<Page>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<Table>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
/ / 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
</Table>
ATRIUM COMPANIES, INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 75-2642488
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</Table>
1341 W. MOCKINGBIRD LANE, SUITE 1200W, DALLAS, TEXAS 75247, (214) 630-5757
(Address of principal executive offices, including zip code and telephone
number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
ATRIUM COMPANIES, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2001
INDEX
<Table>
<Caption>
PAGE
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of June 30, 2001 and December
31, 2000.................................................. 3
Consolidated Statements of Operations for the Three Months
Ended June 30, 2001 and 2000.............................. 4
Consolidated Statements of Operations for the Six Months
Ended June 30, 2001 and 2000.............................. 5
Consolidated Statement of Stockholder's Equity for the Six
Months Ended June 30, 2001................................ 6
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2001 and 2000.............................. 7
Notes to Consolidated Financial Statements.................. 8-22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23-26
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 27-28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 29
Items 2, 3, 4 and 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K............................ 29
Signatures.......................................................................... 30
Exhibit Index....................................................................... 29
</Table>
2
<Page>
ATRIUM COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 2,437 $ 4,646
Accounts receivable, net................................ 64,614 51,239
Inventories............................................. 46,197 45,955
Prepaid expenses and other current assets............... 3,243 2,958
Deferred tax asset...................................... 1,083 2,000
-------- --------
Total current assets.................................. 117,574 106,798
PROPERTY, PLANT AND EQUIPMENT, net.......................... 58,550 54,640
GOODWILL, net............................................... 350,847 356,674
DEFERRED FINANCING COSTS, net............................... 15,666 16,644
OTHER ASSETS................................................ 8,657 7,579
-------- --------
Total assets.......................................... $551,294 $542,335
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable........................ $ 6,072 $ 6,211
Accounts payable........................................ 38,113 28,482
Accrued liabilities..................................... 27,626 33,104
-------- --------
Total current liabilities............................. 71,811 67,797
-------- --------
LONG-TERM LIABILITIES:
Notes payable........................................... 347,734 349,137
Deferred tax liability.................................. 1,083 2,000
Other long-term liabilities............................. 985 1,325
Swaps contract liability................................ 5,425 --
-------- --------
Total long-term liabilities........................... 355,227 352,462
-------- --------
Total liabilities..................................... 427,038 420,259
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock $.01 par value, 3,000 shares authorized,
100 shares issued and outstanding..................... -- --
Paid-in capital......................................... 204,909 196,004
Retained earnings (accumulated deficit)................. (75,392) (73,928)
Accumulated other comprehensive income (loss)........... (5,261) --
-------- --------
Total stockholder's equity............................ 124,256 122,076
-------- --------
Total liabilities and stockholder's equity.......... $551,294 $542,335
======== ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<Page>
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
2001 2000
-------- --------
NET SALES................................................... $143,810 $136,291
COST OF GOODS SOLD.......................................... 97,726 103,472
-------- --------
Gross profit............................................ 46,084 32,819
-------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses
(excluding stock compensation and amortization expense)... 29,459 32,697
Stock compensation expense.................................. 568 --
Amortization expense........................................ 3,598 2,262
-------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES...... 33,625 34,959
Special charges............................................. 139 25,584
-------- --------
33,764 60,543
-------- --------
Income (loss) from operations........................... 12,320 (27,724)
INTEREST EXPENSE............................................ 9,503 8,972
OTHER INCOME (EXPENSE), net................................. (78) 601
-------- --------
Income (loss) before income taxes....................... 2,739 (36,095)
PROVISION (BENEFIT) FOR INCOME TAXES........................ 296 (7,214)
-------- --------
NET INCOME (LOSS)........................................... $ 2,443 $(28,881)
======== ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<Page>
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
2001 2000
-------- --------
NET SALES................................................... $256,112 $270,074
COST OF GOODS SOLD.......................................... 173,800 200,177
-------- --------
Gross profit.......................................... 82,312 69,897
-------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses
(excluding stock compensation and amortization expense)... 55,839 63,785
Stock compensation expense.................................. 713 --
Amortization expense........................................ 7,133 4,609
-------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES...... 63,685 68,394
Special charges............................................. 139 25,584
-------- --------
63,824 93,978
-------- --------
Income (loss) from operations......................... 18,488 (24,081)
INTEREST EXPENSE............................................ 19,508 17,729
OTHER INCOME, net........................................... 66 833
-------- --------
Income (loss) before income taxes..................... (954) (40,977)
PROVISION (BENEFIT) FOR INCOME TAXES........................ 510 (8,481)
-------- --------
NET INCOME (LOSS)........................................... $ (1,464) $(32,496)
======== ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<Page>
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENT OF
STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
RETAINED ACCUMULATED
COMMON STOCK EARNINGS OTHER TOTAL
--------------------- PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT) INCOME (LOSS) EQUITY
-------- ---------- -------- ------------ ------------- -------------
Balance, December 31, 2000................ 100 $ -- $196,004 $(73,928) $ -- $122,076
--- ---------- -------- -------- ------- --------
Comprehensive income (loss):
Net loss.............................. -- -- -- (1,464) -- (1,464)
Cumulative effect of change in
accounting principle, net of tax of
$0 (adoption of SFAS 133--see note
2).................................. -- -- -- -- (2,319) (2,319)
Net fair market value adjustment of
derivative instruments, net of tax
of $0............................... -- -- -- -- (2,778) (2,778)
Accretion of deferred gain on
terminated interest rate collars.... -- -- -- -- (164) (164)
--- ---------- -------- -------- ------- --------
Comprehensive income (loss)........... -- -- -- (1,464) (5,261) (6,725)
Net contribution from Atrium
Corporation............................. -- -- 8,930 -- -- 8,930
Stock option compensation............... -- -- (25) -- -- (25)
--- ---------- -------- -------- ------- --------
Balance, June 30, 2001.................... 100 $ -- $204,909 $(75,392) $(5,261) $124,256
=== ========== ======== ======== ======= ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<Page>
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (1,464) $(32,496)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 11,861 7,806
Amortization of deferred financing costs................ 1,274 1,125
Accretion of discount................................... 89 81
Accretion of gain from interest rate collars............ (164) (164)
Amortization of gain from sale/leaseback of building.... (3) --
Gain on sales of assets................................. (11) (251)
Gain on sale of equity securities....................... -- (507)
Write-down of assets.................................... -- 33,522
Stock compensation expense.............................. (25) --
Provision for bad debts................................. 444 439
Deferred tax provision (benefit)........................ -- (9,214)
Changes in assets and liabilities:
Accounts receivable................................... (13,818) (3,421)
Inventories........................................... (241) (12,142)
Prepaid expenses and other current assets............. (336) 4,135
Accounts payable...................................... 5,483 6,316
Accrued liabilities................................... (5,488) (4,457)
-------- --------
Net cash used in operating activities............... (2,399) (9,228)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (8,669) (4,318)
Proceeds from sales of assets............................. 42 1,876
Proceeds from sale of equity securities................... -- 620
Increase in other assets.................................. (2,384) (2,558)
-------- --------
Net cash used in investing activities............... (11,011) (4,380)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facility............ 1,500 10,230
Scheduled principal payments on term loans................ (2,980) (1,000)
Contribution from Atrium Corporation, net................. 8,930 327
Payments of other notes payable........................... (152) (161)
Increase in checks drawn in excess of book balances....... 4,149 6,609
Capitalized deferred financing costs...................... (246) (428)
-------- --------
Net cash provided by financing activities........... 11,201 15,577
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (2,209) 1,969
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 4,646 1,294
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 2,437 $ 3,263
======== ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<Page>
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION:
The unaudited consolidated financial statements of Atrium Companies, Inc.
