Item 1. Business
The term Company refers to Atrium Corporation (the Registrant) and its subsidiaries after our 1998 recapitalization described in Item. 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The term Atrium Companies refers to Atrium Companies, Inc., our direct subsidiary. The term Wing refers to Wing Industries, Inc. and its former parent, Wing Industries Holdings, Inc. and the term Darby refers to R.G. Darby Company, Inc., Total Trim, Inc. and their former direct parent, Door Holdings, Inc., which entities were all contributed to Atrium Companies and became its direct and our indirect subsidiaries in connection with our 1998 recapitalization.
All references to pro forma assume that the acquisition during 2000 of the operations of Ellison Windows and Doors and VES, Inc., since renamed Atrium Extrusion Systems, Inc. (collectively, “Ellison”), and the divestitures of certain assets of Wing and the Atrium Wood Patio Door operations (“Wood”) during 2000 occurred on January 1, 2000. The financial data for the year ended December 31, 2000 is that of the Company and Ellison.
All share amounts are adjusted for the December 31, 2001 reverse stock split of 1,000 for one effected by the Company.
The Company
We were founded in 1948 and believe we are one of the largest manufacturers and distributors of residential non-wood windows and patio doors in the United States based on our net sales for the year ended December 31, 2001. We offer a complete product line of aluminum and vinyl windows and patio doors to our customers, which include leading national homebuilders and home center retailers such as Pulte/ Del Webb, Centex, The Home Depot and Lowe’s Companies Inc. (“Lowe’s”). We have grown rapidly through a combination of internal growth and complementary acquisitions.
We have a balanced business mix, as measured by management’s estimates of the percentage of actual net sales during 2001 and pro forma net sales during 2000 derived from the market segments we serve and the material types we use in our products:
Our balance between the repair and remodeling and new construction market segments is particularly important as we estimate that sales to the repair and remodeling market segment represented approximately 67% of window and patio door industry unit sales in 2001.
Our portfolio of products includes some of what we believe are the industry’s most recognized brand names, including Atrium®. Our full product line of aluminum and vinyl windows and patio doors enables us to differentiate ourselves from our competition, leverage our multi-channel distribution system and be well positioned to benefit from shifts in product preferences. Regional product preferences exist for aluminum and vinyl windows and patio doors, and a full product line is important to serve our national customer base effectively. We pride ourselves on our ability to provide to our nationwide customers the most suitable material based on varying regional product preferences.
We have 44 manufacturing facilities and distribution centers strategically located in 22 states to service customers on a nationwide basis. We distribute through multiple channels, including direct distribution to large homebuilders and independent contractors, one-step distribution through home centers and lumberyards and two-step distribution to wholesalers and dealers who subsequently resell to lumberyards, contractors and retailers. We believe that our multi-channel distribution network allows us to reach the greatest number of end customers and provide nationwide service to those customers.
We are vertically integrated with operations that include:
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The extrusion of aluminum and vinyl, which is 	utilized internally in our fabrication operations, or sold to 	third parties. 	
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The manufacture and assembly of window and patio 	door units, the pre-hanging of doors, and the sale of such units 	to wholesalers, lumberyards, dealers, home centers and 	homebuilders. 	
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A turn-key installation program for multi-family 	builders in which we supply and install many of our products, 	including windows and patio doors. 	
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The sale of finished products to homebuilders, 	remodelers and contractors through company-owned distribution 	centers located across the United States. 	
We have completed nine acquisitions since 1996, and we believe that we are well-positioned to be a leader in the consolidation of the residential window and patio door industry because of our size, rapid organic growth and our ability to integrate acquisitions successfully.
Competitive Strengths
We believe that we have a competitive advantage in our markets due to our following competitive strengths:
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Leading Market Positions. 	We are one of the largest suppliers of 	residential non-wood windows and patio doors in the United 	States with a domestic market share exceeding 6%. Based on 	management estimates, we believe that we have a leading market 	position in the residential aluminum and vinyl window and patio 	door product categories. 	
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Strong Brand Name Recognition. 	Our brands are well recognized in the 	building trade and are a distinguishing factor in customer 	selection. The Atrium® brand of windows and patio 	doors has been in existence for over 25 years and is 	recognized for its quality and value. In addition, we believe 	Atrium® is among the most-recognized brand names in 	the aluminum and vinyl window market segments. We believe there 	are significant opportunities to leverage our existing brands by 	targeting cross-selling opportunities and by re-branding certain 	products. 	
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Complete, High-Quality Product Offering. 	We are one of the few suppliers with a 	complete line of residential non-wood windows and patio doors in 	the United States. The ability to source windows and patio doors 	from a single supplier is a cost-saving opportunity for national 	homebuilders and home centers. This distribution flexibility and 	nationwide presence distinguishes us as a “one-stop” 	solution for customers’ window and patio door needs. 	
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Multi-Channel Distribution Network. 	We have a multi-channel distribution 	network that includes direct, one-step and two-step distribution 	as well as 28 company-owned distribution centers. Our 	distribution strategy maximizes our market penetration and 	reduces reliance upon any one distribution channel for the sale 	of our products. Furthermore, as a manufacturer and distributor 	of windows and doors for more than four decades, we have 	developed long-standing relationships with key distributors in 	our markets. In each instance, we seek to secure a leading 	distributor in each of our markets. If we cannot secure a 	top-tier distributor in a desired geographic market, we will 	consider the acquisition or start up of our own distribution 	center in that market. 	
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Established and Diversified Customer Base. 	We have developed strong relationships 	with our current customer base, which includes over 15,000 	active accounts. We have strong relationships with some of the 	leading companies in home and multi-family building, including 	J.P.I., D.R. Horton, Pulte/ Del Webb and Centex, and home center 	retailing, including The Home Depot and Lowe’s. Our 	customers are geographically diversified and our sales are 	balanced between the repair and remodeling and new construction 	market segments, which provides increased stability to our 	business. 	
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Low Cost, Vertically Integrated Manufacturer. 	We believe that we are one of the 	industry’s lowest cost providers based on our strong 	operating margins relative to our competitors. Our vertically 	integrated structure enables us to control all facets of the 	production and sale of windows and patio doors, eliminating 	incremental outsourcing costs. For our window and patio door 	products, our integrated operations, including extrusion, 	fabrication and distribution enable us to reduce inventory, 	improve production scheduling and optimize quality control. 	
Business Strategy
Our goal is to increase revenue growth and profitability and to strengthen our leadership position in the residential non-wood window and patio door industry through the following initiatives:
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Enhance National Presence. 	We will continue to focus our core 	efforts on maintaining and developing our nationwide market 	share, including enhancing our strong presence in our existing 	high growth markets such as the southern and western United 	States. Our recent acquisitions have helped to further our 	geographic coverage and, we believe, combined with the 	implementation of cross-selling initiatives, will continue to 	facilitate our growth. We will also seek to enhance our 	nationwide capabilities by 	
selectively starting or acquiring operations that 	complement our geographic coverage and product offerings. 	Additionally, we are exploring opportunities to extend our sales 	capabilities into Mexico. 	
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Extend and Cross-Sell Product Offerings. 	We plan to take advantage of 	cross-selling opportunities by marketing vinyl windows and patio 	doors to our traditional aluminum window and patio door 	customers and aluminum windows and patio doors to our 	traditional vinyl window and patio door customers and adding 	additional styles and designs to address specific regional 	product preferences. We also maintain training and incentive 	programs to ensure that our divisional sales forces market our 	complete product line of windows and patio doors. 	
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Capitalize on 	Atrium® Brand Name. We will seek to continue to leverage the 	strength of our nationally recognized Atrium® brand 	name that has been in existence for over 25 years. We believe 	that leveraging the Atrium® name across our products 	and on a nationwide scale will enhance our brand name 	recognition. For example, we see a significant opportunity in 	transferring the Atrium® brand to recently acquired 	product lines. Further, we will continue trade advertising 	initiatives to maintain our high brand awareness in the industry. 	
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Continue to Pursue Operational Efficiencies. 	Our team of highly experienced 	managers seeks to achieve improvements by closely scrutinizing 	our operations and applying best practices and continuous 	improvement programs across all of our divisions. We have been 	successful in improving the efficiency and productivity of our 	operations by automating manufacturing processes, improving 	logistics, implementing a company-wide information system, 	successfully integrating acquisitions and leveraging working 	capital requirements. We continue to analyze additional 	opportunities to improve operational efficiencies, including 	consolidating and expanding our aluminum extrusion operations, 	increasing capacity utilization at all of our manufacturing 	facilities and leveraging our size to realize purchasing savings. 	
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Refine Product Offering to Maximize 	Profitability. We plan to continually evaluate our 	product offering in terms of both customer needs and overall 	profitability. The result will be an offering of products that 	is diverse enough to satisfy varied regional product preferences 	while at the same time providing maximum profitability to us. 	For example, we made a decision during 2000 to divest Wing, our 	wood door manufacturing unit, and Wood, our wood patio door 	manufacturing unit. The divestitures resulted in an exit from 	the low margin commodity based business of wood doors, reduced 	our exposure to the sometimes volatile wood materials market 	and, we believe, should lead to an overall increase in our 	profitability. 	
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Make Selective Strategic Acquisitions. 	We have successfully consummated and 	integrated nine acquisitions since 1996, in each case lowering 	operating costs. We intend to take advantage of the fragmented 	market for window and patio door manufacturers by acquiring 	companies that present identifiable cost savings opportunities 	and add to our existing product lines, market share and targeted 	geographic coverage. As we continue our acquisition program, we 	believe we can leverage our experience in integrating 	acquisitions and maximizing cost savings and productivity 	enhancements. Additionally, we believe our size and national 	presence will be attractive to companies looking to combine with 	an industry leader. 	
Products
We are one of a few window and patio door manufacturers that offer a complete product line that consists of a full range of residential aluminum and vinyl windows and patio doors. Our complete product line allows us to differentiate ourselves from our competition, leverage our multi-channel distribution system and be well-positioned to benefit from shifts in product preference. As significant regional product preferences exist among
aluminum and vinyl, a full product line is important to serve a national customer base effectively. We estimate that our product mix, as a percentage of actual net sales in 2001 and pro forma net sales in 2000 is as follows:
Windows. We had approximately $388 million in net sales from the sale of windows in 2001. We estimate that our net sales from the sales of windows in 2001 were comprised of 36% from the sale of aluminum products and 64% from vinyl products. Our window products include sliders, single hung, double hung and casement products and are sold under the Atrium®, H-R WindowsTM, ThermalTM, Ellison®, Best BuiltTM and Kel-StarTM brand names, as well as private label brand names. We sell our windows primarily to building contractors and lumberyards through direct and one-step distribution, as well as national home center chains.
The demand for our aluminum and vinyl products vary by region:
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Aluminum - 	Aluminum windows are the product of choice in the southern 	United States due to the region’s warmer weather and 	value-conscious customers. Aluminum is the most appropriate 	fenestration material for the region because thermal efficiency 	is less important and the product is sold at a lower cost than 	either vinyl or wood. 	
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Vinyl - 	Demand for vinyl windows, particularly in colder climates, has 	significantly increased over the last ten years as vinyl windows 	have gained acceptance as a substitute for wood windows. This 	trend has been strengthened as prices for vinyl windows have 	become more competitive with wood products and durability and 	energy efficiency have improved. We entered the vinyl window 	market in mid-1995 and have increased sales of vinyl windows by 	leveraging the Atrium® brand name, leveraging our 	distribution channels and through acquisitions. The acquisitions 	of Heat, Inc. and Champagne Industries, Inc. in 1999 and the 	Ellison acquisition in 2000 increased our presence in the vinyl 	window business such that sales of vinyl windows represent 	approximately 55% of our total net sales in 2001, as compared to 	approximately 32% of our total net sales in 2000. 	
Patio Doors. We had approximately $62 million in net sales from the sale of patio doors in 2001. Our patio door products are sold under the Atrium®, Best BuiltTM, H-R WindowsTM and Ellison® brand names. We sell our patio doors to home center retailers, direct to builders and through one-step distribution.
Other Products and Services. We had approximately $75 million in net sales from the sale of other products and services in 2001. Our other products include deck and dock products, patio enclosures and extruded aluminum and vinyl profiles for a variety of industries, including various competitors of our window and door fabrication operations. The deck and dock products are made of vinyl and serve as an alternative to the more traditional wood counterpart. The enclosures are custom built to any size and are made from aluminum and vinyl product.
We also offer a turn-key total installation program for multi-family builders in which we supply and install exterior, interior and patio doors, mouldings, locks, hardware, wire shelving, bath accessories, plate glass mirrors, toilet partitions and other products. This concept allows a developer to transfer the risk associated with retaining reliable work crews and provides protection from cost overruns. We believe that developers view this as a value added service.
Sales, Marketing and Distribution
One of the key components of our marketing strategy is to capitalize on the complementary nature of our distribution channels. We have a multi-channel distribution network that includes direct, one-step and two-step distribution as well as 28 company-owned distribution centers. Our distribution strategy maximizes our market penetration and reduces reliance upon any one distribution channel for the sale of our products. Furthermore, as a manufacturer and distributor of windows and patio doors for more than four decades, we have developed long-standing relationships with key distributors in each of our markets. In each instance, we seek to secure the leading distributors in each market. If we cannot secure a top-tier distributor in a desired geographic market, we will consider the acquisition or start up of our own distribution center in that market.
We also sell to major home center retailers and smaller regional-based retail centers. Although home centers have become more important to us because they target the repair and remodeling market segment, they still accounted for less than 15% of our total net sales during 2001 and total pro forma net sales during 2000. One of our goals is to continue to increase our window business market share in the repair and remodeling market.
We utilize the following distribution channels:
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Direct Distribution (approximately 35% of our 	net sales from the sale of windows and patio doors in 	2001). We sell our windows and patio 	doors directly to contractors, remodelers and other homebuilders 	without the use of an intermediary. By selling directly to 	builders, we are able to increase our profit margins while at 	the same time offering builders more favorable pricing. 	
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One-Step Distribution, Including Home Center 	Sales (approximately 60% of our net sales from the sale of 	windows and patio doors in 2001 with home center sales 	representing approximately 15%). We 	sell our finished windows to lumberyards, building products 	distributors, home centers and company-owned distribution 	centers, which will then sell to contractors, homebuilders or 	remodelers. While it is not required that lumberyards or 	building products distributors carry our products on an 	exclusive basis, it is not unusual for them to do so. In 	addition, they generally purchase based on orders, keeping 	little or no inventory. One-step distribution tends to be used 	most often in metropolitan areas. 	
We maintain 28 company-owned distribution 	facilities in key markets where available independent 	distributors are weak or where we have been unable to make 	adequate arrangements with existing distributors. Company-owned 	distribution centers essentially act as one-step distributors. 	
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Two-Step Distribution (approximately 5% of our 	net sales from the sale of windows and patio doors in 	2001). Two-step distribution is the 	selling of completed windows and patio doors to a wholesaler or 	distributor who then sells the products to lumberyards, building 	products retailers and home centers. These intermediaries will 	in turn sell the windows and patio doors to the homebuilders, 	homeowners or remodelers. The wholesalers and distributors tend 	to maintain product inventory in order to service the needs of 	their client base for small quantities. Two-step distribution is 	more common where customers generally do not represent 	sufficient volume to purchase from us directly and because 	customers in urban areas are serviced by home centers and large 	lumberyards. 	
To enhance our market coverage and leverage our brand equity, we currently market our windows and patio doors under primarily six brand names, Atrium®, Kel-StarTM, Best BuiltTM, Ellison®, ThermalTM and H-R WindowsTM. Due to the fact that we enjoy national name recognition at both the building trade and consumer levels, we have chosen to consolidate a significant portion of our product line under the Atrium® name. We are currently in the process of rolling our Best BuiltTM, Ellison® and Kel-StarTM brand product lines into the Atrium® brand. We have completed a transition of our Skotty, Bishop, Champagne, Masterview and Gentek brands into the Atrium® brand. We expect to extend the Atrium® brand to other products, as well as to appropriate product lines acquired in the future.
Our promotional efforts to our window and patio door customers are focused on cooperative advertising programs which are offered to certain of our major customers. This gives us exposure in our customers’ local media, including newspaper, radio and television, in order to generate sales at individual locations. We also
invest in in-store displays, hold product knowledge classes for employees and use award winning packaging and in-store signage to further generate awareness within the stores.
We market our window and patio door products through a sales force consisting of approximately 150 company salaried and commissioned sales representatives and approximately 150 independent commissioned sales representatives. Each of our divisions is supported by a sales manager, direct sales representatives and independent representatives. The sales managers coordinate marketing activities among both company and independent representatives. Our sales representatives focus primarily on direct sales to homebuilders, remodelers and contractors, while independent sales representatives sell to home centers, lumberyards and wholesalers. In general, independent sales representatives carry our window and patio door products on an exclusive basis, although they may carry other building products from other manufacturers.
Our full product line has also been an asset to our sales force, especially when we are exploring a new distribution channel opportunity. Distributors have come to recognize that we have a complete line of vinyl and aluminum windows and patio doors. The distributors frequently do not buy the whole range of products since regional tastes vary and distributors tend to work according to regions. However, we believe, these distributors value our ability to provide these products should they ever demand them.
