568		1,300		973		1,674
Corporate and Other		2,537		1,264		5,216		2,228

Consolidated capital expenditures	$	7,455	$	4,464	$	13,204	$	8,756

(1) Capital expenditures are net of proceeds from sales of assets.

5. Special Charges

In connection with the Merger, the Company recorded a special charge in the amount of $2,727. The expenses associated with the Merger include $2,385 related to warrants issued to Mr. Hull and $342 for accrued management retention bonuses to be paid on December 10, 2004.

6. 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:


	June 30,			December 31,
	2004			2003
Raw materials	$	43,284		$	33,526
Work-in process		1,932			1,442
Finished goods		16,913			14,937

		62,129			49,905
LIFO reserve		(1,528	)		(916	)

	$	60,601		$	48,989

7. Notes Payable

Notes payable consisted of the following:


	June 30,			December 31,
	2004			2003
Senior Subordinated Notes	$	225,000		$	225,000
Revolving credit facility		300			—
Term Loan		179,100			180,000
Other notes payable, including capital lease obligations		9,798			8,536

		414,198			413,536
Unamortized premium on Senior Subordinated Notes		1,525			1,656

Total long-term debt		415,723			415,192

Current maturities of long-term debt		(3,736	)		(3,302	)

Long-term debt	$	411,987		$	411,890

The Company’s credit agreement include covenants which require the Company to meet certain financial tests pertaining to total leverage, interest coverage and fixed charge coverage. As of June 30, 2004, the Company was in compliance with all related covenants.

The credit agreement has an “excess cash flows” provision mandating additional principal payments if certain cash flow targets are met during the year. The excess cash flow payment is due no later than 100 days after the end of each fiscal year, commencing with the fiscal year ending December 31, 2004. For 2004 the Company is required to make an additional principal payment in an amount equal to the excess of 75% of their excess cash flow, as defined in the credit agreement, less any voluntary prepayments made on the term loans during the fiscal year. The 2004 excess cash flow payment will be paid in 2005, if applicable.

On November 1, 2000, the Company entered into a $100,000 interest rate swap agreement to limit the effect of changes in interest rates on long-term borrowings. Under the agreement, the Company paid interest at a fixed rate of 6.66% on the notional amount and received interest therein at the three-month LIBOR on a quarterly basis. This swap expired in November 2003.

8. Income Taxes

The Company’s effective tax rate differs from the statutory rate due to the Company’s net operating loss carryforwards. The income tax provision primarily represents state income tax expense for those jurisdictions where the Company does not have available loss carryforwards. The Company did not incur federal tax expense during the second quarter and first six months of 2004 or 2003 as a result of available net operating loss carryforwards generated in prior years. The Company continues to maintain a full valuation allowance against their deferred tax assets for net operating losses. Should the Company continue to generate taxable income in 2004 and if prospects for continued profitability are more likely than not beyond 2004, the net operating loss valuation allowance may reverse in future periods.

9. Contingencies

The Company has three unionized facilities within the State of Texas, all of which are represented by UNITE HERE (formerly known as the Union of Needletrades, Industrial and Textile Employees). Effective May 2004, the Company entered into a new three-year collective bargaining agreement with UNITE HERE which will expire in 2007.

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 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 site, its liability, if any, associated with this site will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

The Company previously owned one parcel of real estate that requires future costs related to environmental clean-up. The estimated costs of clean-up have been reviewed by third-party sources and are expected not to exceed $150. The previous owner of the property has established an escrow of $400 to remediate the associated costs. The Company sold this property in December 1999. The Company has established a letter of credit of $250 to cover any costs of remediation exceeding the previous owner’s escrow. The Company believes the existing escrow amount is adequate to cover costs associated with this clean-up.

In connection with the sale of one of the Company’s facilities in December 2002, a $250 escrow was established. The escrow is receivable upon the Company obtaining an environmental innocent ownership certification on the building. The Company is currently in the process of applying for the certification and expects to be refunded the entire $250 escrow during 2004.

In addition to the foregoing contingencies, the Company is party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, all such matters are without merit or are of such kind, or involve such amounts, that an unfavorable disposition would not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

10. Wing Divestiture and Woodville Closing

During the second quarter of 2004, the accrued provisions for the divested Wing Industries, Inc. (“Wing”) unit decreased by $128 primarily due to payments on remaining lease obligations, leaving a remaining accrual of $191 for unpaid liabilities. In the same period, the Company decreased its accrued provisions for the Woodville closing by $11 related to remaining lease obligations, reducing the remaining accrual to $61.

11. Acquisitions

The acquisitions described below have been accounted for in accordance with SFAS No. 141, “Business Combinations” and the results of their operations are included in the Company’s financial statements from the date of their respective acquisition.

Atrium Shutters

On June 1, 2004, the Company acquired substantially all of the assets of Robico Shutters, Inc. and Expert Installation Service, Inc. (collectively known as “Robico Shutters”), Florida corporations, for a purchase price of $11,965, consisting of $11,665 in cash and $300 in the form of warrants to purchase Atrium Corporation common stock. In addition, transaction fees related to the acquisition totaled $135. The acquisition of Robico Shutters was effected through an existing wholly-owned subsidiary, Atrium Shutters, Inc. The cash portion of the transaction was funded through a combination of cash on hand and borrowings under both the Company’s revolving credit facility and its accounts receivable securitization facility. Atrium Shutters, based in Ft. Lauderdale, Florida, manufactures and installs custom-fit, hurricane and storm protection systems for new home construction in Florida.