(the "Company") for the three months and six months ended June 30, 2001 and
2000, and financial position as of June 30, 2001 and December 31, 2000 have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
These consolidated financial statements and footnotes should be read in
conjunction with the Company's audited financial statements for the fiscal year
ended December 31, 2000 included in the Company's Form 10-K as filed with the
Securities and Exchange Commission on April 2, 2001. 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.
NEW ACCOUNTING PRONOUNCEMENT
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of SFAS No. 125." SFAS No. 140 revised the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
June 30, 2001. This statement shall be applied prospectively, except as provided
in paragraphs 20, 21, 23 and 24. Earlier or retroactive application of this
statement is not permitted. The Company will comply with the provisions of SFAS
No. 140 in the third quarter upon consummation of the asset securitization
transaction discussed in Note 8.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard SFAS No. 141, "Business Combination," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all
business combinations initiated after June 30, 2001 be accounted for using the
purchase method. Additionally, SFAS No. 141 establishes specific criteria for
the recognition of intangible assets separately from goodwill. SFAS No. 142
primarily addresses the accounting for goodwill and intangible assets subsequent
to their acquisition and is effective for the Company on January 1, 2002. The
most significant changes made by SFAS No. 142 require that goodwill and
indefinite lived intangible assets no longer be amortized and be tested for
impairment at least on an annual basis. Additionally, the amortization period of
intangible assets with finite lives will no longer be limited to forty years.
The Company is currently assessing the impact of SFAS No. 141 and No. 142
and has not yet determined the effects these statements will have on its
consolidated financial position or results of operations.
8
<Page>
1. BASIS OF PRESENTATION: (CONTINUED)
PRO FORMA RESULTS
The statement of operations for 2000 only includes the operations of certain
acquisitions and divestitures from the date they were acquired or divested by
the Company. The Ellison Company, Inc.'s Windows and Doors Division and Ellison
Extrusion Systems, Inc. (collectively "Ellison") are included since their date
of acquisition, October 25, 2000, and the Wing Industries, Inc. ("Wing") and
Atrium Wood Patio Door ("Wood") divestitures are excluded since their
dispositions on August 25, 2000 and August 30, 2000, respectively.
The following unaudited pro forma information presents consolidated
operating results as though the acquisition of Ellison and the divestitures of
the Wing and Wood divisions had occurred at the beginning of the periods
presented. For the three and six month periods ended June 30, 2001, there is no
difference between the actual and pro forma information because the acquisitions
have been included in operations for the full period and the divestitures have
been excluded from operations for the full period.
<Table>
<Caption>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2001 JUNE 30, 2000
------------- --------------------
ACTUAL ACTUAL PRO FORMA
------------- -------- ---------
NET SALES................................................... $256,112 $270,074 $240,797
COST OF GOODS SOLD.......................................... 173,800 200,177 158,243
-------- -------- --------
Gross profit............................................ 82,312 69,897 82,554
-------- -------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative Expenses
(excluding stock compensation and amortization expense)... 55,839 63,785 54,364
Stock compensation expense.................................. 713 -- --
Amortization expense........................................ 7,133 4,609 7,133
-------- -------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES...... 63,685 68,394 61,497
Special charges............................................. 139 25,584 --
-------- -------- --------
63,824 93,978 61,497
-------- -------- --------
Income (loss) from operations........................... 18,488 (24,081) 21,057
INTEREST EXPENSE............................................ 19,508 17,729 19,508
OTHER INCOME, net........................................... 66 833 678
-------- -------- --------
Income (loss) before income taxes....................... (954) (40,977) 2,227
PROVISION (BENEFIT) FOR INCOME TAXES........................ 510 (8,481) (7,203)
-------- -------- --------
NET INCOME (LOSS)........................................... $ (1,464) $(32,496) $ 9,430
======== ======== ========
Other Information:
Depreciation expense........................................ $ 4,728 $ 3,197 $ 3,821
======== ======== ========
Ellison corporate service charge............................ $ -- $ -- $ 875
======== ======== ========
</Table>
9
<Page>
1. BASIS OF PRESENTATION: (CONTINUED)
<Table>
<Caption>
THREE
MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2001 JUNE 30, 2000
-------------- --------------------
ACTUAL ACTUAL PRO FORMA
-------------- -------- ---------
NET SALES................................................... $143,810 $136,291 $131,051
COST OF GOODS SOLD.......................................... 97,726 103,472 84,820
-------- -------- --------
Gross profit............................................ 46,084 32,819 46,231
-------- -------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses
(excluding stock compensation and amortization expense)... 29,459 32,697 27,322
Stock compensation expense.................................. 568 -- --
Amortization expense........................................ 3,598 2,262 3,598
-------- -------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES...... 33,625 34,959 30,920
Special charges............................................. 139 25,584 --
-------- -------- --------
33,764 60,543 30,920
-------- -------- --------
Income from operations.................................. 12,320 (27,724) 15,311
INTEREST EXPENSE............................................ 9,503 8,972 9,503
OTHER INCOME, net........................................... (78) 601 496
-------- -------- --------
Income (loss) before income taxes....................... 2,739 (36,095) 6,304
PROVISION (BENEFIT) FOR INCOME TAXES........................ 296 (7,214) (5,850)
-------- -------- --------
NET INCOME (LOSS)........................................... $ 2,443 $(28,881) $ 12,154
======== ======== ========
Other Information:
Depreciation expense........................................ $ 2,476 $ 1,611 $ 1,932
======== ======== ========
Ellison corporate service charge............................ $ -- $ -- $ 536
======== ======== ========
</Table>
2. ADOPTION OF SFAS NO. 133--ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES:
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and the corresponding amendments on January 1, 2001. In
accordance with the transition provisions of SFAS 133, the Company recorded a
cumulative-effect adjustment as of January 1, 2001 of $2,319 to other
comprehensive income. This adjustment represents the current fair-value of
hedging instruments related to interest rate swap agreements of $2,646 with an
offset of $327 related to the reclassification of deferred gains on previously
terminated interest rate collars. There is no income tax effect considering
there is a full valuation allowance against deferred tax assets.
