ATRIUM CORP - 10-Q Quarterly Report

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

As of November 3, 2003, the registrant had 170,906 shares of Common Stock, par value $.01 per share outstanding.

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

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”).

The unaudited consolidated financial statements of the Company for the three and nine months ended September 30, 2003 and 2002, and financial position as of September 30, 2003 and December 31, 2002 have been prepared in accordance with generally accepted accounting principles for interim financial reporting, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

These consolidated financial statements and footnotes should be read in conjunction with the Company’s audited financial statements for the fiscal year ended December 31, 2002 included in the Company’s annual report on Form 10-K as filed with the Securities and Exchange Commission on March 31, 2003. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim financial information have been included. The results of operations for any interim period are not necessarily indicative of the results of operations for a full year.

As of September 30, 2003, the Company had several stock-based compensation plans. The Company accounts for these plans under the recognition and measurement principles of the Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Stock-based employee compensation costs related to the issuance of stock options is not reflected in the Company’s earnings, as all options granted under those plans had an exercise price equal to or in excess of the estimated market value of the underlying common stock on the date of grant.

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

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

During January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 provides guidance for companies having ownership of variable interest entities, typically referred to as special purpose entities, in determining whether to consolidate such variable interest entities. FIN 46 has immediate applicability for variable interest entities created after January 31, 2003 or interest in variable interests created after that date. For interests in variable interest entities, FIN 46 is expected to become effective on December 31, 2003. The Company is considering the implications of FIN 46, however they do not expect that adoption will have a significant effect on their financial statements.

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). SFAS 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Under SFAS 143, the fair value of a liability for an asset retirement obligation covered under the scope of SFAS 143 would be recognized in the period in which the liability is incurred, with an offsetting increase in the carrying amount of the related long-lived asset. Adoption of SFAS 143 has not had a significant effect on the Company.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” requiring that gains and losses from the extinguishment of debt be classified as extraordinary items only if certain criteria are met. SFAS 145 also amends SFAS No. 13, “Accounting for Leases,” and the required accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 was adopted by the Company on January 1, 2003. During April of 2003, the Company expensed $29 of deferred financing fees in connection with their 2002 excess cash flow payment (see Note 5). The loss associated with the debt retirement is included in interest expense on the Company’s financial statements.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized initially at fair value when the liability is incurred. The Company adopted SFAS 146 on January 1, 2003. Adoption of SFAS 146 did not have a significant effect on the Company.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies the accounting and reporting for derivative contracts, including hedging instruments. The amendments and clarifications under SFAS 149 generally serve to codify the conclusions reached by the Derivative Implementation Group, to incorporate other FASB projects on financial instruments, and to clarify other implementation issues. SFAS 149 became effective prospectively for derivative contracts entered into or modified by the Company after June 30, 2003. Adoption of SFAS 149 has not had a significant impact on the Company.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company’s existing financial instruments effective July 1, 2003. On October 29, 2003, the FASB deferred the provisions of paragraphs 9 and 10 and related guidance in the appendices of this pronouncement as they apply to mandatorily redeemable noncontrolling interests. Adoption of the effective provisions of SFAS 150 have not had a significant effect on the Company, the Company does not expect that the deferred provisions will have a significant effect on the Company.

The Company issued $36,500 of senior payment-in-kind notes (the “PIK Notes”) in October of 2000 with shares of stock discounted from management’s estimate of the fair market value of the common stock. These shares are reflected on the balance sheet as common stock subject to mandatory redemption since, if an initial public offering has not occurred prior to October 25, 2006, the holders of these shares can require the Company to repurchase these shares at specified times during the period occurring after October 25, 2006 and prior to October 25, 2010. As the Company’s common stock subject to redemption is not mandatory, but contingent on certain events that may or may not occur, the securities are excluded from the scope of FAS 150 and therefore, would not be reclassified from the current mezzanine treatment on the balance sheet at the effective date of the pronouncement. If the Company were to determine that the events causing the redemption will occur, the Company will be required to reclassify the common stock subject to redemption to be included as a liability and revalue the security to the fair value of the common stock in the period that the Company determines the event will occur.

During November 2002, the FASB issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 generally requires a guarantor to recognize a liability for obligations arising from guarantees. FIN 45 also requires new disclosures for guarantees meeting certain criteria outlined in the pronouncement. The recognition and measurement provisions of FIN 45 are applicable on a prospective basis for guarantees issued or modified after December 31, 2002. The Company’s consolidated financial statements have not been affected as a result of adopting this pronouncement.

