<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 September 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 SEPTEMBER 30, 2001
INDEX
<Table>
<Caption>
PAGE
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000......................................... 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 2001 and 2000......................... 4
Consolidated Statements of Operations for the Nine Months
Ended September 30, 2001 and 2000......................... 5
Consolidated Statement of Stockholder's Equity for the Nine
Months Ended September 30, 2001........................... 6
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2001 and 2000......................... 7
Notes to Consolidated Financial Statements.................. 8-25
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26-29
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 30-31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 32
Items 2, 3, 4 and 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K............................ 32
Signatures.......................................................................... 33
</Table>
2
<Page>
ATRIUM COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 7,168 $ 4,646
Accounts receivable, net.................................. 4,119 51,239
Retained interest in sold accounts receivable............. 28,151 --
Inventories............................................... 48,135 45,955
Prepaid expenses and other current assets................. 3,324 2,958
Deferred tax asset........................................ 1,187 2,000
-------- --------
Total current assets.................................... 92,084 106,798
PROPERTY, PLANT AND EQUIPMENT, net.......................... 59,275 54,640
GOODWILL, net............................................... 347,915 356,674
DEFERRED FINANCING COSTS, net............................... 15,183 16,644
OTHER ASSETS................................................ 8,140 7,579
-------- --------
Total assets............................................ $522,597 $542,335
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable.......................... $ 5,535 $ 6,211
Accounts payable.......................................... 34,119 28,482
Accrued liabilities....................................... 30,129 33,104
-------- --------
Total current liabilities............................... 69,783 67,797
-------- --------
LONG-TERM LIABILITIES:
Notes payable.............................................. 320,366 349,137
Deferred tax liability.................................... 1,187 2,000
Other long-term liabilities............................... 984 1,325
Swaps contract liability.................................. 8,865 --
-------- --------
Total long-term liabilities............................. 331,402 352,462
-------- --------
Total liabilities....................................... 401,185 420,259
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock $.01 par value, 3,000 shares authorized, 100
shares issued and outstanding........................... -- --
Paid-in capital........................................... 204,012 196,004
Retained earnings (accumulated deficit)................... (73,817) (73,928)
Accumulated other comprehensive income (loss)............. (8,783) --
-------- --------
Total stockholder's equity.............................. 121,412 122,076
-------- --------
Total liabilities and stockholder's equity............ $522,597 $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 SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
2001 2000
-------- --------
NET SALES................................................... $140,846 $113,321
COST OF GOODS SOLD.......................................... 93,653 91,784
-------- --------
Gross profit.............................................. 47,193 21,537
-------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses
(excluding stock compensation, securitization and
amortization expense)..................................... 30,981 32,240
Stock compensation expense.................................. (207) --
Securitization expense...................................... 1,165 --
Amortization expense........................................ 3,619 2,077
-------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES...... 35,558 34,317
Special charges............................................. 136 125
-------- --------
35,694 34,442
-------- --------
Income (loss) from operations............................. 11,499 (12,905)
INTEREST EXPENSE............................................ 9,459 9,216
OTHER INCOME (EXPENSE), net................................. (76) 607
-------- --------
Income (loss) before income taxes........................... 1,964 (21,514)
PROVISION (BENEFIT) FOR INCOME TAXES........................ 389 (6,845)
-------- --------
NET INCOME (LOSS)........................................... $ 1,575 $(14,669)
======== ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<Page>
ATRIUM COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
2001 2000
---- --------
NET SALES................................................... $396,958 $383,395
COST OF GOODS SOLD.......................................... 267,453 291,961
-------- --------
Gross profit.............................................. 129,505 91,434
-------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses
(excluding stock compensation, securitization and
amortization expense)..................................... 86,820 96,025
Stock compensation expense.................................. 506 --
Securitization expense...................................... 1,165 --