We believe that customer service plays a key role in the marketing process. On-time delivery of products, order fill rate, consistency of service and flexibility in meeting changing customer requirements have made it possible for us to build a large and loyal customer base that includes companies such as Centex Homes, one of the nation’s largest home-builders, and Lowe’s, one of the nation’s largest home center retailers.
Our pricing and product offering strategy focuses on offering the end consumer lower price points at acceptable margins. We have executed this strategy in two steps. First, we have consolidated our product offerings to simplify the overall offering and reduce inventory levels. Second, we offer the market good, better and best options within our product offering that provide customers a price point and product that meets their needs. Certain of the products in the offering have been redesigned (with particular emphasis on taking costs out of the products) in order to have an offering with three distinct price points. This promotes more “trading up” to our higher quality products by the customer and displays a complete product line.
Operations
We manufacture and sell our windows and patio doors through a vertically integrated process that includes extrusion, fabrication and distribution. We realize many operational and cost benefits from our vertically integrated window and patio door operations. By extruding aluminum and many of our vinyl components in-house, we are able to secure a low-cost, reliable source of extrusions, control product quality and control inventory levels. The integration of extrusion and fabrication operations gives us significantly more control over our manufacturing costs. We continually work to achieve cost savings through increased capacity utilization, adoption of best practices, reduction of cost of materials, rationalization of product lines and reduction of inventory.
We continue to build on what we believe is our position as one of the industry’s lowest cost manufacturers. Because of the scale of our operations, we are able to negotiate price concessions for our raw materials, including glass and vinyl. This is an important consideration because, historically, the total cost of materials typically comprises approximately 40% to 45% of our total net sales.
We have been manufacturing products in Texas since 1953 and today have six primary manufacturing facilities in the state. While solidifying our national presence, we have strategically established 16 manufacturing operations nationwide.
Industry Overview
In 2001, new construction spending in the United States totaled over $668 billion. Of the total new construction spending amount, residential spending totaled approximately $397 billion. Within the residential construction market, replacement spending totaled approximately $165 billion. In 2001, new housing starts in the United States totaled approximately 1.7 million units of which approximately 1.3 million units were single-
family homes and approximately 0.4 million units were multi-family homes. Historical residential repair and remodeling expenditures have demonstrated consistent growth dynamics increasing from approximately $15 billion to approximately $165 billion during the period from 1970 to 2001 and averaging a compound annual growth rate of 8.0%.
Windows. The domestic window market has grown to approximately 59 million in unit sales in 2001, and has outpaced the growth in the domestic building materials industry generally. The residential window industry can be divided into two end-use segments: new construction, with an estimated 19.4 million windows sold in 2001, and repair and remodeling, with approximately 39.6 million windows sold in 2001. We believe that the repair and remodeling segment will continue to experience strong growth due to the strength of sales of existing homes and the increase in the average age of homes from 23 years to 28 years in the last decade.
Patio Doors. We believe that the residential patio door market has grown to more than 6.4 million units in 2001. The residential patio door industry can be divided into two principal market segments: new construction and repair and remodeling. We estimate that patio doors sold to the repair and remodeling segment constituted 66% of all patio door units sold in the United States in 2001.
We believe that the window and patio door industry has experienced significant consolidation in the last few years. We believe this consolidation trend favors companies like ours, with nationwide capabilities to service large home centers and home builders, strong brand names, the ability to provide a complete product line and economies of scale in manufacturing, distributing and marketing. In addition to opportunities presented by consolidation of the industry, industry growth has been driven by the growth in the home center retailer category. The home center industry is one of the fastest growing retail sectors in the United States. According to National Home Center News, the U.S. retail home improvement market is expected to grow to approximately $184 billion by the year 2003.
Competition
The residential window and patio door industry is highly fragmented. With few exceptions, competitors are privately-owned, regional companies with annual sales under $100 million. On a national basis we compete with a few national companies in different regions, products, distribution channels and price points, but do not compete against any single company across all of these areas. We compete with various other companies in specific regions within each market.
Our major competitors for the sale of aluminum windows and patio doors are Alenco Windows and MI Home Products, Inc. The market for vinyl windows and patio doors is comprised primarily of local and regional manufacturers, as no dominant manufacturer operates on a national basis. Historically, demand for vinyl windows and patio doors has been concentrated in the colder regions of the United States. Our major competitors for the sale of vinyl windows and patio doors are Silver Line Building Products and Nortek, Inc. in the Northeast, Simonton Windows in the Mid-Atlantic and Southeast and Milgard Manufacturing, Inc. in the Pacific Northwest. In addition, we compete with a number of regional manufacturers that sell directly to repair and remodeling contractors.
Inflation and Raw Materials
During the past several years, the rate of general inflation has been relatively low and has not had a significant impact on our results of operations. We purchase raw materials, including aluminum, glass and vinyl, that are subject to fluctuations in price that may not reflect the rate of general inflation. These materials fluctuate in price based on supply and demand. Historically, there have been periods of significant and rapid aluminum price changes, both upward and downward, with a concurrent short-term impact on our operating margins. We historically mitigated the effects of these fluctuations over the long-term by passing through price increases to our customers and through other means, such as hedging activities. The primary raw materials used in the production of our windows and patio doors are readily available and are procured from numerous suppliers.
Seasonality
The new home construction market and the market for external repairs and remodeling in northern climates are seasonal, with increased related product sales in the second and third quarters of the calendar year. Although this results in seasonal fluctuations in the sales of certain of our products, the overall impact of these fluctuations is mitigated to some degree by our balanced national presence which reduces our dependency on a single geographic area.
Cyclicality
Demand in the window and patio door manufacturing and distribution industry is influenced by new home construction activity. For the year ended December 31, 2001, we estimate that approximately 52% of our net sales were related to new home construction. Trends in the housing sector directly impact our financial performance. Accordingly, the strength of the U.S. economy, the age of existing home stock, job growth, interest rates, consumer confidence and the availability of consumer credit, as well as demographic factors, such as the migration of the population within the United States, have a direct impact on our business. Cyclical declines in new housing starts may adversely impact our business, and we cannot assure you that any such adverse effects would not be material.
Employees
We employ approximately 4,350 people, of whom approximately 4,265 are employed at our manufacturing facilities and distribution centers and approximately 85 are employed at our corporate headquarters in Dallas, Texas. Approximately 1,300 of our hourly employees are covered by collective bargaining agreements. We entered into a new three-year collective bargaining agreement in May 2001 with the Union of Needletrades, Industrial and Textile Employees (“UNITE!”) covering certain employees at the Atrium Aluminum, Atrium Vinyl, H-R Windows and Extruders manufacturing facilities. The collective bargaining agreement expires in May 2004. In addition, we have a collective bargaining agreement with the Sheet Metal International Association covering certain employees at our Kel-Star facility. Due to our recent decision to close this facility, we have negotiated an agreement resulting in the termination of the agreement. There are no union affiliations with any of our other divisions or subsidiaries. We believe that our relationship with our employees is good.
Backlog and Material Customers
We have no material long-term contracts. Orders are generally filled within 7 to 14 days of receipt. Our backlog is subject to fluctuation due to various factors, including the size and timing of orders for our products and is not necessarily indicative of the level of future sales.
Government Regulation and Environmental Matters
Our past and present operations and our assets are subject to extensive federal, state, local and foreign environmental laws and regulations pertaining to the discharge of materials into the environment, the handling and disposal of wastes, including solid and hazardous wastes, or otherwise relating to health, safety and protection of the environment. We do not expect to make any expenditures with respect to ongoing compliance with these environmental laws and regulations that would have a material adverse effect on our capital expenditures, results of operations or competitive position. However, the applicable requirements under the law could change at any time.
The nature of our operations and assets expose us to the risk of claims under environmental, health and safety laws and regulations. We cannot assure you that material costs or liabilities will not be incurred in connection with such claims. We have been subject to such claims in the course of our operations, and have made expenditures to address known conditions in a manner consistent with applicable laws and regulations. Based on our experience to date, we do not believe that existing claims will have any further material adverse effect on our capital expenditures, earnings or competitive position. We cannot assure you that the discovery of presently unknown environmental conditions, changes in environmental claims that may involve material
health and safety laws and regulations or other unanticipated events will not give rise to unforeseen expenditures or liabilities.
Trademarks and Patents
We rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality and non-disclosure agreements and other contractual provisions to protect our propriety rights. We have registered and non-registered trade names and trademarks covering the principal brand names and product lines under which our products are marketed.
We have a perpetual, irrevocable, exclusive and royalty-free license to use a registered trademark under the name Ellison®. This trademark’s duration is perpetual as long as it is renewed every five years.
Item 2.
Item 2. Properties
Our operations are conducted at the owned or leased facilities described below:
Additionally, our indirect subsidiary, Thermal Industries, Inc. leases 21 distribution warehouses in 14 states for vinyl window distribution with sites averaging 8,000 square feet.
We maintain our corporate headquarters in Dallas, Texas. The Dallas facility provides approximately 17,500 square feet and is leased for a seven-year term expiring in 2004.
We believe that our manufacturing plants are generally in good operating condition and are adequate to meet future anticipated requirements.
Item 3.
Item 3. Legal Proceedings
We are involved from time to time in litigation arising in the ordinary course of our business, none of which is expected to individually, or in the aggregate, have a material adverse effect on us.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
There is no established public trading market for our outstanding equity securities.
Item 6.
Item 6. Selected Financial Data
The selected income statement data set forth below for the years ended December 31, 1997, 1998, 1999, 2000 and 2001, and the selected balance sheet data at December 31, 1997, 1998, 1999, 2000 and 2001 were derived from the audited consolidated financial statements as described further below. The selected historical financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements, related notes and other financial information included elsewhere in this Form 10-K.
Prior to October 2, 1998, our historical financial statements included the operations of Atrium Corporation and its subsidiaries prior to our 1998 recapitalization and the reverse acquisition of Wing. On October 2, 1998, pursuant to our 1998 recapitalization, we contributed the assets of Wing and Darby to Atrium Companies.
As Wing was determined to be the acquiror in a reverse acquisition in connection with our 1998 recapitalization, the historical financial statements of the Company were replaced with the historical financial statements of Wing. As a result, the statement of operations for 1998 only includes the operations of the Company and Darby from October 3, 1998. The financial statements as of and for the year ended December 31, 1997 only include the operations and accounts of Wing. Additionally, the operations of Delta Millwork, Inc. (renamed R.G. Darby Company-South and Total Trim, Inc.-South, together, “Darby-South,” since merged into Door Holdings, Inc.) are included since its date of acquisition, January 27, 1999, the operations of Heat, Inc. (“Heat,” renamed Atrium Vinyl, Inc.) and Champagne Industries, Inc. (“Champagne,” renamed Atrium Door and Window Company of the Rockies) are included since their respective dates of acquisition, May 17, 1999, and the operations of Ellison are included since its date of acquisition,
October 25, 2000. The December 31, 2001 and 2000 balance sheet data includes the accounts of the Company, Wing, Darby, Darby-South, Heat, Champagne, Ellison and each of their respective subsidiaries.
Note:
EBITDA amounts presented above are not pro forma 	for the acquisitions and/or divestitures that occurred during 	the years presented. 	
(1)
EBITDA represents income before interest, 	securitization expense, income taxes, extraordinary charge, 	depreciation and amortization, special charges, stock 	compensation expense, special writedown of inventory of $1,010 	in 2001 (included in cost of goods sold) related to the shutdown 	of our Woodville, Texas facility, and certain non-recurring 	expenses. The special charges of $1,213 during 2001 related to 	the shutdown of our Woodville, Texas facility and to 	non-capitalizable legal fees incurred to amend our credit 	agreement. The special charges of $27,739 in 2000 were primarily 	related to the divestitures of the Wing and Wood operations. The 	special charges of $1,886 in 1999 were related to severance paid 	to the former CEO. We believe it is appropriate to exclude these 	special charges to provide investors a more accurate 	understanding of our ongoing operations. While we do not intend 	for EBITDA to represent cash flow from operations as defined by 	GAAP and we do not suggest that you consider it 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, we include it herein to provide additional 	information with respect to our ability to meet our future debt 	service, capital expenditures and working capital requirements. 	See “Management’s Discussion and Analysis of Financial 	Condition and Results of Operations.” We believe EBITDA 	provides investors and analysts in the building materials 	industry the necessary information to analyze and compare our 	historical results on a comparable basis with other companies on 	the basis of operating performance, leverage and liquidity. 	However, as EBITDA is not defined by GAAP, it may not be 	calculated on the same basis as other similarly titled measures 	of other companies within the building materials industry. 	
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements which appear elsewhere in this Form 10-K.
The Recapitalization
On August 3, 1998, we entered into a Merger Agreement with Atrium Corporation, our then direct subsidiary, and certain securityholders to acquire all of the outstanding capital stock of Atrium Corporation for $225.0 million, through a series of transactions described below and referred to as our 1998 recapitalization. Atrium Corporation owned 100% of the outstanding capital stock of Atrium Companies prior to the merger. In connection with the merger, GE Investment Private Placement Partners II, a Limited Partnership, referred to as GEIPPPII, and Ardatrium L.L.C. formed us by acquiring all of our outstanding common stock for an aggregate purchase price of $50.0 million. GEIPPPII is a private equity partnership affiliated with GE Investments, a wholly-owned investment management subsidiary of the General Electric Company. Ardatrium L.L.C. is an affiliate of Ardshiel, Inc., referred to as Ardshiel, a private equity investment firm based in Connecticut.
Our acquisition of Atrium Corporation was effected through a merger on October 2, 1998 of one of our wholly-owned subsidiaries with and into Atrium Corporation pursuant to the terms of the Merger Agreement. Prior to the merger, we contributed $50.0 million to Atrium Corporation in exchange for all of its outstanding common stock. As a result of the merger, Atrium Corporation became our direct wholly-owned subsidiary, and Atrium Companies became our indirect wholly-owned subsidiary.
In connection with the merger, GEIPPPII and an affiliate of Ardshiel recapitalized Wing and Darby and contributed them to Atrium Companies. As a part of our 1998 recapitalization, GEIPPPII and an affiliate of Ardshiel contributed to Atrium Companies $50.0 million from the sale of our common stock and $52.0 million in the implied asset value of the Wing and Darby businesses. In October 2000, Atrium Corporation was merged into us and we were subsequently renamed Atrium Corporation. As a result of the merger of Atrium Corporation into us, Atrium Companies became our direct wholly-owned subsidiary.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to revenue recognition, recoverability of goodwill, allowance for doubtful accounts, inventory reserves and actuarially determined insurance reserves. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
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Revenue recognition. 	Our revenue recognition policy is 	significant because our sales are a key component of our results 	of operations. In addition, our revenue recognition determines 	the timing of certain expenses, such as commissions, delivery 	expense and sales returns and allowances. Revenue is recognized 	from the sale of windows and patio doors and related components 	at the time of delivery to the customer. On contracts involving 	installation, revenue is recognized when the installation is 	complete. We offer our customers the right to return products 	that do not function properly or are defective. Estimates are 	used to derive sales returns and allowances, commissions, 	delivery expense, and allowances for doubtful accounts. We 	follow very specific and detailed guidelines in measuring 	
revenue. However, certain judgments affect the 	application of our revenue policy. Revenue results can be 	difficult to predict, and any shortfall in revenue or delay in 	recognizing revenue could cause our operating results to vary 	significantly from period to period. 	
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Goodwill and Long-Lived Assets. 	We assess the impairment of goodwill 	and other long-lived assets whenever events or changes in 	circumstances indicate that the carrying value may not be 	recoverable. In assessing the recoverability of our goodwill, 	management must make assumptions regarding the estimated cash 	flows and other factors to determine the fair value of the 	respective assets. If these estimates or their related 	assumptions change in the future, we may be required to record 	an impairment charge. Factors we consider important which could 	trigger an impairment review include the following: 	
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Significant underperformance relative to expected 	history or projected future operating results. 	
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Significant changes in the manner of our use of 	the acquired assets or the strategy of our overall business. 	
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Significant negative industry or economic trends. 	
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Allowance for doubtful accounts. 	We maintain an allowance for doubtful 	accounts for estimated losses resulting from the inability of 	its customers to make required payments. Additionally, we take 	into consideration the current financial condition of our 	customers, historical experience and any specific customer 	collection issues we have identified. If the financial condition 	of our customers were to deteriorate, resulting in an impairment 	of their ability to make payments, additional allowances may be 	required. 	
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Inventory reserves. 	Inventories are valued at the lower of 	cost (last-in, first-out) or market. We provide reserves for 	estimated obsolescence or unmarketable inventory equal to the 	difference between the cost of inventory and the estimated net 	realizable value using assumptions about future demand for its 	products and market conditions. If actual future demand or 	market conditions are less favorable than those projected by 	management, additional inventory reserves may be required. 	
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Self-insurance 	reserves. We are self-insured and 	provide reserves for estimated medical and workers’ 	compensation claims and incurred but not reported claims. We 	take into consideration the status of current and historical 	claims and actuarial calculations of such claims to determine 	the reserve amounts. If current or future claims are higher than 	estimated, additional reserves may be required. 	
Results of Operations (in thousands, except percentages)
The following table sets forth for the periods indicated, information derived from our consolidated statements of operations expressed as percentage of net sales.
