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UNITED STATES

Form 10-K

Commission File Number 333-20095

Atrium Companies, Inc.

3890 West Northwest Highway

(214) 630-5757

Securities registered pursuant to Section 12(b) and (g)of the Act:

         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

         State the aggregate market value of the voting stock held by non-affiliates of the registrant — None

         Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

         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 March 30, 2004, the registrant had 100 shares of Common Stock, par value $.01 per share outstanding.

ATRIUM COMPANIES, INC. AND SUBSIDIARIES

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CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS

      This Form 10-K 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-K, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” and similar expressions, as they relate to us or our management, identify forward-looking statements. Such statements reflect our current views with respect to the risks and uncertainties regarding our operations and results of operations, as well as our 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. In addition to specific factors described in connection with any particular forward-looking statement, factors that could cause actual results to differ materially include, but are not limited to, those in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.” Other risks besides those listed in Item 7A also could adversely affect us. We disclaim any obligation to publicly update or revise any forward-looking statements.

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PART I

Organizational Structure

      Unless we indicate otherwise, references in this report to “we,” “us,” “our,” “the Company” and “Atrium Companies” mean Atrium Companies, Inc. and its subsidiaries and predecessors and references in this report to “Atrium Corporation” mean Atrium Corporation, our parent and sole stockholder.

      The table below sets forth each of Atrium Company’s wholly-owned subsidiaries and its date of inception or acquisition, as applicable.

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The Company

      Atrium, founded in 1948, is a Delaware corporation based in Dallas, Texas. We are one of the largest manufacturers and distributors of residential windows and patio doors in the United States and one of the few such providers with a national presence. We offer a comprehensive product line of aluminum and vinyl windows as well as patio doors to leading national homebuilders, including Pulte, D.R. Horton and Richmond American, one-step distributors, including Owens Corning and Ted Lansing, and home center retailers such as The Home Depot and Lowe’s. We have steadily generated revenue and cash flow growth through market share gains, new product development and operational improvements that have resulted from vertical integration, operational efficiencies and purchasing savings from increasing scale. We have also selectively acquired businesses that strategically add distribution channels, vertical integration opportunities and provide new product offerings and entry into new geographic markets.

      We have consolidated our brand names into the flagship Atrium® brand, and the well-known regional brands of HR^TM, Danvid^TM, Superior® and Thermal^TM. Additionally, we utilize multi-branding to alleviate channel conflict using such other names as Ellison® and Best Built®. Our full product line of windows and patio doors enables us to differentiate ourself from our competitors, leverage multi-channel distribution systems 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 broad product line is important to serve a national customer base effectively. We are able to provide nationwide customers the most suitable material based on their customers’ varying regional product preferences.

      We have 25 manufacturing facilities and 31 distribution centers strategically located in 22 states and Mexico. We distribute through multiple channels, including: (i) one-step distribution through lumberyards

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      We are vertically integrated with operations that include:

	•	The extrusion of aluminum and vinyl lineals, which are utilized internally in our fabrication operations or sold to third-parties;
	•	Blending of vinyl compounds, manufacture of zinc die cast hardware and screens;
	•	The manufacture and assembly of window and patio door units, including the cutting and insulation of glass, the pre-hanging of patio doors, and the sale of such units to homebuilders, multi-family builders, remodelers/ contractors, home centers, lumberyards, and retail and wholesale distributors;
	•	A turn-key installation program for multi-family builders in which we supply and install many of our products, including interior/ exterior doors, windows and patio doors; and
	•	The sale of finished products to homebuilders and remodelers/ contractors through company-owned distribution centers located across the United States.

2003 Acquisitions

      Miniature Die Casting. On January 31, 2003, we acquired substantially all of the assets of Miniature Die Casting of Texas, L.P. (“MD Casting”), a zinc die cast hardware manufacturer located in Fort Worth, Texas for approximately $3.3 million in cash, transaction fees of approximately $.1 million and an additional amount of up to $.6 million to be paid over three years upon the achievement by MD Casting of certain financial targets.

      Danvid. On April 1, 2003, we acquired substantially all of the assets of Danvid Window Company (“Danvid”), an aluminum and vinyl window manufacturer located in Dallas, Texas for approximately $5.5 million in cash, $.3 million in transaction fees and the assumption of certain liabilities.

      Aluminum Screen. On October 1, 2003, we acquired substantially all of the assets of Aluminum Screen Manufacturing Ltd., L.L.P., Aluminum Screen Products, Inc. and Aztex Screen Products (collectively, “Aluminum Screen”), a screen manufacturer with manufacturing and distribution operations in Dallas, Houston, Las Vegas, Phoenix and Cuidad Juarez, Mexico for $16.5 million in cash, and approximately $.8 million in transaction fees.

      Superior. On December 31, 2003, we acquired all of the capital stock of Superior Engineered Products Corporation (“Superior”), a manufacturer of windows and other building materials based in Ontario, California for $47.5 million in cash, approximately $.4 million in transaction fees and $5.0 million in Atrium Corporation stock. Superior’s window products, which are primarily vinyl, are sold predominantly to the repair and remodeling market in California, Arizona, Nevada and Hawaii through an extensive dealer network.

      The acquisitions of MD Casting, Danvid, Aluminum Screen and Superior are consistent with our strategy of selectively acquiring businesses that principally provide vinyl window production, new distribution channels, vertical integration opportunities, additional geographic presence and additional repair and remodeling volume.