Amortization expense........................................ 10,752 6,687
-------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES...... 99,243 102,712
Special charges............................................. 275 25,708
-------- --------
99,518 128,420
-------- --------
Income (loss) from operations............................. 29,987 (36,986)
INTEREST EXPENSE............................................ 28,967 26,945
OTHER INCOME (EXPENSE), net................................. (10) 1,441
-------- --------
Income (loss) before income taxes......................... 1,010 (62,490)
PROVISION (BENEFIT) FOR INCOME TAXES........................ 899 (15,326)
-------- --------
NET INCOME (LOSS)........................................... $ 111 $(47,164)
======== ========
</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 NINE MONTHS ENDED SEPTEMBER 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 income (loss)................ -- -- -- 111 -- 111
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................... -- -- -- -- (6,218) (6,218)
Accretion of deferred gain on
terminated interest rate
collars........................ -- -- -- -- (246) (246)
--- ---------- -------- -------- ------- --------
Comprehensive income (loss)...... -- -- -- 111 (8,783) (8,672)
Net contribution from Atrium
Corporation...................... -- -- 8,008 -- -- 8,008
--- ---------- -------- -------- ------- --------
Balance, September 30, 2001.......... 100 $ -- $204,012 $(73,817) $(8,783) $121,412
=== ========== ======== ======== ======= ========
</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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 111 $(47,164)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................... 18,099 11,416
Amortization of deferred financing costs................ 1,924 1,754
Accretion of debt discount.............................. 137 123
Accretion of gain from interest rate collars............ (246) (245)
Amortization of gain from sale/leaseback of building.... (5) --
Loss (gain) on sales of assets.......................... 17 (693)
Gain on sale of equity securities....................... -- (507)
Non cash special charge................................. -- 25,708
Provision for bad debts................................. 927 2,229
Deferred tax provision (benefit)........................ -- (15,775)
Changes in assets and liabilities:
Assets held for sale.................................. -- 460
Accounts receivable................................... (10,664) (496)
Sale of accounts receivable........................... 27,800 --
Inventories........................................... (2,180) 18,423
Prepaid expenses and other current assets............. (442) 8,201
Accounts payable...................................... 2,469 (2,181)
Accrued liabilities................................... (2,983) 3,279
-------- --------
Net cash provided by operating activities......... 34,964 4,532
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (12,100) (10,924)
Proceeds from sales of assets............................. 101 2,801
Transfer to restricted cash............................... -- (23,930)
Net proceeds from divestitures of Wing and Atrium Wood
fixed assets............................................ -- 6,382
Proceeds from sale of equity securities................... -- 620
Increase in other assets.................................. (1,648) (3,441)
-------- --------
Net cash used in investing activities............. (13,647) (28,492)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under revolving credit
facility................................................ (5,000) 16,230
Principal payments on term loans.......................... (24,354) (1,500)
Contribution from Atrium Corporation, net................. 8,008 5,327
Payments of other notes payable........................... (230) (233)
Increase in checks drawn in excess of book balances....... 3,169 6,659
Capitalized deferred financing costs...................... (388) (426)
-------- --------
Net cash provided by (used in) financing
activities..................................... (18,795) 26,057
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 2,522 2,097
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 4,646 1,294
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 7,168 $ 3,391
======== ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<Page>
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 30, 2001
and 2000, and financial position as of September 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. The Company adopted SFAS No. 140 in the third quarter upon
consummation of the asset securitization transaction discussed in Note 3.
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.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
the Company on January 1, 2003. The Company is currently assessing the impact of
SFAS
8
<Page>
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION: (CONTINUED)
No. 143 and has not yet determined the effects, if any, it will have on its
consolidated financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 is effective for the Company on January 1, 2002. The Company is
currently assessing the impact of SFAS No. 144 and has not yet determined the
effects, if any, it will have on its consolidated financial position or results
of operations.
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 nine month periods ended September 30, 2001, there
is no difference between the actual and pro forma information because the
acquisitions have been included in operations for the full periods and the
divestitures have been excluded from operations for the full periods.