At June 30, 2001, the fair-value of the hedging instruments is a liability
of $5,425 and is included in other comprehensive income and long-term
liabilities.
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments, but it expects all
counterparties to meet their obligations given their high credit ratings.
The Company, as part of its risk management program, is party to interest
rate swap agreements for the purpose of hedging its exposure to floating
interest rates on certain portions of its debt. As of June 30, 2001, the Company
had $141,900 of notional amount in outstanding interest rate swaps with
10
<Page>
2. ADOPTION OF SFAS NO. 133--ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES: (CONTINUED)
third parties. The maximum length of the interest rate swaps currently in place
as of June 30, 2001 is approximately 2 1/2 years.
All derivatives are recognized on the balance sheet at their fair-value. On
the date that the Company enters into a derivative contract, it designates the
derivative as a hedge of (a) a forecasted transaction or (b) the variability of
cash flows that are to be received or paid in connection with a recognized asset
or liability (a "cash flow" hedge). Changes in the fair-value of a derivative
that is highly effective as--and that is designated and qualifies as--a cash
flow hedge, to the extent that the hedge is effective, are recorded in other
comprehensive income, until earnings are affected by the variability of cash
flows of the hedged transaction (e.g., until periodic settlements of a
variable-rate asset or liability are recorded in earnings). Any hedge
ineffectiveness (which represents the amount by which the changes in the
fair-value of the derivative exceed the variability in the cash flows of the
forecasted transaction) is recorded in current-period earnings. As of June 30,
2001, all hedges outstanding were highly effective.
The Company formally documents all relationships between hedging instruments
and hedge items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair-value or cash flow hedges to
(1) specific assets and liabilities on the balance sheet or (2) specific firm
commitments or forecasted transactions. The Company also formally assesses (both
at the hedge's inception and on an ongoing basis) whether the derivatives that
are used in hedging transactions have been highly effective in offsetting
changes in the fair value or cash flows of hedged items and whether those
derivatives may be expected to remain highly effective in future periods. When
it is determined that a derivative is not (or has ceased to be) highly effective
as a hedge, the Company discontinues hedge accounting prospectively, as
discussed below.
The Company discontinues hedge accounting prospectively when (1) it
determines that the derivative is no longer effective in offsetting changes in
the fair-value or cash flows of a hedge item (including hedged items such as
firm commitments or forecasted transactions); (2) the derivative expires or is
sold, terminated, or exercised; (3) it is no longer probable that the forecasted
transaction will occur; or (4) management determines that designating the
derivative as a hedging instrument is no longer appropriate.
When the Company discontinues hedge accounting because it is no longer
probable that the forecasted transaction will occur in the originally expected
period, the gain or loss on the derivative remaining in accumulated other
comprehensive income is reclassified into earnings. In all situations in which
hedge accounting is discontinued and the derivative remains outstanding, the
Company will carry the derivative at its fair-value on the balance sheet,
recognizing changes in the fair-value in current-period earnings.
11
<Page>
3. 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:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
Raw materials.......................................... $32,170 $31,785
Work-in-process........................................ 1,233 671
Finished goods......................................... 13,336 14,312
------- -------
46,739 46,768
LIFO reserve........................................... (542) (813)
------- -------
$46,197 $45,955
======= =======
</Table>
4. NOTES PAYABLE:
Notes payable consisted of the following:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
Revolving credit facility............................. $ 20,500 $ 19,000
Term loan A........................................... 11,210 13,070
Term loan B........................................... 69,160 69,720
Term loan C........................................... 80,090 80,650
Senior subordinated notes............................. 175,000 175,000
Other................................................. 127 279
-------- --------
356,087 357,719
Less:
Unamortized debt discount............................. (2,281) (2,371)
Current portion of notes payable...................... (6,072) (6,211)
-------- --------
Long-term debt...................................... $347,734 $349,137
======== ========
</Table>
The Credit Agreement requires the Company to meet certain financial tests
pertaining to, interest coverage, fixed charge coverage and leverage. On
May 15, 2001 and July 20, 2001, the Company amended its Credit Agreement with
Amendments No. 1 and No. 2 (collectively "the Amendments"). The Amendments allow
for certain changes to the Company's financial covenants and permit the Company
to enter into certain transactions including an accounts receivable
securitization and the sale of specific assets. As of June 30, 2001, the Company
was in compliance with all related covenants.
5. CONTINGENCIES:
The Company is party to various claims, legal actions and complaints arising
in the ordinary course of business. In the opinion of management, all such
matters are without merit or are of such kind, or involve such amounts, that an
unfavorable disposition would not have a material effect on the consolidated
financial position, results of operations or liquidity of the Company.
In 1995, various Dallas-based factory employees became members of the
Amalgamated Clothing and Textile Workers Union. On May 25, 2001, the Company
entered into a collective bargaining agreement which expires in May 2004. In
addition, in connection with its Woodville, Texas operations,
12
<Page>
5. CONTINGENCIES: (CONTINUED)
the Company is party to a collective bargaining arrangement due to expire in
September 2001. The Company expects to renew this arrangement for a period of
three years on similar terms.
The Company is involved in various stages of investigation and cleanup
related to environmental protection matters, some of which relate to waste
disposal sites. The potential costs related to such matters and the possible
impact thereof on future operations are uncertain due in part to: the
uncertainty as to the extent of pollution; the complexity of Government laws and
regulations and their interpretations; the varying costs and effectiveness of
alternative cleanup technologies and methods; the uncertain level of insurance
or other types of recovery; and the questionable level of the Company's
involvement. The Company was named in 1988 as a potentially responsible party
("PRP") in two superfund sites pursuant to the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended (the Chemical
Recycling, Inc. site in Wylie, Texas, and the Diaz Refinery site in Little Rock,
Arkansas). The Company believes that based on the information currently
available, including the substantial number of other PRP's and relatively small
share allocated to it at such sites, its liability, if any, associated with
either of these sites will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
Atrium previously owned one parcel of real estate that requires future costs
related to environmental clean-up. The estimated costs of clean-up have been
reviewed by third-party sources and are expected not to exceed $150. The
previous owner of the property has established an escrow of $400 to remediate
the associated costs. This property was sold by Atrium in December 1999. The
Company has established a letter of credit of $250 to cover any costs of
remediation exceeding the previous owner's escrow. The Company believes the
existing escrow amount is adequate to cover costs associated with this clean-up.
