Atrium Companies 10-Q 2004 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 (Mark One)

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

For the quarterly period endedSeptember 30, 2004

OR

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

For the transition period from _______to_______

Commission File Number 333-20095

Atrium Companies, Inc.

(Exact name of registrant as specified in its charter)

Delaware	75-2642488
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

3890 West Northwest Highway, Suite 500 Dallas, Texas 75220, (214) 630-5757

(Address of principal executive offices, including zip code and telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes x  Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yeso  Nox

As of November 12, 2004, the registrant had 100 shares of Common Stock, par value $.01 per share outstanding.

ATRIUM COMPANIES, INC.

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2004

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003	3
	Consolidated Statements of Operations for the Three and Nine Months
	Ended September 30, 2004 and 2003	4
	Consolidated Statement of Stockholder’s Equity and Other Comprehensive
	Income for the Nine Months Ended September 30, 2004	5
	Consolidated Statements of Cash Flows for the Nine Months Ended
	September 30, 2004 and 2003	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results
	of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26
Item 4.	Controls and Procedures	26
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 6.	Exhibits and Reports on Form 8-K	26
SIGNATURES		28

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

ATRIUM COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

	September 30,			December 31,
	2004			2003
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,159		$	7,713
Accounts receivable, net		22,866			8,387
Retained interest in sold accounts receivable		23,666			24,461
Inventories, net		74,699			48,989
Prepaid expenses and other current assets		6,329			8,007
Deferred tax asset		2,186			2,595
Total current assets		133,905			100,152
Property, plant and equipment, net		104,573			95,921
Goodwill		395,231			376,763
Intangible assets, net		21,974			12,900
Deferred financing costs, net		14,480			16,298
Other assets		6,005			5,442
Total assets	$	676,168		$	607,476
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	47,969		$	28,036
Accrued liabilities		47,683			34,261
Current portion of notes payable		3,960			3,302
Total current liabilities		99,612			65,599
Non-current liabilities:
Notes payable, net of current portion		430,419			411,890
Deferred tax liability		2,186			2,595
Other non-current liabilities		5,142			2,341
Total non-current liabilities		437,747			416,826
Total liabilities		537,359			482,425
Commitments and contingencies		—			—
Stockholder’s equity:
Common stock $0.01 par value, 3,000 shares
authorized, 100 shares issued and outstanding		—			—
Paid-in capital		186,269			183,601
Accumulated deficit		(47,460	)		(58,550	)
Total stockholder’s equity		138,809			125,051
Total liabilities and stockholder’s equity	$	676,168		$	607,476

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

3

ATRIUM COMPANIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2004			2003			2004			2003
Net sales	$	197,431		$	166,873		$	535,849		$	442,237
Cost of goods sold		137,631			111,914			374,025			299,705
Gross profit		59,800			54,959			161,824			142,532
Operating expenses:
Selling, delivery, general and administrative
expense (excluding amortization, securitization
and stock compensation expense)		39,556			33,461			114,265			94,352
Amortization expense		2,106			1,092			5,325			3,067
Securitization expense		327			355			841			867
Stock compensation expense		—			100			—			552
Total selling, delivery, general and
administrative expenses		41,989			35,008			120,431			98,838
Special charges		210			375			2,938			375
Total operating expenses		42,199			35,383			123,369			99,213
Income from operations		17,601			19,576			38,455			43,319
Other income (expense):
Interest expense		(9,110	)		(8,329	)		(26,612	)		(25,025	)
Other income (expense), net		33			(5	)		(248	)		159
Income before income taxes		8,524			11,242			11,595			18,453
Provision for income taxes		(265	)		(343	)		(505	)		(650	)
Net income	$	8,259		$	10,899		$	11,090		$	17,803

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

4

ATRIUM COMPANIES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY

AND OTHER COMPREHENSIVE INCOME

For the Nine Months Ended September 30, 2004

(Dollars in thousands, except share amounts)

(Unaudited)

											Total
	Common Stock				Paid-in			Accumulated			Stockholder’s
	Shares		Amount		Capital			Deficit			Equity
Balance at December 31, 2003		100	$	—	$	183,601		$	(58,550	)	$	125,051
Net cash distributions to Atrium
Corporation		—		—		(167	)		—			(167	)
Issuance of Atrium Corporation
warrants for acquisitions		—		—		450			—			450
Vesting of Merger-related
Atrium Corporation warrants,
included in special charges		—		—		2,385			—			2,385
Comprehensive income:
Net income		—		—		—			11,090			11,090
Balance at September 30, 2004		100	$	—	$	186,269		$	(47,460	)	$	138,809

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

5

ATRIUM COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine months ended
	September 30,
	2004			2003
Cash flows from operating activities:
Net income	$	11,090		$	17,803
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		20,043			12,577
Non-cash special charges		2,715			375
Advances from litigation settlement		—			6,471
Other		2,964			2,847
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		(4,010	)		(2,492	)
Retained interest in sold accounts receivable		(9,625	)		(16,593	)
Sale of accounts receivable		9,800			12,900
Inventories		(15,467	)		(11,568	)
Other current assets		2,194			187
Accounts payable		8,879			10,386
Accrued liabilities and other long-term liabilities		7,190			4,086
Net cash provided by operating activities		35,773			36,979
Cash flows from investing activities:
Purchases of property, plant and equipment		(16,882	)		(13,032	)
Acquisitions		(44,351	)		(9,087	)
Other assets		(1,805	)		(1,443	)
Net cash used in investing activities		(63,038	)		(23,562	)
Cash flows from financing activities:
Proceeds from borrowings under term loans		20,000			—
Scheduled principal payments on term loans		(1,400	)		(4,097	)
Additional principal payments on term loans		—			(1,058	)
Checks drawn in excess of bank balances		6,699			(699	)
Other		(1,588	)		(90	)
Net cash provided by (used in) financing activities		23,711			(5,944	)
Net increase (decrease) in cash and cash equivalents		(3,554	)		7,473
Cash and cash equivalents, beginning of period		7,713			1,131
Cash and cash equivalents, end of period	$	4,159		$	8,604

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

6

ATRIUM COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004 and 2003

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview and basis of presentation

Atrium Companies, Inc. (the “Company” or “Atrium”) was founded in 1948 and is a Delaware corporation based in Dallas, Texas. As one of the largest manufacturers and distributors of residential windows and patio doors in the United States, Atrium is one of few such providers with a national presence. Atrium offers a comprehensive product line of aluminum and vinyl windows, as well as patio doors, to leading national homebuilders and home center retailers. Through selective acquisitions, Atrium has added distribution channels, vertically integrated operations and new product offerings while entering new geographic markets.

On December 10, 2003, Atrium Corporation, our parent company, was acquired by and merged-into a newly formed affiliate of Kenner & Company, Inc., with Atrium Corporation as the surviving corporation (referred-to herein as the “Merger”). As a result of the Merger, the Company and Atrium Corporation are controlled by an investor group that includes: KAT Holdings, L.P. and KAT Group, L.P., special purpose Kenner investment partnerships; UBS Capital Americas II, LLC; ML IBK Positions, Inc.; Merrill Lynch Ventures L.P. 2001; and management.