<Table>
<Caption>
NINE MONTHS
ENDED NINE MONTHS
SEPTEMBER 30, ENDED
2001 SEPTEMBER 30, 2000
------------- --------------------
ACTUAL ACTUAL PRO FORMA
------------- -------- ---------
NET SALES................................................... $396,958 $383,395 $377,754
COST OF GOODS SOLD.......................................... 267,453 291,961 250,241
-------- -------- --------
Gross profit.............................................. 129,505 91,434 127,513
-------- -------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses
(excluding stock compensation, securitization and
amortization expense)..................................... 86,820 96,025 84,461
Stock compensation expense.................................. 506 -- 576
Securitization expense...................................... 1,165 -- --
Amortization expense........................................ 10,752 6,687 10,752
-------- -------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES...... 99,243 102,712 95,789
Special charges............................................. 275 25,708 --
-------- -------- --------
99,518 128,420 95,789
-------- -------- --------
Income (loss) from operations............................. 29,987 (36,986) 31,724
</Table>
9
<Page>
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION: (CONTINUED)
<Table>
<Caption>
NINE MONTHS
ENDED NINE MONTHS
SEPTEMBER 30, ENDED
2001 SEPTEMBER 30, 2000
------------- --------------------
ACTUAL ACTUAL PRO FORMA
------------- -------- ---------
INTEREST EXPENSE............................................ 28,967 26,945 28,967
OTHER INCOME, net........................................... (10) 1,441 1,279
-------- -------- --------
Income (loss) before income taxes......................... 1,010 (62,490) 4,036
PROVISION (BENEFIT) FOR INCOME TAXES........................ 899 (15,326) 4,055
-------- -------- --------
NET INCOME (LOSS)........................................... $ 111 $(47,164) $ (19)
======== ======== ========
Other Information:
Depreciation expense........................................ $ 7,346 $ 4,730 $ 5,858
======== ======== ========
Ellison corporate service charge............................ $ -- $ -- $ 1,400
======== ======== ========
</Table>
<Table>
<Caption>
THREE
MONTHS
ENDED THREE MONTHS
SEPTEMBER 30, ENDED
2001 SEPTEMBER 30, 2000
------------- --------------------
ACTUAL ACTUAL PRO FORMA
------------- -------- ---------
NET SALES................................................... $140,846 $113,321 $136,958
COST OF GOODS SOLD.......................................... 93,653 91,784 91,998
-------- -------- --------
Gross profit.............................................. 47,193 21,537 44,960
-------- -------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative expenses
(excluding stock compensation, securitization and
amortization expense)..................................... 30,981 32,240 30,098
Stock compensation expense.................................. (207) -- 576
Securitization expense...................................... 1,165 -- --
Amortization expense........................................ 3,619 2,077 3,619
-------- -------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE EXPENSES...... 35,558 34,317 34,293
Special charges............................................. 136 125 --
-------- -------- --------
35,694 34,442 34,293
-------- -------- --------
Income from operations.................................... 11,499 (12,905) 10,667
INTEREST EXPENSE............................................ 9,459 9,216 9,459
OTHER INCOME, net........................................... (76) 607 601
-------- -------- --------
Income (loss) before income taxes......................... 1,964 (21,514) 1,809
PROVISION (BENEFIT) FOR INCOME TAXES........................ 389 (6,845) 1,533
-------- -------- --------
NET INCOME (LOSS)........................................... $ 1,575 $(14,669) $ 276
======== ======== ========
Other Information:
Depreciation expense........................................ $ 2,617 $ 1,533 $ 2,037
======== ======== ========
Ellison corporate service charge............................ $ -- $ -- $ 526
======== ======== ========
</Table>
10
<Page>
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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 September 30, 2001, the fair-value of the hedging instruments is a
liability of $8,865 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 September 30, 2001, the
Company had $141,620 of notional amount in outstanding interest rate swaps with
third parties. The maximum length of the interest rate swaps currently in place
as of September 30, 2001 is approximately 2 1/4 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
September 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.
11
<Page>
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
2. ADOPTION OF SFAS NO. 133--ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES: (CONTINUED)
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.
3. SECURITIZATION OF ACCOUNTS RECEIVABLE:
On July 31, 2001, the Company and certain of its subsidiaries (collectively
"the Originators") entered into an agreement whereby each Originator agreed to
sell on a non-recourse basis, and on an ongoing basis, a pool of receivables
comprising their entire trade receivable portfolio to a wholly owned
bankruptcy-remote special purpose funding subsidiary ("Atrium Funding
Corporation" or "AFC") of the Company. AFC is a distinct legal entity that
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, subject to a borrowing base.