Inventories are valued at the lower of cost or market using the last-in, first-out (LIFO) method of accounting. Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead. Inventories consisted of the following:

The senior subordinated notes (the “Notes”), PIK Notes and credit agreement require the Company to meet certain financial tests pertaining to total leverage, senior leverage, interest coverage, fixed charge coverage and maximum capital expenditures. As of September 30, 2003, the Company was in compliance with all related covenants.

Additionally, the term loans have an “excess cash flows” provision mandating additional principal payments if certain cash flow targets are met during the year. For 2002 and 2001, the excess cash flow payments were $1,058 and $684, respectively. These amounts are required to be paid within 100 days of the fiscal year end. In December 2002, the Company voluntarily pre-paid $6,544 on the term loans, which reduced the mandated excess cash flow payment for 2002 to $1,058, which was paid in April 2003.

Interest on the Company’s PIK Notes accrues at a rate of 15%, except under the following two conditions: 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 the Company commencing with March 2002 is greater than 3.75x, then the 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 increased to 17% in April 2002 as a result of the ratio not being met. The interest on the PIK Notes will continue to accrue at 17% until the default clears.

Atrium Companies has an interest rate swap agreement to hedge exposure to interest rate fluctuations. As of September 30, 2003, Atrium Companies had an interest rate swap with a notional amount totaling $100,000. The swap expires in November 2003.

The Company has four unionized facilities within the State of Texas, all of which are represented by the Union of Needletrades, Industrial and Textile Employees (“UNITE!”). During May of 2001, the Company entered into a new three-year collective bargaining agreement with UNITE! which will expire in 2004.

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. The Company 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. The Company’s costs to date associated with this site have been approximately $78.

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, the Company 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 Company will incur any additional costs. Records indicate that, through agreements with the site’s steering committee and the Arkansas Department of Pollution Control (the “ADPCE”), the Company will not receive any orders or be allocated further costs for continuing work because the Company does not have a volume contribution assigned to the site (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.

The Company believes that based on the information currently available, including the substantial number of other PRP’s and relatively small share allocated to it at such sites, its liability, if any, associated with either of these sites will not have a material adverse effect on the Company’s 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. The Company sold this property 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. The Company believes the existing escrow amount is adequate to cover costs associated with this clean-up.

In connection with the sale of one of Atrium Companies’ facilities in December 2002, a $250 escrow was established. The escrow is receivable upon the Company obtaining an environmental certification on the building. The Company is currently in the process of applying for the certification and expects to be refunded the entire $250 escrow paid at closing during 2003.

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

During the first nine months of 2003, the accrued provisions for Wing Industries, Inc. (“Wing”) increased by $13 primarily due to a special charge recorded in the amount of $375 for a legal settlement that was larger than initially anticipated, offset by $362 in legal fees and exit costs related to idle facilities, leaving a remaining accrual of $653 for unpaid liabilities. In the same period, the Company decreased its accrued

On January 31, 2003, Atrium Companies, through its newly-formed and wholly-owned subsidiary, MD Casting, Inc. (“MD Casting”), acquired substantially all of the operating assets of Miniature Die Casting of Texas, L.P. for a purchase price of $3,250 in cash, excluding transaction fees of approximately $108, and the assumption of certain liabilities with an additional amount of up to $600 to be paid over three years upon the achievement of certain financial targets. MD Casting is a zinc die cast hardware manufacturer located in Fort Worth, Texas. The Company financed the acquisition through its revolving credit facility.

The acquisition was accounted for in accordance with SFAS No. 141, “Business Combinations” (“SFAS 141”). 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 estimated fair value of the net assets acquired (“goodwill”) was $2,960. The results of MD Casting’s operations were included in the Company’s consolidated financial statements beginning on February 1, 2003. The purchase price allocation is as follows:

On April 1, 2003, Atrium Companies acquired substantially all of the assets of Danvid Window Company (“Danvid”), a wholly-owned subsidiary of American Architectural Products Corporation (“AAPC”), for approximately $5,550 in cash, excluding transaction fees of $179, and the assumption of certain liabilities. The Company financed the acquisition through its revolving credit facility. The assets of Danvid have been acquired out of bankruptcy (with both Danvid and AAPC operating as a debtor-in-possession under Chapter 11) pursuant to an auction sale under Sections 363 and 365 of the Bankruptcy Code. The acquisition of Danvid, an aluminum and vinyl window and door manufacturer, located in Dallas, Texas, further strengthens the Company’s market share in the Southern regions of the United States.