The Transactions

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

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      The acquisition of Atrium Corporation was made by an investor group led by Kenner & Company, Inc., a New York based private investment firm, and certain members of our management, including Jeff L. Hull, our Chairman, President and Chief Executive Officer. The investor group included: KAT Holdings, L.P. and KAT Group, L.P., special purpose Kenner investment partnerships; UBS Capital Americas II, LLC; ML IBK Positions, Inc. and Merrill Lynch Ventures L.P. 2001 and management. At the closing of the merger, $12.2 million of equity securities owned by Atrium Corporation’s existing stockholders were exchanged for similar securities in KAT Holdings, Inc. and the investor group contributed an additional $251.8 million to KAT Holdings, Inc., including $251.7 million from ATR Acquisition, LLC, the members of which are KAT Holdings, L.P., KAT Group, L.P., UBS Capital Americas II, LLC, ML IBK Positions, Inc. and Merrill Lynch Ventures L.P. 2001.

      In connection with the merger, we renewed our existing accounts receivable securitization facility for a period of five years and refinanced our existing senior revolving credit and term loan facilities, with a new revolving credit facility of $50.0 million, which was undrawn at the close of the merger, and a new $180.0 million term loan facility. We also issued an additional $50.0 million of 10 1/2% senior subordinated notes, or “add-on notes,” and left the existing $175.0 million of 10 1/2% senior subordinated notes outstanding. $40.0 million of the new term loan facility was funded into escrow upon closing of the merger and was released to fund a portion of the acquisition of Superior on December 31, 2003.

      On November 18, 2003, in connection with the merger, we received consents from holders representing approximately 97% of the aggregate principal amount of our outstanding 10 1/2% senior subordinated notes to:

	•	waive our obligations under the Indenture to make a change of control offer in connection with the merger and amend the Indenture to replace the definition of permitted holders with certain direct and indirect equity holders of ATR Acquisition, LLC and their affiliates,
	•	modify certain restrictions on affiliate transactions set forth in the indenture governing the notes; and
	•	allow for the issuance of additional notes.

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

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

Competitive Strengths

      We believe that we have a competitive advantage in our markets due to the following competitive strengths:

	•	Leading Market Positions. We are one of the largest suppliers of residential windows and patio doors in the United States with a domestic market share exceeding 7%. Based on our estimates, we believe that we have a leading market position in the residential aluminum and vinyl window and patio door product categories.
	•	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 and patio door 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 comprehensive line of residential aluminum and vinyl 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. Our balance between material type is reflected in the following table:

	•	Multi-Channel Distribution Network. We have a multi-channel distribution network that includes direct, one-step and two-step distribution as well as 31 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 five 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.
	•	Established and Diversified Customer Base. We have developed strong relationships with our current customer base, which includes over 11,000 active accounts. We have strong relationships with some of the leading companies in home and multi-family building, including Pulte, D.R. Horton, Richmond American and Summit Contractors, and home center retailing, including The Home Depot. 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 and is reflected in the following table:

	•	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.

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Business Strategy

      Our goal is to increase revenue growth and profitability and to strengthen our leadership position in the residential window and patio door industry through the following initiatives:

	•	Enhance National Presence. We will continue to focus our core efforts on maintaining and increasing our nationwide market share, including enhancing our strong presence in our existing high growth markets such as the Southern and Western United States. Our 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 also will seek to enhance our nationwide capabilities by selectively starting or acquiring operations that complement our geographic coverage and product offerings.
	•	Extend and Cross-Sell Product Offerings. We are taking 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.
	•	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. Furthermore, we will continue trade advertising initiatives to maintain our high brand awareness in the industry.
	•	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 an integrated company-wide information system and successfully integrating acquisitions. We continue to analyze additional opportunities to improve operational efficiencies, including consolidating and expanding our extrusion operations, increasing capacity utilization at all of our manufacturing facilities and leveraging our size to realize purchasing savings.
	•	Refine Product Offering to Maximize Profitability. We plan to continually evaluate our product offering in terms of both customer needs and overall profitability. We believe our offering of products is diverse enough to satisfy varied regional product preferences while at the same time maximizing our profitability. For example, we made a decision during 2000 to divest the assets of Wing Industries, Inc. (“Wing”), our wood interior door manufacturing unit, and of the Atrium Wood Patio Door Division (“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 contributed to an overall increase in our profitability.
	•	Make Selective Strategic Acquisitions. We have successfully consummated and integrated twelve 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.

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Products

      We are one of only 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 net sales in 2003, 2002 and 2001 is as follows:

      Windows. We had approximately $456 million in net sales from the sale of windows in 2003. We estimate that our net sales from the sales of windows in 2003 were comprised of 42% from the sale of aluminum products and 58% from the sale of vinyl products. Our window products include sliders, single hung, double hung and casement products and are sold under the Atrium®, HR^TM, Danvid^TM, Thermal^TM, Ellison®, Best Built®, and Superior® brand names, as well as private label brand names.

      The demand for our aluminum and vinyl products vary by region:

	•	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.
	•	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 strategic acquisitions. The acquisitions of Bishop (now known as Northeast) in 1996, the Western Window Division of Gentek Building Products, Inc. (now known as West Coast) in 1997, Heat and Champagne (now known as Rockies) in 1999, Ellison in 2000 and the acquisition of Superior in 2003 increased our presence in the vinyl window business such that sales of vinyl windows represented approximately 44% of our total net sales in 2003, as compared to approximately 32% of our total net sales in 2000.

      Patio Doors. We had approximately $36 million in net sales from the sale of patio doors in 2003. Our patio door products are sold under Atrium® and various other brand names.

      Other Products and Services. We had approximately $106 million in net sales from the sale of other products and services in 2003. 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. The 2003 acquisitions have expanded our other products and services by adding screens, steel security doors, ornamental iron gates and fencing and window hardware.

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      We also offer a turn-key total installation program for multi-family builders in which we supply and install exterior, interior and patio doors, moldings, 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 31 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 five 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. Home centers are important to us because they target the repair and remodeling market segment, however they accounted for less than 14% of our total net sales during 2003 and 2002. One of our goals is to continue to increase our market share in the repair and remodeling market.