No additional liabilities are believed to exist in regards to the Company's
remaining operations.
6. SUBSIDIARY GUARANTORS:
The term Wing collectively refers to Wing Industries and its direct parent,
Wing Industries Holdings, Inc. The term Darby collectively refers to R.G. Darby
Company, R.G. Darby Company-South, Total Trim, Inc. and Total Trim-South. The
term Heat refers to Heat, Inc., H.I.G. Vinyl, Inc., Thermal Industries, Inc. and
Best Built, Inc.
In connection with the Company's Senior Subordinated Notes due 2009, the
Company's payment obligations under the Notes are fully and unconditionally
guaranteed, jointly and severally (collectively, the "Subsidiary Guarantees") on
a senior subordinated basis by its wholly-owned subsidiaries: ADW-Northeast,
ADW-Arizona, ADW-West Coast, ADW-New England, ADW-New York, Heat, Champagne,
Wing, Darby and VES, Inc, (doing business as Ellison Extrusion Systems, Inc.).
The Company has no non-guarantor direct or indirect subsidiaries. The operations
related to ADW-Northeast, ADW-Arizona, ADW-West Coast, ADW-New England, ADW-New
York, Heat, Champagne, Wing and Darby are presented for all periods covered. The
operations of Ellison Extrusion Systems, Inc. are included since their date of
acquisition on October 25, 2000. The balance sheet information includes all
subsidiaries as of December 31, 2000 and June 30, 2001. No single Subsidiary
Guarantor has any significant legal restrictions on the ability of investors or
creditors to obtain access to its assets in event of default on the Subsidiary
Guarantee other than subject to subordination to senior indebtedness.
The Notes and the Subsidiary Guarantees are subordinated to all existing and
future Senior Indebtedness of the Company. The indenture governing the Notes
contains limitations on the amount of additional indebtedness (including Senior
Indebtedness) which the Company may incur.
13
<Page>
6. SUBSIDIARY GUARANTORS: (CONTINUED)
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2001
(dollars in thousands, except share amounts)
<Table>
<Caption>
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $(33,071) $ 23,930 $11,578 $ 2,437
Accounts receivable, net...................... 22,502 42,112 -- 64,614
Inventories................................... 19,303 27,595 (701) 46,197
Prepaid expenses and other current assets..... 1,371 1,516 356 3,243
Deferred tax asset............................ -- 1,083 -- 1,083
-------- -------- ------- --------
Total current assets.......................... 10,105 96,236 11,233 117,574
PROPERTY, PLANT AND EQUIPMENT, net.............. 23,167 35,386 (3) 58,550
GOODWILL, net................................... 170,429 180,418 -- 350,847
DEFERRED FINANCING COSTS, net................... -- 15,666 -- 15,666
OTHER ASSETS, net............................... 1,311 7,346 -- 8,657
-------- -------- ------- --------
Total assets.................................. $205,012 $335,052 $11,230 $551,294
======== ======== ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable.............. $ 2,562 $ 3,510 $ -- $ 6,072
Accounts payable.............................. 8,801 17,734 11,578 38,113
Accrued liabilities........................... 10,139 17,131 356 27,626
-------- -------- ------- --------
Total current liabilities..................... 21,502 38,375 11,934 71,811
-------- -------- ------- --------
LONG-TERM LIABILITIES:
Notes payable................................. 146,744 200,990 -- 347,734
Deferred tax liability........................ -- 1,083 -- 1,083
Other long-term liabilities................... -- 985 -- 985
Swaps contract liability...................... -- 5,425 -- 5,425
-------- -------- ------- --------
Total long-term liabilities................... 146,744 208,483 -- 355,227
-------- -------- ------- --------
Total liabilities............................. 168,246 246,858 11,934 427,038
-------- -------- ------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock.................................. -- -- -- --
Paid-in capital............................... 36,014 168,895 -- 204,909
Retained earnings (accumulated deficit)....... 752 (75,440) (704) (75,392)
Accumulated other comprehensive loss.......... -- (5,261) -- (5,261)
-------- -------- ------- --------
Total stockholder's equity.................... 36,766 88,194 (704) 124,256
-------- -------- ------- --------
Total liabilities and stockholder's
equity...................................... $205,012 $335,052 $11,230 $551,294
======== ======== ======= ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
14
<Page>
6. SUBSIDIARY GUARANTORS: (CONTINUED)
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
(dollars in thousands, except share amounts)
<Table>
<Caption>
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $(34,019) $ 31,236 $ 7,429 $ 4,646
Accounts receivable, net...................... 21,652 29,587 -- 51,239
Inventories................................... 19,401 27,570 (1,016) 45,955
Prepaid expenses and other current assets..... 1,611 1,347 -- 2,928
Deferred tax asset............................ -- 2,000 -- 2,000
-------- -------- ------- --------
Total current assets.......................... 8,645 91,740 6,413 106,798
PROPERTY, PLANT AND EQUIPMENT, net.............. 23,983 30,660 (3) 54,640
GOODWILL, net................................... 173,198 183,476 -- 356,674
DEFERRED FINANCING COSTS, net................... -- 16,644 -- 16,644
OTHER ASSETS, net............................... 1,484 6,095 -- 7,579
-------- -------- ------- --------
Total assets.................................. $207,310 $328,615 $ 6,410 $542,335
======== ======== ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable.............. $ 2,621 $ 3,590 $ -- $ 6,211
Accounts payable.............................. 6,714 14,339 7,429 28,482
Accrued liabilities........................... 12,601 20,503 -- 33,104
-------- -------- ------- --------
Total current liabilities..................... 21,936 38,432 7,429 67,797
-------- -------- ------- --------
LONG-TERM LIABILITIES:
Notes payable................................. 147,308 201,829 -- 349,137
Deferred tax liability........................ -- 2,000 -- 2,000
Other long-term liabilities................... -- 1,325 -- 1,325
-------- -------- ------- --------
Total long-term liabilities................... 147,308 205,154 -- 352,462
-------- -------- ------- --------
Total liabilities............................. 169,244 243,586 7,429 420,259
-------- -------- ------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock.................................. -- -- -- --
Paid-in capital............................... 36,013 159,991 -- 196,004
Retained earnings (accumulated deficit)....... 2,053 (74,962) (1,019) (73,928)
-------- -------- ------- --------
Total stockholder's equity.................... 38,066 85,029 (1,019) 122,076
-------- -------- ------- --------
Total liabilities and stockholder's
equity...................................... $207,310 $328,615 $ 6,410 $542,335
======== ======== ======= ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
15
<Page>
6. SUBSIDIARY GUARANTORS: (CONTINUED)
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001
(dollars in thousands)
<Table>
<Caption>
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
NET SALES........................................ $54,810 $97,840 $(8,840) $143,810
COST OF GOODS SOLD............................... 34,452 72,114 (8,840) 97,726
------- ------- ------- --------