The unaudited consolidated financial statements include the accounts of Atrium Companies, Inc. and its wholly-owned subsidiaries and have been prepared in accordance with generally accepted accounting principles for interim financial reporting, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All significant intercompany balances have been eliminated in consolidation.

These consolidated financial statements and footnotes should be read in conjunction with the Company’s audited financial statements for the fiscal year ended December 31, 2003 included in the Company’s amended annual report on Form 10-K/A as filed with the Securities and Exchange Commission on April 9, 2004. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim financial information have been included. The results of operations for any interim period are not necessarily indicative of the results of operations for a full year. Certain items in the prior period presentation have been reclassified to conform to the current period presentation.

Stock-based compensation

As of September 30, 2004, the Company had several stock-based compensation plans. The Company accounts for these plans under the recognition and measurement principles of the Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related interpretations. Stock-based employee compensation costs related to the issuance of stock options under the Atrium Corporation 2003 Stock Option Plan is not reflected in the Company’s earnings, as all options granted under those plans had an exercise price equal to or in excess of the estimated market value of the underlying common stock on the date of grant.

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

7

The Financial Accounting Standards Board ("FASB") has indicated that it expects to issue a proposal to change the recognition and measurement principles for equity-based compensation granted to employees. Under the proposed rules, the Company would be required to recognize compensation expense related to stock options granted to employees, beginning with the interim period ending June 30, 2005. The compensation expense would be calculated based on the number of options expected to vest and would be recognized over the stock options' vesting period. If this proposal is passed, the Company would be required to recognize compensation expense related to stock options granted to its employees, which may have a material effect on its consolidated financial position or results of operations.

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2004			2003			2004			2003
Net income, as reported	$	8,259		$	10,899		$	11,090		$	17,803
Add: stock-based employee compensation expense
included in reported net income, net of related
tax effects		—			—			2,385			252
Deduct: stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects		(154	)		(34	)		(2,848	)		(35	)
Adjusted net income	$	8,105		$	10,865		$	10,627		$	18,020

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

2. ACQUISITIONS

The acquisitions described below (collectively, the “Acquisitions”) have been accounted for in accordance with SFAS No. 141, “Business Combinations” and the results of their operations are included in the Company's financial statements from the dates of the respective acquisitions.

Company acquired	Date of acquisition	Operating segment
MD Casting, Inc.	January 31, 2003	Components
Danvid Window Company	April 1, 2003	Windows & Doors
Aluminum Screen Manufacturers, Inc.	October 1, 2003	Components
Superior Engineered Products Corporation	December 31, 2003	Windows & Doors
Robico Shutters, Inc. and Expert
Installation Service, Inc.	June 1, 2004	Windows & Doors
West Coast Custom Finish, Inc.	August 2, 2004	Windows & Doors
Kinco, Ltd.	September 1, 2004	Windows & Doors

8

Superior Engineered Products Corporation

On December 31, 2003, the Company acquired all of the outstanding capital stock of Superior Engineered Products Corporation (“Superior”), a California corporation, for a purchase price of $53.8 million, including $48.8 million in cash and $5.0 million in Atrium Corporation common stock. Transaction fees related to the acquisition of Superior were $1.0 million. The cash portion of the transaction was funded with $40.0 million of term loan borrowings previously held in escrow and $7.5 million borrowed under the Company's accounts receivable securitization facility. Superior, based in Ontario, California, is a manufacturer of windows and other building materials.

The aggregate purchase price was allocated to the underlying assets and liabilities based upon their respective estimated fair market values at the date of acquisition, as follows (in thousands):

Cash	$	3,229
Accounts receivable		4,591
Other receivables		162
Inventory		5,593
Prepaid expenses		487
Deferred tax asset		208
Property, plant and equipment		16,312
Other assets		176
Goodwill		14,283
Intangible assets		12,900
Accounts payable		(787	)
Accrued liabilities		(2,104	)
Deferred tax liability		(208	)
Total purchase price	$	54,842

Goodwill of $14.3 million was assigned to the Windows & Doors segment and is not expected to be deductible for tax purposes. Intangible assets totaling $12.9 million have estimated useful lives and estimated annual amortization as follows (in thousands):

					Estimated
			Estimated		annual
	Amount		useful life		amortization
Customer relationships	$	10,200		8 years	$	1,275
Non-compete agreement		2,200		5 years		440
Trade names		500		3 years		167
	$	12,900			$	1,882

Robico Shutters, Inc. and Expert Installation Service, Inc.

On June 1, 2004, the Company acquired all of the assets of Robico Shutters, Inc. and Expert Installation Service, Inc. through an existing wholly-owned subsidiary, Atrium Shutters, Inc. (collectively “Atrium Shutters”) for a purchase price of $12.0 million, consisting of $11.7 million in cash and $300,000 in the form of warrants to purchase Atrium Corporation common stock. Transaction fees related to the acquisition were $319,000. The cash portion of the transaction was funded through a combination of cash on hand and borrowings under both the Company’s revolving credit facility and its accounts receivable securitization facility. Atrium Shutters, based in Ft. Lauderdale, Florida, manufactures and installs custom-fit, hurricane and storm protection systems for new home construction in Florida.

9

The aggregate purchase price was allocated to the underlying assets and liabilities based upon their respective estimated fair market values at the date of acquisition, as follows (in thousands):

Accounts receivable	$	1,465
Inventory		1,224
Prepaid expenses		100
Property, plant and equipment		785
Other assets		44
Goodwill		4,750
Intangible assets		5,000
Accounts payable		(512	)
Accrued liabilities		(570	)
Total purchase price	$	12,286

Goodwill of $4.8 million was assigned to the Windows & Doors segment and is expected to be fully deductible for tax purposes. Intangible assets totaling $5.0 million have estimated useful lives and estimated annual amortization as follows (in thousands):

					Estimated
			Estimated		annual
	Amount		useful life		amortization
Order backlog	$	3,300		2.5 years	$	1,320
Customer relationships		1,000		9 years		111
Non-compete agreement		500		5 years		100
Patent		200		17 years		12
	$	5,000			$	1,543

West Coast Custom Finish, Inc.

On August 2, 2004, the Company acquired substantially all of the assets of West Coast Custom Finish, Inc. (“West Coast Custom”), a Nevada corporation for $2.3 million in cash with an additional amount of $3.5 million to be paid over a period of four years upon the achievement of certain financial targets. The transaction was effected through an existing wholly-owned subsidiary and was funded through a combination of cash on hand and borrowings under the Company’s revolving credit facility. West Coast Custom, based in Palm Springs, California, distributes and installs aluminum and vinyl windows for new home construction in the Riverside County and Desert areas of Southern California.

The aggregate purchase price was allocated to the underlying assets and liabilities based upon their respective estimated fair market values at the date of acquisition. Goodwill of $5.3 million was assigned to the Windows & Doors segment and is expected to be fully deductible for tax purposes. The aggregate purchase price was allocated as follows (in thousands):

Accounts receivable	$	532
Inventory		218
Property, plant and equipment		159
Goodwill		5,284
Accounts payable		(403	)
Total purchase price	$	5,790

10

Kinco, Ltd.