The acquisition was accounted for in accordance with SFAS 141 and the results of operations were included in the Company’s consolidated financial statements beginning on April 1, 2003. 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 purchase price over the fair market value of the net assets acquired (“goodwill”) was $1,226. The purchase price allocation is as follows:

On October 28, 2003, the Company entered into a definitive agreement providing for the acquisition of the Company by an investor group led by an affiliate of Kenner & Company, Inc. (“Kenner”), a New York-based private investment firm, UBS Capital Americas and certain members of Atrium management. Kenner has received financing commitments from CIBC World Markets and UBS Investment Bank in connection with this transaction.

Pursuant to the agreement, each outstanding share of the Company’s common stock and each option, with the exception of some shares and options owned by certain members of management (which will be exchanged), will be acquired by KAT Holdings, Inc. (a newly formed affiliate of Kenner & Company), and all outstanding indebtedness (including accrued interest) will continue to be outstanding or refinanced. The transaction, as contemplated, will be in compliance with the 10 1/2% Senior Subordinated Notes (due 2009) indenture. Under the indenture, Atrium Companies is required to make an offer to purchase its 10 1/2% Senior Subordinated Notes and will either commence the offer within 30 days after the closing of the transaction or solicit a consent to leave the 10 1/2% Senior Subordinated Notes outstanding. In connection with the transaction, Atrium Companies also intends on renewing its accounts receivable securitization facility and refinancing its existing senior credit facility with a new senior credit facility arranged by CIBC World Markets and UBS Investment Bank.

The acquisition is expected to be completed during the fourth quarter of 2003 and is subject to the availability of certain financing, the expiration of the applicable waiting period under the Hart-Scott-Rodino Act and other conditions.

On October 1, 2003, Atrium Companies acquired substantially all of the assets of Aluminum Screen Manufacturing, Ltd., L.L.P., a Texas registered limited liability partnership and Texas limited partnership, Aluminum Screen Products, Inc., a Nevada corporation and Aztex Screen Products, L.L.C., an Arizona limited liability corporation (collectively, “Aluminum Screen”) for $16.5 million in cash. Aluminum Screen is a screen manufacturer based in Dallas, Texas with additional operations in Houston, Phoenix, Las Vegas and Ciudad Juarez, Mexico. The transaction was effected through the Company’s newly-formed subsidiary, Aluminum Screen Manufacturers, Inc., a Delaware corporation and was funded through a combination of borrowings under the Company’s revolving credit facility and accounts receivable securitization facility.

The acquisition will be accounted for in accordance with SFAS 141. The aggregate purchase price will be allocated to the underlying assets and liabilities based upon their respective estimated fair market values at the

On October 1, 2003, the state district court in Boulder, Colorado granted final approval of a settlement agreement between Atrium Companies and its subsidiary, formerly known as Champagne Industries, Inc. (“Champagne,” renamed Atrium Door and Window Company of the Rockies), and 63 named plaintiffs who claimed to represent a purported class of approximately 4,500 homeowners. The plaintiffs sued Atrium Companies and Champagne, along with three other home builder and home product manufacturer defendants, for claims arising out of Champagne’s sale of its Imperial wood window between 1987 and 1997. Under the terms of the approved settlement, Champagne’s insurance carriers paid approximately $18,450 to Atrium Companies for a settlement that will be used to compensate the approximately 4,500 class members, either through a one-time liquidated payment or through a payment that would be used by class members for the repair and replacement of their windows. In addition, Champagne will offer to sell a fixed number of replacement windows to the class members at a reduced price from Champagne’s retail list price, which will in no event be below Champagne’s cost to manufacture the replacement product. Under the terms of the approved settlement, neither Atrium Companies nor Champagne will pay any cash to the class members and both Atrium Companies and Champagne were released from any liability arising from any claims asserted or that could have been asserted by the plaintiffs in this litigation, including any claims associated with the Imperial window. In addition, as part of the approved settlement, the home builder co-defendant withdrew with prejudice its cross-claim against Champagne.

As of September 30, 2003, the Company had cash of $6,471 as a result of the receipt of a portion of the settlement from Atrium Companies’ insurance carriers, a receivable in the amount of $11,979 for the portion of the settlement remaining to be funded by Atrium Companies’ insurance carriers, and a liability in the amount of $18,450 for the settlement. On October 25, 2003, the Company paid $18,450 to class members using cash received from Atrium Companies’ insurance carriers.