Gross profit..................................... 20,358 25,726 -- 46,084
------- ------- ------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative
expenses (excluding stock compensation and
amortization expense).......................... 13,051 16,408 -- 29,459
Stock compensation expense..................... -- 568 -- 568
Amortization expense........................... 1,669 1,929 -- 3,598
------- ------- ------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE
EXPENSES....................................... 14,720 18,905 -- 33,625
Special charges................................ -- 139 -- 139
------- ------- ------- --------
14,720 19,044 -- 33,764
------- ------- ------- --------
Income from operations....................... 5,638 6,682 -- 12,320
INTEREST EXPENSE................................. 3,932 5,571 -- 9,503
OTHER INCOME, net................................ 20 (98) -- (78)
------- ------- ------- --------
Income (loss) before income taxes and
extraordinary charge........................... 1,726 1,013 -- 2,739
PROVISION (BENEFIT) FOR INCOME TAXES............. 556 (260) -- 296
------- ------- ------- --------
NET INCOME (LOSS)................................ $ 1,170 $ 1,273 $ -- $ 2,443
======= ======= ======= ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<Page>
6. SUBSIDIARY GUARANTORS: (CONTINUED)
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(dollars in thousands)
<Table>
<Caption>
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
NET SALES....................................... $99,047 $172,684 $(15,619) $256,112
COST OF GOODS SOLD.............................. 63,584 126,203 (15,987) 173,800
------- -------- -------- --------
Gross profit.................................... 35,463 46,481 368 82,312
------- -------- -------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative
expenses (excluding stock compensation and
amortization expense)......................... 25,118 30,801 (80) 55,839
Stock compensation expense.................... -- 713 -- 713
Amortization expense.......................... 3,318 3,815 -- 7,133
------- -------- -------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE
EXPENSES...................................... 28,436 35,329 (80) 63,685
Special charges............................... -- 139 -- 139
------- -------- -------- --------
28,436 35,468 (80) 63,824
------- -------- -------- --------
Income from operations...................... 7,027 11,013 448 18,488
INTEREST EXPENSE................................ 8,232 11,276 -- 19,508
OTHER INCOME, net............................... 36 163 (133) 66
------- -------- -------- --------
Income (loss) before income taxes and
extraordinary charge.......................... (1,169) (100) 315 (954)
PROVISION (BENEFIT) FOR INCOME TAXES............ 180 330 -- 510
------- -------- -------- --------
NET INCOME (LOSS)............................... $(1,349) $ (430) $ 315 $ (1,464)
======= ======== ======== ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<Page>
6. SUBSIDIARY GUARANTORS: (CONTINUED)
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000
(dollars in thousands)
<Table>
<Caption>
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
NET SALES........................................ $ 86,498 $60,116 $(10,323) $136,291
COST OF GOODS SOLD............................... 68,256 45,594 (10,378) 103,472
-------- ------- -------- --------
Gross profit..................................... 18,242 14,522 55 32,819
-------- ------- -------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative
expenses (excluding amortization expense)...... 23,664 9,113 (80) 32,697
Amortization expense........................... 1,257 1,005 -- 2,262
-------- ------- -------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE
EXPENSES....................................... 24,921 10,118 (80) 34,959
Special charges................................ 24,320 1,264 -- 25,584
-------- ------- -------- --------
49,241 11,382 (80) 60,543
-------- ------- -------- --------
Income (loss) from operations................ (30,999) 3,140 135 (27,724)
INTEREST EXPENSE................................. 5,694 3,278 -- 8,972
OTHER INCOME, net................................ 120 616 (135) 601
-------- ------- -------- --------
Income (loss) before income taxes and
extraordinary charge........................... (36,573) 478 -- (36,095)
PROVISION (BENEFIT) FOR INCOME TAXES............. (7,592) 378 -- (7,214)
-------- ------- -------- --------
NET INCOME (LOSS)................................ $(28,981) $ 100 $ -- $(28,881)
======== ======= ======== ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<Page>
6. SUBSIDIARY GUARANTORS: (CONTINUED)
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(dollars in thousands)
<Table>
<Caption>
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
NET SALES....................................... $174,335 $116,019 $(20,280) $270,074
COST OF GOODS SOLD.............................. 135,370 85,195 (20,388) 200,177
-------- -------- -------- --------
Gross profit.................................... 38,965 30,824 108 69,897
-------- -------- -------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative
expenses (excluding amortization expense)..... 45,268 18,677 (160) 63,785
Amortization expense.......................... 2,579 2,030 -- 4,609
-------- -------- -------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE
EXPENSES...................................... 47,847 20,707 (160) 68,394
Special charges............................... 24,320 1,264 -- 25,584
-------- -------- -------- --------
72,167 21,971 (160) 93,978
-------- -------- -------- --------
Income (loss) from operations................... (33,202) 8,853 268 (24,081)
INTEREST EXPENSE................................ 11,444 6,285 -- 17,729
OTHER INCOME, net............................... 145 956 (268) 833
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary charge.......................... (44,501) 3,524 -- (40,977)
PROVISION (BENEFIT) FOR INCOME TAXES............ (9,648) 1,167 -- (8,481)
-------- -------- -------- --------
NET INCOME (LOSS)............................... $(34,853) $ 2,357 $ -- $(32,496)
======== ======== ======== ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<Page>
6. SUBSIDIARY GUARANTORS: (CONTINUED)
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES............. $ 2,460 $(9,008) $ 4,149 $ (2,399)
-------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..... (1,512) (7,157) -- (8,669)
Proceeds from sales of assets.................. -- 42 -- 42
Other assets................................... -- (2,384) -- (2,384)
-------- ------- ------- --------
Net cash used in investing activities........ (1,512) (9,499) -- (11,011)
-------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit
facility....................................... -- 1,500 -- 1,500
Scheduled principal payments on term notes..... -- (2,980) -- (2,980)
Contributions from Atrium Corp, net............ -- 8,930 -- 8,930
Payment of other notes payable................. -- (152) -- (152)
Checks drawn in excess of book balances........ -- 4,149 -- 4,149
Capitalized deferred financing costs........... -- (246) -- (246)
-------- ------- ------- --------
Net cash provided by financing activities.... -- 11,201 -- 11,201
-------- ------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 948 (7,306) 4,149 (2,209)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD... (34,019) 31,236 7,429 4,646