Year Ended December 31, 2001 Compared 	to Year Ended December 31, 2000
Net Sales. Net sales increased by $28,652 from $496,247 in 2000 to $524,899 in 2001, or approximately 5.8%. Net sales in 2001 increased principally as a result of the acquisition of Ellison during the fourth quarter of 2000. Ellison’s net sales increased by $118,194 from $19,091 in 2000 to $137,285 in 2001. Additionally, the increase during 2001 was partially due to increases from our vinyl operations (excluding the Ellison acquisition) as a result of increased demand for vinyl windows. Net sales at these operations increased $8,414, or 5.6% compared to 2000. The increase during 2001 was partially offset by the decrease from the divestiture of the Wing and Wood operations during 2000. Wing’s net sales decreased from $84,154 in 2000 to $0 in 2001 and the net sales of Wood decreased from $7,852 in 2000 to $0 in 2001. The increase during 2001 was also offset by decreases from our aluminum operations as a result of inclement weather in the first quarter and softer demand related to its aluminum extrusion operations in 2001. Net sales at these operations decreased $11,636, or 4.8%, compared to 2000.
Cost of Goods Sold. Cost of goods sold improved from 74.8% of net sales during 2000 to 67.6% of net sales during 2001. The improvement as a percentage of net sales was primarily attributable to the divestitures of the Wing and Wood operations. The cost of goods sold as a percentage of net sales during 2000 for Wing and Wood was 82.1% and 128.4%, respectively. This improvement was partially offset by increases at our
aluminum and vinyl operations. Cost of goods sold at the aluminum operations increased from 74.6% of net sales during 2000 to 77.3% of net sales during 2001. The increase was due to a number of factors including energy surcharges on materials, higher insurance costs related to workers compensation and health insurance, expenses associated with plant consolidations and lease costs at new facilities. The increase was also due to the special writedown of inventory of $1,010 related to the closure of the Woodville, Texas facility and the associated product line rationalization, compared to inventory writedowns of $5,338 and $1,868 in 2000 related to the Wing and Wood divestitures. Cost of goods sold at the vinyl operations increased from 63.7% of net sales during 2000 to 64.7% of net sales during 2001. The increase was primarily due to the acquisition of Ellison during 2000. Ellison had cost of goods sold of 66.2% of net sales during 2001. The LIFO benefit during 2001 was $1,116 and the LIFO expense during 2000 was $1,541. Overall, changes in the cost of goods sold as a percentage of net sales for one period as compared to another period may reflect a number of factors, including changes in the relative mix of products sold and the effects of changes in sales prices, material costs and changes in productivity levels.
Selling, Delivery, General and Administrative Expenses. Selling, delivery, general and administrative expenses decreased $10,064 from $125,991 during 2000 (25.4% of net sales during 2000) to $115,927 during 2001 (22.1% of net sales during 2001). The decrease was primarily due to the divestitures of Wing and Wood during 2000. Wing’s selling, delivery, general and administrative expenses decreased from $32,067 during 2000 to $0 during 2001. The Wood operation’s selling, delivery, general and administrative expenses decreased from $3,731 during 2000 to $0 during 2001. The decrease during 2001 was partially offset by the acquisition of Ellison during the fourth quarter of 2000. Ellison’s selling, delivery, general and administrative expenses increased $22,006 from $3,607 during 2000 to $25,613 during 2001. Excluding the Ellison acquisition during 2000, the aluminum operations increased from 17.2% of net sales during 2000 to 18.5% of net sales during 2001 and the vinyl operations improved from 27.8% of net sales during 2000 to 26.5% of net sales during 2001. The general and administrative expense includes $695 of gain on sale of assets during 2000 and $1,798 of gain on sale of assets during 2001. The 2000 gain includes $446 from the sale of idle facilities and the 2001 gain includes $1,741 from the sale of our vinyl extrusion operation of Thermal Industries, Inc.
Securitization Expense. During 2001, we incurred securitization expense of $1,532 on the sale of our accounts receivable, which included $878 of fees associated with the placement of our accounts receivable securitization facility and a loss on the sale of accounts receivable of $654, which represented the interest expense component of the transaction.
Amortization Expense. Amortization increased $4,540 from $9,870 during 2000 to $14,410 during 2001. The increase was largely due to increased amortization of goodwill recorded in connection with the acquisition of Ellison during October 2000.
Stock Compensation Expense. Stock compensation expense increased from $0 during 2000 to $582 during 2001. The increase was due to the repurchase of outstanding options from former employees during 2001 and payment for services rendered in the form of our common stock to Ardshiel, Inc.
Special Charges. During 2001, we recorded one-time charges of $1,213, of which $910 related to the shutdown of our Kel-Star facility and $303 related to non-capitalizable legal fees incurred to amend our credit agreement. During 2000, we recorded a one-time charge of $27,739, of which $24,585 related to the write-off of certain intangible assets and the writedown of certain assets related to the sale of Wing and $1,251 related to the writedown of certain assets and charges for idle facilities at Wood. Special charges were recorded in the amount of $539 for non-capitalizable legal fees associated with the amendment of our credit agreement. Additionally, we recorded $1,364 for severance benefits incurred in connection with the separation agreement entered into between us and the former Chief Executive Officer.
Interest Expense. Interest expense increased by $6,572 from $40,251 during 2000 to $46,823 during 2001. The increase in interest expense was due primarily to the additional debt of $38,000 incurred under our credit facility and $36,500 of senior pay-in-kind notes issued in connection with the acquisition of Ellison. The increase in interest expense includes the amortization of additional deferred financing costs incurred in connection with the Ellison acquisition.
Extraordinary Charge. Extraordinary charge increased from $0 during 2000 to $837 during 2001. Extraordinary charge in 2001 consisted of the write-off of a pro-rata portion of deferred financing costs of $837 in connection with the $20,000 prepayment of debt under our credit agreement from the proceeds of our securitization of accounts receivable.
Year Ended December 31, 2000 Compared 	to Year Ended December 31, 1999
Net Sales. Net sales decreased by $2,209 from $498,456 in 1999 to $496,247 in 2000, or approximately 0.4%. Net sales in 2000 decreased principally as a result of decreases at Wing and Wood during the year. Wing’s net sales decreased by $68,002 from $151,841 during 1999 to $83,839 during 2000 and Wood’s net sales decreased by $8,508 from $16,156 during 1999 to $7,648 during 2000. During the second and third quarter of 2000, net sales from Wing declined prior to its divestiture, as its largest customer, The Home Depot, began shifting its business to other interior door manufacturers. The declines at Wood prior to their divestiture were due to our efforts to eliminate less-profitable sales territories. The decrease during the year was also attributable to a decline at Darby which was the result of eliminating single-family installations and focusing exclusively on multi-family installations. The decrease during 2000 was partially offset by the increase from the acquisitions of Heat and Champagne, which were acquired during the second quarter of 1999. During 2000, these acquisitions had a combined increase in net sales of $33,385, or 47.7%. On October 25, 2000, we also acquired Ellison, which had net sales of $19,091 subsequent to the acquisition. The decrease during 2000 was also partially offset by increases (exclusive of the 1999 and 2000 acquisitions) that included approximately $18,880 from our aluminum window operations, or a 9.8% growth rate, and $4,100, or a 10.8% growth rate, at our vinyl window operations.
Cost of Goods Sold. Cost of goods sold increased from 68.4% of net sales during 1999 to 74.8% of net sales during 2000. The increase as a percentage of net sales was due largely to increases at Wing and Wood. Wing experienced increases in material costs, up from 58.7% of net sales during 1999 to 82.1% of net sales during 2000, primarily the result of a $5,338 writedown of inventory that was recorded during the second and third quarters of 2000. This writedown related to its divestiture and $12,609 of price concessions made to move remaining inventories. Wood’s cost of goods sold increased from 79.5% of net sales during 1999 to 128.4% of net sales during 2000. The increase at Wood was primarily due to material costs relating to the $1,868 writedown of inventory and $1,277 of price concessions made to move remaining inventories. The increase was also attributable to the aluminum and vinyl operations. The aluminum operations had costs of goods sold of 71.3% of net sales during 1999 compared to 74.6% of net sales during 2000. The increases at the aluminum operations were the result of higher insurance and lease costs at new facilities. The vinyl operations had costs of goods sold of 60.3% of net sales during 1999 compared to 63.7% of net sales during 2000. The increases at the vinyl operations were primarily due to the acquisition of Ellison during 2000. Ellison had cost of goods sold of 65.5% of net sales during 2000 from the date it was acquired. The LIFO expense during 2000 was $1,541 and the LIFO benefit was $75 during 1999. Overall, changes in the cost of goods sold as a percentage of net sales for one period as compared to another period may reflect a number of factors, including changes in the relative mix of products sold and the effects of changes in sales prices, material costs and changes in productivity levels.
Selling, Delivery, General and Administrative Expenses. Selling, delivery, general and administrative expenses increased $18,290 from $107,701 (21.6% of net sales during 1999) to $125,991 (25.4% of net sales during 2000). Wing’s selling, delivery, general and administrative expenses were up from 20.7% of net sales during 1999 to 37.8% of net sales during 2000, due to increased labor, freight expense and shut down expenses surrounding the divestiture during 2000. The remaining increase was largely due to the inclusion of selling, delivery, general and administrative expenses of Heat and Champagne for the full year, which have higher selling expenses as a percentage of net sales. The combined Heat and Champagne selling, delivery, general and administrative expenses were $30,747 (29.7% of net sales) during 2000, an increase of $11,636 over 1999 (27.3% of net sales). Excluding the acquisitions during 1999 and 2000, the aluminum operations improved from 21.0% of net sales during 1999 to 20.0% of net sales during 2000 and the vinyl operations improved from 26.5% of net sales during 1999 to 26.2% of net sales during 2000. Additionally, delivery expenses increased due to increased fuel costs.
Amortization Expense. Amortization expense increased $1,153 from $8,717 during 1999 to $9,870 during 2000 due to amortization of goodwill recorded in connection with the acquisitions of Heat and Champagne in 1999 and Ellison in 2000. The increase was partially offset by the write-off of capitalized software costs and goodwill in connection with the divestiture of Wing during 2000.
Special Charges. During 2000, we recorded a one-time charge of $27,739, of which $24,585 related to the write-off of certain intangible assets and the writedown of certain assets related to the sale of Wing and $1,251 related to the writedown of certain assets and charges for idle facilities at the Wood operations. During 2000, special charges were recorded in the amount of $539 for non-capitalizable legal fees associated with the amendment of our credit facility. Additionally, we recorded $1,364 for severance benefits incurred in connection with the separation agreement entered into between us and the former Chief Executive Officer hired in March 2000. During the first quarter of 1999, we recorded a one-time charge of $1,886 for severance benefits incurred in connection with the separation agreement entered into between us and our former President and Chief Executive Officer.
Interest Expense. Interest expense increased $7,737 from $32,514 during 1999 to $40,251 during 2000. The increase in interest expense was due primarily to the $175,000 senior subordinated notes we issued on May 17, 1999. The notes were issued in connection with the acquisitions of Heat and Champagne and are due May 1, 2009. In addition, the increase in interest expense includes the amortization of deferred financing, accretion of the discount recorded in connection with the issuance of the $175,000 senior subordinated notes, interest on additional term loan borrowings and a higher average revolving credit balance during 2000. The increase in interest expense was partially offset from gains of $327 during 2000 from interest rate collars.
Liquidity and Capital Resources
Cash generated from operations, availability under our credit facility and availability under our accounts receivable securitization facility are our principal sources of liquidity. During 2001, cash was primarily used for capital expenditures and debt payments. Net cash provided by operating activities was $50,411 during 2001 compared to cash used in operating activities of $4,441 during 2000. The increase was primarily related to the proceeds received from the accounts receivable securitization facility of $27,400. The increase was also due to improvements in working capital management. Cash flows used in investing activities decreased from $89,780 during 2000 to $10,596 during 2001. The decrease was primarily due to the acquisition of Ellison during 2000 of $99,276, which was offset by the proceeds of $24,355 received from the sales of Wing and Wood during 2000. Net cash used in financing activities was $43,214 during 2001 compared to net cash provided by financing activities of $97,573 during 2000. Cash used in financing activities during 2001 consisted of a $20,000 prepayment of the term loans as a result of proceeds received from the accounts receivable securitization facility, as well as $19,000 of net payments on the revolving credit facility, paid from cash provided by operating activities. Cash provided from financing activities during 2000 included proceeds from issuance of common stock of $26,500, term loan borrowings of $38,000, and the issuance of $36,500 senior pay-in-kind notes, all of which were necessary to fund the acquisition of Ellison.
The following table summarizes our contractual obligations at December 31, 2001, and the effects such obligations are expected to have on our liquidity and cash flow in future periods.
Payments Due by Period
Long-term debt consists of borrowings under our credit facility, $175,000 of senior subordinated notes and $36,500 of senior pay-in-kind notes. The credit facility term borrowings require quarterly principal and interest payments. The senior subordinated notes require semi-annual interest payments only and are due in May 2009. The senior pay-in-kind notes accrete at 15%. We may, at our option, prepay the revolving credit facility or term loans without premium or penalty.
The credit agreement, senior subordinated notes and senior pay-in-kind notes require us to comply with certain covenants which, among other things, include limitations on indebtedness, liens and further negative pledges, investments, contingent obligations, dividends, redemptions and repurchases of equity interests, mergers, acquisitions and asset sales, capital expenditures, sale-leaseback transactions, transactions with affiliates, dividend and other payment restrictions affecting subsidiaries, changes in business conducted, amendment of documents relating to other indebtedness and other material documents, creation of subsidiaries, designation of Designated Senior Indebtedness in respect of the senior subordinated notes, and prepayment or repurchase of other indebtedness. The credit agreement and senior pay-in-kind notes require us to meet certain financial tests pertaining to interest coverage, fixed charge coverage and leverage. As of December 31, 2001, we were in compliance with all related covenants.
The credit agreement, senior subordinated notes and senior pay-in-kind notes contain customary events of default, including, without limitation, payment defaults, covenant defaults, breaches of representations and warranties, bankruptcy and insolvency, judgments, change of control and cross-default with certain other indebtedness.
We have two interest rate swaps each of which have negative fair values at December 31, 2001. The notional amount, fair value and expiration dates of the swaps are $37,500, ($1,448) and December 2002 and $100,000, ($6,821) and November 2003.
We have various outstanding operating leases for office and manufacturing space, automobiles and machinery and equipment.
We have various letters of credit outstanding related to certain of our insurance policies and facility leases.
In connection with our accounts receivable securitization facility executed in 2001, we formed a special purpose funding subsidiary to facilitate the sale of pools of trade receivables. The special purpose entity is consolidated with us. At December 31, 2001, we did not have any other relationships with unconsolidated entities or financial partnerships, such entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity or market or credit risk that could arise if we had engaged in such relationships.
Other Capital Resources
In connection with our 1998 recapitalization, Atrium Companies entered into a Credit Agreement providing for a revolving credit facility in the amount of $30,000, which was increased to $40,000 in September 1999. In connection with the acquisition of Ellison, the revolving credit facility was increased to $47,000, which includes a $10,000 letter of credit sub-facility. The revolving credit facility has a maturity date of June 30, 2004. Additionally, we have an accounts receivable securitization facility which will make additional funds available to us depending on our accounts receivable levels. At December 31, 2001, there was $44,355 of availability under the revolving credit facility, net of outstanding letters of credit totaling $2,645. As of March 27, 2002, there was cash of $789 and $41,855 of availability under the revolving credit facility, net of borrowings of $2,500 and outstanding letters of credit totaling $2,645. At December 31, 2001, there was $22,600 of availability under the accounts receivable securitization facility, subject to borrowing base requirements, net of securitizations of $27,400. As of March 27, 2002, there was $26,200 available under the accounts receivable securitization facility, net of securitizations of $23,800.
Capital Expenditures
We had net cash capital expenditures of $7,984 during 2001, compared to $11,689 and $8,111 during 2000 and 1999, respectively. The 2001 capital expenditures are net of proceeds received from the sale of assets of $6,120. The proceeds primarily related to the sale of two of our buildings and the sale of our vinyl extrusion operation of Thermal Industries, Inc. Capital expenditures during 2001 were largely a result of our continued efforts to increase efficiency through automation of our various divisions, as well as to increase plant capacity at the Dallas-based aluminum and vinyl operations. We expect capital expenditures (exclusive of acquisitions, if any) in 2002 to be approximately $13,500, however, actual capital requirements may change based on management and strategic decisions.
Moreover, our ability to meet debt service, working capital obligations and capital expenditure requirements is dependent upon our future performance which, in turn, will be subject to general economic conditions and to financial, business and other factors, including factors beyond our control.
Inflation, Trends and General Considerations
We have evaluated and expect to continue to evaluate possible acquisitions on an ongoing basis and at any given time may be engaged in discussions or negotiations with respect to acquisition candidates. Our performance is dependent to a significant extent upon the levels of new residential construction, residential replacement and remodeling and non-residential construction, all of which are affected by such factors as interest rates, inflation and unemployment. In the near term, we expect to operate in an environment of relatively stable levels of construction and remodeling activity. However, increases in interest rates could have a negative impact on the level of housing construction and remodeling activity. The demand for our products is seasonal, particularly in the Northeast and Midwest regions of the United States where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home improvement and new construction markets. Our lower sales levels usually occur during the first and fourth quarters of our fiscal year. Since a high percentage of our manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income and net earnings tend to be lower in quarters with lower sales levels. In addition, the demand for cash to fund the working capital of our subsidiaries is greater from late in the first quarter of our fiscal year until early in the fourth quarter of our fiscal year.