This Form 10-Q contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) relating to the Registrant based on beliefs of management that involve substantial risks and uncertainties. When used in this Form 10-Q, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” and similar expressions, as they relate to the Registrant or the Registrant’s management, identify forward-looking statements. Such statements reflect the current views of the Registrant with respect to the risks and uncertainties regarding the operations and the results of operations of the Registrant, as well as its customers and suppliers, including the availability of credit, interest rates, employment trends, changes in levels of consumer confidence, changes in consumer preferences, national and regional trends in new housing starts, raw material costs, pricing pressures, shifts in market demand and general economic conditions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended.

The operations of the Company are cyclical in nature and generally result in increases during the peak building season which coincides with the second and third quarters of the year. Accordingly, results of operations for the third quarter and first nine months of 2003 are not necessarily indicative of results expected for the full year.

The operations of MD Casting and Danvid (“2003 acquisitions”) are included since their date of acquisition, January 31, 2003 and April 1, 2003, respectively.

Net Sales. Net sales increased by $22,110 from $144,763 during the third quarter of 2002 to $166,873 during the third quarter of 2003. The increase in net sales was primarily the result of the 2003 acquisitions, sales growth at the Company’s vinyl and aluminum window fabrication and aluminum extrusion operations. Net sales from the 2003 acquisitions were $13,111 during the third quarter. Net sales at the Company’s vinyl window operations increased $3,557, or 4.5%, from the prior year as a result of increased volume with new and existing customers. This increase occurred despite Lowe’s Companies, Inc. (“Lowe’s”) shifting certain volume to a competitor. Net sales at the Company’s aluminum window operations increased $2,677, or 5.7%, over the prior year primarily due to increased volume with existing customers. Net sales at the Company’s aluminum extrusion operation increased $1,475, or 13.3%, over the prior year due to increased volume with new and existing customers.

Net sales increased by $36,004 from $406,233 during the first nine months of 2002 to $442,237 during the first nine months of 2003. The increase in net sales was primarily the result of the 2003 acquisitions and sales growth at the Company’s aluminum window fabrication and aluminum extrusion operations. Net sales from the 2003 acquisitions were $27,586 for the first nine months of 2003. The Company also experienced increases of $5,922, or 4.4%, over the prior year from its aluminum window operations due to increased unit volume with the Company’s existing customers. Net sales at the Company’s aluminum extrusion operation increased $4,602, or 14.9%, over the prior year due to increased volume with new and existing customers. Net sales at the Company’s vinyl window operations decreased $917, or .4%, from the prior year as a result of lower volume in the East related to Lowe’s shifting certain volume to a competitor, offset by an increase in volume with new and existing customers.

Cost of Goods Sold. Cost of goods sold increased from 66.3% of net sales during the third quarter of 2002 to 67.1% of net sales during the third quarter of 2003 and increased from 67.2% of net sales during the first nine months of 2002 to 67.8% of net sales during the first nine months of 2003. Material cost of goods sold increased from 39.0% of net sales during the third quarter of 2002 to 39.1% of net sales during the third quarter of 2003 and decreased from 40.0% of net sales during the first nine months of 2002 to 39.5% of net sales during the first nine months of 2003. The increase in material costs, as a percentage of net sales, during the third quarter of 2003 is primarily related to a rise in the cost of vinyl resins and aluminum, offset by a decrease in

material costs as a result various cost saving initiatives, leveraging the Company’s increased purchasing power and additional vertical integration. Material costs decreased, as a percentage of net sales, during the first nine months of 2003 due to the Company’s various cost saving initiatives, which were partially offset by an increase in the cost of vinyl resins. Direct manufacturing expenses increased from 27.3% of net sales during the third quarter of 2002 to 28.0% of net sales during the third quarter of 2003 and increased from 27.3% of net sales during the first nine months of 2002 to 28.3% of net sales for the first nine months of 2003. The increase in direct manufacturing expenses during the third quarter and first nine months of 2003 was primarily caused by higher insurance, property taxes and labor costs.