-------- ------- ------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD......... $(33,071) $23,930 $11,578 $ 2,437
======== ======= ======= ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<Page>
6. SUBSIDIARY GUARANTORS: (CONTINUED)
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES............. $(22,497) $ 6,695 $ 6,574 $(9,228)
-------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..... (1,795) (2,523) -- (4,318)
Proceeds from sales of assets.................. -- 1,876 -- 1,876
Proceeds from sale of equity securities........ -- 620 -- 620
Other assets................................... -- (2,558) -- (2,558)
-------- ------- ------- -------
Net cash used in investing activities........ (1,795) (2,585) -- (4,380)
-------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of other notes payable................. -- (161) -- (161)
Net borrowings under revolving credit
facility....................................... -- 10,230 -- 10,230
Scheduled principal payments on term notes..... -- (1,000) -- (1,000)
Contributions from Atrium Corp, net............ -- 327 -- 327
Capitalized deferred financing costs........... -- (428) -- (428)
Checks drawn in excess of bank balances........ -- 6,609 -- 6,609
-------- ------- ------- -------
Net cash provided by financing activities.... -- 15,577 -- 15,577
-------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (24,292) 19,687 6,574 1,969
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD... (23,144) 19,956 4,482 1,294
-------- ------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD......... $(47,436) $39,643 $11,056 $ 3,263
======== ======= ======= =======
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<Page>
7. CONTRIBUTION FROM ATRIUM CORPORATION:
During May of 2001, the Company received a capital contribution of $10,050
from Atrium Corporation, which represented the proceeds from the issuance of
common stock. This amount was contributed to the Company net of transaction
expenses of $1,120 incurred in connection with the registration of the Atrium
Corporation Senior Pay-In-Kind Notes.
8. SUBSEQUENT EVENT:
On July 31, 2001, the Company and certain of its subsidiaries ("the
Originators") entered into an agreement whereby each Originator agreed to sell
on a non-recourse basis, and on an ongoing basis, a pool of receivables
comprising their entire trade receivable portfolio to a wholly owned bankruptcy-
remote special purpose funding subsidiary ("Atrium Funding Corporation" or
"AFC") of the Company. AFC is a distinct legal entity that engages in no trade
or business in order to make remote the possibility that it would enter
bankruptcy or other receivership and is consolidated for financial purposes. On
July 31, 2001, AFC entered into an agreement with Fairway Finance Corp. ("the
Securitization Company"), agented by BMO Nesbitt Burns, whereby AFC sold a pro
rata share of the trade receivable portfolio to the Securitization Company for
aggregate payments of up to $50,000. The receivables sold to the Securitization
Company are thus not reflected in the Company's consolidated balance sheet. The
Securitization Company is free to pledge or exchange its interest. Any
receivables not sold to the Securitization Company constitute the retained
interest in the receivables portfolio of AFC. On August 3, 2001, AFC sold a pro
rata share of the trade receivable portfolio for $33,000, leaving a retained
interest of $28,055. The amount the Company received from the sale was net of
transaction fees, which included placement fees and professional fees of
approximately $800.
The Company retains the servicing responsibilities for which it receives an
annual servicing fee of .5% of the securitized accounts receivables. The Company
recognizes no servicing asset or liability because the servicing fee represents
adequate compensation for the services performed.
22
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN FORWARD-LOOKING STATEMENTS
This 10-Q contains certain forward looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties relating to the Company that are based on
the beliefs of management. When used in this 10-Q, the words "anticipate",
"believe", "estimate", "expect", "intend", and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to the risks and uncertainties regarding the operations and the results
of operations of the Company as well as its customers and suppliers, including
as a result of the availability of consumer 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.
RESULTS OF OPERATIONS
The operations of the Company are cyclical in nature and generally result in
increases during the peak building season which coincides with the second and
third quarters of the year. Accordingly, results of operations for the second
quarter ended and the first six months ended June 30, 2001 are not necessarily
indicative of results expected for the full year.
The operations of Ellison are included since their date of acquisition,
October 25, 2000, and the Wing and Wood divestitures are excluded since their
dispositions on August 25, 2000 and August 30, 2000, respectively. The balance
sheet information includes all subsidiaries and divisions as of June 30, 2001
and December 31, 2000.
NET SALES. Net sales increased by $7,519 from $136,291 during the second
quarter of 2000 to $143,810 during the second quarter of 2001 and decreased
$13,962 from $270,074 during the first six months of 2000 to $256,112 during the
first six months of 2001. The increase during the second quarter was primarily
the result of the $38,013 in net sales from the acquisition of Ellison during
October 2000. The Company also experienced increases during the second quarter
from its aluminum and vinyl window operations (excluding the Ellison acquisition
in October 2000) of $1,336 and $3,045, respectively. The increases were offset
by $36,221 in net sales from the divestiture of the Company's Wing and Wood
operations during the third quarter of 2000. The decrease during the first six
months of 2001 was primarily the result of the loss of $82,251 in net sales from
the divestiture of the Company's Wing and Wood operations. The Company also
experienced decreases during the first six months of 2001 from its aluminum
window operations as a result of inclement weather in the first quarter. These
operations net sales decreased $2,857, or 2.7%, compared to the first six months
of 2000. The decreases were offset by $65,381 in net sales from the acquisition
of Ellison. The Company also experienced increases during the first six months
of 2001 from its vinyl window operations (excluding the Ellison acquisition in
October 2000) of $3,611, or 5.3%, compared to the first six months of 2000.
COST OF GOODS SOLD. Cost of goods sold improved from 75.9% of net sales
during the second quarter of 2000 to 68.0% of net sales during the second
quarter of 2001 and from 74.1% of net sales during the first six months of 2000
to 67.9% of net sales during the first six months of 2001. The improvement over
prior year is primarily attributable to the divestitures of Wing and Wood during
2000. During the second quarter of 2000, Wing and Wood had a cost of goods sold
as a percent of net sales of 101.5% and 166.6%, respectively. During the first
six months of 2000, Wing and Wood had a
23
<Page>
cost of goods sold as a percent of net sales of 91.0% and 126.8%, respectively.