      We utilize the following distribution channels:

	•	Direct Distribution (approximately 35% of our net sales from the sale of windows and patio doors in 2003). Direct distribution is the selling of our windows and patio doors directly to homebuilders, multi-family builders and remodelers/ contractors without the use of an intermediary. By selling direct, we are able to increase our profit margins while at the same time offer builders more favorable pricing.
	•	One-Step Distribution, Including Home Center Sales (approximately 64% of our net sales from the sale of windows and patio doors in 2003 with home center sales representing approximately 14%). One-step distribution is the selling of our windows and patio doors to home centers, lumberyards, retail distributors and company-owned distribution centers, which will then sell to homeowners, homebuilders and remodelers/ contractors. While it is not required that lumberyards and retail 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 31 company-owned distribution facilities in key markets where available independent distributors are limited or where we have been unable to make adequate arrangements with existing distributors. Company-owned distribution centers essentially act as one-step distributors.

	•	Two-Step Distribution (approximately 1% of our net sales from the sale of windows and patio doors in 2003). Two-step distribution is the selling of windows and patio doors to a wholesale distributor who then sells the products to home centers, lumberyards and retail distributors. These intermediaries will in turn sell the windows and patio doors to homeowners, homebuilders and remodelers/ contractors. Wholesale 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 require sufficient volume to purchase from us directly.

      To enhance our market coverage and leverage our brand equity, we currently market our windows and patio doors under primarily seven brand names: Atrium®, HR^TM, Danvid^TM, Thermal^TM, Ellison®, Best Built^TM, and Superior®. 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 Built® and Ellison® brand product lines into the Atrium® brand. We have completed a transition of our Skotty, Bishop, Champagne, Masterview, Kel-Star and Gentek brands into the

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      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 and kiosks, and product knowledge classes for customers’ employees 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, company sales representatives and independent sales representatives. The sales managers coordinate sales and marketing activities among both company and independent sales representatives. Our company sales representatives focus primarily on direct sales to homebuilders, multi-family builders and remodelers/ contractors, while independent sales representatives sell to home centers, lumberyards and retail and wholesale distributors. 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 purchase the entire 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 Pulte and D.R. Horton, two of the nation’s largest home-builders, and The Home Depot, the nation’s largest home center retailer.

      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. The acquisitions of MD Casting and Aluminum Screen during 2003 have further enhanced our vertical integration strategy. MD Casting is a zinc die casting operation that provides us and the window and patio door industry with metal hardware. Aluminum Screen is a supplier of screens to us and the window and patio door industry. The acquisitions of Aluminum Screen and MD Casting have allowed us to achieve significant cost savings by shifting our current suppliers to our own internal operations. We have also increased our vertical integration by entering into a partnership agreement with Aurora Terra LLC, or Aurora, under which Aurora has constructed a vinyl compounding facility in Welcome, North Carolina adjacent to our vinyl extrusion and fabrication facilities and will provide us with vinyl compound, the primary raw material used in the vinyl extrusion process. The partnership will allow us to realize significant cost savings by taking us one step further up the supply chain. We continually work to

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      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 favorable pricing 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 10 manufacturing facilities in the state, including our vertically integrated operations. While solidifying our national presence, we have strategically established 15 other manufacturing operations nationwide.

Industry Overview

      In 2003, construction spending in the United States totaled over $683 billion. Of this total, residential spending accounted for approximately $466 billion. Within the residential construction market, replacement spending totaled approximately $187 billion. In 2003, new housing starts in the United States totaled approximately 1.8 million units of which approximately 1.5 million units were single-family homes and approximately .3 million  units were multi-family units. Historical residential repair and remodeling expenditures have demonstrated consistent growth dynamics increasing from approximately $15 billion to approximately $187 billion during the period from 1970 to 2003 and averaging a compound annual growth rate of 8.0%.

      Windows. The domestic window market has grown to approximately 61 million in unit sales in 2003, 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 20 million windows sold in 2003, and repair and remodeling, with approximately 41 million windows sold in 2003. 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 29 years in the last decade.

      Patio Doors. We estimate that the residential patio door market has grown to more than 7 million units in 2003. 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 65% of all patio door units sold in the United States in 2003.

      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.

Competition

      Despite the recent consolidation, the residential window and patio door industry remains 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.

      The residential window and patio door industry is very competitive. 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 Great Lakes Windows (Ply Gem Industries, Inc.) in the Northeast, Simonton Windows in the Mid-Atlantic and Southeast and Milgard Manufacturing, Inc.

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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, 2003, we estimate that approximately 60% 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 6,100 people, of whom approximately 6,000 are employed at our manufacturing facilities and distribution centers and approximately 100 are employed at our corporate headquarters in Dallas, Texas. Approximately 1,290 of our hourly employees are covered by collective bargaining agreements. We entered into a three-year collective bargaining agreement in May 2001 with the Union of Needletrades, Industrial and Textile Employees (“UNITE!”) covering certain employees at three manufacturing facilities located in Dallas, Texas. This collective bargaining agreement expires in May 2004. We expect to begin negotiations for a new collective bargaining agreement in April 2004 and expect to renew the agreement shortly thereafter. 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

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      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 unforeseen expenditures 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 a material adverse effect on our consolidated financial position, results of operations or cash flows. We cannot assure you that the discovery of presently unknown environmental conditions, changes in environmental, health and safety laws and regulations or other unanticipated events will not give rise to unforeseen claims, expenditures or liabilities.

Trademarks and Patents

      Among the various trademarks owned and registered by us in the United States and Mexico are the following: Atrium, The Atrium Door, The French Classic, Masterview, Weatherlok and Superior. Among the various pending trademark applications filed by us are the following: Quality by Design, Atrium Windows and Doors, Energy-Sense, Improving Your View of the World and Pro100. In addition, we own several patents and patent applications concerning various aspects of window assembly and related processes. We are not aware of any circumstances that would have a material adverse effect on our ability to use our trademarks and patents. As long as we continue to renew our trademarks when necessary, the trademark protection provided by them is perpetual. Our patents will expire at various times over the next 17 years.