On September 1, 2004, the Company completed the acquisition of substantially all of the assets of Kinco, Ltd. (“Kinco”), a Florida limited partnership, for a purchase price of $27.1 million, including $26.6 million in cash, approximately $350,000 in assumed liabilities and approximately $150,000 in the form of warrants to purchase Atrium Corporation common stock. Transaction fees related to the acquisition were $1.0 million. The transaction was effected through a newly-formed subsidiary, Atrium Windows and Doors of Florida, LLC, a Delaware LLC, and was funded through a combination of $20 million of additional term loan borrowings, borrowings under the Company’s revolving credit and accounts receivable securitization facilities and cash on hand. Kinco, based in Jacksonville, Florida, manufactures, distri butes and installs aluminum and vinyl windows for the new home construction and replacement markets in Florida, Georgia and South Carolina.

The aggregate purchase price was allocated to the underlying assets and liabilities based upon their respective estimated fair market values at the date of acquisition, as follows (in thousands):

Accounts receivable	$	8,624
Inventory		8,865
Prepaid expenses		327
Other receivables		10
Property, plant and equipment		5,344
Note receivable		191
Other assets		78
Goodwill		6,436
Intangible assets		6,000
Accounts payable		(3,091	)
Accrued liabilities		(4,657	)
Total purchase price	$	28,127

Goodwill of $6.4 million was assigned to the Windows & Doors segment and is expected to be fully deductible for tax purposes. Intangible assets totaling $6.0 million have estimated useful lives and estimated annual amortization as follows (in thousands):

					Estimated
			Estimated		annual
	Amount		useful life		amortization
Customer relationships	$	4,900		22 years	$	223
Non-compete agreements		700		3.3 years		212
Trade name		400		2 years		200
	$	6,000			$	635

Pro forma summary financial information

The following unaudited pro forma summary financial information combines the consolidated results of operations of Atrium Companies, Inc. and the Acquisitions for the three and nine months ended September 30, 2004 and 2003 as if the Acquisitions had occurred on January 1, 2003. This pro forma summary financial information is provided for informational purposes only and may not be indicative of the results of operations as they would have been had the transaction been effected on the assumed dates nor is it necessarily indicative of the results of operations which may occur in the future (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2004		2003		2004		2003
Net sales	$	209,451	$	209,576	$	590,070	$	568,308
Net income		8,417		13,828		12,256		23,901

11

3. SECURITIZATION OF ACCOUNTS RECEIVABLE

The Company and certain of its subsidiaries may sell on a non-recourse basis a pool of receivables comprising their entire trade receivable portfolio to a wholly-owned bankruptcy-remote special purpose funding subsidiary, Atrium Funding Corporation (“AFC”). While AFC is consolidated for financial purposes, it is a distinct legal entity that does not engage in trade or business in order to make remote the possibility that it would have to file in bankruptcy or other receivership.

AFC can sell a pro rata share of the trade receivable portfolio to Fairway Finance Corporation (the “Securitization Company”), agented by BMO Nesbitt Burns, for aggregate payments, subject to receivable eligibility and a borrowing base. Receivables sold to the Securitization Company are not reflected in the Company’s consolidated balance sheet. Any receivables not sold to the Securitization Company constitute the retained interest in the receivables portfolio of AFC.

Managed portfolio data consisted of the following (in thousands):

	September 30,		December 31,
	2004		2003
Securitized balances	$	40,800	$	31,000
Retained interest in sold
accounts receivable		23,666		24,461
Owned receivables		22,866		8,387
Managed receivables	$	87,332	$	63,848

4. INVENTORIES

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

	September 30,			December 31,
	2004			2003
Raw materials	$	52,272		$	34,090
Work in process		2,536			1,442
Finished goods		23,485			14,937
		78,293			50,469
LIFO reserve		(2,350	)		(916	)
Inventory reserve		(1,244	)		(564	)
	$	74,699		$	48,989

12

5. INTANGIBLE ASSETS

The Company has acquired identifiable intangible assets that are subject to amortization. The following table presents carrying values of those intangible assets (in thousands):

	September 30, 2004					December 31, 2003
	Carrying		Accumulated			Carrying		Accumulated
	value		amortization			value		amortization
Customer relationships	$	16,100	$	(993	)	$	10,200	$	—
Non-compete agreements		3,400		(363	)		2,200		—
Order backlog		3,300		(440	)		—		—
Other		1,100		(130	)		500		—
	$	23,900	$	(1,926	)	$	12,900	$	—

Amortization expense for those intangible assets was $985,000 and $0 for the three months ended September 30, 2004 and 2003, respectively, and was $1.9 million and $0 for the nine months ended September 30, 2004 and 2003, respectively.

The following table presents the estimated amortization expense for these intangible assets for the years ended December 31 (in thousands):

2004	$	2,993
2005		4,057
2006		3,881
2007		2,371
2008		2,161
Thereafter		8,437
Total	$	23,900

6. NOTES PAYABLE

Notes payable consisted of the following (in thousands):

	September 30,			December 31,
	2004			2003
Senior subordinated notes	$	225,000		$	225,000
Term loan		198,600			180,000
Other notes payable, including
capital lease obligations		9,323			8,536
		432,923			413,536
Unamortized premium on senior
subordinated notes		1,456			1,656
Total long-term debt		434,379			415,192
Current maturities of long-term debt		(3,960	)		(3,302	)
Long-term debt	$	430,419		$	411,890

In connection with the Merger, the Company issued an additional $50.0 million of 10.50% senior subordinated notes (the “Add-On Notes”) due on May 1, 2009. The Add-On Notes constitute an additional issuance of the $175.0 million of existing senior subordinated notes pursuant to our indenture, dated May 17, 1999, as amended, under which the outstanding notes were previously issued. Also in connection with the Merger, we entered into a new credit agreement providing for a revolving credit facility in the amount of $50.0 million, which includes a $20.0 million sub-facility for the issuance of letters of credit and a $10.0 million sub-facility for swing line loans and a $180.0 million term loan facility. With the acquisition of Kinco, the Company issued an additional $20.0 million of term loans, increasing the total term loan facility to $200.0 million. In addition to these items, the Company has an accounts receivable securitization facility with up to an additional $50.0 million available, subject to certain borrowing base levels.

13

The Company’s credit agreement includes covenants that require the Company to meet certain financial tests pertaining to total leverage, interest coverage and fixed charge coverage. As of September 30, 2004, the Company was in compliance with all related covenants. The current credit agreement also has an “excess cash flow” provision mandating additional principal payments if certain cash flow targets are met during the year. The excess cash flow payment is due no later than 100 days after the end of each fiscal year, commencing with the fiscal year ending December 31, 2004. For 2004 the Company would be required to make an additional principal payment in an amount equal to the excess of 75% of its excess cash flow, as defined in the credit agreement, less any voluntary prepayments made on the term loan s during the fiscal year. As of November 12, 2004, management estimates that additional principal payments will be required to be paid in April 2005 for the year 2004, but cannot reasonably estimate the amount of those payments at this time.