These improvements were partially offset by increases at the aluminum and vinyl
divisions (excluding the Ellison acquisition in October 2000). The aluminum
division's cost of goods sold increased from 72.2% of net sales during the
second quarter of 2000 to 77.1% of net sales during the second quarter of 2001
and from 72.2% of net sales during the first six months of 2000 to 76.1% of net
sales during the first six months of 2001. The vinyl divisions cost of goods
sold increased from 61.1% of net sales during the second quarter of 2000 to
62.5% of net sales during the second quarter of 2001 and from 63.6% of net sales
during the first six months of 2000 to 64.0% of net sales during the first six
months of 2001. These increases were due to a number of factors including energy
surcharges on materials, higher insurance costs related to the workers'
compensation, moving expenses associated with plant consolidations, and lease
costs at new facilities. The LIFO reserve expense during the second quarter of
2000 was $371 and the LIFO reserve benefit was $118 during the second quarter of
2001. The LIFO reserve expense during the first six months of 2000 was $593 and
the LIFO reserve benefit was $271 during the first six months of 2001. Overall,
changes in the cost of goods sold as a percentage of net sales for one period as
compared to another period may reflect a number of factors, including changes in
the relative mix of products sold and, the effects of changes in sales prices,
material costs and changes in productivity levels.
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, delivery,
general and administrative expenses decreased $3,238 from $32,697 (24.0% of net
sales during the second quarter of 2000) to $29,459 (20.5% of net sales during
the second quarter of 2001) and decreased $7,946 from $63,785 (23.6% of net
sales during the first six months of 2000) to $55,839 (21.8% of net sales during
the first six months of 2001). The second quarter of 2000 included $11,222 and
$932 from the divested divisions of Wing and Wood, respectively. The second
quarter of 2001 included $6,868 from the acquisition of Ellison. The first six
months of 2000 included $20,662 and $1,663 from the divested divisions of Wing
and Wood, respectively. The first six months of 2001 included $12,852 from the
acquisition of Ellison. If the Wing and Wood divestitures and the Ellison
acquisition had both occurred on January 1, 2000, total selling, delivery,
general and administrative expenses would have improved from 20.9% of net sales
during the second quarter of 2000 to 20.4% of net sales during the second
quarter of 2001 and improved from 22.6% of net sales during the first six months
of 2000 to 21.7% of net sales during the first six months of 2001. If the Wing
and Wood divestitures and the Ellison acquisition had both occurred on
January 1, 2000, delivery expense would have remained the same at 6.0% for both
the first six months of 2000 and 2001 while improving from 5.8% during the
second quarter of 2000 to 5.6% during the second quarter of 2001. General and
administrative expenses improved from 7.1% during the second quarter of 2000 to
6.9% of net sales during the second quarter of 2001 and improved from 8.3% of
net sales during the first six months of 2000 to 7.4% of net sales during the
first six months of 2001. The company continues to gain operating leverage from
its sales growth and absorbs its acquisitions without further administrative
costs. Selling expenses remained flat at 7.9% for the second quarter and 8.3%
for the six months, primarily as a result of the variable nature of commissions.
AMORTIZATION EXPENSE. Amortization expense increased $1,336 from $2,262
during the second quarter of 2000 to $3,598 during the second quarter of 2001
and increased $2,524 from $4,609 during the first six months of 2000 to $7,133
during the first six months of 2001. The increase was largely due to the
increased amortization of goodwill recorded in connection with the acquisition
of Ellison during October 2000.
SPECIAL CHARGES. During the second quarter of 2001, the Company recorded a
one time charge of $139 relating to non-capitalizable legal fees incurred to
amend the Credit Facility. During the second quarter of 2000, the Company
recorded a one time charge of $25,584, of which $24,320 related to the write-off
of certain intangible assets and the write-down of certain assets related to
sale of Wing and $1,264 related to the write-down of certain assets at the Wood.
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INTEREST EXPENSE. Interest expense increased $531 from $8,972 during the
second quarter of 2000 to $9,503 during the second quarter of 2001 and increased
$1,779 from $17,729 during the first six months of 2000 to $19,508 during the
first six months of 2001. The increase in interest expense was due primarily to
the additional debt of $38,000, under the Credit Facility, in connection with
the acquisition of Ellison during October 2000. In addition, the increase in
interest expense includes the amortization of additional deferred financing
costs. The interest expense was partially offset from gains and distributions of
$190 during the second quarter of 2001 and $319 during the first six months of
2001 from interest rate collars.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations and availability under the Company's
Revolving Credit Facility are the Company's principal sources of liquidity.
During the first six months of 2001, cash was primarily used for increases in
working capital, capital expenditures and debt payments. Net cash used in
operating activities was $2,399 during the first six months of 2001 ($3,444
during the second quarter of 2001) compared to $9,228 during the first six
months of 2000 ($12,599 during the second quarter of 2000). The decrease in cash
used in operating activities is largely due to a reduction in investments in
inventory. Net cash used in investing activities during the first six months of
2001 was $11,011 (5,397 during the second quarter of 2001) compared to $4,380
during the first six months of 2000 ($1,181 during the second quarter of 2000).
The increase in cash used in investing activities was due primarily to capital
expenditures to increase plant capacity and automation. Cash provided by
financing activities during the first six months of 2001 was $11,201 ($7,753
during the second quarter of 2001) compared to $15,577 during the first six
months of 2000 ($13,379 during the second quarter of 2000). The decrease from
prior year was due to lower borrowings on the Company's credit facility, offset
by additional equity contributed to the Company.
OTHER CAPITAL RESOURCES
In connection with the recapitalization, the Company entered into a Credit
Agreement providing for a revolving facility in the amount of $30,000, which was
increased to $40,000 in June 1999. In connection with the acquisition of
Ellison, the Revolving Credit Facility was increased to $47,000, of which
$10,000 is available under a letter of credit sub-facility. The revolving
facility has a maturity date of June 30, 2004. At June 30, 2001, we had $21,507
of availability under the revolving facility, net of borrowings of $20,500 and
outstanding letters of credit totaling $4,993. As of August 14, 2001, the
Company had cash of $7,512 and $28,205 of availability under the Revolving
Credit Facility, net of borrowings of $17,500 and outstanding letters of credit
totaling $1,295.
CAPITAL EXPENDITURES
The Company had cash capital expenditures of $8,669 during the first six
months of 2001 ($3,900 during the second quarter of 2001) compared to $4,318
during the first six months of 2000 ($2,107 during the second quarter of 2000).