Recent Developments

      None.

      Our operations are conducted at the owned or leased facilities described below:

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      Additionally, our subsidiary, Thermal Industries, Inc., leases 21 distribution warehouses in 14 states for vinyl window distribution with sites averaging 10,738 square feet.

      We maintain our corporate headquarters in Dallas, Texas. This facility provides approximately 19,520 square feet and is leased for a ten-year term expiring in 2014.

      We believe that our manufacturing plants are generally in good operating condition and are adequate to meet future anticipated requirements.

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

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      Not applicable.

PART II

      There is no established public trading market for our outstanding equity securities.

      To date, we have not paid any dividends on our common stock and do not expect to pay any dividends on our common stock in the foreseeable future.

Equity Compensation Plans

*	We do not have equity compensation plans which were not approved by stockholders.

2003 Stock Option Plan

      Atrium Corporation adopted the Atrium Corporation 2003 Stock Option Plan on December 10, 2003, which provides for the grant of options to purchase common stock of Atrium Corporation to our key employees and eligible non-employees. The stock option plan provides for the grant of options to purchase up to 14,000 shares of common stock of Atrium Corporation. Immediately following the consummation of the merger, a total of 8,750 options to purchase shares of common stock of Atrium Corporation were outstanding under the stock option plan.

      Options granted under the stock option plan have a term of ten years from the date of grant and vest in equal installments either on the annual anniversary of grant or on the last day of each month over a period of five years, subject to continued employment. No option is exercisable until it has vested.

      Upon termination of the optionee for cause or voluntary termination by the optionee without good reason, all unvested options are automatically forfeited. Upon a change of control, as defined in the stock option plan, all outstanding options issued under the stock option plan shall be automatically vested and be exercisable in full. Upon termination of employment of an optionee for any reason or if a sale of the company, as defined in the stock option plan, occurs, Atrium Corporation has the right to purchase all or any portion of the optionee’s vested options and any shares of common stock of Atrium Corporation held by the optionee as a result of the exercise of an option.

      The stock option plan provides that, unless specifically approved otherwise, 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. All options granted to date under the stock option plan are nonqualified options. Options are not transferable other than in accordance with the laws of descent and distribution. All shares of common stock issued upon exercise of options are subject to a right of first refusal that provides Atrium Corporation or its designee with the right to purchase such shares in the event of any proposed transfer thereof by the optionee.

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Replacement Stock Option Plan

      Atrium Corporation adopted the Atrium Corporation Replacement Stock Option Plan on December 10, 2003, which provides for the grant of options to purchase Atrium Corporation’s common stock in replacement of outstanding options issued under Atrium Corporation’s previous stock option plan. The replacement plan provides for the grant of up to 1,105 options to purchase shares of common stock of Atrium Corporation, all of which were outstanding as of December 31, 2003. Options granted under the replacement plan have a term of ten years from the date of grant, subject to continued employment, and vest ratably over a period of three years on the last day of each month during such period. No option is exercisable until it is vested. These options have an exercise price of $0.01 per share.

      Upon termination of an optionee’s employment for any reason or upon sale of the Company, Atrium Corporation has the right to repurchase all or any portion of the replacement options held by the optionee.

      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. 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 any optionee’s family members or personal representative.

      As a condition to the grant of the replacement options, each holder of a replacement option was required to execute a buy-sell agreement containing certain repurchase provisions.

Warrants

      In connection with the merger and entry into his employment agreement, Mr. Hull was granted warrants to purchase 7,750 shares of Atrium Corporation’s common stock. 4,000 of these shares fully vested on February 1, 2004 and were exercised on February 27, 2004 at an exercise price of $.01 per share. With respect to the remaining 3,750 shares, the warrants vest ratably on a monthly basis over a five-year period and have an exercise price of $1,000 per share. Notwithstanding the foregoing, all of the remaining warrants will immediately vest upon a sale of the Company, change of control or upon certain other conditions related to Mr. Hull’s employment.

      The selected income statement and balance sheet data set forth below 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.

      The operations of Darby-South are included since its date of acquisition, January 27, 1999, the operations of Heat and Champagne are included since their date of acquisition, May 17, 1999, the operations of Ellison are included since its date of acquisition, October 25, 2000, the operations of MD Casting are included since its date of acquisition, January 31, 2003, the operations of Danvid are included since its date of acquisition, April 1, 2003 and the operations of Aluminum Screen are included since its date of acquisition, October 1, 2003. The December 31, 1999 balance sheet data includes our accounts and the accounts of Darby-South, Heat and Champagne. The December 31, 2000, 2001 and 2002 balance sheet data include the accounts of the Company, Darby-South, Heat, Champagne and Ellison. The December 31, 2003 balance sheet data includes

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Note:	EBITDA amounts presented above are not pro forma for the acquisitions and/or divestitures that occurred during the years presented.

(1)	In 2003, we incurred special charges of $11,024, which caused the reduction in net income. See further discussion in management discussion and analysis.
(2)	EBITDA represents income before interest, securitization expense, income taxes and depreciation and amortization. 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. The reconciliation of net income (in accordance with GAAP) to EBITDA is summarized as follows:

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      The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements which appear elsewhere in this Form 10-K.

The Transactions

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

      The acquisition of Atrium Corporation was made by an investor group led by Kenner & Company, Inc., a New York based private investment firm, and certain members of our management, including Jeff L. Hull, our Chairman, President and Chief Executive Officer. The investor group included: KAT Holdings, L.P. and KAT Group, L.P., special purpose Kenner investment partnerships; UBS Capital Americas II, LLC; ML IBK Positions, Inc. and Merrill Lynch Ventures L.P. 2001 and management. At the closing of the merger, $12.2 million of equity securities owned by Atrium Corporation’s existing stockholders were exchanged for similar securities in KAT Holdings, Inc. and the investor group contributed an additional $251.8 million to KAT Holdings, Inc., including $251.7 million from ATR Acquisition, LLC, the members of which are KAT Holdings, L.P., KAT Group, L.P., UBS Capital Americas II, LLC, ML IBK Positions, Inc. and Merrill Lynch Ventures L.P. 2001.