7. INCOME TAXES

The Company’s effective tax rate differs from the statutory rate due to the Company’s net operating loss carryforwards and the existence of a full valuation allowance against the Company’s net deferred tax assets. The income tax provision primarily represents state income tax expense for those jurisdictions where the Company does not have available loss carryforwards. The Company did not incur federal tax expense during the three and nine months ended September 30, 2004 and 2003 as a result of available net operating loss carryforwards generated in prior years. The Company continues to maintain a full valuation allowance against its deferred tax assets for net operating losses. Should the Company continue to generate taxable income in 2004 and if prospects for continued profitability are more likely tha n not beyond 2004, its net operating loss valuation allowance may reverse in future periods. Such reversal would have a significant effect on the Company’s income tax expense.

8. OPERATING SEGMENT INFORMATION

The Company is engaged in the manufacture and sale of windows, doors and various other building materials throughout North America and is organized within two principal operating segments: the Windows and Doors Segment and the Components Segment. The Windows and Doors Segment primarily fabricates, distributes and installs vinyl and aluminum windows and doors for the residential new construction and repair and remodel markets. The Components Segment primarily manufactures component parts utilized in the fabrication of aluminum and vinyl windows and doors. In the tables below, Corporate and Other includes corporate overhead costs and certain income and expense items not allocated to reportable operating segments, including Merger-related expenses and intangible asset amortization.

14

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

(Amounts in thousands)	Three months ended						Nine months ended
	September 30,						September 30,
	2004			2003			2004			2003
Net sales:
Windows and Doors	$	177,203		$	152,950		$	479,862		$	402,692
Components		34,402			26,996			101,079			73,973
Intersegment eliminations		(14,174	)		(13,073	)		(45,092	)		(34,428	)
Consolidated net sales	$	197,431		$	166,873		$	535,849		$	442,237
Depreciation and amortization:
Windows and Doors	$	4,428		$	3,088		$	12,435		$	8,838
Components		1,031			646			2,949			1,930
Corporate and Other		1,953			654			4,659			1,809
Consolidated depreciation and amortization	$	7,412		$	4,388		$	20,043		$	12,577
Income from operations:
Windows and Doors	$	15,225		$	18,976		$	35,659		$	41,235
Components		3,110			2,019			10,057			5,925
Corporate and Other		(734	)		(1,419	)		(7,261	)		(3,841	)
Consolidated income from operations		17,601			19,576			38,455			43,319
Interest expense		(9,110	)		(8,329	)		(26,612	)		(25,025	)
Other income (expense), net		33			(5	)		(248	)		159
Income before income taxes	$	8,524		$	11,242		$	11,595		$	18,453

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

(In thousands)	September 30,		December 31,
	2004		2003
Goodwill:
Windows & Doors	$	319,208	$	300,567
Components		66,646		66,819
Corporate & Other		9,377		9,377
	$	395,231	$	376,763
Total assets:
Windows & Doors	$	498,915	$	445,314
Components		94,907		91,807
Corporate & Other		82,346		70,355
	$	676,168	$	607,476

9. COMMITMENTS AND CONTINGENCIES

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

15

The Company is involved in various stages of investigation and cleanup related to environmental protection matters, some of which relate to waste disposal sites. The potential costs related to such matters and their possible impact on future operations are uncertain due in part to: the uncertainty as to the extent of pollution, the complexity of government laws and regulations and their interpretations, the varying costs and effectiveness of alternative cleanup technologies and methods, the uncertain level of insurance or other types of recovery and the questionable level of the Company’s involvement. In the opinion of management, however, none of these matters are expected to have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

The Company previously owned one parcel of real estate that requires future costs related to environmental clean-up. The estimated costs of clean-up have been reviewed by third-party sources and are expected not to exceed $150,000. The previous owner of the property has established an escrow of $400,000 to remediate the associated costs. The Company sold this property in December 1999. The Company has established a letter of credit of $250,000 to cover any costs of remediation exceeding the previous owner’s escrow. The Company believes the existing escrow amount is adequate to cover costs associated with this clean-up.

In connection with the sale of one of the Company’s facilities in December 2002, a $250,000 escrow was established. The escrow is receivable upon the Company obtaining an environmental innocent ownership certification on the building. The Company is currently in the process of applying for the certification and expects to be refunded the entire $250,000 escrow during 2004.

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

10. SUBSIDIARY GUARANTORS

The Company's payment obligations under the notes payable (the “Notes”) are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis, by its wholly-owned subsidiaries (collectively, the "Subsidiary Guarantees"): Atrium Door and Window Company of the Northeast, Atrium Door and Window Company of Arizona, Atrium Door and Window Company — West Coast, Atrium Vinyl, Inc. (formerly known as Heat, Inc.), Thermal Industries, Inc., Atrium Door and Window Company of the Northwest (formerly known as Best Built, Inc.), Atrium Door and Window Company of the Rockies (formerly known as Champagne Industries, Inc.), Wing Industries, Inc., R.G. Darby Company, Inc., Total Trim, Inc, Atrium Extrusion Systems, Inc. (formerly known as VES, Inc.), MD Casting, Inc., Superior Engineered Product s Corporation, Aluminum Screen Manufacturers, Inc. and Atrium Shutters, Inc. (collectively, the "Guarantor Subsidiaries"). The following subsidiaries do not guarantee the Company's Notes: Atrium Funding Corporation, Atrium Ventanas de Mexico and Atrium Servicios de Mexico (collectively, the "Non-Guarantor Subsidiaries").

The balance sheets, results of operations and statements of cash flows of all subsidiaries are presented for all periods covered except for the Acquisitions, which are presented since their respective dates of acquisition, see Note 2. In the opinion of management, separate financial statements of the respective Guarantor Subsidiaries would not provide additional material information that would be useful in assessing the financial composition of the Guarantor Subsidiaries. None of the Guarantor Subsidiaries has any significant legal restrictions on the ability of investors or creditors to obtain access to its assets in the event of a default on the Subsidiary Guarantee other than its subordination to senior indebtedness. The Notes and the Subsidiary Guarantees are subordinated to all existing and future Senior Indebted ness of the Company. The indenture governing the Notes contains limitations on the amount of additional indebtedness (including senior indebtedness) that the Company may incur.