Capital expenditures during the first six months of 2001 were largely a result
of the Company's continued efforts to increase efficiency through automation at
its various divisions as well as to increase plant capacity at the Company's
Dallas-based aluminum and vinyl operations. The Company expects capital
expenditures, including capitalization of software implementation costs
(exclusive of acquisitions) in 2001 to be approximately $15,000, however, actual
capital requirements may change.
The ability of the Company to meet its debt service and working capital
obligations and capital expenditure requirements is dependant, however, upon the
future performance of the Company and its subsidiaries which, in turn, will be
subject to general economic conditions and to financial, business and other
factors, including factors beyond the Company's control.
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NEW ACCOUNTING PRONOUNCEMENT
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of SFAS No. 125." SFAS No. 140 revised the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
June 30, 2001. This statement shall be applied prospectively, except as provided
in paragraphs 20, 21, 23 and 24. Earlier or retroactive application of this
statement is not permitted. The Company will comply with the provisions of SFAS
No. 140 in the third quarter upon consummation of the asset securitization
transaction discussed in Note 8.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard SFAS No. 141, "Business Combination," and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires all
business combinations initiated after June 30, 2001 be accounted for using the
purchase method. Additionally, SFAS No. 141 establishes specific criteria for
the recognition of intangible assets separately from goodwill. SFAS No. 142
primarily addresses the accounting for goodwill and intangible assets subsequent
to their acquisition and is effective for the Company on January 1, 2002. The
most significant changes made by SFAS No. 142 require that goodwill and
indefinite lived intangible assets no longer be amortized and be tested for
impairment at least on an annual basis. Additionally, the amortization period of
intangible assets with finite lives will no longer be limited to forty years.
The Company is currently assessing the impact of SFAS No. 141 and No. 142
and has not yet determined the effects these statements will have on its
consolidated financial position or results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK
The Company is exposed to market risk from changes in interest rates and
commodity pricing. The Company uses derivative financial instruments on a
limited basis to hedge economic exposures including interest rate protection
agreements and forward commodity delivery agreements. The Company does not enter
into derivative financial instruments or other financial instruments for
speculative trading purposes.
On November 1, 2000, the Company entered into a $100,000 interest rate swap
agreement to limit the effect of changes in interest rates on long-term
borrowings. Under the agreement, the Company pays interest at a fixed rate of
6.66% on the notional amount and receives interest therein at the three-month
LIBOR on a quarterly basis. This swap expires in November 2003.
On December 8, 2000, the Company entered into a $40,000 interest rate swap
agreement to limit the effect of changes in interest rates on long-term
borrowings. Under the agreement, the Company pays interest at a fixed rate of
6.15% on the notional amount and receives interest therein at the three-month
LIBOR on a quarterly basis. This swap expires in December 2002.
ADOPTION OF SFAS NO. 133
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and the corresponding amendments on January 1, 2001. In
accordance with the transition provisions of SFAS 133, the Company recorded a
cumulative-effect adjustment as of January 1, 2001 of $2,319 to other
comprehensive income. This adjustment represents the current fair-value of
hedging instruments related to interest rate swap agreements of $2,646 with an
offset of $327 related to the reclassification of deferred gains on previously
terminated interest rate swaps. There is no income tax effect considering there
is a full valuation allowance against deferred tax assets.
At June 30, 2001, the fair-value of the hedging instruments is a liability
of $5,425 and is included in other comprehensive income and other long-term
liabilities. The Company expects that none of this liability will require
adjustment to expense within the next twelve months.
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments, but it expects all
counterparties to meet their obligations given their high credit ratings.
The Company, as part of its risk management program, is party to interest
rate swap agreements for the purpose of hedging its exposure to floating
interest rates on certain portions of its debt. As of June 30, 2001, the Company
had $141,900 of notional amount in outstanding interest rate swaps with third
parties. The maximum length of the interest rate swaps currently in place as of
June 30, 2001 is approximately 2 1/2 years.
All derivatives are recognized on the balance sheet at their fair-value. On
the date that the Company enters into a derivative contract, it designates the
derivative as a hedge of (a) a forecasted transaction or (b) the variability of
cash flows that are to be received or paid in connection with a recognized asset
or liability (a "cash flow" hedge). Changes in the fair-value of a derivative
that is highly effective as--and that is designated and qualifies as--a cash
flow hedge, to the extent that the hedge is effective, are recorded in other
comprehensive income, until earnings are affected by the variability of cash
flows of the hedged transaction (e.g., until periodic settlements of a
variable-rate asset or liability are recorded in earnings). Any hedge
ineffectiveness (which represents the amount by which the changes in the
fair-value of the derivative exceed the variability in the cash flows of the
forecasted transaction) is recorded in current-period earnings. As of June 30,
2001, all hedges outstanding were highly effective.
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The Company formally documents all relationships between hedging instruments
and hedge items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair-value or cash flow hedges to
(1) specific assets and liabilities on the balance sheet or (2) specific firm
commitments or forecasted transactions. The Company also formally assesses (both
at the hedge's inception and on an ongoing basis) whether the derivatives that
are used in hedging transactions have been highly effective in offsetting
changes in the fair value or cash flows of hedged items and whether those
derivatives may be expected to remain highly effective in future periods. When
it is determined that a derivative is not (or has ceased to be) highly effective
as a hedge, the Company discontinues hedge accounting prospectively, as
discussed below.
The Company discontinues hedge accounting prospectively when (1) it
determines that the derivative is no longer effective in offsetting changes in
the fair-value or cash flows of a hedge item (including hedged items such as
firm commitments or forecasted transactions); (2) the derivative expires or is
sold, terminated, or exercised; (3) it is no longer probable that the forecasted
transaction will occur; or (4) management determines that designating the
derivative as a hedging instrument is no longer appropriate.
When the Company discontinues hedge accounting because it is no longer
probable that the forecasted transaction will occur in the originally expected
period, the gain or loss on the derivative remaining in accumulated other
comprehensive income is reclassified into earnings. In all situations in which
hedge accounting is discontinued and the derivative remains outstanding, the
Company will carry the derivative at its fair-value on the balance sheet,
recognizing changes in the fair-value in current-period earnings.
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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
None
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<Table>
ATRIUM COMPANIES, INC.
(Registrant)
Date: August 14, 2001 By: /s/ JEFF L. HULL
-----------------------------------------
Jeff L. Hull
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
Date: August 14, 2001 By: /s/ ERIC W. LONG
-----------------------------------------
Eric W. Long
CHIEF FINANCIAL OFFICER, TREASURER AND
SECRETARY (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
</Table>
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