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 (“SG&A”) increased $3,148 from $30,313 (20.9% of net sales during the third quarter of 2002) to $33,461 (20.1% of net sales during the third quarter of 2003). SG&A for the 2003 acquisitions were $2,830 during the third quarter. SG&A, excluding the 2003 acquisitions, increased $318 from $30,313 during the third quarter of 2002 to $30,631 during the third quarter of 2003. General and administrative expenses, excluding the 2003 acquisitions, decreased $111 from $11,836 during the third quarter of 2002 to $11,725 during the third quarter of 2003 due to the Company’s ability to manage its overhead more efficiently and the closure of the Company’s Kel-Star facility. The improvement to general and administrative expenses, was partially offset by higher insurance premiums and increases in salary expense. Delivery expenses, excluding the 2003 acquisitions, decreased from 6.6% of net sales during the third quarter of 2002 to 6.1% of net sales during the third quarter of 2003. The Company experienced a decrease in delivery expenses as a result of the use of a new, lower cost distribution channel for a portion of the Company’s home center deliveries and a decrease in its leased transportation costs, primarily as a result of a favorable contract renewal. The decrease in delivery expenses was partially offset by an increase in fuel costs. Selling expenses, excluding the 2003 acquisitions, were flat to prior year at 6.2% of net sales. Selling expenses are primarily variable in nature as a significant portion of these expenses represent commissions.

SG&A increased by $6,452 from $87,900 (21.6% of net sales during the first nine months of 2002) to $94,352 (21.3% of net sales during the first nine months of 2003). SG&A for the 2003 acquisitions were $5,438 during the first nine months of 2003. SG&A, excluding the 2003 acquisitions, increased $995 from $87,900 during the first nine months of 2002 to $88,895 during the first nine months of 2003. General and administrative expenses, excluding the 2003 acquisitions, increased $442 from $34,917 during the first nine months of 2002 to $35,359 during the first nine months of 2003, largely as a result of higher insurance costs and increases in salary expense, offset by the Company’s ability to manage its overhead more efficiently and the closure of the Company’s Kel-Star facility. Delivery expenses, excluding the 2003 acquisitions, decreased from 6.5% of net sales during the first nine months of 2002 to 6.4% of net sales during the first nine months of 2003. The Company experienced a decrease in delivery expenses as a result of the use of a new, lower cost distribution channel for a portion of the Company’s home center deliveries and a decrease in its leased transportation costs primarily as a result of a favorable contract renewal. The decrease in delivery expenses was partially offset by an increase in fuel costs. Selling expenses, excluding the 2003 acquisitions, decreased as a percentage of net sales from 6.6% of net sales during the first nine months of 2002 to 6.5% of net sales during the first nine months of 2003. The decrease as a percentage of net sales resulted from modifications to the Company’s commission structure. Selling expenses are primarily variable in nature as a significant portion of these expenses represent commissions.

Securitization Expense. Securitization expense increased $30 from $325 in the third quarter of 2002 to $355 in the third quarter of 2003 and decreased $12 from $879 during the first nine months of 2002 to $867 during the first nine months of 2003. Securitization expense incurred by the Company represents the losses on the sales of the Company’s accounts receivable, which includes both the interest expense and commitment fee components of the transaction.

Stock Compensation Expense. Stock compensation expense increased $25 from $75 during the third quarter of 2002 to $100 during the third quarter of 2003 and increased $244 from $308 during the first nine months of 2002 to $552 during the first nine months of 2003. Stock compensation expense for the third quarter of 2003 and 2002 included payments of $100 and $75, respectively, for services rendered, in the form of the Company’s common stock to the Company’s equity sponsor, Ardshiel, Inc. Stock compensation for the first nine months of 2003 and 2002 included $252 and $83, respectively, for the repurchase of stock options from current and former employees and payments of $300 and $225, respectively, for services rendered, in the form of the Company’s common stock to Ardshiel, Inc.

Amortization Expense. Amortization expense increased $247 from $845 during the third quarter of 2002 to $1,092 during the third quarter of 2003 and increased $592 from $2,475 during the first nine months of 2002 to $3,067 during the first nine months of 2003. Amortization expense increased during the third quarter and first nine months of 2003, primarily due to increased amortization on software implementation costs.

Special Charge. During the second quarter of 2002, the Company recorded a special charge in the amount of $3,948 for liabilities associated with the divestiture of the assets of Wing. The majority of the special charge is attributable to $2,859 of exit costs incurred by the Company on the remaining lease obligations at Wing’s former facilities. The special charge also included $1,089 for litigation expenses. During the third quarter of 2003, the Company recorded a special charge in the amount of $375 for a legal settlement related to the divestiture of Wing that was higher than initially anticipated. As of September 2003, the Company still has an accrual of $653 for unpaid liabilities related to the Wing special charge.