16

ATRIUM COMPANIES, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2004

(In thousands)

	Guarantor		Non-guarantor						Consolidating
	Subsidiaries		Subsidiaries			Parent			adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	54,469	$	(10,896	)	$	(48,977	)	$	9,563		$	4,159
Accounts receivable, net		22,451		415			—			—			22,866
Retained interest in sold accounts receivable		—		23,666			—			—			23,666
Inventories		44,411		92			30,196			—			74,699
Other current assets		17,079		336			2,635			(11,535	)		8,515
Total current assets		138,410		13,613			(16,146	)		(1,972	)		133,905
Property, plant and equipment, net		47,212		3			57,358			—			104,573
Goodwill		216,223		—			179,008			—			395,231
Intangible assets, net		21,974		—			—			—			21,974
Investment in subsidiaries		—		—			125,782			(125,782	)		—
Other assets		2,221		27			18,237			—			20,485
Total assets	$	426,040	$	13,643		$	364,239		$	(127,754	)	$	676,168
LIABILITIES AND
STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable	$	16,464	$	6		$	21,936		$	9,563		$	47,969
Accrued liabilities		28,416		304			18,963			—			47,683
Current portion of notes payable		1,773		—			2,187			—			3,960
Total current liabilities		46,653		310			43,086			9,563			99,612
Non-current liabilities:
Notes payable, net of current portion		249,073		—			181,346			—			430,419
Other non-current liabilities		17,865		—			998			(11,535	)		7,328
Total non-current liabilities		266,938		—			182,344			(11,535	)		437,747
Total liabilities		313,591		310			225,430			(1,972	)		537,359
Commitments and contingencies		—		—			—			—			—
Stockholder's equity:
Common stock		—		—			—			—			—
Paid-in capital		86,111		21,499			186,269			(107,610	)		186,269
Retained earnings (accumulated deficit)		26,338		(8,166	)		(47,460	)		(18,172	)		(47,460	)
Total stockholder's equity		112,449		13,333			138,809			(125,782	)		138,809
Total liabilities and stockholder's equity	$	426,040	$	13,643		$	364,239		$	(127,754	)	$	676,168

17

ATRIUM COMPANIES, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2003

(In thousands)

	Guarantor		Non-guarantor						Consolidating
	Subsidiaries		Subsidiaries			Parent			adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	45,313	$	(10,485	)	$	(29,979	)	$	2,864		$	7,713
Accounts receivable, net		8,174		213			—			—			8,387
Retained interest in sold accounts receivable		—		24,461			—			—			24,461
Inventories		26,463		50			22,476			—			48,989
Other current assets		15,780		133			4,985			(10,296	)		10,602
Total current assets		95,730		14,372			(2,518	)		(7,432	)		100,152
Property, plant and equipment, net		40,753		3			55,164			—			95,920
Goodwill		197,755		—			179,008			—			376,763
Intangible assets, net		12,900		—			—			—			12,900
Investment in subsidiaries		—		—			122,103			(122,103	)		—
Other assets		1,802		37			19,902			—			21,741
Total assets	$	348,940	$	14,412		$	373,659		$	(129,535	)	$	607,476
LIABILITIES AND
STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable	$	7,686	$	11		$	17,475		$	2,864		$	28,036
Accrued liabilities		12,218		81			21,962			—			34,261
Current portion of notes payable		1,225		—			2,077			—			3,302
Total current liabilities		21,129		92			41,514			2,864			65,599
Non-current liabilities:
Notes payable, net of current portion		206,279		—			205,611			—			411,890
Other non-current liabilities		13,749		—			1,483			(10,296	)		4,936
Total non-current liabilities		220,028		—			207,094			(10,296	)		416,826
Total liabilities		241,157		92			248,608			(7,432	)		482,425
Commitments and contingencies		—		—			—			—			—
Stockholder's equity:
Common stock		—		—			—			—			—
Paid-in capital		86,111		21,499			183,601			(107,610	)		183,601
Retained earnings (accumulated deficit)		21,672		(7,179	)		(58,550	)		(14,493	)		(58,550	)
Total stockholder's equity		107,783		14,320			125,051			(122,103	)		125,051
Total liabilities and stockholder's equity	$	348,940	$	14,412		$	373,659		$	(129,535	)	$	607,476

18

ATRIUM COMPANIES, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the three months ended September 30, 2004

(In thousands)

	Guarantor			Non-guarantor						Consolidating
	Subsidiaries			Subsidiaries			Parent			adjustments			Consolidated
Net sales	$	96,097		$	207		$	116,842		$	(15,715	)	$	197,431
Cost of goods sold		64,086			187			89,073			(15,715	)		137,631
Gross profit		32,011			20			27,769			—			59,800
Operating expenses:
Selling, delivery, general
and administrative expense		21,345			91			18,120			—			39,556
Amortization expense		1,616			—			490			—			2,106
Other operating expenses		—			407			130			—			537
Total operating expenses		22,961			498			18,740			—			42,199
Income (loss) from operations		9,050			(478	)		9,029			—			17,601
Other income (expense):
Interest expense		(5,223	)		—			(3,887	)		—			(9,110	)
Other income (expense), net		13			7			13			—			33
Income (loss) before income taxes		3,840			(471	)		5,155			—			8,524
Income tax benefit (expense)		(407	)		142			—			—			(265	)
Equity in income of subsidiaries		—			—			3,104			(3,104	)		—
Net income	$	3,433		$	(329	)	$	8,259		$	(3,104	)	$	8,259

ATRIUM COMPANIES, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the three months ended September 30, 2003

(In thousands)

	Guarantor			Non-guarantor						Consolidating
	Subsidiaries			Subsidiaries			Parent			adjustments			Consolidated
Net sales	$	63,740		$	78		$	117,549		$	(14,494	)	$	166,873
Cost of goods sold		41,436			83			84,889			(14,494	)		111,914
Gross profit		22,304			(5	)		32,660			—			54,959
Operating expenses:
Selling, delivery, general
and administrative expense		13,710			51			19,700			—			33,461
Amortization expense		363			—			729			—			1,092
Other operating expenses		375			438			17			—			830
Total operating expenses		14,448			489			20,446			—			35,383
Income (loss) from operations		7,856			(494	)		12,214			—			19,576
Other income (expense):
Interest expense		(5,419	)		—			(2,910	)		—			(8,329	)
Other income (expense), net		(37	)		2			30			—			(5	)
Income (loss) before income taxes		2,400			(492	)		9,334			—			11,242
Income tax benefit (expense)		—			153			(496	)		—			(343	)
Equity in income of subsidiaries		—			—			2,061			(2,061	)		—
Net income (loss)	$	2,400		$	(339	)	$	10,899		$	(2,061	)	$	10,899

19

ATRIUM COMPANIES, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the nine months ended September 30, 2004

(In thousands)

	Guarantor			Non-guarantor						Consolidating
	Subsidiaries			Subsidiaries			Parent			adjustments			Consolidated
Net sales	$	249,622		$	507		$	335,031		$	(49,311	)	$	535,849
Cost of goods sold		167,865			507			254,964			(49,311	)		374,025
Gross profit		81,757			—			80,067			—			161,824
Operating expenses:
Selling, delivery, general
and administrative expense		57,251			214			56,800			—			114,265
Amortization expense		3,441			—			1,884			—			5,325
Other operating expenses		—			1,075			2,704			—			3,779
Total operating expenses		60,692			1,289			61,388			—			123,369
Income (loss) from operations		21,065			(1,289	)		18,679			—			38,455
Other income (expense):
Interest expense		(15,316	)		—			(11,296	)		—			(26,612	)
Other income (expense), net		(202	)		(74	)		28			—			(248	)
Income before income taxes		5,547			(1,363	)		7,411			—			11,595
Income tax benefit (expense)		(881	)		376			—			—			(505	)
Equity in income of subsidiaries		—			—			3,679			(3,679	)		—
Net income	$	4,666		$	(987	)	$	11,090		$	(3,679	)	$	11,090

ATRIUM COMPANIES, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the nine months ended September 30, 2003