      In connection with the merger, we renewed our existing accounts receivable securitization facility for a period of five years and refinanced our existing senior revolving credit and term loan facilities, with a new revolving credit facility of $50.0 million, which was undrawn at the close of the merger, and a new $180.0 million term loan facility. We also issued an additional $50.0 million of 10 1/2% senior subordinated notes, or “add-on notes,” and left the existing $175.0 million of 10 1/2% senior subordinated notes outstanding. $40.0 million of the new term loan facility was funded into escrow upon closing of the merger and was released to fund a portion of the acquisition of Superior on December 31, 2003.

      On November 18, 2003, in connection with the merger, we received consents from holders representing approximately 97% of the aggregate principal amount of our outstanding 10 1/2% senior subordinated notes to:

	•	waive our obligations under the Indenture to make a change of control offer in connection with the merger and amend the Indenture to replace the definition of permitted holders with certain direct and indirect equity holders of ATR Acquisition, LLC and their affiliates,
	•	modify certain restrictions on affiliate transactions set forth in the indenture governing the notes; and
	•	allow for the issuance of additional notes.

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

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

      GAAP generally provides for the application of “push down accounting” in situations where the ownership of an entity has changed, meaning that the post-transaction financial statements of the acquired entity reflect a new basis of accounting. The accompanying data does not reflect a new basis of accounting pursuant to Staff Accounting Bulletin (“SAB”) No. 54 (“SAB 54”). The guidance in SAB 54 allows our post-merger financial statements to continue under the historical basis of accounting because of the existence of significant outstanding public debt at the time of the merger.

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

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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 and delivery expense. We follow 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.
	•	Goodwill. We assess the impairment of goodwill annually in addition to 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:

	•	Significant underperformance relative to expected history or projected future operating results
	•	Significant changes in the manner of our use of the acquired assets or the strategy of our overall business
	•	Significant negative industry or economic trends

	•	Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our 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.
	•	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 our 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.
	•	Self-insurance reserves. We are self-insured and provide reserves for estimated medical and certain 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.

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	•	Deferred taxes. We establish deferred tax assets and liabilities based on profits or losses in each jurisdiction in which we operate. Associated valuation allowances reflect our evaluation of the likelihood of the recoverability of these assets. Our judgment is based primarily on our historical earnings, expected future earnings as well as prudent and feasible tax planning strategies.
	•	Accounting for Stock-Based Compensation. Currently, we follow Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and its related interpretations for stock options granted to employees. Under the recognition and measurement principles of APB 25, we are not required to recognize any compensation expense unless the market price of the stock exceeds the exercise price on the date of grant or the terms of the grant are subsequently modified. The Financial Accounting Standards Board (“FASB”) has recently indicated that it expects to issue a proposal to change the recognition and measurement principles for equity-based compensation granted to employees. The proposed rules could be implemented as early as the end of the 2004 calendar year. Under the proposed rules, we would be required to recognize compensation expense related to stock options granted to employees after December 15, 2004. The compensation expense would be calculated based on the expected number of options expected to vest and would be recognized over the stock options’ vesting period. If this proposal is passed, we would be required to recognize compensation expense related to stock options granted to our employees, which may have a material effect on our consolidated financial condition or results of operations.

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.

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Discussion of Consolidated Results

      Net Sales. Net sales increased by $61,511 from $536,299 in 2002 to $597,810 in 2003, or approximately 11.5%. The increase in net sales was primarily the result of the 2003 acquisitions and sales growth at our vinyl and aluminum window fabrication and aluminum extrusion operations. Net sales from the 2003 acquisitions were $43,179 in 2003. We also experienced increases of $9,040, or 5.0%, over 2002 from our aluminum window operations due to increased unit volume with our existing customers. Net sales at our aluminum extrusion operations increased $4,732, or 11.5%, over 2002 due to increased volume with new and existing customers. Net sales at our vinyl window operations increased $3,945, or 1.4%, over 2002 due to increased unit volume with new and existing customers. This increase occurred despite Lowe’s Companies, Inc. shifting certain volume from our North Carolina operation to a competitor and soft sales due to a general economic slowdown in certain markets.

      Cost of Goods Sold. Cost of goods sold increased from 67.2% of net sales during 2002 to 68.3% of net sales during 2003. Material cost of goods sold decreased from 39.8% of net sales during 2002 to 39.5% of net sales during 2003. This decrease was primarily due to the leveraging of the Company’s increased purchasing power and additional cost savings generated from the expansion of our vertical integration. The decrease was partially offset by an increase in the cost of vinyl resins and aluminum. Direct manufacturing expense increased from 27.4% of net sales during 2002 to 28.7% of net sales during 2003. The increase in direct manufacturing expense was primarily related to higher insurance and labor costs.

      Selling, Delivery, General and Administrative Expenses. Selling, delivery, general and administrative expenses increased $12,432 from $116,364 during 2002 (21.7% of net sales in 2002) to $128,796 during 2003 (21.5% of net sales in 2003). Selling, delivery, general and administrative expenses from the 2003 Acquisitions were $9,843 during 2003. Selling, delivery, general and administrative expenses, excluding the 2003 acquisitions, increased $2,589 from $116,364 during 2002 to $118,953 during 2003. General and administrative expenses, excluding the 2003 acquisitions, increased $1,311 from $45,481 during 2002 to $46,792 during 2003, largely as a result of higher insurance costs and an increase in salary expenses. Delivery expenses, excluding the 2003 acquisitions, decreased from 6.6% of net sales during 2002 to 6.4% of net sales during 2003. We experienced a decrease in delivery expenses as a result of the use of a new, lower cost distribution method for a portion of our home center deliveries and a decrease in leased transportation cost 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, remained flat at 6.6% of net sales. Selling expenses are primarily variable in nature as a significant portion of these expenses represent commissions.