Interest Expense. Interest expense decreased $180 from $11,377 during the third quarter of 2002 to $11,197 during the third quarter of 2003 and decreased $438 from $33,796 during the first nine months of 2002 to $33,358 during the first nine months of 2003. The decrease was due to reduced debt levels and a decrease in the Company’s weighted-average interest rate, as a result of the expiration of one of its interest rate swap agreements in December of 2002. The decrease was partially offset by an interest rate increase on the Company’s PIK Notes from 15% to 17% in April 2002 (see Note 6).

Cash generated from operations, availability under Atrium Companies’ revolving credit facility and availability under Atrium Companies’ accounts receivable securitization facility are the Company’s principal sources of liquidity. During the first nine months of 2003, cash was primarily used for capital expenditures and for the acquisitions of Danvid and MD Casting. Net cash provided by operating activities was $36,979 during the first nine months of 2003 compared to $17,588 during the first nine months of 2002. Approximately $6,471 of the increase in cash provided by operating activities is due to cash received for the Braverman settlement (see Note 10). The increase in cash provided by operating activities also includes amounts borrowed against Atrium Companies’ accounts receivable securitization facility, offset by a decrease in cash provided by changes in working capital. Net cash used in investing activities during the first nine months of 2003 was $23,562 compared to $13,101 during the first nine months of 2002. The increase in cash used in investing activities was primarily due to the acquisition of Danvid and MD Casting during 2003. Cash used in financing activities during the first nine months of 2003 was $5,944 compared to $253 during the first nine months of 2002. The increase in cash used in financing activities was primarily due to a decrease in checks drawn in excess of bank balances and additional principal payments on Atrium Companies’ term loans.

Additionally, the term loans have an “excess cash flows” provision mandating additional principal payments if certain cash flow targets are met annually at December 31. For 2002 and 2001, the excess cash flow payments were $1,058 and $684, respectively. These amounts are required to be paid within 100 days of the fiscal year end. In December 2002, the Company voluntarily pre-paid $6,544 on the term loans, which reduced the mandated excess cash flow payment for 2002 to $1,058, which was paid in April of 2003.

Atrium Companies’ credit agreement, as amended, provides for a revolving credit facility in the amount of $47,000, which includes a $10,000 letter of credit sub-facility. The revolving credit facility has a maturity

date of June 30, 2004. The Company will either renew the existing revolving credit facility or negotiate a new facility in connection with the transaction noted in Note 10 — Subsequent Events. Additionally, Atrium Companies has an accounts receivable securitization facility, which can make additional funds available to the Company subject to certain borrowing base levels. On July 3, 2003, the receivables purchase agreement was amended, at the Company’s discretion, to increase the size of the accounts receivable securitization facility from $42,000 to $50,000.

At September 30, 2003, the Company had $42,912 of availability under the revolving credit facility, net of outstanding letters of credit totaling $4,088. As of October 27, 2003, the Company had cash of $1,646 and $36,184 of availability under the revolving credit facility, net of borrowings of $6,000 and outstanding letters of credit totaling $4,816. As of September 30, 2003, the Company had $9,000 of availability under the accounts receivable securitization facility and an additional $7,800 currently unavailable due to borrowing base limitations, net of securitizations of $33,200. As of October 27, 2003, the Company had $1,000 of availability under the accounts receivable securitization facility and an additional $7,000 currently unavailable due to borrowing base limitations, net of securitizations of $42,000.

The Company had cash capital expenditures (net of proceeds from sales) of $10,614 during the nine months of 2003 ($3,186 during the third quarter of 2003) compared to $10,168 during the first nine months of 2002 ($3,720 during the third quarter of 2002). Capital expenditures during these periods were a result of the Company’s effort to increase plant capacity and to increase efficiency through automation at its various manufacturing facilities. The Company expects capital expenditures (exclusive of acquisitions) in 2003 to be approximately $15,000, however, actual capital requirements may change based on management and strategic decisions.

The Company’s ability to meet debt service, working capital obligations and capital expenditure requirements is dependent upon the Company’s future performance which, in turn, will be subject to general economic conditions and to financial, business and other factors, including factors beyond the Company’s control.

effective date of the pronouncement. If the Company were to determine that the events causing the redemption will occur, the Company will be required to reclassify the common stock subject to redemption to be included as a liability and revalue the security to the fair value of the common stock in the period that the Company determines the event will occur.

The Company is exposed to market risk from changes in interest rates and commodity pricing. The Company uses derivative financial instruments on a limited basis to hedge economic exposures including interest rate protection agreements and forward commodity delivery agreements. The Company does not enter into derivative financial instruments or other financial instruments for speculative trading purposes.

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, the Company 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. The fair value of this swap is a liability of $507, which is included in accrued liabilities.