(In thousands)

	Guarantor			Non-guarantor						Consolidating
	Subsidiaries			Subsidiaries			Parent			adjustments			Consolidated
Net sales	$	161,431		$	266		$	318,162		$	(37,622	)	$	442,237
Cost of goods sold		107,719			263			229,345			(37,622	)		299,705
Gross profit		53,712			3			88,817			—			142,532
Operating expenses:
Selling, delivery, general
and administrative expense		38,145			498			55,709			—			94,352
Amortization expense		1,036			—			2,031			—			3,067
Other operating expenses		375			1,077			342			—			1,794
Total operating expenses		39,556			1,575			58,082			—			99,213
Income (loss) from operations		14,156			(1,572	)		30,735			—			43,319
Other income (expense):
Interest expense		(15,394	)		—			(9,631	)		—			(25,025	)
Other income (expense), net		(107	)		2			264			—			159
Income (loss) before income taxes		(1,345	)		(1,570	)		21,368			—			18,453
Income tax benefit (expense)		—			377			(1,027	)		—			(650	)
Equity in income (loss) of subsidiaries		—			—			(2,538	)		2,538			—
Net income (loss)	$	(1,345	)	$	(1,193	)	$	17,803		$	2,538		$	17,803

20

ATRIUM COMPANIES, INC.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2004

(In thousands)

	Guarantor			Non-guarantor						Consolidating
	Subsidiaries			Subsidiaries			Parent			adjustments		Consolidated
Cash flows from operating activities	$	17,941		$	(421	)	$	18,253		$	—	$	35,773
Cash flows from investing activities:
Purchases of property, plant and equipment		(7,282	)		—			(9,600	)		—		(16,882	)
Acquisitions		(44,351	)		—			—			—		(44,351	)
Other		(609	)		10			(1,206	)		—		(1,805	)
Net cash provided by (used in) investing activities		(52,242	)		10			(10,806	)		—		(63,038	)
Cash flows from financing activities:
Proceeds from borrowings under term loans		11,580			—			8,420			—		20,000
Scheduled principal payments on term loans		(811	)		—			(589	)		—		(1,400	)
Checks drawn in excess of bank balances		—			—			—			6,699		6,699
Capital contributions		32,688			—			(32,688	)		—		—
Other		—			—			(1,588	)		—		(1,588	)
Net cash provided by (used in) financing activities		43,457			—			(26,445	)		6,699		23,711
Net increase (decrease) in cash and cash equivalents		9,156			(411	)		(18,998	)		6,699		(3,554	)
Cash and cash equivalents, beginning of period		45,313			(10,485	)		(29,979	)		2,864		7,713
Cash and cash equivalents, end of period	$	54,469		$	(10,896	)	$	(48,977	)	$	9,563	$	4,159

ATRIUM COMPANIES, INC.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2003

(In thousands)

	Guarantor			Non-guarantor						Consolidating
	Subsidiaries			Subsidiaries			Parent			adjustments			Consolidated
Cash flows from operating activities	$	(1,530	)	$	(8,435	)	$	46,944		$	—		$	36,979
Cash flows from investing activities:
Purchases of property, plant and equipment		(3,538	)		—			(9,494	)		—			(13,032	)
Acquisitions		(3,358	)		—			(5,729	)		—			(9,087	)
Other		(738	)		(3	)		(702	)		—			(1,443	)
Net cash used in investing activities		(7,634	)		(3	)		(15,925	)		—			(23,562	)
Cash flows from financing activities:
Scheduled principal payments on term loans		(2,493	)		—			(1,604	)		—			(4,097	)
Additional principal payments on term loans		(656	)		—			(402	)		—			(1,058	)
Checks drawn in excess of bank balances		—			—			—			(699	)		(699	)
Capital contributions		—			1,162			(1,162	)		—			—
Other		—			—			(90	)		—			(90	)
Net cash provided by (used in) financing activities		(3,149	)		1,162			(3,258	)		(699	)		(5,944	)
Net increase (decrease) in cash and cash equivalents		(12,313	)		(7,276	)		27,761			(699	)		7,473
Cash and cash equivalents, beginning of period		26,189			(10,540	)		(17,860	)		3,342			1,131
Cash and cash equivalents, end of period	$	13,876		$	(17,816	)	$	9,901		$	2,643		$	8,604

21

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

The following discussion and analysis should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included in our amended Annual Report on Form 10-K/A for the year ended December 31, 2003. This Form 10-Q contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) relating to Atrium Companies, Inc. and its subsidiaries based on beliefs of management that involve substantial risks and uncertainties. When used in this Form 10-Q, the words "anticipate," "believe," "estimate," "expect," "intend," and similar expressions, as they relate to us or our management, identify forward-looking statements. Such statements reflect our curren t 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. We disclaim any obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.

Overview

Atrium Companies, Inc. (“Atrium”) was founded in 1948 and is a Delaware corporation based in Dallas, Texas. As one of the largest manufacturers and distributors of residential windows and patio doors in the United States, we are one of 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 and home center retailers. Through selective acquisitions, we have added distribution channels, vertically integrated operations and new product offerings while entering new geographic markets.

On December 10, 2003, Atrium Corporation, our parent company, was acquired by and merged-into a newly formed affiliate of Kenner & Company, Inc., with Atrium Corporation as the surviving corporation (referred-to herein as the “Merger”). As a result of the Merger, Atrium Companies, Inc. and Atrium Corporation are controlled by an investor group that includes: KAT Holdings, L.P. and KAT Group, L.P., special purpose Kenner investment partnerships; UBS Capital Americas II, LLC; ML IBK Positions, Inc.; Merrill Lynch Ventures L.P. 2001; and management.

Recent developments

Our financial results have been adversely affected by the less-than-expected performance of Atrium Shutters, Inc. and Kinco, Ltd., which were acquired in 2004 and operate primarily in the state of Florida. The catastrophic weather conditions that plagued that area of the country throughout the third quarter hampered both operations and was a significant factor contributing to our performance. In addition to dealing with weather issues, the business continued to be negatively affected by raw material inflation, rising fuel costs and rising workers’ compensation and health insurance costs. While we have completed a number of initiatives to mitigate the impact of each of these items, including increasing selling prices and restructuring insurance programs, the full effect of these initiatives has yet to be felt.