      Securitization Expense. Securitization expense increased $772 from $1,133 in 2002 to $1,905 during 2003. During 2003, securitization expense included $750 of fees associated with the renewal of our accounts receivable securitization facility. During 2003 and 2002, securitization expense included a loss on the sale of accounts receivable of $1,155 and $1,133 respectively, which represented the interest expense and commitment fee components of the transaction.

      Stock Compensation Expense. Stock compensation expense increased $170 from $383 during 2002 to $553 during 2003. Stock compensation expense for 2002 and 2003 included $83 and $253, respectively, for the repurchase of stock options from current and former employees and $300 of payments for services rendered in the form of Atrium Corporation common stock issued to Ardshiel, Inc., our former equity sponsor.

      Amortization Expense. Amortization expense increased $789 from $3,410 during 2002 to $4,199 during 2003. Amortization expense increased primarily due to increased amortization of software implementation costs.

      Special Charges. During 2003, we recorded a special charge of $11,024. The special charge included $10,059 of expenses associated with the merger and $965 of additional expenses related to the divestitures of Wing and our wood patio door division. The expenses associated with the merger include $6,407 of management transaction bonuses, $1,615 related to warrants issued to Mr. Hull, $1,226 related to the

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      Interest Expense. Interest expense increased $317 from $35,901 during 2002 to $36,218 during 2003. Interest expense during 2002 and 2003 included $204 and $3,117, respectively, for the write-off of deferred financing costs in connection with the prepayment and retirement of our old senior credit facility. Interest expense, excluding the write-off of deferred financing costs, decreased $2,596 from $35,697 during 2002 to $33,101 during 2003 as a result of reduced debt levels and a decrease in our weighted-average interest rate, which resulted from the expiration of our interest rate swap agreements in December of 2002 and November of 2003.

      Provision for Income Taxes. Our income tax provision primarily represents state income tax expense for those jurisdictions where we do not have available loss carryforwards. We have not incurred federal tax expense in 2003 or 2002 as a result of available net operationing loss carryforwards generated in prior years. We continue to maintain a full valuation allowance against our deferred tax assets for net operating losses. Should we continue to generate taxable income in 2004 and if prospects for continued profitability are more likely than not beyond 2004, our net operating loss valuation allowance may reverse in future periods.

      Net Sales. Net sales increased by $19,236 from $517,063 in 2001 to $536,299 in 2002, or approximately 3.7%. The increase in net sales during 2002 was due to an increase in volume at our aluminum and vinyl window operations, offset by a decline in sales at the Darby and aluminum extrusion operations. Net sales at our aluminum window operations increased $18,898, or 11.8% over 2001. This increase was primarily due to increased volume to our home center customers. Net sales at our vinyl window operations increased $7,423, or 2.6% over 2001. The growth rate at our vinyl window operations was hindered by soft sales at our Northwest and Rockies operations due to general economic slowdowns in their respective markets. The decrease at our aluminum extrusion operation was virtually all related to declining aluminum prices, which affect the overall selling price of the extrusion product, while the decrease at our Darby operations was a result of softer demand in the multi-family market.

      Cost of Goods Sold. Cost of goods sold improved from 68.6% of net sales during 2001 to 67.2% of net sales during 2002. The improvement was primarily the result of a decrease in material costs as a percentage of net sales, as material costs decreased from 41.3% of net sales during 2001 to 39.8% of net sales during 2002. This decrease was due to our increased purchasing power and the realization of synergies from acquisitions made in prior years. This improvement, as a percentage of net sales, was partially offset by an increase in our LIFO expense of $1,463, as the LIFO expense during 2002 was $347 compared to a LIFO benefit of $1,116 during 2001. Direct manufacturing expense remained relatively flat as a percentage of net sales, increasing from 27.3% of net sales during 2001 to 27.4% of net sales during 2002. 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 $8,297 from $108,067 during 2001 (20.9% of net sales) to $116,364 during 2002 (21.7% of net sales). The increase was partially due to an increase in delivery expense, which increased $4,165 from $31,192 during 2001 (6.0% of net sales) to $35,357 during 2002 (6.6% of net sales). The increase in delivery expense over 2001 was primarily related to an increase in the volume of products shipped into the southern California market resulting in a longer average distance per truckload, increased fuel prices and the variable nature of delivery expense. General and administrative expenses increased $4,034 from $41,447 during 2001 (8.0% of net sales) to $45,481 during 2002 (8.5% of net sales). The increase in general and administrative expenses was largely due to higher insurance premiums, higher professional fees and an increase in salaries

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      Securitization Expense. We securitized our accounts receivable during the third quarter of 2001. Securitization expense decreased $399 from $1,532 in 2001 to $1,133 in 2002. During 2002, securitization expense incurred by us included a loss on the sale of accounts receivable, which represented the interest expense and commitment fee components of the transaction. During 2001, securitization expense of $1,532 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 and commitment fee components of the transaction.

      Stock Compensation Expense. Stock compensation expense decreased by $199 from $582 during 2001 to $383 during 2002. Stock compensation expense during 2001 and 2002 included $282 and $83, respectively, for the repurchase of outstanding stock options from former employees and $300 of payments for services rendered in the form of Atrium Corporation common stock issued to Ardshiel, Inc.

      Amortization Expense. Amortization expense decreased $11,000 from $14,410 during 2001 to $3,410 during 2002. The decrease was primarily attributable to the Company’s adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” which eliminates the amortization of goodwill and subjects it to an annual impairment test. Goodwill amortization for 2001 was $11,725.