Market Risk
We are exposed to market risks related to changes in interest rates and commodity pricing. We use derivative financial instruments on a limited basis to hedge economic exposures. We do not enter into derivative financial instruments or other financial instruments for speculative trading purposes.
Interest Rate Risk
We are exposed to market risk from changes in interest rates primarily through our investing and borrowing activities. In addition, our ability to finance any future acquisition transactions may be impacted if we are unable to obtain appropriate financing at acceptable interest rates. We manage our borrowing exposure to changes in interest rates by utilizing a combination of fixed and variable rate debt instruments. In addition, as of December 31, 2001, we hedged our exposure on a portion of our variable rate debt by entering into interest rate swap agreements to lock in a fixed rate. At December 31, 2001, approximately 100% of the carrying values of our long-term debt was either at fixed interest rates or covered by interest rate swap agreements that fixed the interest rates.
The following table presents principal cash flows of variable rate debt by maturity date and the related average interest rate. The table also presents the notional amount of the swaps and their expected future interest rates. The notional amount is used to calculate the contractual payments to be exchanged. The interest rates are weighted between the various loans based on debt outstanding and are estimated based on implied forward rates using a yield curve at December 31, 2001.
Expected Maturities (dollars in thousands)
Commodity Pricing Risk
We are subject to significant market risk with respect to the pricing of our principal raw materials, which include, among others, resins, compounds, glass, PVC and aluminum. If prices of these raw materials were to increase dramatically, we may not be able to pass such increases onto our customers and, as a result, gross margins could decline significantly. We manage some of our exposure to commodity pricing risk through purchasing aluminum forward commitments. The following is information related to aluminum forward commitments at December 31, 2001:
Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in a derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the statement of operations, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.
We adopted SFAS No. 133 and the corresponding amendments under SFAS No. 138 on January 1, 2001, as required, which required us to record the market value of our swaps as an adjustment to equity (see Financial Statements Note 4). SFAS No. 133, as amended, is not expected to have a material impact on our future consolidated results of operations, financial position or cash flows.
In September 2000, the FASB issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125” (“SFAS No. 140”). SFAS No. 140 revised the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after June 30, 2001. We adopted SFAS No. 140 in the third quarter upon consummation of the accounts receivable securitization transaction (see Financial Statements Note 5).
In July 2001, the FASB issued SFAS No. 141, “Business Combination” (“SFAS No. 141”) and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 141”). SFAS No. 141 requires all business combinations initiated after June 30, 2001 be accounted for using the purchase method. Additionally, SFAS No. 141 establishes specific criteria for the recognition of intangible assets separately from goodwill. We do not expect the adoption of SFAS No. 141 to have any impact on us. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition and is effective for us on January 1, 2002. The most significant changes made by SFAS No. 142 require that goodwill and indefinite lived intangible assets no longer be amortized and be tested for impairment at least on an annual basis. Additionally, the amortization period of intangible assets with finite lives will no longer be limited to forty years.
We are currently assessing the impact of SFAS No. 142 and have not yet determined the full effect this statement will have on our consolidated financial position or results of operations. We have estimated that the pretax reduction in annual amortization expense will be approximately $11,725.
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for us on January 1, 2003. We are currently assessing the impact of SFAS No. 143 and have not yet determined the effects, if any, it will have on our consolidated financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 became effective for the us on January 1, 2002. We are currently assessing the impact of SFAS No. 144 and have not yet determined the effects, if any, it will have on our consolidated financial position or results of operations.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements are listed in the accompanying Index to Financial Statements on page of this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The following table provides information concerning our directors and the executive officers:
*Christopher M. Unrath resigned from the position of Director effective as of August 28, 2001.
*James G. Turner resigned from the position of Director effective as of February 23, 2001.
Jeff L. Hull has served as Chief Executive Officer of Atrium Corporation and Atrium Companies, Inc. since 2000 and President and Director of Atrium Corporation and Atrium Companies, Inc. since 1999. Prior to 2000, Mr. Hull was the Chief Financial Officer of Atrium Corporation and Atrium Companies, Inc. from 1996. Mr. Hull also served as Executive Vice President of Atrium Corporation and Atrium Companies, Inc. from 1998 to 1999, Secretary of Atrium Corporation from 1998 to 2000, Secretary of Atrium Companies, Inc. from 1996 to 2000 and Treasurer of Atrium Corporation from 1998 to 2000 and of Atrium Companies, Inc. from 1996 to 2000. Prior to joining us, Mr. Hull was Director of Asset/ Liability Management of AmVestors Financial Corporation (NYSE:AMV) and he was a manager with the accounting firm of Deloitte & Touche L.L.P. Mr. Hull is a certified public accountant.
Eric W. Long has served as Executive Vice President of Atrium Corporation and Atrium Companies, Inc. since 2001, Chief Financial Officer, Treasurer and Secretary of Atrium Corporation and Atrium Companies, Inc. since 2000. Mr. Long also served as Corporate Controller of Atrium Corporation and Atrium Companies, Inc. from 1996 to 2000. Prior to 2000, Mr. Long served as Assistant Secretary of Atrium Corporation and Atrium Companies, Inc. from 1996 and Vice President of Finance of Atrium Corporation and Atrium Companies, Inc. from 1999 to 2000. Prior to 1996, Mr. Long was a financial analyst with Applebee’s International, Inc. and was with the accounting firm of Deloitte & Touche L.L.P. Mr. Long is a certified public accountant.
Robert E. Burns has served as Executive Vice President and Co-Chief Operating Officer of Atrium Corporation and Atrium Companies, Inc. since December 2001, Chief Operating Officer of Aluminum Operations of Atrium Companies, Inc. since December 2000. Mr. Burns joined Atrium Companies, Inc. in January 2000 as Senior Vice President of Operations in which capacity he served until December 2000. Prior to that, Mr. Burns was Vice President of Operations of Baldwin Hardware, a division of Masco Corp. (NYSE: MAS) from March 1996. Prior to joining Masco Corp., Mr. Burns was a management consultant with Universal Scheduling Company.
C. Douglas Cross has served as Executive Vice President and Co-Chief Operating Officer of Atrium Corporation and Atrium Companies, Inc. since December 2001 and Chief Operating Officer of Vinyl Operations of Atrium Companies, Inc. since October, 2000. Prior to October 2000, Mr. Cross was President and Chief Operating Officer of Ellison Windows and Doors since 1988. Mr. Cross had been with Ellison Windows and Doors since 1985. Prior to that, he was a commercial loan officer with First Union Bank.
Cliff Darby has served as President of R.G. Darby, Inc. and Total Trim, Inc. since 1997. Mr. Darby has worked for Darby since 1985, holding numerous roles, including managerial, sales and administrative positions.
Daniel T. Morley has served as Chairman of the Board of Directors of Atrium Corporation and Atrium Companies, Inc. since October 1998. Mr. Morley has also been a Managing Partner of Ardshiel since 1994. Mr. Morley has served as Co-President of Ardshiel since 1997. Mr. Morley also serves as Chairman of Astro Textiles Holdings, Inc. and HBG Building Products, Inc., is a Director of Infigen, Inc. and Avanti Petroleum, Inc., and holds positions with several other privately held companies.
Roger A. Knight has served as a Director of Atrium Corporation and Atrium Companies, Inc. since October 1998. Mr. Knight has been a principal of Ardshiel since May 1998. Mr. Knight is also a Director of Astro Textiles Holdings, Inc., HBG Building Products, Inc., Infigen, Inc. and Offshoots, Inc. Prior to joining Ardshiel, he was Managing Director and a member of the Management Committee of Coopers & Lybrand Securities, Inc., the wholly-owned investment banking subsidiary of Coopers & Lybrand L.L.P. (now known as PricewaterhouseCoopers LLP).
Andreas Hildebrand has served as a Director of Atrium Corporation and Atrium Companies, Inc. since October 1998. Mr. Hildebrand is Vice President of GE Investments. He has served in other capacities with GE Investments during the past five years. Mr. Hildebrand is also a Director of Eagle Family Foods Holdings, Inc., Astro Textiles Holdings, Inc., HBG Building Products, Inc. and several other privately held companies.
John C. Deterding has served as a Director of Atrium Corporation and Atrium Companies, Inc. since November 1998. Mr. Deterding has been the owner of Deterding Associates, a real estate consulting company, since June 1993. From 1975 until June 1993, he served as Senior Vice President and General Manager of the Commercial Real Estate division of General Electric Capital Corporation. From November 1989 to June 1993, Mr. Deterding served as Chairman of the General Electric Real Estate Investment Company, a privately held REIT. He served as Director of GECC Financial Corporation from 1986 to 1993. Mr. Deterding is also a Director of Patriot American Hospitality, BlackRock Asset Investors and AMRESCO Capital Trust and a former member and trustee of the Urban Land Institute.
Nimrod Natan has served as a Director of Atrium Corporation and Atrium Companies, Inc. since October 1998. Mr. Natan has been a principal of Ardshiel since 1997. Mr. Natan also serves as Chief Executive Officer of Astro Textiles Holdings, Inc. and is a director of Infigen, Inc. Prior to joining Ardshiel in 1997, Mr. Natan was a management consultant with Gemini Consulting.
John Ellison, Jr. has served as a Director of Atrium Corporation and Atrium Companies, Inc. since October 25, 2000. He has also held the position of President and Chief Executive Officer of the Ellison Company, Inc. since 1972. Mr. Ellison is also a director of First Union National Bank of Greensboro and of Carolina Tractor, Inc.
Dennis M. McCormick has served as a Director of Atrium Corporation and Atrium Companies, Inc. since November 2000. In addition, Mr. McCormick has served as Co-President of Ardshiel since 1994. Mr. McCormick has also served as Chairman of the Board of Directors of Infigen, Inc. and Avanti Petroleum, Inc. since 1994. Mr. McCormick also serves as a Director of Astro Textiles Holdings, Inc. and HBG Building Products, Inc. Mr. McCormick was Chairman of the Board of Directors of Cellu Tissue Corporation from 1995 to 1997.
Item 11.
Item 11. Executive Compensation
Executive Compensation and Other Information
Compensation of Named Executive Officers. The following table provides certain summary information for each of the years ended December 31, 2001, 2000 and 1999, concerning compensation paid to or accrued by us for or on behalf of our Chief Executive Officer and the four other most highly compensated persons whose individual combined salary and bonus exceeded $100,000 during such period:
Annual Compensation
*
Mr. Burns joined us on January 24, 	2000. Accordingly, no compensation was paid to Mr. Burns in 	1999. 	
**
Mr. Cross joined us on October 25, 	2000. Accordingly, no compensation was paid to Mr. Cross 	during 1999. 	
(1)
Perquisites related to insurance and benefit 	plans, automobile and expense allowances are excluded since the 	aggregated amounts are the lesser of $50,000 or 10% of the total 	annual salary. 	
(2)
All share amounts are adjusted for our 	December 31, 2001 reverse stock split of 1,000 for one. 	
(3)
Amount represents stay-on bonus paid for 	completing one year of service after our 1998 recapitalization. 	
(4)
Amount represents expenses reimbursed for moving 	costs, grossed-up for applicable taxes. 	
Option Grants During 2001. No option grants were made to the named executive officers during the year ended December 31, 2001.
Aggregated Option Exercises and Fiscal-Year-End Option Values. The following table sets forth option exercises by the named executive officers and value of in-the-money unexercised options held at December 31, 2001.
(1)
Represents options held by the named individual 	to purchase our common stock. 	
(2)
Based on the fair market value of the option 	shares at fiscal year end of $1,300 per share less the 	exercise price per share payable for such shares. 	
1998 Stock Option Plan
The D and W Holdings, Inc. 1998 Stock Option Plan, as amended, or the 1998 plan, which provides for the grant of options to purchase our common stock to our key employees and eligible non-employees, was adopted in connection with our 1998 recapitalization. The 1998 plan provides for the grant of options to purchase up to 14,991 shares of our common stock. As of December 31, 2001, a total of 9,008 options to purchase shares of our common stock were outstanding under the 1998 plan.
All options granted thus far are non-qualified options, which do not qualify for favored tax treatment under Section 422 of the Internal Revenue Code. Options granted under the 1998 plan generally have a term of ten years from the date of grant and vest in equal installments annually over three to five years dependent on continued employment. No option is exercisable until it has vested. Some of the options granted in connection with our 1998 recapitalization, will vest only in connection with a value event, which is defined in the 1998 plan.
Options are not transferable other than in accordance with the laws of descent and distribution. Upon termination for cause or voluntary termination by the optionee without good reason all vested options automatically expire. Upon termination of employment for any other reason, the optionee has the right to exercise the vested portion of any option. Also, upon termination of an optionee’s employment for any reason, we have the right to purchase outstanding options and any shares of our common stock held by the optionee as a result of the exercise of an option.
Replacement Stock Option Plan
In addition to the 1998 plan, we adopted the D and W Holdings, Inc. Replacement Stock Option Plan, or replacement plan, relating to certain options to purchase our common stock which were granted in replacement of outstanding options of Atrium Corporation, our former subsidiary in connection with our 1998 recapitalization. Under the replacement plan, options to purchase an aggregate of 1,575 shares of our common stock were granted in exchange for outstanding options of our former subsidiary which were not exercised in our 1998 recapitalization. These options vest ratably over a period of five years on each anniversary date of the grant and have an exercise price of $10 per share. The replacement plan was amended in connection with the consummation of the Heat and Champagne acquisitions to increase the number of shares of our common stock issuable upon the exercise of options under the replacement plan to 2,575 shares. Options to purchase 531 shares of our common stock were issued under the replacement plan in exchange for outstanding
options of Heat which were not exercised. As of December 31, 2001, a total of 1,383 options to purchase shares of our common stock were outstanding under the replacement plan.
Upon termination of an optionee’s employment, we have the right to repurchase all or any portion of the replacement options held by the optionee. Upon exercise of any vested portion of a replacement option, we may require the optionee to execute a buy-sell agreement containing provisions similar to the repurchase provisions described above, as a condition to the option exercise of that option.
The replacement plan provides that all options granted are in the form of nonqualified options, which are options that do not qualify for favored tax treatment under Section 422 of the Internal Revenue Code. The replacement options have a term of 20 years from the date of grant subject to early termination in connection with termination of employment. No option is exercisable until it is vested. Replacement options are not transferable other than in accordance with the laws of descent and distribution by an optionee, except that options may be transferred to an optionee’s family members or personal representative.
Bonus Plan
We maintain a bonus plan providing for annual cash bonus awards to certain key employees. Bonus amounts are based on us meeting certain performance goals established by our board of directors.
Other Benefit Programs
Our executive officers also participate in other employee benefit programs including health insurance, group life insurance, and a 401(k) plan on the same basis as our other employees.
Employment and Consulting Agreements
Mr. Hull
Mr. Hull has entered into an employment agreement with us pursuant to which he serves as our Chief Executive Officer and President. Mr. Hull’s employment agreement has a three-year term, which commenced December 31, 2000. The term is renewable for a series of three year terms as mutually agreed to at least 30 days prior to the end of the then current term. Under the terms of Mr. Hull’s employment agreement, he is entitled to receive an annual base salary, as follows: during the period beginning on December 31, 2000 and ending on December 31, 2001, $300,000, during the period beginning on December 31, 2001 and ending on December 31, 2002, $325,000, and during the period beginning on December 31, 2002 and ending on December 31, 2003, $350,000. Mr. Hull’s salary is subject to increase at the discretion of the board of directors. The agreement provides that Mr. Hull may receive an annual target bonus of $375,000, as adjusted, 50% of which will be payable contingent on achievement of our EBITDA plan and 50% of which will be payable contingent on achievement of certain other performance targets set by the board of directors. The annual target bonus is subject to increase at the discretion of the board of directors.
The agreement also provides that we will make certain payments to Mr. Hull in the event
•
Mr. Hull is terminated by us without cause, 	
•
of a change of control, or 	
•
Mr. Hull terminates his employment for good 	reason. 	
Pursuant to the agreement, Mr. Hull has agreed not to compete with us and our subsidiaries for certain specified periods.
Mr. Long
Mr. Long entered into an employment and non-competition agreement with us pursuant to which he serves as our Executive Vice President, Chief Financial Officer and Treasurer. Mr. Long’s employment agreement has a three-year term, which commenced on January 1, 2001. Under the terms of Mr. Long’s employment agreement, he is entitled to receive an annual base salary of $185,000, as adjusted for 2002, which
is subject to increase at the discretion of the board of directors. The agreement provides that Mr. Long is eligible to receive an annual incentive bonus of $100,000, as adjusted, 50% of which will be payable contingent on the achievement of our EBITDA plan and 50% of which will be payable if we meet the performance targets set by the board of directors.
The agreement also provides that we will make certain payments to Mr. Long in the event
•
Mr. Long is terminated by us without cause, 	
•
of a change of control, or 	
•
Mr. Long terminates his employment for good 	reason. 	
Pursuant to the agreement, Mr. Long agreed not to compete with us and our subsidiaries for certain specified periods.