There have not been any material changes in the Company’s market risk during the nine months ended September 30, 2003. For additional information related to various market risks refer to Section 7A of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2002.

An evaluation of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was carried out as of the last day of the period covered by this report. This evaluation was made under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have not been any changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The exhibits filed with or incorporated by reference in this report are listed on the Exhibit Index beginning on page E-1 of this report.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	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 and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2003

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


Delaware		75-2814598
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)


	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-31.1 Certification of Chief Executive Officer
EX-31.2 Certification of Chief Financial Officer


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited):
	Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002		2
	Consolidated Statements of Operations for the Three Months Ended September 30, 2003 and 2002		3
	Consolidated Statements of Operations for the Nine Months Ended September 30, 2003 and 2002		4
	Consolidated Statement of Stockholders’ Equity and Other Comprehensive Loss for the Nine Months Ended September 30, 2003		5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002		6
	Notes to Consolidated Financial Statements		7-15
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16-21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		21
Item 4.	Controls and Procedures		21

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		22
Items 2, 3, 4 and 5 are not applicable
Item 6.	Exhibits and Reports on Form 8-K		22
Signatures			23


			September 30,			December 31,
			2003			2003

			(unaudited)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	8,604		$	1,131
	Accounts receivable, net			4,520			1,847
	Retained interest in sold accounts receivable			32,111			25,209
	Other receivable — litigation settlement			11,979			—
	Inventories			47,057			33,712
	Prepaid expenses and other current assets			5,946			6,109
	Deferred tax asset			1,300			922

		Total current assets		111,517			68,930
PROPERTY, PLANT AND EQUIPMENT, net				60,232			55,322
GOODWILL, net				349,425			345,239
DEFERRED FINANCING COSTS, net				11,909			14,401
OTHER ASSETS, net				10,461			8,134

		Total assets	$	543,544		$	492,026

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Current portion of notes payable		$	4,609		$	6,524
	Accounts payable			33,318			22,535
	Other payable — litigation settlement			18,450			—
	Accrued liabilities			34,216			31,441

		Total current liabilities		90,593			60,500

LONG-TERM LIABILITIES:
	Notes payable			335,420			329,880
	Deferred tax liability			1,300			922
	Other long-term liabilities			2,348			560

		Total long-term liabilities		339,068			331,362

		Total liabilities		429,661			391,862

COMMON STOCK SUBJECT TO MANDATORY REDEMPTION				15,604			15,604

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
	Common stock $01 par value, 245,000 shares authorized, 170,906 and 170,700 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively			2			2
	Paid-in capital			179,979			179,704
	Accumulated deficit			(81,236	)		(90,706	)
	Accumulated other comprehensive loss			(466	)		(4,440	)

		Total stockholders’ equity		98,279			84,560

		Total liabilities and stockholders’ equity	$	543,544		$	492,026

Exhibit

Number

Description

Certification by Chief Executive Officer Pursuant to 17 CFR 240.13a-14, promulgated under the Sarbanes-Oxley Act of 2002.

Certification by Chief Financial Officer Pursuant to 17 CFR 240.13a-14, promulgated under the Sarbanes-Oxley Act of 2002.


		2003			2002

NET SALES		$	166,873		$	144,763
COST OF GOODS SOLD			111,914			95,977

Gross profit			54,959			48,786

OPERATING EXPENSES:
Selling, delivery, general and administrative expenses (excluding securitization, stock compensation and amortization expense)			33,461			30,313
	Securitization expense		355			325
	Stock compensation expense		100			75
	Amortization expense		1,092			845

SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE
	EXPENSES		35,008			31,558
Special charge			375			—

			35,383			31,558

	Income from operations		19,576			17,228
INTEREST EXPENSE			11,197			11,377
OTHER EXPENSE, net			(5	)		(132	)

Income before income taxes			8,374			5,719
PROVISION FOR INCOME TAXES			343			248

NET INCOME		$	8,031		$	5,471


													Accumulated
		Class A											Other			Total
							Paid-in			Accumulated			Comprehensive			Stockholders’
		Shares			Amount		Capital			Deficit			Loss			Equity

Balance, December 31, 2002			170,700		$	2	$	179,704		$	(90,706	)	$	(4,440	)	$	84,560
Issuance of Class A Shares			231			—		300			—			—			300
Repurchase of Class A shares			(25	)		—		(25	)		—			—			(25	)
Comprehensive income:
	Net income		—			—		—			9,470			—			9,470
	Net fair market value adjustment of derivative instruments, net of tax of $0		—			—		—			—			3,974			3,974