      Special Charges. During 2002, we recorded a special charge of $4,198 for liabilities associated with the divestiture of Wing. The majority of this special charge is attributable to $2,553 of exit costs incurred by the Company on the remaining lease obligations at Wing’s former facilities. The special charge also includes $1,645 of litigation expenses. During 2001, we recorded special charges totaling $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.

      Interest Expense. Interest expense decreased by $4,049 from $39,950 during 2001 to $35,901 during 2002. Interest expense during 2001 and 2002 included $837 and $204, respectively, for the write-off of deferred financing cost in connection with the prepayment of debt. Interest expense, excluding the write-off of deferred financing costs, decreased $3,416 from $39,113 during 2001 to $35,697 during 2002. The decrease is attributable to reduced debt level in 2002 as a result of working capital improvements and the execution of the accounts receivable securitization facility in August 2001, from which the proceeds were used to repay a portion of our long-term debt.

      Provision for Income Taxes. Our income tax provision primarily represents state income tax expense for those jurisdictions where we do not have available loss carryforwards. The decrease in the effective rate from 2001 primarily results from the impact of non-deductible goodwill amortization in 2001. Amortization of goodwill ceased in 2002 as a result of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).

Discussion of Results by Reporting Segment

      Net Sales. Net sales increased by $51,633 from $491,584 in 2002 to $543,217 in 2003, or approximately 10.5%. The increase was primarily the result of the 2003 acquisition of Danvid, which provided additional sales

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      Income from Operations. Income from operations decreased from 11.3% of net sales during 2002 to 9.9% of net sales during 2003. An increase in cost of goods sold from 66.4% of net sales during 2002 to 68.1% of net sales during 2003 was partially offset by a slight decrease in selling, delivery, general and administrative expenses from 22.3% of net sales during 2002 to 22.0% of net sales during 2003. The increase in cost of goods sold included an increase in both materials and direct manufacturing expense, due largely to an increase in the cost of vinyl resins and aluminum, as well as higher insurance and labor costs.

      Net Sales. Net sales increased by $19,465 from $81,451 in 2002 to $100,916 in 2003, or approximately 23.9%. The increase was primarily the result of the 2003 acquisitions of Aluminum Screen and Miniature Die Casting, which provided combined sales of $8,686, and the 2003 acquisition of Danvid, which provided additional sales of $3,359 to our aluminum and vinyl extrusion operations. In addition, sales at our aluminum extrusion operation, excluding amounts sold to Danvid, increased $7,426, or 9.8%, over 2002 due to increased volume with new and existing customers.

      Income from Operations. Income from operations increased $4,574 from $3,307, or 4.1% of net sales during 2002 to $7,880, or 7.8% of net sales during 2003. The increase was largely due to the acquisitions of Aluminum Screen and Miniature Die Casting, which provided combined income from operations of $1,331, and an increase in income from operations at our aluminum extrusion operation of $3,035. The increase at our aluminum extrusion operation was due to a 13.7% increase in sales. The increase in income from operations as a percentage of net sales is largely due to increased operating leverage at our aluminum extrusion operation as a result of the increase in sales.

      Net Sales. Net sales increased by $20,329 from $471,255 in 2001 to $491,584 in 2002, or approximately 4.3%. The increase in net sales during 2002 was due to an increase in unit volume at our aluminum and vinyl window operations, offset by a decline in sales to the multi-family market. Net sales at our aluminum window operations increased $18,898, or 11.8% over 2001. This increase was primarily due to increased volume to our home center customers. Net sales at our vinyl window operations increased $7,423, or 2.6% over 2001. The growth rate at our vinyl window operations was hindered by soft sales in certain operations due to general economic slowdowns in their respective markets.

      Income from Operations. Income from operations increased from 10.1% of net sales during 2001 to 11.3% of net sales during 2002. A decrease in cost of goods sold from 68.1% of net sales during 2001 to 66.4% of net sales during 2002 was partially offset by an increase in selling, delivery, general and administrative expenses from 21.8% of net sales during 2001 to 22.3% of net sales during 2002. The decrease in cost of goods sold included a decrease in materials from 41.6% of net sales during 2001 to 40.0% of net sales during 2002, primarily due to our increased purchasing power and the realization of synergies from acquisitions made in prior years. The increase in selling, delivery, general and administrative expenses was due largely to an increase in delivery expense, which increased from 6.1% of net sales during 2001 to 6.6% of net sales during 2002. The increase in delivery expense was primarily related to an increase in the volume of products shipped into the Southern California market, resulting in a longer average distance per truckload.

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      Net Sales. Net sales increased by $6,270 from $75,181 in 2001 to $81,451 in 2003, or 8.3%. The increase was primarily the result of an increase at our aluminum extrusion operation of $6,185, or 8.9%, which included a decrease in sales to outside customers of $859 and an increase to internal customers of $7,044. The increase in sales to internal customers was due largely to the 11.8% increase in sales at our aluminum window operations as a result of increased home center business.

      Income from Operations. Income from operations decreased $125 from $3,432, or 4.6% of net sales during 2001 to $3,307, or 4.1% of net sales during 2002. The decrease was made up of a decrease in income from operations at our aluminum extrusion operation of $240, partially offset by an increase at our vinyl extrusion operation of $115. The decrease at our aluminum extrusion operation, despite an 8.9% increase in sales, was due to the fact that the majority of the sales increase was the result of overall increases in the price of aluminum. Due to the nature of how the product is priced to the customer, an increase in the price of aluminum results in an increase in sales and material costs, but does not result in higher income from operations. In fact, an increase in the price of aluminum, alone, will typically result in a lower income from operations as a percentage of net sales.