Mr. Burns
Mr. Burns entered into an employment and non-competition agreement with us pursuant to which he serves as our Co-Chief Operating Officer. Mr. Burns’ employment agreement has a three year term, which commenced on January 24, 2000. Under the terms of Mr. Burns’ employment agreement, he is entitled to receive an annual base salary of $225,000, as adjusted for 2002, which is subject to increase at the discretion of the board of directors. The agreement provides that Mr. Burns is eligible to receive an annual incentive bonus of $125,000, as adjusted, 75% of which will be payable contingent on the achievement of our EBITDA plan and 25% of which will be payable contingent on achievement of management’s objectives to be set each fiscal year by our senior officers and the board of directors.
The agreement also provides that we will make certain payments to Mr. Burns in the event
•
Mr. Burns is terminated by us without cause, 	
•
of a change of control, or 	
•
Mr. Burns terminates his employment for good 	reason. 	
Pursuant to the agreement, Mr. Burns agreed not to compete with us and our subsidiaries for certain specified periods.
Mr. Cross
Mr. Cross entered into an employment and non-competition agreement with us pursuant to which he serves as our Co-Chief Operating Officer. Mr. Cross’ employment agreement has a three year term, which commenced on October 25, 2000. Under the terms of Mr. Cross’ employment agreement, he is entitled to receive an annual base salary of $225,000, as adjusted for 2002, which is subject to increase at the discretion of the board of directors. The agreement provides that Mr. Cross is eligible to receive an annual incentive bonus of $125,000, as adjusted, 75% of which will be payable contingent on the achievement of our vinyl operations EBITDA plan and 25% of which will be payable contingent on achievement of management’s objectives to be set each fiscal year by our senior officers and the board of directors.
The agreement also provides that we will make certain payments to Mr. Cross in the event
•
Mr. Cross is terminated by us without cause, 	
•
of a change of control, or 	
•
Mr. Cross terminates his employment for good 	reason. 	
Pursuant to the agreement, Mr. Cross agreed not to compete with us and our subsidiaries for certain specified periods.
Mr. Darby
Mr. Darby entered into an employment agreement with us pursuant to which he serves as President of R.G. Darby Company and Total Trim, Inc. Mr. Darby’s employment agreement has a two year term which commenced on January 1, 2002. Under the terms of Mr. Darby’s employment agreement, he is entitled to receive an annual based salary of $225,000 per annum, which is subject to increase at the discretion of the board of directors. The agreement provides that Mr. Darby is eligible to receive an annual bonus which amount will be payable contingent on Darby’s EBITDA plan.
The agreement also provides that we will make certain payments to Mr. Darby in the event
•
Mr. Darby is terminated by us without cause, 	
•
of a change of control, or 	
•
Mr. Darby terminates his employment for good 	reason. 	
Pursuant to the agreement, Mr. Darby has agreed not to compete with us and our subsidiaries for certain specified periods.
Consulting Agreement
Mr. Ellison
Atrium Companies entered into a consulting, non-competition and non-solicitation agreement with Mr. Ellison. The term of the agreement commenced on October 25, 2000, was amended June 2001 and will continue through October 15, 2007. Under this agreement, Mr. Ellison provides Atrium Companies with consulting services with respect to the matters or transactions of Ellison, as well as various strategies for expanding our customer base and increasing our sales. During the term of his agreement, Mr. Ellison will receive payments in the aggregate amount of $2,600,100, payable in 18 installments of $12,500 each, on the fifteenth and last day of each month beginning on October 31, 2000 and continuing thereafter to and including July 15, 2001, and 150 installments of $15,834 on the 15th and last day of each month beginning July 31, 2001 and continuing thereafter to and including October 15, 2007.
Under the agreement, Mr. Ellison has agreed not to engage in the making, marketing, assembling, selling or distributing of the products of Ellison or any other windows or doors for sale in the United States for the term of the agreement. Mr. Ellison has also agreed not to solicit any of our employees to work for any other person or solicit any of our present or future customers during the term of the agreement.
Board of Directors
Employment and Compensation 	Committee
Daniel T. Morley, Andreas Hildebrand and Roger A. Knight serve as our employment and compensation committee.
Audit Committee
Roger A. Knight and Daniel T. Morley serve as our audit committee.
Executive Committee
Roger A. Knight, Andreas Hildebrand and Jeff L. Hull serve as our executive committee.
Non-Employee Director 	Compensation
Any member of our board of directors who is not an officer or employee does not receive compensation for serving on our board of directors. We anticipate compensating non-employee directors not affiliated with GEIPPPII or Ardshiel in the future for their service on our board.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial ownership of our common stock as of December 31, 2001, by each person who owns beneficially more than 5% of our outstanding common stock and by our directors and certain of our executive officers. Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of our common stock.
*
Less than 1%. 	
(1)
Includes (1) 1,040 shares of common 	stock issuable upon exercise of warrants that are currently 	exercisable; (2) 3,092 shares of common stock held by 	Ardshiel, Inc., Ardatrium L.L.C., Arddoor L.L.C., Ardwing L.L.C. 	and Wing Partners, L.P. which are under common control with 	Ardshiel, and excludes all shares of common stock held by 	certain of our other stockholders who have granted proxies to 	Ardshiel or its affiliates to vote their shares. 	
(2)
Mr. Morley and Mr. McCormick are each a 	50% stockholder of Ardshiel. 	
(3)
Represents shares beneficially owned by Ardshiel 	and its affiliates. Mr. Morley is the Co-President and a 	stockholder of Ardshiel and a managing member of Arddoor L.L.C., 	Ardatrium L.L.C. and Ardwing L.L.C., the general partner of Wing 	Partners, L.P. Mr. McCormick is the Co-President and a 	stockholder 	
of Ardshiel and a member of Arddoor L.L.C., 	Ardatrium L.L.C. and Ardwing L.L.C. and a limited partner of 	Wing Partners, L.P. Accordingly, Messrs. Morley and 	McCormick may be deemed to be the beneficial owner of these 	shares. Messrs. Morley and McCormick disclaim beneficial 	ownership of these shares. 	
(4)
The business address for these individuals is 	1341 West Mockingbird Lane, Suite 1200W, Dallas, Texas 	75247. 	
(5)
Represents 17,137 and 3,846 shares 	beneficially owned by The Ellison Company, Inc. and Ellison 	Capital, LLC, respectively. Mr. Ellison is the President 	and Chief Executive Officer of The Ellison Company, Inc. and 	holder of a majority membership interest in Ellison Capital, 	LLC. Mr. Ellison may be deemed to be the beneficial owner 	of these shares. 	
(6)
John Ellison, Jr. holds directly or indirectly, 	the beneficial ownership in The Ellison Company, Inc. and 	Ellison Capital, LLC. 	
(7)
Includes 2,289, 112, 80, 400 and 	1,181 shares of common stock issuable upon exercise of 	options granted to Messrs. Hull, Long, Burns, Cross and 	Darby, respectively. 	
(8)
Includes 7,757 of Class A Common Stock and 	1,939 shares of Class B common stock. 	
(9)
Represents shares of Class A common stock, 	unless otherwise stated. 	
Item 13.
Item 13. Certain Relationships and Related Transactions
The Stockholders Agreement
GEIPPPII, Ardshiel, and certain other stockholders are parties to an amended and restated stockholders agreement which sets forth their relative rights as our stockholders.
Under the stockholders agreement, the stockholders have agreed that the authorized number of directors should consist of up to eleven directors. GEIPPPII has the right to designate one director in the event there are less then seven directors, and two directors in the event the board of directors consists of seven or more members. In addition, (1) our Chief Executive Officer and (2) John Ellison, Jr., as long as The Ellison Company is a stockholder, each have the right to be nominated for election as a director. Ardshiel and its affiliates, are entitled to designate up to six directors.
Subject to certain exceptions, each of the stockholders party to the agreement, except for GEIPPPII, has agreed not to sell, transfer or otherwise dispose of our equity securities. These exceptions include, among other things, transfer to affiliates and transfers pursuant to a tag-along right, drag-along right and put option that were granted to some of our stockholders. In the event that GEIPPPII intends to transfer its equity securities, each of the other stockholders party to the agreement will be entitled to purchase a pro rata portion, based on its ownership of equity securities, of the equity securities being transferred by GEIPPPII. However, in the event that such sale, transfer or disposition by GEIPPPII after October 2, 2002, GEIPPPII may require that the other stockholders party to the agreement sell all of their equity securities to the proposed transferee.
Pursuant to the agreement, Ardshiel and its affiliates may propose or request that GEIPPPII sell or otherwise dispose of its equity securities in us to any person who is not an affiliate of Ardshiel; provided, however, that GEIPPPII has a right to refuse such transfer. If GEIPPPII exercises its right of refusal, and subject to certain conditions relating to the terms of Ardshiel’s proposal to sell, Ardshiel and its affiliates may require that GEIPPPII purchase all of our equity securities owned by Ardshiel and certain other stockholders. In addition, we and/or GEIPPPII have the right to purchase from any selling stockholder party to the agreement any or all of our parent’s equity securities proposed to be sold to a third party by the selling stockholder party to the agreement. This right of first offer does not apply in the event of transfer pursuant to, among other things, a tag-along right, drag-along right, or put option or transfer to an affiliate.
Pursuant to the terms of the stockholders agreement, we have granted our major stockholders piggyback registration rights and demand registration rights relating to the shares of our common stock held by those stockholders.
The stockholders agreement provides that the prior written consent of GEIPPPII is required for us to take specified fundamental corporate actions. These actions include, among other things:
•
electing members of our board of directors; 	
•
amending charter documents; 	
•
changing our corporate and financial structure; 	
•
issuing securities. 	
Management Agreement
We are party to a management agreement dated October 2, 1998, which was amended on May 17, 1999, with Ardshiel. Under the management agreement, Ardshiel provides advisory services to us with respect to business strategy, operations and budgeting and financial controls in exchange for an annual fee of $1.9 million plus expenses. Additionally, the management agreement provides that we must offer Ardshiel the opportunity to perform investment banking services in connection with a sale or purchase of a business or any financing prior to engaging another financial advisor. Ardshiel has the right to receive a closing fee for its services in an amount not be greater than 2% of the total purchase or sale price for such a business. The consent of GEIPPPII is required prior to the payment by us of any closing fees to Ardshiel where we are paying similar fees to other entities for similar services. Amounts paid under the management agreement in 2001 were $2.1 million ($.3 million of which was paid in the form of Atrium Corporation common stock).
The management agreement will remain in effect until October 2, 2008. The agreement will be automatically renewed for one-year periods thereafter unless either party gives a written termination notice prior to the expiration of the initial or any extended term.
Buy-Sell Agreements
We entered into buy-sell agreements with certain members of our management under which we may repurchase from those persons all or any portion of their shares of our common stock for a purchase price specified in these agreements after the termination of their employment. Each agreement also provides for certain restrictions on transfer.
In addition, the buy-sell agreement entered into with Mr. Cliff Darby provided that he will have the right to require us to repurchase his shares if he is terminated for any other reason than for cause and we do not exercise our right to purchase the shares.
2001 Equity Issuance
On May 2, 2001, we entered into subscription agreements with GEIPPPII, The Ellison Company, Inc. and Ardatrium L.L.C. under which we issued 1,153 shares of our common stock for an aggregate purchase price of $1.5 million to each of GEIPPPII and The Ellison Company, Inc., and 12 shares of our common stock for an aggregate purchase price of $15,000 to Ardatrium L.L.C. We contributed to $3.0 million from the proceeds of the issuance to Atrium Companies.
On May 16, 2001, we entered into subscription agreements with GEIPPPII, Ellison Capital, LLC, The Ellison Company, Inc. and Ardatrium L.L.C. under which we issued 2,692 shares of our common stock for an aggregate purchase price of $3.5 million to each of GEIPPPII and Ellison Capital, LLC, and 27 shares of our common stock for an aggregate purchase price of $35,000 to Ardatrium L.L.C. We contributed $7,050,000 from the proceeds of the issuance to Atrium Companies. In addition, pursuant to the assignment and subscription agreement of The Ellison Company, Inc. and Ellison Capital, LLC, The Ellison Company, Inc. assigned all the rights and obligations under its subscription agreement of May 2, 2001 to Ellison Capital, LLC. Mr. Ellison, one of our directors, is the President and Chief Executive Officer of The Ellison Company, Inc. and holder of a majority membership interest in Ellison Capital, LLC.
Indemnification Agreements
We entered into indemnification agreements with Jeff L. Hull, Robert E. Burns, Cliff Darby, Eric W. Long, Daniel T. Morley, Roger A. Knight, Andreas Hildebrand, John C. Deterding, Nimrod Natan, John Ellison, Jr., C. Douglas Cross and Dennis M. McCormick under which we agreed to indemnify them, if any of them becomes a party to or other participant in any threatened, pending or completed action, suit or proceeding relating to the fact that the person is or was our director, officer, employee, agent or fiduciary.
Facility Leases
VES, Inc. was party to a facility lease agreement with Mr. Ellison, one of our directors, dated May 3, 1994. Pursuant to the terms of the lease, VES, Inc. paid to Mr. Ellison minimum monthly rent of $15,860. The term of the lease was ten years with three extension terms of five years each. The amount paid under this lease totaled approximately $174,460 in 2001. In addition, in connection with the Ellison acquisition, we assumed the obligations of The Ellison Company, Inc. under a facility lease agreement with Mr. Ellison dated May 3, 1994. Under this lease, we paid to Mr. Ellison minimum monthly rent of $113,176. The term of the lease was ten years with three extension terms of five years each. The amount paid under this lease totaled approximately $1,244,936 in 2001. These leases were terminated effective November 30, 2001 and replaced with third-party unaffiliated leases.
Darby is party to a facilities lease agreement with Mr. R.G. Darby, a former stockholder of Darby and the father of Mr. Cliff Darby, President of Darby. Pursuant to the terms of the lease, Darby pays rent to Mr. R.G. Darby of approximately $21,700 (adjusted from $16,904 in April 2001) per month, adjusted annually for inflation. The term of the lease is fifteen years with three extension terms of five years each. Rent expense paid to Mr. R.G. Darby was approximately $246,000 in 2001. Additionally, we lease property on a month to month basis from Cliff Darby. Amounts paid under this arrangement were $21,600 in 2001.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are included in this report:
	(1) FINANCIAL STATEMENTS: 	
The financial statements are listed in the 	accompanying Index to Financial Statements on page of 	this report. 	
	(2) FINANCIAL STATEMENT SCHEDULES: 	
The financial statement schedules are presented 	beginning on page S-1 of this report. 	
	(3) EXHIBITS: 	
The exhibits filed with or incorporated by 	reference in this report are listed in the Exhibit Index 	beginning on page E-1 of this report. 	
(b) REPORTS ON FORM 8-K
	The following reports on Form 8-K were filed 	by the Registrant during the fourth quarter: 	
	None. 	
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ATRIUM CORPORATION 	
By:
/s/ Jeff L. Hull 	
Jeff L. Hull 	
President, Chief Executive Officer and 	Director
(Principal Executive Officer)
By:
/s/ Eric W. Long 	
Eric W. Long 	
Executive Vice President, Chief Financial 	Officer,
Treasurer and Secretary
(Principal Financial and Accounting 	Officer)
Date: March 28, 2002
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the dates indicated.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Atrium Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and other comprehensive loss and of cash flows present fairly, in all material respects, the financial position of Atrium Corporation and its subsidiary at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 4 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” on January 1, 2001.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 27, 2002
ATRIUM CORPORATION
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
ATRIUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2001, 2000 and 1999
The accompanying notes are an integral part of the consolidated financial statements.
ATRIUM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY
AND OTHER COMPREHENSIVE LOSS
For the Year Ended December 31, 2001, 2000, and 1999
The accompanying notes are an integral part of the consolidated financial statements.
ATRIUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000, 1999
The accompanying notes are an integral part of the consolidated financial statements.
ATRIUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
The accompanying notes are an integral part of the consolidated financial statements.
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and pound amounts)
1. Organization, Business and Basis of Presentation:
Atrium Corporation (the “Company”) is engaged in the manufacture and sale of patio doors, windows and various building materials throughout the United States through its wholly-owned subsidiary Atrium Companies, Inc. (“Atrium Companies”).
On August 3, 1998, the Company, then known as D and W Holdings, Inc. entered into a Merger Agreement with Atrium Corporation, the Company’s then direct subsidiary and certain security holders to acquire all of the outstanding capital stock of Atrium Corporation for $225.0 million, through a series of transactions (the “1998 Recapitalization”). In connection with the merger, GE Investment Private Placement Partners II, a limited partnership (“GEIPPPII”), and Ardatrium L.L.C. (“Ardatrium”) formed the Company by acquiring all of its outstanding common stock for an aggregate purchase price of $50.0 million. GEIPPPII is a private equity partnership affiliated with GE Investments, a wholly-owned investment management subsidiary of General Electric Company. Ardatrium is an affiliate of Ardshiel, Inc. (“Ardshiel”), a private equity investment firm based in Connecticut.
The acquisition of Atrium Corporation by the Company was effected through the merger on October 2, 1998 of one of the Company’s wholly-owned subsidiaries, with and into Atrium Corporation pursuant to the terms of the Merger Agreement. Prior to the merger, the Company contributed $50.0 million to Atrium Corporation in exchange for all of its outstanding common stock. As a result of the merger, Atrium Corporation became a direct wholly-owned subsidiary of the Company, and Atrium Companies became an indirect wholly-owned subsidiary of the Company.