Results of operations

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

22

Our results of operations for operating segments include the following acquisitions (collectively, the “Acquisitions”) since their respective dates of acquisition:

Company acquired	Date of acquisition	Operating segment
MD Casting, Inc. (“MD Casting”)	January 31, 2003	Components
Danvid Window Company (“Danvid”)	April 1, 2003	Windows & Doors
Aluminum Screen Manufacturers, Inc. (“Aluminum Screen”)	October 1, 2003	Components
Superior Engineered Products Corporation (“Superior”)	December 31, 2003	Windows & Doors
Robico Shutters, Inc. and Expert Installation Service, Inc.
(collectively “Atrium Shutters”)	June 1, 2004	Windows & Doors
West Coast Custom Finish, Inc. (“West Coast Custom”)	August 2, 2004	Windows & Doors
Kinco, Ltd. (“Kinco”)	September 1, 2004	Windows & Doors

Net sales. Net sales increased by $30.6 million, or 18.3%, from $166.9 million during the third quarter of 2003 to $197.4 during the third quarter of 2004. The increase in net sales was primarily due to additional net sales from Acquisitions of $30.2 million. Excluding additional sales from Acquisitions, net sales grew $382,000, or 0.2%, from $166.9 million during 2003 to $167.3 million during 2004. This increase was made up of growth within our Components Segment of $1.1 million, partially offset by a decrease within our Windows and Doors Segment of $756,000. The increase in our Components Segment was primarily due to growth at our aluminum extrusion operation of $1.1 million as a result of increased unit volume with new and existing customers and higher selling prices due to the increased price of aluminum. The decrease within our Windows and Doors Segment was primarily made up of a decrease at our aluminum operations of $2.4 million, due in part to weather conditions in the South. This decrease was partially offset by an increase at our vinyl operations of $953,000 and Darby operation of $675,000 due to increased unit volume.

Net sales increased by $93.6 million, or 21.2%, from $442.2 million during the first nine months of 2003 to $535.8 million during the first nine months of 2004. The increase in net sales was primarily due to additional net sales from Acquisitions of $80.8 million. Excluding the additional net sales from Acquisitions, net sales grew $12.8 million, or 2.9%, from $442.2 million during 2003 to $455.0 million during 2004. This increase was primarily made up of growth within our Window and Doors Segment of $10.0 million, including increases at our vinyl operations of $7.8 million, or 4.0%, our Darby operation of $3.5 million, or 19.3%, partially offset by a decrease at our aluminum operations of $1.3 million, or 0.7%. The majority of these increases were due to increased unit volume. Net sales at our Components Segment incr eased by $2.8 million, or 7.0%, primarily due to growth at our aluminum extrusion operations due to increased volume with new and existing customers and higher selling prices due to the increased price of aluminum.

Cost of goods sold. Cost of goods sold increased from 67.1% of net sales during the third quarter of 2003 to 69.7% of net sales during the third quarter of 2004 and increased from 67.8% of net sales during the first nine months of 2003 to 69.8% of net sales during the first nine months of 2004. Material costs increased from 39.1% of net sales during the third quarter of 2003 to 39.8% of net sales during the third quarter of 2004 and remained flat at 39.5% for the first nine months of 2004 as compared to the first nine months of 2003. The increase in material costs as a percentage of net sales during the third quarter of 2004 was primarily related to inflationary increases in the cost of certain raw materials, which were partia lly offset by synergies captured from the Acquisitions and our ability to leverage our purchasing power. Direct manufacturing expenses, which represent the labor and overhead components of cost of goods sold, increased from 28.0% of net sales during the third quarter of 2003 to 29.9% of net sales during the third quarter of 2004 and increased from 28.3% during the first nine months of 2003 to 30.3% during the first nine months of 2004. The increase in direct manufacturing expenses for the third quarter and first nine months of 2004, was primarily due to higher insurance, labor and depreciation expense. Additionally, certain expenses that were previously included in material costs have been shifted to direct manufacturing expenses as a result of our increased vertical integration provided by the 2003 acquisitions of MD Casting and Aluminum Screen. This shift in expenses resulted in higher direct manufacturing expenses and lower material costs; however, it had no net impact on total cost of goods sold.

23

Selling, delivery, general and administrative expenses. Selling, delivery, general and administrative expenses increased $6.1 million from $33.5 million (20.0% of net sales) during the third quarter of 2003 to $40.0 million (20.0% of net sales) during the third quarter of 2004. The increase was due to additional expenses from Acquisitions of $6.1 million. Excluding additional expenses from Acquisitions, selling, delivery, general and administrative expenses were flat at $33.5 million (20.0% of net sales) during 2003 and 2004. This was primarily due to increased selling expense of $678,000 from $10.3 million (6.2% of net sales) during 2003 to $11.0 million (6.6% of net sales) during 2004 and increased delivery expenses of $544, 000 from $10.6 million (6.3% of net sales) during 2003 to $11.1 million (6.7% of net sales) during 2004, offset by a reduction in general and administrative expenses of $1.2 million from $12.6 million (7.6% of net sales) during 2003 to $11.4 million (6.8% of net sales) during 2004. The increase in selling expense was primarily due to expenses associated with marketing initiatives (principally additional advertising costs), while the increase in delivery expense was the result of higher fuel costs. The reduction in general and administrative expenses was primarily the result of the continued leveraging of overhead.

Selling, delivery and general and administrative expenses increased $19.9 million from $94.4 million (21.3% of net sales) during the first nine months of 2003 to $114.3 million (21.3% of net sales) during the first nine months of 2004. The increase was primarily due to additional expenses from Acquisitions of $16.6 million. Excluding additional expenses from Acquisitions, selling, delivery, general and administrative expenses increased $3.3 million from $94.3 million (21.3% of net sales) during 2003 to $97.7 million (21.5% of net sales) during 2004. This increase was primarily due to increased selling expense of $3.2 million from $28.3 million (6.4% of net sales) during 2003 to $31.5 million (6.9% of net sales) during 2004 and increased delivery expenses of $1.4 million from $28.9 million (6.5% of net sales) during 20 03 to $30.3 million (6.7% of net sales) during 2004, offset by a reduction in general and administrative expenses of $1.3 million from $37.2 million (8.4% of net sales) during 2003 to $35.9 million (7.9% of net sales) during 2004. The increase in selling expense was primarily due to expenses associated with marketing initiatives (principally additional advertising costs), while the increase in delivery expense was the result of higher fuel costs. The reduction in general and administrative expenses was primarily the result of the continued leveraging of overhead.

Amortization expense. Amortization expense increased $1.0 million from $1.1 million during the third quarter of 2003 to $2.1 million during the third quarter of 2004 and increased $2.3 million from $3.1 million during the first nine months of 2003 to $5.3 million during the first nine months of 2004. Amortization expense increased during the third quarter and first nine months of 2004, primarily due to additional amortization associated with $23.9 million of intangible assets recorded in connection with the Acquisitions, as well as amortization of software implementation costs capitalized during 2003.

Securitization expense. Securitization expense decreased $28,000 from $355,000 during the third quarter of 2003 to $327,000 during the third quarter of 2004 and decreased $26,000 from $867,000 during the first nine months of 2003 to $841,000 during the first nine months of 2004. Securitization expense incurred by the Company represents the losses on the sale of accounts receivable, which includes both the interest expense and commitment fee components of the transaction.

Stock compensation expense. Stock compensation expense was $100,000 and $552,000 during the third quarter and first nine months of 2003, respectively, for the purchase of stock options from current and former employees and payments in the form of Atrium Corporation common stock, for services rendered, to our former equity sponsor, Ardshiel, Inc.

Special charges. Special charges were $210,000 and $2.9 million during the third quarter and first nine months of 2004, respectively, for expenses associated with the Merger. The first nine months of 2004 included $2.4 million of charges for the vesting of warrants issued to Mr. Hull and $553,000 of charges for accrued management retention bonuses to be paid on December 10, 2004, of which $210,000 was recorded during the third quarter of 2004. Special charges were $375,000 during the third quarter and first nine months of 2003 for the divestiture of Wing Industries, Inc.