Liquidity and Capital Resources

      Cash generated from operations, availability under our revolving credit facility and availability under our accounts receivable securitization facility are our principal sources of liquidity. During 2003, cash was primarily used for capital expenditures, debt payments and the 2003 acquisitions. Net cash provided by operating activities was $33,248 during 2003 compared to $27,089 during 2002. The increase was primarily due to increases in the sale of accounts receivable, partially offset by increases in working capital. Cash flows used in investing activities increased from $15,335 during 2002 to $95,044 during 2003. The increase was primarily due to an increase in capital expenditures and the 2003 acquisitions. Cash provided by financing activities increased $80,248 from net cash used in financing activities of $11,870 during 2002. The increase was primarily due to the Transactions, including the refinancing which were partially offset by a net distribution to Atrium Corporation related to the merger.

      Long-term debt consists of borrowings under our credit facility, the senior subordinated notes and capital lease obligations. Our new credit facility term loan requires quarterly principal and interest payments. The senior subordinated notes require semi-annual interest payments only and are due in May 2009. The capital leases require monthly principal and interest payments. Our credit facility has an “excess cash flows” provision mandating additional principal payments if certain cash flows targets are met during the year.

      Our new credit facility and senior subordinated 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. Our credit agreement requires us to meet certain quarterly financial tests pertaining to total leverage, interest coverage, fixed charge coverage and capital expenditures. As of December 31, 2003, we were in compliance with all related covenants and expect to maintain compliance in 2004.

      Our new credit facility and senior subordinated 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 various letters of credit outstanding primarily related to certain insurance policies and facility lease deposits.

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Off-Balance Sheet Arrangements

      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. As a result of the agreement, receivables sold to the securitization company are not reflected in our 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 the special purpose entity. Due to the short-term nature of the underlying receivables, the net carrying amount of our retained interest in transferred accounts receivables as of December 31, 2003 approximates fair value and is classified as a current asset in our balance sheet. All of the revenues, expenses and cash flows associated with our accounts receivable securitization facility have been incorporated into our financial statements.

      At December 31, 2003, 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, market or credit risk that could arise if we had engaged in such relationships.

      We have various outstanding operating leases for office and manufacturing space, automobiles and machinery and equipment. We finance the use of certain facilities and equipment under lease agreements provided by various institutions. Since the terms of these agreements meet the definitions of operating lease agreements, the sum of future lease payments is not reflected on our consolidated balance sheet. As of December 31, 2003, future minimum lease payments under these arrangements was approximately $108,061.

Other Capital Resources

      In connection with the merger, we entered into a new credit facility providing for a revolving credit facility in the amount of $50,000, which includes a $20,000 sublimit for the issuance of letters of credit and a $10,000 sublimit for swing line loans. The revolving credit facility has a maturity date of December 10, 2008. Additionally, we have an accounts receivable securitization facility of $50,000, which can make additional funds available to us depending on our accounts receivable levels. On December 10, 2003, in connection with the merger, we renewed the accounts receivable securitization facility for a period of five years.

      We had $41,299 of availability under the new revolving credit facility, net of outstanding letters of credit totaling $8,701 as of December 31, 2003 and March 29, 2004. At December 31, 2003, we had $10,200 of availability under the accounts receivable securitization facility and an additional $8,800 currently unavailable due to borrowing base limitation, net of securitizations of $31,000. At March 29, 2004, we had $5,300 available under the accounts receivable securitization facility and an additional $9,700 currently unavailable due to borrowing base limitations, net of securitizations of $35,000.

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Contractual Obligations

      The following table summarizes our contractual obligations at December 31, 2003, and the effects such obligations are expected to have on our liquidity and cash flow in future periods:

Capital Expenditures

      We had net cash capital expenditures of $18,945 during 2003, compared to $11,157 and $7,984 during 2002. Capital expenditures during 2003 were largely a result of our continued efforts to increase efficiency through automation at our various manufacturing facilities. We expect capital expenditures (exclusive of acquisitions) in 2004 to be approximately $20,000 and to be primarily used for machinery and equipment to increase automation and establish new products lines, however, actual capital requirements may change based on management and strategic decisions.

      Moreover, our ability to meet debt service 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

      From 2001 to 2003, inflation has been relatively low and we believe that inflation has not had a material affect on our results of operations. 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 repair 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 until early in the fourth quarter of our fiscal year.

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Recently Issued Accounting Standards

      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. The Company expensed $29, $204 and $837 of deferred financing fees in connection with their excess cash flow payments during the years ended December 31, 2003, 2002 and 2001, respectively (see Note 5). The Company also expensed $3,117 in 2003 related to the refinancing of its previous credit facilities. The loss associated with the debt retirement has been included in interest expense on the Company’s financial statements. The 2002 and 2001 amounts have been reclassified from extraordinary items to interest expense pursuant to SFAS 145.

      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 has not had a material effect on the Company’s consolidated financial position or results of operations.

      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 September 30, 2003. Adoption of SFAS 149 has not had a material effect on the Company’s consolidated financial position or results of operations.

      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 broadens the definition of financial instruments and establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 also requires that an issuer classify a financial instrument that is within its scope as an asset or as a liability. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of SFAS 150 has not had a material effect on the Company’s consolidated financial position or results of operations.

      During November 2002, the FASB issued Financial Interpretation (“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

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

      During December 2003, the FASB issued a revision to FIN 46, FIN No. 46R (“FIN 46R”), to clarify some of the provisions and to exempt certain entities from its requirements. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied FIN 46 prior to issuance of the revised interpretation. Otherwise, application of FIN 46R is required in financial statements of public entities that have interests in structures that are commonly referred to as special purpose entities (“SPE’s”) for periods ending after December 15, 2003. Application by public entities, other than business issuers, for all other types of variable interest entities other that SPE’s is required in financial statements for periods ending after March 15, 2004. Adoption of FIN 46R has not had a material effect on the Company’s consolidated financial position or results of operations.

      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.

      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 the past, we have hedged our exposure on a portion of our variable rate debt by entering an interest rate swap agreement to lock in a fixed rate. At December 31, 2003, approximately 55% of the carrying values of our long-term debt were at fixed interest rates.

      The following table presents principal cash flows of variable rate debt by maturity date and the related average interest rate. 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, 2003.