On October 25, 2000, the Company and Atrium Corporation were merged and the Company was the surviving entity of the merger. Upon completion of this merger, the Company changed its name to Atrium Corporation. As a result of the merger, Atrium Companies became our direct wholly-owned subsidiary.
The operations of Delta Millwork, Inc. (“Darby-South,”, since merged into Door Holdings, Inc., which has since been merged into Atrium Companies are included since the date of acquisition, January 27, 1999, the operations of Heat, Inc. (“Heat,” since renamed Atrium Vinyl, Inc.) and Champagne Industries, Inc. (“Champagne,” since renamed Atrium Door and Window of the Rockies) are included since their date of acquisition, May 17, 1999 and the operations of VES, Inc. doing business as Ellison Extrusion Systems, Inc. since renamed Atrium Extrusion Systems, Inc. and Ellison Windows and Doors (collectively “Ellison”) are included since their date of acquisition, October 25, 2000. There were no acquisitions in 2001 that would require pro forma information.
All share amounts are adjusted for the December 31, 2001 reverse stock split of 1,000 to one effected by the Company.
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following unaudited pro forma information presents consolidated operating results as though the acquisitions of Ellison (see Note 6) and the divestitures of Wing Industries, Inc. (“Wing”) and the Atrium Wood Patio Door division (“Wood”) (see Note 3) had occurred at the beginning of the periods presented:
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Significant Accounting Policies:
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation.
Industry Segment
The Company operates in a single operating segment, the fabrication, distribution and installation of doors and windows and related components for the residential new construction, manufactured housing and the repair and remodeling markets.
Revenue Recognition
Revenue from the sale of doors and windows and related components is recorded at the time of delivery to the customer. On contracts involving installation, revenue is recognized when the installation is complete. Allowances are established to recognize the risk of sales returns from customers and estimates of warranty costs.
The Company classifies any shipping charges to customers as revenues. The costs of shipping and handling fees are presented in selling, delivery, general and administrative expenses on the Company’s consolidated statements of operations and were $31,192, $38,619 and $37,364 for 2001, 2000 and 1999, respectively.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2001 and 2000, the Company had $2,309 and $7,430 of checks outstanding that were reclassified into accounts payable.
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 in stockholders’ equity. During 2000, the Company sold its equity securities for $620 which resulted in a $507 gain on the sale.
Concentrations of Credit Risk
Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of the Company’s retained interest in trade accounts receivable. The Company’s customers are located in 49 states. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The Company has sales to one significant customer as follows (presented as a percentage of actual net sales):
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Inventories
Inventories are valued at the lower of cost (last-in, first-out or “LIFO”) or market. Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead. Inventory costs include direct materials, labor and manufacturing overhead. Management believes that the LIFO method results in a better matching of current costs with current revenues. Under the first-in, first-out method (FIFO) of accounting, such inventories would have been approximately $304 lower at December 31, 2001 and $813 higher at December 31, 2000. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. A reserve for inventory allowance is included in raw materials.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation. The Company depreciates the assets principally on a straight-line basis for financial reporting purposes over their estimated useful lives, as follows:
Gains or losses on disposition are based on the net proceeds and the adjusted carrying amount of the assets sold or retired. Expenditures for maintenance, minor renewals and repairs are expensed as incurred, while major replacements and improvements are capitalized.
Goodwill
Goodwill represents the excess of cost over fair market value of net assets acquired. Goodwill is being amortized over periods ranging from 20 to 40 years on a straight-line basis. Management reviews the carrying value of goodwill for recoverability based on anticipated undiscounted cash flows of the assets to which it relates when events or changes in circumstances indicate, in management’s judgement, that the carrying value may not be recoverable. The Company considers operating results, trends and prospects of the Company, as well as competitive comparisons. The Company also takes into consideration competition within the building materials industry and any other events or circumstances which might indicate potential impairment. When goodwill is determined not to be recoverable, an impairment is recognized as a charge to operations. Such impairment is based on the discounted cash flow approach.
The Company is amortizing the goodwill related to the Ellison acquisition over 20 years (see Note 6). For prior acquisitions, the Company believes that a 40 year useful life for goodwill is appropriate based upon the fact that the majority of the Company’s operating entities have been in business over fifty years with some of the industry’s most recognized brand names, including Atrium®. Management believes its brand names have an indeterminable life that may equal or exceed 40 years and therefore, will amortize goodwill over that period. Further, products are not significantly impacted by technological risks that would cause the Company to consider reducing the goodwill life. The Company’s management periodically reviews the appropriateness of the estimated useful life of goodwill (see “New Accounting Pronouncements”).
Capitalized Software Costs
The Company capitalizes internal employee costs and external consulting costs associated with implementing and developing software for internal use. Internal costs capitalized include payroll and payroll-related costs for employees who are directly associated with the development, modification and implementation of the
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
software. External costs include direct expenses related to consulting and other professional fees incurred in developing, modifying and implementing the software. Capitalization of costs occurs upon the completion of the preliminary project stage and when management believes it is probable a project will be completed and the software will be used to perform the function intended. Amortization begins the period after the software is put into service and is calculated on a straight-line basis over three years. Management continually reviews the carrying value and expected functionality of the accumulated costs for potential impairment. When it is no longer probable that computer software being developed will be completed, modified or placed in service, the asset’s carrying value will be adjusted to the lower of cost or fair value.
Unamortized capitalized software costs at December 31, 2001 and 2000 were $3,230 and $2,981, respectively, and are included in other long-term assets. Amortization expense for 2001, 2000 and 1999 was $1,359, $1,925 and $2,005, respectively.
Income Taxes
The provision for income taxes is based on pretax income as reported for financial statement purposes. Deferred income taxes are provided in accordance with the liability method of accounting for income taxes to recognize the tax effects of temporary differences between financial statement and income tax accounting.
Forward Commitments
The Company periodically enters into forward commitments to hedge price variances in certain raw materials. Changes in the market value of forward commitments are recognized in income when the effects of the related charges in the hedged items are recognized.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 141, “Business Combination” (“SFAS No. 141”) and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 141 requires all business combinations initiated after June 30, 2001 be accounted for using the purchase method. Additionally, SFAS No. 141 establishes specific criteria for the recognition of intangible assets separately from goodwill. The adoption of SFAS No. 141 is not expected to have any impact on the Company. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition and is effective for the Company on January 1, 2002. The most significant changes made by SFAS No. 142 require that goodwill and indefinite lived intangible assets no longer be amortized and be tested for impairment at least on an annual basis. Additionally, the amortization period of intangible assets with finite lives will no longer be limited to forty years.
The Company is currently assessing the impact of SFAS No. 142 and has not yet determined the full effects this statement will have on its consolidated financial position or results of operations. However, the Company has estimated that the pretax reduction in annual amortization expense will be approximately $11,725.
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for the Company on January 1, 2003. The Company is currently assessing the impact of SFAS No. 143 and has not yet determined the effects, if any, it will have on its consolidated financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). SFAS No. 144 addresses financial accounting and reporting for the
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
impairment or disposal of long-lived assets. SFAS No. 144 is effective for the Company on January 1, 2002. The Company is currently assessing the impact of SFAS No. 144 and has not yet determined the effects, if any, it will have on its consolidated financial position or results of operations.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates and assumptions are based upon the best available information and are subject to change as conditions within and beyond the control of the Company change, including but not limited to, economic conditions, the availability of additional information and actual experience rates different from those used in the Company’s estimates. Accordingly, actual results could differ from those estimates. Significant estimates are used in calculating allowance for bad debt, insurance, including medical and workers’ compensation and warranty accruals, and in recognizing deferred tax assets and liabilities.
Advertising Costs
Advertising costs are expensed when incurred and were $3,664, $3,852 and $4,457, for 2001, 2000 and 1999, respectively. These costs are reflected in selling, delivery, general and administrative in the consolidated statements of operations.
Reclassifications
Certain reclassifications have been made to the 2000 and 1999 balances to conform to the 2001 presentation.
3. Special Charges:
Woodville closing:
During 2001, Atrium Companies recorded special charges of $1,213, of which $303 related to non-capitalizable legal fees incurred to amend the Credit Agreement and $910 related to management’s commitment to close its Woodville, Texas facility and merge certain operations into existing operations at other divisions. Included in the charge of $910 is $389 related to operating leases, $156 related to the write-off of fixed assets, $94 related to severance and other reserves totaling $271. Of these amounts, $754 is included in accrued liabilities as of December 31, 2001. The Company believes that all the reserves associated with the special charge recorded by Atrium Companies for the closure of the Woodville, Texas facility will be utilized during 2002.
In addition to the above charges, Atrium Companies recorded a special writedown to inventory of $1,010 related to the closure of the Woodville, Texas facility and the associated product line rationalization, which is included in cost of goods sold.
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Wing divestiture:
On August 25, 2000, Atrium Companies completed the sale of substantially all of the assets of Wing, its wood interior door subsidiary to Premdor Corporation, a subsidiary of Premdor Inc. In connection with the sale, Atrium Companies received $20,570 in proceeds. As such, Atrium Companies has recorded a special charge related to this divestiture as follows:
In 2001, Atrium Companies reduced its accrued provisions by $452 and $1,456 for expenses related to its operating leases on idle equipment and idle facilities, respectively.
Wood divestiture:
On August 30, 2000, Atrium Companies completed the sale of substantially all of the assets of Wood to Woodgrain Millwork, Inc. In connection with the sale, Atrium Companies received $3,785 in proceeds. As such, Atrium Companies has recorded a special charge related to this divestiture as follows:
In addition to the above charges, Atrium Companies recorded writedowns related to inventory of $5,338 and $1,868, respectively, related to the Wing and Wood divestitures that are included in cost of goods sold. In addition, Atrium Companies’ gross margins were also adversely affected as a result of liquidating the Wood divestitures inventory below normal selling prices, although in excess of cost.
Atrium Companies recorded special charges in the amount of $539 for non-capitalizable legal fees associated with the amendment of the Credit Agreement. Additionally, during 2000, $1,364 was recorded for severance benefits incurred in connection with the separation agreement entered into between the Company and a former Chief Executive Officer hired in March 2000.
During the first quarter of 1999, a special charge of $1,886 was recorded for severance benefits incurred in connection with the separation agreement entered into between the Company and a former President and Chief Executive Officer.
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Adoption of SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities:
The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133), and the corresponding amendments on January 1, 2001. In accordance with the transition provisions of SFAS No. 133, the Company recorded a cumulative-effect adjustment as of January 1, 2001 of $2,319 to other comprehensive income. This adjustment represents the current fair-value of hedging instruments related to interest rate swap agreements of $2,646 with an offset of $327 related to the reclassification of deferred gains on previously terminated interest rate collars. There is no income tax effect considering there is a full valuation allowance against deferred tax assets. The Company also has forward aluminum contracts. However, these are excluded from the scope of SFAS No. 133 as they represent normal sales and purchases.
At December 31, 2001, the fair-value of the hedging instruments is a liability of $8,269. One of the Company’s hedging instruments will mature in 2002. Therefore, the related liability of $1,448 has been classified as a current liability. The remaining liability of $6,821 is classified as a long-term liability.
The Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but it expects all counterparties to meet their obligations given their credit ratings.
The Company, as part of its risk management program, is party to interest rate swap agreements for the purpose of hedging its exposure to floating interest rates on certain portions of its debt. As of December 31, 2001, the Company had $137,500 of notional amount in outstanding interest rate swaps with third parties. The maximum length of the interest rate swaps currently in place as of December 31, 2001 is approximately 2 years 10 months.
All derivatives are recognized on the balance sheet at their fair-value as a hedge of cash flows. On the date that the Company enters into a derivative contract, it designates the derivative as a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a “cash flow” hedge). Changes in the fair-value of a derivative that is highly effective as - and that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction (e.g., until periodic settlements of a variable-rate asset or liability are recorded in earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair-value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current-period earnings. As of December 31, 2001, all hedges outstanding were highly effective.
The Company formally documents all relationships between hedging instruments and hedge items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value or cash flow hedges to (1) specific assets and liabilities on the balance sheet or (2) specific firm commitments or forecasted transactions. The Company also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the Company discontinues hedge accounting prospectively, as discussed below.
The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer effective in offsetting changes in the fair-value or cash flows of a hedge item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate.
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remaining in accumulated other comprehensive income is reclassified into earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair-value on the balance sheet, recognizing changes in the fair-value in current-period earnings.
5. Securitization of Accounts Receivable:
On July 31, 2001, Atrium Companies and certain of its subsidiaries (collectively “the Originators”) entered into an agreement whereby each Originator agreed to sell on a non-recourse basis, and on an ongoing basis, a pool of receivables comprising their entire trade receivable portfolio to a wholly-owned bankruptcy-remote special purpose funding subsidiary (“Atrium Funding Corporation” or “AFC”) of the Company. AFC is a distinct legal entity that does not engage in trade or business in order to make remote the possibility that it would have to file bankruptcy or other receivership. In addition, AFC is consolidated for financial purposes. Certain subsidiaries sell all of their trade receivables to AFC. AFC entered into an agreement with Fairway Finance Corp. (the “Securitization Company”), agented by BMO Nesbitt Burns, whereby AFC can sell a pro rata share of the trade receivable portfolio to the Securitization Company for aggregate payments of up to $50,000, subject to a borrowing base and receivable eligibility.
Generally, the agreement provides that as payments are collected from the sold accounts receivable, AFC may elect to have the Securitization Company reinvest the proceeds in new accounts receivable. The Securitization Company, in addition to the right to collect payments from that portion of the interests in the accounts receivable owned by them, also has the right to collect payments from that portion of the ownership interest in the accounts receivable that is owned by AFC. The facility, which expires July 31, 2004, requires Atrium Companies to comply with various affirmative or negative covenants and requires early amortization if AFC does not maintain a minimum equity requirement. The facility also terminates on the occurrence and failure to cure certain events, including, among other things, any failure of AFC to maintain certain ratios related to the collectability of the receivables, or Atrium Companies’ failure to maintain long-term unsecured debt ratios. Atrium Companies and AFC were in compliance with all related covenants as of December 31, 2001.
As a result of the agreement, the receivables sold to the Securitization Company are not reflected in the Company’s consolidated balance sheet. The Securitization Company is free to pledge or exchange its interest. Any receivables not sold to the Securitization Company constitute the retained interest in the receivables portfolio of AFC. Due to the short term nature of the underlying receivables, the net carrying amount of the retained interest in transferred accounts receivables as of December 31, 2001 approximates fair value and is classified as a current asset.
On August 3, 2001, AFC sold a pro rata share of the trade receivable portfolio for $33,000, leaving a retained interest of $28,055. Subsequently, additional pools of receivables were sold. The amount received from the sale was net of provisions for bad debts and transaction fees, which included placement fees and professional fees of approximately $878. The proceeds from the sale were used to repay debt under the Atrium Companies’ Credit Agreement (see Note 11). As of December 31, 2001 the retained interest was $14,373 and the amount of receivables sold was $27,400.
Atrium Companies retains the servicing responsibilities for which it receives an annual servicing fee of .5% of the securitized accounts receivables. Atrium Companies recognizes no servicing asset or liability because the servicing fee represents adequate compensation for the services performed.
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The table below summarizes certain cash flow information for 2001:
(a) 	
not applicable due to collateral coverage on 	securitizations. 	
(b) 	
not applicable since fair value of retained 	interest approximates carrying value given the short-term nature 	of underlying receivables. 	
Managed portfolio data:
The delinquency rate as defined by the agreement represents any sold receivables that have aged beyond 60 days past due. The delinquency rate at December 31, 2001 was 2.71%.
During 2001, Atrium Companies incurred costs of $1,532 on the sale of its receivables that have been classified as a separate line item in selling, delivery, general and administrative expenses. These costs were comprised of $878 of fees associated with the placement of the securitization and a loss on the sale of receivables of $654, which represents the interest expense component of the transaction. Additionally, included in selling, delivery, general and administrative expenses is $1,069 related to the loss on sale of receivables related to the adjustment to fair value.
6. Acquisitions:
2000 Acquisition
Ellison Acquisition:
On October 25, 2000, Atrium Companies completed the acquisition of the stock of VES, Inc. doing business as Ellison Extrusion Systems, Inc. (since renamed Atrium Extrusion Systems, Inc.), and substantially all of the operating assets of The Ellison Company, Inc.’s Windows and Doors Division. The transaction was valued at $125,466, excluding transaction fees and expenses of $6,002.
The purchase price was comprised of $98,187 of cash and $27,279 (20,983 shares) of common stock in the Company. The cash portion of the purchase price and transaction fees and expenses aggregating $104,189, was funded through the Company’s issuance of $36,500 and $26,000 of Senior PIK Notes and common stock, respectively, $24,355 from the divestiture of Wing and Wood assets and $4,913 of cash acquired from Ellison. The remaining portion was funded through additional borrowings under Atrium Companies’ Credit Agreement.
The acquisition 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. The excess of purchase price over the fair value of the net assets acquired (“goodwill”) was
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
$97,503. The results of operations for the acquired business were included in the Company’s consolidated financial statements beginning October 25, 2000.