Interest expense. Interest expense increased $781,000 from $8.3 million during the third quarter of 2003 to $9.1 million during the third quarter of 2004 and increased $1.6 million from $25.0 million during the first nine months of 2003 to $26.6 million during the first nine months of 2004. Interest expense increased as a result of increased debt levels, offset by a decrease in our weighted-average interest rate as a result of the expiration of an interest rate swap agreement in November of 2003 and a lower effective rate on our new debt.

24

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 did not incur federal tax expense during the third quarter and first nine months of 2004 or 2003 as a result of available net operating loss carryforwards generated in prior years and the existence of a full valuation allowance against net deferred tax assets. 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 rever se in future periods. Such reversal would have a significant effect on our income tax expense.

Liquidity and capital resources

Cash provided by operating activities and availability under our revolving credit facility and our accounts receivable securitization facility are our principal sources of liquidity. Net cash provided by operating activities was $35.8 million during the first nine months of 2004, compared to $37.0 million during the first nine months of 2003. The decrease of $1.2 million was primarily due to year-over-year increases in operating expenses, partially offset by a year-over-year increase in gross profit - see preceding discussion of results of operations in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Net cash used in investing activities increased $39.4 million to $63.0 million during the first nine months of 2004, compared to $23.6 million during the first nine months of 2003. The increase was primarily due to the acquisitions of Atrium Shutters, West Coast Custom and Kinco during the first nine months of 2004, compared to the acquisitions of MD Casting and Danvid during the first nine months of 2003, and a $3.9 million increase in capital expenditures as a result of our effort to increase automation and establish new product lines at our various manufacturing facilities.

Net cash provided by financing activities was $23.7 million during the first nine months of 2004, compared to net cash used in financing activities of $5.9 million during the first nine months of 2003. The increase was primarily due to an additional borrowing of $20 million in term loans under our existing credit agreement for the Kinco acquisition, a $7.4 million increase in checks drawn in excess of bank balances and a $3.8 million decrease in principal payments on term loans.

Our credit agreement provides for a revolving credit facility in the amount of $50 million, which includes a $20 million letter of credit sub-facility. The revolving credit facility has a maturity date of December 10, 2008. Additionally, we have an accounts receivable securitization facility, which can make additional funds available to us depending on certain borrowing base levels up to $50 million.

As of September 30, 2004, we had liquidity of $46.0 million, including cash of $4.2 million, availability under our $50 million revolving credit facility of $39.3 million (net of letters of credit of $10.7 million) and availability under our $50.0 million accounts receivable securitization facility of $2.5 million (net of borrowings of $40.8 million and $6.7 million currently unavailable due to borrowing base limitations).

Our credit agreement includes covenants that require us to meet certain financial tests pertaining to total leverage, interest coverage and fixed charge coverage. As of September 30, 2004, we were in compliance with all related covenants. The current credit agreement also has an “excess cash flow” provision mandating additional principal payments if certain cash flow targets are met during the year. The excess cash flow payment is due no later than 100 days after the end of each fiscal year, commencing with the fiscal year ending December 31, 2004. For 2004 we would be required to make an additional principal payment in an amount equal to the excess of 75% of our excess cash flow, as defined in the credit agreement, less any voluntary prepayments made on the term loans during the fiscal year. As of November 12, 2004, management estimates that additional principal payments will be required to be paid in April 2004 for the year 2004, but cannot reasonably estimate the amount of those payments at this time.

Our ability to meet debt service, working capital 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.

25

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

There have not been any material changes in our market risk during the nine months ended September 30, 2004. For additional information related to various market risks refer to Section 7A of our amended annual report on Form 10-K/A for the fiscal year ended December 31, 2003.

Item 4. Controls and Procedures

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

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits
	31.1	Certification by Chief Executive Officer Pursuant to 17 CFR 240.13a-14, promulgated under the Sarbanes-Oxley Act of 2002.
	31.2	Certification by Chief Financial Officer Pursuant to 17 CFR 240.13a-14, promulgated under the Sarbanes-Oxley Act of 2002.
	32.1	Certification by Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted, Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

26

(b)	Reports on Form 8-K
	On August 13, 2004, Atrium Companies, Inc. filed a Report on Form 8-K, which furnished information under Item 7 - Financial Statements and Exhibits and Item 12 - Results of Operations and Financial Condition for its press release announcing its financial results for the second quarter ended June 30, 2004 and transcript of the conference call to discuss those financial results.
	On August 16, 2004, Atrium Companies, Inc. filed a Report on Form 8-K/A to amend the Report on Form 8-K dated June 1, 2004, furnishing information under Item 2 - Acquisition or Disposition of Assets and Item 7 - Financial Statements to include the financial statements and pro forma financial information related to the acquisition of the assets of Robico Shutters, Inc. and Expert Installation Service, Inc.
	On September 7, 2004, Atrium Companies, Inc. filed a Report on Form 8-K, which furnished information under Item 2.01 - Completion of Acquisition or Disposition of Assets and Item 9.01 - Financial Statements and Exhibits to announce its acquisition of the assets of Kinco, Ltd.
	On October 18, 2004, Atrium Companies, Inc. filed a Report on Form 8-K/A to amend the Report on Form 8-K dated September 1, 2004, furnishing information under Item 2.01 - Completion of Acquisition or Disposition of Assets and Item 9.01 - Financial Statements and Exhibits to include the financial statements and pro forma financial information related to the acquisition of the assets of Kinco, Ltd.
	On October 18, 2004, Atrium Companies, Inc. filed a Report on Form 8-K, which furnished information under Item 5.02 - Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers to announce a change in membership of its Board of Directors.
	On October 22, 2004, Atrium Companies, Inc. filed a Report on Form 8-K, which furnished information under Item 4.01 - Changes in Registrant’s Certifying Accountant and Item 9.01 - Financial Statements and Exhibits to announce a change in certifying accountants and furnished the outgoing accountants’ letter regarding agreement with the statements made in that Form 8-K.
	On November 10, 2004, Atrium Companies, Inc. filed a Report on Form 8-K, which furnished information under Item 2.02 - Results of Operations and Financial Condition and Item 9.01 - Financial Statements and Exhibits for its press release announcing its financial results for the third quarter ended September 30, 2004.

27

SIGNATURES

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

	ATRIUM COMPANIES, INC.
	(Registrant)
Date: November 15, 2004	By:	/s/ Jeff L. Hull
		Jeff L. Hull
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)
Date: November 15, 2004	By:	/s/ Eric W. Long
		Eric W. Long
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

28

ATRIUM COMPANIES, INC.

EXHIBIT INDEX

ExhibitNumber
31.1	Certification by Chief Executive Officer Pursuant to 17 CFR 240.13a-14, promulgated under the Sarbanes-Oxley Act of 2002.
31.2	Certification by Chief Financial Officer Pursuant to 17 CFR 240.13a-14, promulgated under the Sarbanes-Oxley Act of 2002.
32.1	Certification by Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted, Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.