Total comprehensive income			—			—		—			9,470			3,974			13,444

Balance, September 30, 2003			170,906		$	2	$	179,979		$	(81,236	)	$	(466	)	$	98,279


				2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income			$	9,470		$	3,557
	Adjustments to reconcile net income to net cash flows provided by operating activities:
	Depreciation and amortization				12,577			10,965
	Non-cash stock compensation expense				300			225
	Amortization of deferred financing costs				2,469			2,533
	Write-off of deferred financing costs				29			—
	Accretion of discount on notes payable				170			152
	Accretion of discount on senior payment-in-kind notes				7,940			6,512
	Amortization of gain from sale/leaseback of building				(22	)		(32	)
	Special Charges				375			456
	Loss on sale of receivables				308			664
	Gain (loss) on disposals of assets				(14	)		1
	Advances from litigation settlement				6,471			—
	Changes in assets and liabilities, net of acquisitions:
		Accounts receivable			(2,492	)		528
		Retained interest in sold accounts receivable			(16,593	)		(12,915	)
		Sale of accounts receivable			12,900			(4,400	)
		Inventories			(11,568	)		(1,296	)
		Prepaid expenses and other current assets			187			563
		Accounts payable			10,386			8,271
		Accrued liabilities and other long-term liabilities			4,086			1,804

			Net cash provided by operating activities		36,979			17,588

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of property, plant and equipment				(11,029	)		(10,362	)
	Proceeds from sales of assets				415			194
	Acquisitions				(9,087	)		—
	Other assets				(3,861	)		(2,933	)

			Net cash used in investing activities		(23,562	)		(13,101	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Payments of capital lease obligations				(58	)		(18	)
	Deferred financing costs				(7	)		—
	Proceeds from the issuance of common stock				—			1
	Repurchase of stock options and common stock				(25	)		(124	)
	Scheduled principal payments on term loans				(4,097	)		(4,114	)
	Additional principal payments on term loans				(1,058	)		(684	)
	Checks drawn in excess of bank balances				(699	)		4,686

			Net cash used in financing activities		(5,944	)		(253	)

NET INCREASE IN CASH AND CASH EQUIVALENTS					7,473			4,234
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD					1,131			1,247

CASH AND CASH EQUIVALENTS, END OF PERIOD				$	8,604		$	5,481



			Three Months						Nine Months
			Ended						Ended
			September 30,						September 30,

			2003			2002			2003			2002

Net income, as reported			$	8,031		$	5,471		$	9,470		$	3,557
Adjustments:
	Stock-based employee compensation expense included in reported net income, net of related tax effects			—			—			252			83
	Stock-based employee compensation determined under fair value method for all awards, net of related tax effects			(34	)		(10	)		(35	)		(153	)

		Adjusted net income	$	7,997		$	5,461		$	9,687		$	3,487


	*SFAS No. 143 — “Accounting for Asset Retirement Obligations”:*


	*SFAS No. 145 — “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”:*


	*SFAS No. 146 — “Accounting for Costs Associated with Exit or Disposal Activities”:*


	*SFAS No. 149 — “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”:*


	*SFAS No. 150 — “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”:*


	*FIN No. 45 — “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Indebtedness of Others”:*


1.	Basis of Presentation


2.	Stock-Based Compensation


3.	New Accounting Pronouncement


4.	Adoption of New Accounting Pronouncements


Accounts receivable		$	181
Inventory			195
Property, plant and equipment, net			929
Goodwill			2,960
Accounts payable			(224	)
Accrued liabilities			(283	)
Other long-term liabilities			(400	)

	Total purchase price	$	3,358


Accounts receivable		$	3,518
Employee receivables			24
Inventory			1,581
Property, plant and equipment, net			2,226
Other assets, net			1,534
Goodwill			1,226
Accounts payable			(872	)
Accrued liabilities			(2,244	)
Other long-term liabilities			(1,264	)

	Total purchase price	$	5,729



		Three months ended
		September 30,

		2003		2002

Equity in undistributed income of subsidiary		$	10,899	$	7,947
Operating Expenses			—		12
Interest expense			2,868		2,464

	Net income	$	8,031	$	5,471



		Nine months ended
		September 30,

		2003		2002

Equity in undistributed income of subsidiary		$	17,803	$	10,482
Operating expenses			—		12
Interest expense			8,333		6,913

	Net income	$	9,470	$	3,557


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*