Generally, the agreement provides that as payments are collected from the
sold accounts receivable, AFC may elect to have the Securitization Company
reinvest the proceeds in new accounts receivable. The Securitization Company, in
addition to the right to collect payments from that portion of the interests in
the accounts receivable owned by them, also have the right to collect payments
from that portion of the ownership interest in the accounts receivable that is
owned by AFC. In calculating the fair market value of the Company's retained
interest in the receivables, the book value of the receivables represented the
best estimate of the fair market value due to the current nature of these
receivables. The facility, which expires July 31, 2004, requires the Company to
comply with various affirmative or negative covenants and requires early
amortization if AFC does not maintain a minimum equity requirement. The facility
also terminates on the occurrence and failure to cure certain events, including,
among other things, any failure of AFC to maintain certain ratios related to the
collectability of the receivables, or the Company's failure to maintain
long-term unsecured debt ratios. The Company and AFC are in compliance with all
related covenants as of September 30, 2001.
12
<Page>
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
3. SECURITIZATION OF ACCOUNTS RECEIVABLE: (CONTINUED)
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. Subsequently, additional pools
of receivables were sold. As of September 30, 2001 the retained interest was
$28,151. The amount the Company received from the sale was net of provisions for
bad debt and transaction fees, which included placement fees and professional
fees of approximately $840. The proceeds from the sale were used to repay debt
under the Company's Senior Credit Facility.
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.
The table below summarizes certain cash flow information:
<Table>
<Caption>
SEPTEMBER 30,
2001
-------------
Proceeds from new securitizations........................... $87,768
Proceeds from collections reinvested........................ 88,890
</Table>
Managed portfolio data:
<Table>
<Caption>
SEPTEMBER 30,
2001
-------------
Securitized balances........................................ $27,800
Retained interest in sold accounts receivable............... 28,151
Owned receivables........................................... 4,119
-------
Managed receivables......................................... $60,070
=======
</Table>
During the third quarter of 2001, the Company incurred costs of $1,165 on
the sale of its receivables that have been classified as a separate line item in
selling, delivery and general and administrative expenses. These costs were
comprised of $840 of fees associated with the placement of the securitization
and a loss on the sale of receivables of $325.
13
<Page>
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Raw materials............................................... $32,974 $31,785
Work-in-process............................................. 1,330 671
Finished goods.............................................. 14,025 14,312
------- -------
48,329 46,768
LIFO reserve................................................ (194) (813)
------- -------
$48,135 $45,955
======= =======
</Table>
5. NOTES PAYABLE:
Notes payable consisted of the following:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Revolving credit facility................................... $ 14,000 $ 19,000
Term loan A................................................. 8,999 13,070
Term loan B................................................. 60,260 69,720
Term loan C................................................. 69,827 80,650
Senior subordinated notes................................... 175,000 175,000
Other....................................................... 49 279
-------- --------
328,135 357,719
Less:
Unamortized debt discount................................... (2,234) (2,371)
Current portion of notes payable............................ (5,535) (6,211)
-------- --------
Long-term debt............................................ $320,366 $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
permit the Company to enter into certain transactions including an accounts
receivable securitization and the sale of specific assets, and accordingly,
adjust covenants for the transactions. As of September 30, 2001, the Company was
in compliance with all related covenants.
14
<Page>
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
6. 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 renewed collective bargaining agreement which expires in
May 2004. In addition, in connection with its Woodville, Texas operations, the
Company is party to a renewed collective bargaining arrangement due to expire in
September 2004. The agreements cover approximately 1,200 of the Company's
employees.
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.
7. SUBSIDIARY GUARANTORS:
The term Wing collectively refers to Wing Industries, Inc. 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:
15
<Page>
ATRIUM COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
7. SUBSIDIARY GUARANTORS: (CONTINUED)
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 one non-guarantor subsidiary, Atrium Funding
Corporation (see note 3).
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 operations of
AFC are included since their date of inception on July 31, 2001. The balance
sheet information includes all subsidiaries as of December 31, 2000 and
September 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.