1999 Acquisitions
Delta Asset Purchase:
On January 27, 1999, Atrium Companies acquired certain assets of Delta Millwork, Inc. (renamed R.G. Darby Company-South and Total Trim, Inc.-South, collectively Darby-South), a privately held door pre-hanger located in Orlando, Florida, for approximately $1,755. Atrium Companies financed the acquisition through its revolving credit facility.
The acquisition of Delta Millwork, Inc. has been accounted for as a purchase in accordance with 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 of $491 allocated to goodwill, which is being 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.
Heat Stock Purchase:
On May 17, 1999, Atrium Companies acquired the stock of Heat (since renamed Atrium Vinyl, Inc.), a privately held vinyl window and door company with operations located in Yakima, Washington (Best Built, Inc., “Best Built,” since renamed Atrium Door and Window Company of the Northwest) and Pittsburgh, Pennsylvania (Thermal Industries, Inc., “Thermal”), pursuant to a stock purchase agreement (the “Purchase Agreement”), dated as of April 20, 1999, among Heat, its shareholders and optionholders, H.I.G. Vinyl, Inc., a Cayman Island corporation (since merged into Heat), H.I.G. Investment Fund, L.P., a Cayman Island limited partnership and H.I.G. Capital Management, Inc., a Delaware corporation. Atrium Companies paid $85,000, which included $679 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. Atrium Companies financed the acquisition with a portion of the proceeds raised in the $175,000 Senior Subordinated Notes offering.
The acquisition of Heat has been accounted for as a purchase in accordance with 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 of $56,886 allocated to goodwill, which is being 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.
Champagne Stock Purchase:
On May 17, 1999, Atrium Companies acquired the stock of Champagne (since renamed Atrium Door and Window Company of the Rockies), a privately held vinyl window and door company located in Denver, Colorado, for approximately $4,426, including assumed indebtedness. Atrium Companies financed the acquisition with a portion of the proceeds raised in the $175,000 Senior Subordinated Notes offering.
The acquisition of Champagne has been accounted for as a purchase in accordance with 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 of $2,618 allocated to goodwill, which is being 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.
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Fair Value of Financial Instruments:
In accordance with SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” the following methods have been used in estimating fair value disclosures for significant financial instruments of the Company.
Estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Due to the fact that considerable judgment is required to interpret market data to develop the estimates of fair value, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange.
Cash and cash equivalents - The carrying amounts reported in the balance sheet approximate the fair value.
Notes payable - The fair value of the Company’s notes is based on quoted market prices. The carrying value of notes payable, other than the Senior Subordinated Notes, approximate fair value due to the floating nature of the interest rates. Management estimates that the Senior Subordinated Notes of $175,000 are valued at $162,750 and $170,406 as of December 31, 2001 and 2000, respectively, based on quoted market prices. The Company has $36,500 of Senior Pay-In-Kind Notes, issued with a discount of $15,608. These notes accrete at 15% and are valued at $29,397 and $22,156 as of December 31, 2001 and 2000, respectively.
Interest Rate Swaps - The Company has entered into interest rate swap agreements whereby the Company will pay the counterparties interest at a fixed rate and the counterparties will pay the Company interest at a floating rate equal to the three-month LIBOR interest rate. The fair value of interest rate swap agreements is the amount at which they could be settled, based on estimates obtained from lenders. Swaps consisted of the following at December 31:
In December 2001, the Company terminated Swap #1 and amended Swap #3 to a notional amount of $37,500 to maintain hedge effectiveness. The Company incurred a loss of $184 which was reclassified from other comprehensive loss to interest expense.
Forward aluminum contracts - The unrealized gains and losses are based on quotes for aluminum as reported on the London Metal Exchange. The Company had forward contracts with fixed rate prices totaling
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
$18,124 and $14,663 with unrealized losses of $599 and unrealized gains of $176 at December 31, 2001 and 2000, respectively.
8. Inventories:
Inventories consisted of the following at December 31:
The change in the LIFO reserve for 2001, 2000 and 1999, resulted in a decrease of cost of sales of $1,116, an increase of cost of sales of $1,541 and a decrease in cost of sales of $75, respectively. During 2001, inventory quantities were reduced. This reduction resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the costs of 2001 purchases, the effect of which decreased cost of goods sold by approximately $282.
9. Property, Plant and Equipment:
Property, plant and equipment consisted of the following at December 31:
Depreciation expense was $10,005, $6,613 and $5,344 in 2001, 2000 and 1999, respectively.
Thermal Extrusion Sale:
On September 10, 2001, Atrium Companies and its subsidiary, Thermal Industries, Inc. entered into an asset sale agreement with Royal Group Technologies Limited (“Royal”) to sell certain assets of Thermal’s vinyl extrusion operation for $3,784. Atrium Companies recorded a gain of $1,741 in the fourth quarter of 2001, net of certain shut down costs associated with the extrusion operation. Additionally, Atrium Companies entered into a supply agreement with Royal for a period of five years at current market prices for minimum quantities.
W.P. Carey Sale-leaseback:
On November 29, 2001, the Company sold one of its manufacturing facilities and subsequently leased back the facility under an operating lease. In connection with the sale, the Company recorded a gain of $582.
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On November 18, 1999, the Company sold two of its manufacturing facilities and subsequently leased back the facilities under operating leases. In connection with the sales, the Company recorded a gain of $143. All of these sale-leaseback gains have been deferred and are being amortized as an adjustment to rent expense over the terms of the related leases. Each of these sales were consummated with W.P. Carey and its affiliates. W.P. Carey is a New York based real estate investor that is not affiliated with the Company.
Alenco Asset Purchase:
On August 17, 2001, Atrium Companies entered into an asset purchase agreement with Alenco Holding Corporation (formerly known as Reliant Building Products) whereby Atrium Companies purchased assets comprised primarily of machinery and equipment located in Gallatin, Tennessee for $1,302. The transaction has been accounted for as a purchase and accordingly the assets have been recorded at cost, which represents fair market value.
10. Deferred Financing Costs:
Deferred financing costs relate to costs incurred in the placement of the Company’s debt and are being amortized using the straight line method over the terms of the related debt, which range from five to ten years. Amortization expense for 2001, 2000 and 1999 was $3,299, $2,351 and $1,902, respectively and was recorded as interest expense in the accompanying consolidated statements of operations.
During 2001, Atrium Companies wrote off deferred financing costs of $837 in connection with the $20,000 prepayment of debt under Atrium Companies’ Credit Agreement (see note 11) from a portion of the proceeds of the securitization of accounts receivable (see note 5). During 1999, Atrium Companies wrote off deferred financing costs of $896 and paid a tender premium of $2,182, net of income tax benefit of $1,142 in connection with the paydown of the Term Loan B and the retirement of the old Senior Subordinated Notes. The amounts for both periods have been classified as an extraordinary charge on early retirement of debt in the statements of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Notes Payable:
Notes payable consisted of the following at December 31:
On May 17, 1999, Atrium Companies issued $175,000 of Senior Subordinated Notes (the “Notes”) due May 1, 2009. The notes are non-callable for five years and have redemption prices of 105.25%, 103.50%, 101.75% and 100.00% of the principal amount for the twelve months beginning May 1, 2004, 2005, 2006 ,2007 and thereafter, respectively. The notes 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, Atrium Companies retired its previously outstanding senior subordinated notes and paid down $15,000 on its Term Loan B.
In connection with the 1998 Recapitalization, the Company issued $80,562 of Discount Debentures which accreted interest at 12% semi-annually. In connection with the issuance of the $175,000 of Senior Subordinated Notes, the Company utilized $21,500 of the proceeds to repay $21,500 of the Discount Debentures. In July 2000, the Discount Debentures, which had a value of $30,798, were converted into 23,691 shares of common stock at the fair value of $1,300.
On October 25, 2000, the Company issued $36,500 of Senior Pay-In-Kind Notes (the “PIK Notes”) due October 25, 2010. As the PIK Notes were issued with Class A and Class B common stock attached, a value was assigned to those shares and the PIK Notes were issued with a discount of $15,608. The notes will pay
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
interest at 15% per year on April 25 and October 25 of each year, beginning April 25, 2001 until October 25, 2005. Interest is payable to holders of the exchange notes in the form of additional exchange notes.
The agreement with the PIK Note holders was amended and restated on June 29, 2001 to permit the Company to enter into the accounts receivable securitization and to amend certain of the existing related financial covenants. Interest on the PIK Notes accrues at a rate of 15%, except if a default occurs, as defined by the agreement, and remains uncured or if the ratio of total consolidated indebtedness to consolidated cash flow of Atrium Companies, as defined by the agreement, commencing with March 2002 is greater than 3.75x, then the interest rate shall increase to 17%. The interest rate will return to 15% upon curing of a default or upon the ratio being equal to or less than the 3.75x limit. The interest rate on the PIK Notes will increase to 17% in April 2002 as a result of the ratio not being met.
In connection with the 1998 Recapitalization, Atrium Companies entered into a Credit Agreement (the “Credit Agreement”), dated as of October 2, 1998 as amended and restated as of October 25, 2000, among Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, as lead arranger and syndication agent, Bank One, Texas, N.A. as documentation agent and Fleet National Bank, as administrative agent. On May 15, 2001 and July 20, 2001, Atrium Companies amended its Credit Agreement. The most recent amendments permit Atrium Companies to enter into certain transactions, including the accounts receivable securitization (Note 5), the sale of specific assets, and accordingly, adjust covenants for the transactions. In August 2001, in accordance with the Credit Agreement, Atrium Companies was required to repay $20,000 of its Term Loans as a result of the proceeds from the accounts receivable securitization. The repayment was allocated between Term Loan A, Term Loan B and Term Loan C.
The Credit Agreement provides for four separate facilities (the “Facilities”) consisting of three term loans (referred to individually as “Term Loan A,” “Term Loan B” and “Term Loan C,” and collectively as the “Term Loans”) and a revolving credit facility with a letter of credit sub-facility (the “Revolving Facility,” together with the Term Loans, the “Loans”). The Revolving Facility is in the amount of $47,000, of which $10,000 is available under a letter of credit sub-facility. As of December 31, 2001 and 2000, letters of credit of $2,645 and $5,413, respectively, were outstanding. The Revolving Facility has a maturity date of June 30, 2004. Atrium Companies repaid the outstanding Revolving Facility in the fourth quarter of 2001.
All amounts outstanding under the Credit Agreement are collateralized by (i) a pledge of all of the capital stock and intercompany notes of Atrium Companies and its direct and indirect subsidiaries existing October 2, 1998 or thereafter and (ii) an interest in substantially all of the tangible and intangible properties and assets (including substantially all contract rights, certain real property interests, trademarks, tradenames, equipment and proceeds of the foregoing) of the Company, Atrium Companies and their respective direct and indirect domestic subsidiaries existing on the October 2, 1998 or thereafter created or acquired (the “Domestic Subsidiaries”). The Company and each of the Domestic Subsidiaries have unconditionally guaranteed, on a joint and several basis, all obligations of Atrium Companies under the Credit Agreement.
The Term Loans have an “excess cash flows” provision mandating additional principal payments if certain cash flows targets are met during the year. For 2001 and 2000, the excess cash flows payments were $684 and $0, respectively, and have been reflected in current maturities of long-term debt. This payment is required within 100 days of the fiscal year end.
Atrium Companies is required to pay certain commitment fees in connection with the Credit Agreement based upon the average daily unused portion of the Revolving Facility, certain fees assessed in connection with the issuance of letters of credit as well as other fees specified in the Credit Agreement and other documents related thereto.
The Notes, PIK Notes and Credit Agreement require the Company to comply with certain covenants which, among other things, include limitations on indebtedness, liens and further negative pledges, investments, contingent obligations, dividends, redemptions and repurchases of equity interests, mergers, acquisi-
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
tions and asset sales, capital expenditures, sale leaseback transactions, transactions with affiliates, dividend and other payment restrictions affecting subsidiaries, changes in business conducted, amendment of documents relating to other indebtedness and other material documents, creation of subsidiaries, designation of Designated Senior Indebtedness in respect of the Notes, and prepayment or repurchase of other indebtedness. Additionally, the Notes, PIK Notes and Credit Agreement require the Company meet certain financial tests pertaining to interest coverage, fixed charge coverage and leverage. As of December 31, 2001, the Company is in compliance with all related covenants.
The Credit Agreement contains customary events of default, including, without limitation, payment defaults, covenant defaults, breaches of representations and warranties, bankruptcy and insolvency, judgments, change of control and cross-default with certain other indebtedness.
On January 4, 1999, Atrium Companies entered into two interest rate collars totaling $60,000. These collars were to expire on January 6, 2002. The collars had a floor of 4.57% and 4.66%, respectively, and caps of 6.00%. To the extent that the three-month US dollar LIBOR rate was below the collar floor, payment was due from Atrium Companies for the difference to the extent the three-month US dollar LIBOR rate was above the collar cap, Atrium Companies was entitled to receive the difference. On August 6, 1999, Atrium Companies terminated the collars. Atrium Companies received $790 in connection with the termination. This gain was deferred and was amortized over 29 months, the remaining term of the collars, as a reduction to interest expense.
On November 1, 2000, Atrium Companies 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, Atrium Companies pays interest at a fixed rate of 6.66% on the notional amount and receives interest therein at the three-month LIBOR on a quarterly basis. This swap expires in November 2003.
On December 8, 2000, Atrium Companies entered into a $40,000 interest rate swap agreement to limit the effect of changes in interest rates on long-term borrowings. Under the agreement, Atrium Companies pays interest at a fixed rate of 6.15% on the notional amount and receives interest therein at the three-month LIBOR on a quarterly basis. In December 2001, Atrium Companies amended the swap notional amount to $37,500. This swap expires in December 2002.
Principal payments due during the next five years on long-term notes payable as of December 31, 2001 are as follows:
The ability of the Company to meet its debt service and working capital obligations and capital expenditure requirements is dependent upon the future performance of the Company and its subsidiaries which, in turn, is subject to general economic conditions and to financial, business and other factors, including factors beyond the Company’s control.
Atrium Companies’ Credit Agreement contains quarterly financial covenants which, as amended, become more restrictive in the fourth quarter of 2002. Atrium Companies anticipates that they will continue to comply in 2002 with the quarterly financial covenants.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Accrued Liabilities:
Accrued expenses and other liabilities consisted of the following at December 31:
13. Stockholders’ Equity:
In October 2000, the Company amended its Articles of Incorporation to issue 250,000 shares of stock consisting of 245,000 shares of Series A common stock (“Series A”), par value $.01, and 5,000 shares of Series B common stock (“Series B”), par value $.01. Each share of the Company’s previously outstanding stock was converted into Series A. All shares previously authorized were reclassified to shares of Series A.
In December 2001, the Company amended its Articles of Incorporation to allow for a 1,000 to 1 reverse stock split resulting in a reduction of authorized common stock from 250,000,000 to 250,000 shares. The reverse split was undertaken in order to minimize the Company’s tax liability. The effect of the reverse stock split has been retroactively reflected in the 2001 consolidated balance sheet and in the 2001 consolidated statements of stockholders’ equity and other comprehensive loss, but activity for 2000 and 1999 was not restated in the consolidated balance sheet and in the statements of stockholders’ equity and other comprehensive loss. All references to the number of common shares elsewhere in the consolidated financial statements and related footnotes have been restated as appropriate to reflect the effect of the reverse stock split for all periods presented.
In connection with the issuance of the $36,500 PIK Notes, 13,169 shares of Series A and 3,292 shares of Series B were issued to the purchasers. These shares were assigned a value and this amount is reflected on the balance sheet as common stock subject to mandatory redemption because the holders of these shares can require the Company to repurchase these shares if an initial public offering does not occur after October 2006 and prior to October 2010.
On May 2, 2001, the Company entered into subscription agreements with GEIPPPII, The Ellison Company, Inc. and Ardatrium under which the Company issued 1,153 shares of the Company’s common stock for an aggregate purchase price of $1,500 to each of GEIPPPII and The Ellison Company, Inc., and 12 shares of the Company’s common stock for an aggregate purchase price of $15 to Ardatrium. The Company contributed $3,000 from the proceeds of the issuance to Atrium Companies.
On May 16, 2001, the Company entered into subscription agreements with GEIPPPII, Ellison Capital, LLC, The Ellison Company, Inc. and Ardatrium under which the Company issued 2,692 shares of the Company’s common stock for an aggregate purchase price of $3,500 to each of GEIPPPII and Ellison Capital, LLC, and 27 shares of the Company’s common stock for an aggregate purchase price of $35 to Ardatrium. The Company contributed $7,050 from the proceeds of the issuance to Atrium Companies. In
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
addition, pursuant to the assignment and subscription agreement of The Ellison Company, Inc. and Ellison Capital, LLC, The Ellison Company, Inc. assigned all the rights and obligations under its subscription agreement of May 2, 2001 to Ellison Capital, LLC. Mr. Ellison, one of our directors, is the President and Chief Executive Officer of The Ellison Company, Inc. and holder of a majority membership interest in Ellison Capital, LLC.
14. Federal Income Tax:
Temporary differences that give rise to the deferred income tax assets and liabilities are as follows as of December 31:
A valuation allowance is required against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some of or all of the deferred tax assets will not be realized. The change in the valuation allowance is the result of changes in temporary differences, return to provision adjustments and adoption of SFAS No. 133. A valuation allowance has been recorded against the Company’s net deferred tax asset.
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, 2001, the Company had net operating loss carryforwards of approximately $55,200, which begin to expire in 2019. The Company also had $230 of alternative minimum tax credit carryforwards at December 31, 2001, which have no expiration date.
The components of the provision for income taxes are as follows:
Reconciliation of the federal statutory income tax rate to the effective tax rate, was as follows:
For income tax purposes, Internal Revenue Code Section 197 (“IRC section 197”) provides for the amortization of certain intangible assets, including goodwill, for asset acquisitions occurring after August 1993. Any resulting difference in the book and tax basis of these intangibles is reflected as a component of deferred taxes. Amortization expense related to intangible assets which do not qualify under IRC section 197 is reflected as nondeductible amortization in the rate reconciliation.
15. Related Parties:
Stockholders Agreement
GEIPPPII, Ardshiel and certain of its affiliates and certain other stockholders of the Company have entered into an Amended and Restated Stockholders Agreement (the “Stockholders Agreement”), dated as of October 25, 2000, which sets forth their relative rights as stockholders of the Company.
Under the Stockholders Agreement, the stockholders have agreed that the authorized number of directors should consist of up to eleven directors and set forth the manner of appointing directors. Further, the Stockholders Agreement contains certain restrictions on selling, transferring or disposing of common stock of the Company and provisions regarding stockholders rights in connection with sale, transfer or disposition of the Company’s common stock by other stockholders as well as registration of the Company’s stock under the Securities Act of 1933. Finally, the Stockholders Agreement provides that the Company cannot take certain enumerated actions without obtaining the prior written consent of GEIPPPII.
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Management Agreement
The Company is a party to a management agreement, dated October 2, 1998, which was amended on May 17, 1999, with Ardshiel. Under the management agreement, Ardshiel provides advisory services to the Company with respect to business strategy, operations and budgeting and financial controls in exchange for an annual fee of $1,900, plus expenses. Amounts paid under the management agreement totaled $2,063, $2,062 and $1,525 in 2001, 2000, and 1999, respectively. Of the $2,063 paid in 2001, $300 was in the form of the Company’s common stock and is included in stock compensation expense, $1,763 of the 2001 amount and the entire amounts for 2000 and 1999 are included in selling, delivery, general and administrative expenses. Additionally, the management agreement provides that, in connection with a sale or purchase of a business or any financing prior to engaging another financial advisor, the Company must offer Ardshiel the opportunity to perform investment banking services. Ardshiel has the right to receive a closing fee for its services in an amount not greater than 2% of the total purchase or sale price for such a business. The consent of GEIPPPII is required prior to the payment by the Company in paying similar fees to other entities for similar services. The Company paid Ardshiel’s fees and expenses of $1,352 in 1999 in connection with the acquisitions of Darby-South, Heat and Champagne and $1,900 in fees, of which $900 was in cash and $1,000 in the Company’s restricted stock, in connection with the Ellison acquisition (see Note 6). The management agreement will remain in effect until October 2, 2008. The agreement will automatically be renewed for one-year periods unless either party gives written notice to the contrary prior to the expiration of the initial or any extended term.
Consulting Agreement
Atrium Companies entered a consulting, noncompetition and nonsolicitation agreement with John Ellison, the former owner of Ellison. The term of the agreement commenced October 25, 2000, was amended in June 2001 and will continue through October 15, 2007. Under this agreement, Mr. Ellison provides Atrium Companies with consulting services with respect to the matters of Ellison, as well as various strategies for expanding Atrium Companies’ customer base and increasing its sales. During the term of his agreement, Mr. Ellison will receive payments in the aggregate amount of $2,600, payable in 18 installments of $12 each, on the fifteenth and last day of each month and 150 installments of $16 on the fifteenth and last day of each month beginning on July 31, 2001 and continuing thereafter to and including October 15, 2007.
Under the agreement, Mr. Ellison has agreed not to engage in the making, marketing, assembling, selling or distribution of the products of Ellison or any other windows or doors for sale in the United States for the term of the agreement. Mr. Ellison has also agreed not to solicit any of the Company’s employees to work for any other person or solicit any of the Company’s present or future customers during the term of the agreement.
Notes Receivable
Included in prepaid expenses and other current assets are the following receivables due from related parties at December 31:
16. Commitments and Contingencies:
Employment Agreements
The Company has entered into employment agreements with several key executives of the Company and Atrium Companies including its President and Chief Executive Officer, Chief Financial Officer, its Co-Chief
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Operating Officers, several Divisional Presidents and Vice Presidents, General Managers and Sales Managers of Atrium Companies’ divisions. The agreements generally provide for terms of employment, annual salaries, bonuses, eligibility for option awards and severance.
Operating Leases
The Company has entered into operating lease agreements for office and manufacturing space, automobiles, and machinery and equipment with unrelated third parties, and related parties of the Company. Total rent expense for 2001, 2000 and 1999 was $23,197, $16,721 and $8,414, respectively. Of these totals, amounts paid to related parties were $1,665, $398 and $1,323 for 2001, 2000 and 1999, respectively. The Company terminated three lease agreements with related parties, one in November 1999 and two in November 2001, and entered into replacement lease agreements with an unrelated third party. Future minimum rents due under operating leases with initial or remaining terms greater than twelve months are as follows:
Certain of these lease agreements provide for increased payments based on changes in the consumer price index. Additionally, under certain of these lease agreements the Company is obligated to pay insurance and taxes.
Forward Commitments
The Company has contracts with various suppliers to purchase aluminum for use in the manufacturing process. The contracts vary from one to twelve months and are at fixed quantities with fixed and floating prices. As of December 31, 2001, the Company had forward commitments for 45,160,000 pounds of aluminum, of which 23,825,000 pounds were at fixed prices. The fixed contracts totaled $18,124 for delivery through December 2002.
Contingencies
Atrium Companies 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 effect on the consolidated financial position, results of operations or liquidity of the Company.
The Company has five unionized facilities within the State of Texas, four of which are represented by the Union of Needletrades, Industrial and Textile Employees (“UNITE!”) and one is represented by the Sheet Metal International Association. During May of 2001, Atrium Companies entered into a new three-year collective bargaining agreement with UNITE! All of these collective bargaining agreements will expire in 2004. Due to the decision to close the Woodville, Texas facility in early 2002 (see note 3), Atrium Companies negotiated a termination agreement with the Sheet Metal International Association resulting in a termination of this contract.
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Atrium Companies 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 Atrium Companies’ involvement. Atrium Companies 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.
Atrium Companies is a PRP at the Chemical Recycling, Inc. or “CRI” Superfund site in Wylie, Texas. Atrium Companies is a very small contributor at the CRI site, being assigned approximately 2.788% of the damages based on its waste volume at the site. The site was a solvent reclamation facility, and the Company sent paint waste to the site for recycling. The site has soil and groundwater contamination. Major removal actions have occurred and a Work Plan for Risk Assessment/ Feasibility Study was submitted to the Environmental Protection Agency (“EPA”) in October 1996. According to the studies performed by the site’s steering committee, affected groundwater has not migrated off-site. According to the EPA general counsel in charge of the site, the site is low priority compared to other sites in the region. There are 115 PRP’s at this site with approximately 85 that are members of the site’s steering committee. Two main PRP’s, Glidden and Sherwin Williams, account for approximately 46% of all liability. Atrium Companies’ costs to date associated with this site have been approximately $78, with a current credit for overpayment of $30.
The second site is the Diaz Refinery site in Jackson County, Arkansas. There is no documentation linking Atrium Companies to the site. In connection with a De Minimis Buyout Agreement, Atrium Companies paid $11 to exclude itself from future liability. Because of the lack of documentation linking Atrium Companies to the site and the De Minimis Buyout Agreement, it is not expected that the costs will be incurred in the future. Records indicate that, through agreements with the site’s steering committee and the Arkansas Department of Pollution Control (“ADPCE”), Atrium Companies will not receive any orders or be allocated further costs for continuing work because Atrium Companies does not have a volume contribution assigned to it (because of the lack of records showing it used the site). The facility was a solvent recovery, supplemental fuel blending and hazardous waste facility from the mid 1970s to 1988, resulting in impacted soil and groundwater. In 1995, the ADPCE approved a work plan and no further requirements have been assigned. Additionally, monitoring actions were completed in 2000 and no further activities have occurred since then.
Atrium Companies 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 consolidated financial position, results of operations or liquidity.
Atrium Companies 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. This property was sold in December 1999. Atrium Companies has established a letter of credit of $250 to cover any costs of remediation exceeding the previous owner’s escrow. Atrium Companies believes the existing escrow amount is adequate to cover costs associated with this clean-up. No additional liabilities are believed to exist in regards to the Company’s remaining operations.
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. Other Income, Net:
Other income, net consists of the following for the years ended December 31, 2001, 2000 and 1999:
18. Stock Options:
The 1998 Plan
In connection with the 1998 Recapitalization, the Board of Directors of D and W adopted the 1998 Plan authorizing the issuance of 11,991 options to acquire common stock of D and W, now Atrium Corporation. Upon consummation of the acquisitions of Heat and Champagne, the 1998 Plan was amended to increase the number of shares of options available for grant to 14,991. Through December 31, 2001, the Board of Directors had granted 9,008 options under the 1998 Plan. All options granted under the 1998 Plan expire ten years from the date of grant.
As of December 31, 2001, options of 831 had been granted that consisted of two tranches: (a) - options to purchase 277 shares with an exercise price of $1,090 per share and (b) - options to purchase 554 shares with an exercise price of $1,400. These options previously had a strike price that increased annually by 15% and 30%, respectively. On January 1, 2002, these options were fixed with strike prices of $1,090 and $1,300, respectively. At December 31, 2001, all of these options were vested.
As of December 31, 2001, options of 220 with an exercise price of $1,650 had been granted that are exercisable only upon the occurrence of a value event as defined by the 1998 Plan. These options vest at such time of occurrence of a value event and expire ten years from the date of grant. Additionally, options of 7,538 options had been granted with exercise prices ranging from $1,000 to $1,500 per share. These options vest ratably over periods ranging from three to five years.
The Company recorded non-cash stock compensation expense of $128 in 1999, representing the difference between the fair value of the stock at the date of issuance and the respective exercise prices of each of the above grants and upon appreciation in the fair value for variable options.
The Replacement Plan
In addition to the 1998 Plan, the board of directors of the Company adopted the D and W Holdings, Inc. Replacement Stock Option Plan (the “Replacement Plan”) relating to certain options to purchase common stock which were granted in replacement of outstanding options of Atrium Corporation, our former subsidiary, in connection with the 1998 Recapitalization. Under the Replacement Plan, options to purchase 1,575 shares of the Company’s common stock were granted in exchange for outstanding options of Atrium Corporation, our former subsidiary, which were not exercised pursuant to the 1998 Recapitalization. The Replacement Plan was amended in connection with the consummation of the Heat and Champagne acquisitions to increase the number of shares of the Company’s common stock issuable upon exercise of options to 2,575 shares. Options to purchase 531 shares of our common stock were issued under the Replacement Plan in exchange for outstanding options of Heat which were not exercised. The options granted pursuant to the Replacement Plan vest ratably over a period ranging from three to five years on each anniversary date of the grant. The replacement options have exercise prices ranging from $10 to $160 per share and expire 10 years from the date
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
of grant. As of December 31, 2001, a total of 1,383 options to purchase shares of the Company’s common stock were outstanding under the Replacement Plan.
Upon termination of an optionee’s employment, the company has the right to repurchase all or any portion of the replacement options held by the optionee. Upon exercise of any vested portion of a replacement option, the Company may require the optionee to execute a buy-sell agreement containing provisions similar to the repurchase provisions described above, as a condition to the optionee’s exercise of that option.
The following table summarizes the transactions of the 1998 Plan and the Replacement Plan (combined) for the years ended December 31, 2001, 2000 and 1999.
The following table summarizes information about stock options outstanding at December 31, 2001:
In connection with the 1998 Recapitalization, Ardshiel exchanged 1,040 previously issued warrants in exchange for equivalent warrants of the Company. These warrants have a strike price of $10 and as of December 31, 2001 all of the warrants were vested.
In 1995, the FASB issued SFAS Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), which, if fully adopted by the Company, would change the methods the Company applies in recognizing the cost of the stock based plans. Adoption of the cost recognition provisions of SFAS No. 123 is optional, and the Company has not elected the provisions of SFAS No. 123. However, pro forma disclosures, as if the Company adopted the cost recognition provisions of SFAS No. 123 are required by SFAS No. 123. During 2001, 2000 and 1999, the Company granted only nonqualified stock options and warrants under the plans.
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of each stock option granted is estimated on the date of grant using the minimum value method of option pricing with the following weighted-average assumptions for grants in 2000, 1999 and 1998: dividend yield of 0.0%; risk-free interest rate of 5.65%; and the expected life of 5 years. In determining the “minimum value” SFAS 123 does not require the volatility of the Company’s common stock underlying the options to be calculated or considered because the Company was not publicly-traded when the options were granted.
Had the compensation cost for the stock-based compensation plans and warrants been determined consistent with SFAS No. 123, the Company’s net income (loss) for 2001, 2000, and 1999 would have been $(13,048), $(80,163) and $(951), respectively.
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts.
19. Employee Benefit Plans:
Atrium Companies maintains an employees’ savings plan under Section 401(k) of the Internal Revenue Code (“Atrium Plan”). Atrium Companies makes discretionary matching contributions equal to 50% of the first 4% of the employee’s contribution. Atrium Companies contributed $1,107, $839 and $505 during 2001, 2000 and 1999, respectively.
In connection with the Recapitalization, Atrium Companies assumed Door Holding, Inc’s profit sharing plan under section 401 of the Code. The plan provided for discretionary contributions by the employer. The plan did not provide for employee contributions. No contributions were contributed in 1999 and upon receipt of a favorable tax determination letter from the Internal Revenue Service the plan was terminated in October 1999 at which time a distribution of $1,710 was made to eligible employees.
Atrium Companies assumed Thermal’s qualified 401(k) and profit-sharing plan which covered substantially all of its employees. Under the terms of the plan, Thermal contributed up to 25% of the first 8% of each employee’s compensation contributed and made discretionary contributions to the plan. Total expense recorded was $5 and $529 during 2000 and 1999, respectively. The Thermal 401(k) and profit-sharing plan was merged into the Atrium Plan in 2000.
During 1998, Best Built implemented a qualified 401(k) plan. Under the terms of the plan, Best Built contributed up to 25% of the first 8% of each employee’s compensation contributed. The total expense recorded was $6 and $17 during 2000 and 1999, respectively. The Best Built 401(k) plan was merged into the Atrium Plan in 2001.
Champagne sponsored a 401(k) profit sharing plan covering substantially all employees. Contributions are determined annually by the Board of Directors. The total expense recorded was $0 and $67 during 2000 and 1999, respectively. The Champagne 401(k) profit sharing plan was merged into the Atrium Plan in 2001.
20. Quarterly Results (unaudited)
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During the third quarter of 2001, the Company wrote off deferred financing costs of $837 in connection with the retirement of debt under the Company’s Credit Agreement (see note 11) from the proceeds of the securitization of accounts receivable. These charges were previously not reflected in the Company’s September 30, 2001 financial statements. The following table presents the quarterly results as restated for the third quarter.
21. Atrium Corporation Only Financial Information:
Condensed Balance Sheets
Condensed Statements of Operations
ATRIUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Statements of Cash Flows
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of Atrium Corporation:
Our audits of the consolidated financial statements of Atrium Corporation referred to in our report dated March 27, 2002, appearing in this Annual Report on Form 10-K also included an audit of the related financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 27, 2002
S-1
ATRIUM CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
(a) 	
includes write-offs, net of recoveries, and 	adjustment to writedown receivables sold to AFC to fair value. 	
(b)
includes the cumulative-effect adjustment of 	adoption of SFAS No. 133 	
S-2
ATRIUM CORPORATION
EXHIBIT INDEX
E-1
E-2
E-3
(1)
Filed herewith. 	
(2)
Incorporated by reference from Atrium Companies 	Inc.’s Report on Form 10-K filed as of April 1, 	2002. 	
(3)
Incorporated by reference from Atrium Companies, 	Inc.’s Report on Form 8-K filed on August 14, 	2001. 	
(4)
Incorporated by reference from Amendment 	No. 2 to Atrium Corporation’s Registration Statement 	on Form S-4 , dated May 9, 2001, SEC File 	No. 333-54122. 	
(5)
Incorporated by reference from Atrium 	Corporation’s Registration Statement on Form S-4, 	dated January 22, 2001, SEC File No. 333-54122. 	
(6)
Incorporated by reference from Atrium Companies, 	Inc.’s Report on Form 8-K, dated October 24, 2000 	and filed on November 9, 2000. 	
E-4
(7)
Filed with Atrium Companies, Inc.’s 	Registration Statement on Form S-4 dated July 15, 	1999, SEC File No. 333-82921. 	
(8)
Incorporated by reference from Atrium Companies, 	Inc.’s Report on Form 10-K dated March 31, 1999 	and filed on April 15, 1999. 	
(9)
Incorporated by reference from Atrium Companies, 	Inc.’s Report on Form 8-K, dated March 27, 1998 	and filed on April 13, 1998. 	
E-5