16
<Page>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2001
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $(26,715) $(14,252) $ 34,837 $13,298 $ 7,168
Accounts receivable, net.................... 4,119 -- -- -- 4,119
Retained interest in sold accounts
receivable................................ -- 28,151 -- -- 28,151
Inventories................................. 20,447 -- 28,389 (701) 48,135
Prepaid expenses and other current assets... 1,595 -- 1,729 -- 3,324
Deferred tax asset.......................... 2,828 -- 82 (1,723) 1,187
-------- -------- -------- ------- --------
Total current assets........................ 2,274 13,899 65,037 10,874 92,084
PROPERTY, PLANT AND EQUIPMENT, net............ 23,166 -- 36,112 (3) 59,275
GOODWILL, net................................. 169,037 -- 178,878 -- 347,915
DEFERRED FINANCING COSTS, net................. -- -- 15,183 -- 15,183
OTHER ASSETS, net............................. 1,329 -- 6,811 -- 8,140
-------- -------- -------- ------- --------
Total assets................................ $195,806 $ 13,899 $302,021 $10,871 $522,597
======== ======== ======== ======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of notes payable............ $ 2,367 $ -- $ 3,168 $ -- $ 5,535
Accounts payable............................ 8,547 -- 12,274 13,298 34,119
Accrued liabilities......................... 9,534 119 20,476 -- 30,129
-------- -------- -------- ------- --------
Total current liabilities................... 20,448 119 35,918 13,298 69,783
-------- -------- -------- ------- --------
LONG-TERM LIABILITIES:
Notes payable............................... 137,009 -- 183,357 -- 320,366
Deferred tax liability...................... 5,592 -- (2,682) (1,723) 1,187
Other long-term liabilities................. -- -- 984 -- 984
Swaps contract liability.................... -- -- 8,865 -- 8,865
-------- -------- -------- ------- --------
Total long-term liabilities................. 142,601 -- 190,524 (1,723) 331,402
-------- -------- -------- ------- --------
Total liabilities........................... 163,049 119 226,442 11,575 401,185
-------- -------- -------- ------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock................................ -- -- -- -- --
Paid-in capital............................. 36,014 15,000 152,998 -- 204,012
Retained earnings (accumulated deficit)..... (3,257) (1,220) (68,636) (704) (73,817)
Accumulated other comprehensive loss........ -- -- (8,783) -- (8,783)
-------- -------- -------- ------- --------
Total stockholder's equity.................. 32,757 13,780 75,579 (704) 121,412
-------- -------- -------- ------- --------
Total liabilities and stockholder's
equity.................................. $195,806 $ 13,899 $302,021 $10,871 $522,597
======== ======== ======== ======= ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<Page>
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 -- 2,958
Deferred tax asset................................. 4,689 50 (2,739) 2,000
-------- -------- ------- --------
Total current assets............................... 13,334 89,790 3,674 106,798
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....................................... $211,999 $326,665 $ 3,671 $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............................. 4,689 50 (2,739) 2,000
Other long-term liabilities........................ -- 1,325 -- 1,325
-------- -------- ------- --------
Total long-term liabilities........................ 151,997 203,204 (2,739) 352,462
-------- -------- ------- --------
Total liabilities.................................. 173,933 241,636 4,690 420,259
-------- -------- ------- --------
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....... $211,999 $326,665 $ 3,671 $542,335
======== ======== ======= ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<Page>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
NET SALES........................... $56,950 $ -- $92,432 $(8,536) $140,846
COST OF GOODS SOLD.................. 35,779 -- 66,410 (8,536) 93,653
------- ------- ------- ------- --------
Gross profit........................ 21,171 -- 26,022 -- 47,193
------- ------- ------- ------- --------
OPERATING EXPENSES:
Selling, delivery, general and
administrative expenses (excluding
stock compensation, securitization
and amortization expense)......... 13,254 -- 17,727 -- 30,981
Stock compensation expense........ -- -- (207) -- (207)
Securitization expense............ -- 1,220 (55) -- 1,165
Amortization expense.............. 1,694 -- 1,925 -- 3,619
------- ------- ------- ------- --------
SELLING, DELIVERY, GENERAL AND
ADMINISTRATIVE EXPENSES........... 14,948 1,220 19,390 -- 35,558
Special charges................... -- -- 136 -- 136
------- ------- ------- ------- --------
14,948 1,220 19,526 -- 35,694
------- ------- ------- ------- --------
Income (loss) from operations... 6,223 (1,220) 6,496 -- 11,499
INTEREST EXPENSE.................... 4,156 -- 5,303 -- 9,459
OTHER INCOME (EXPENSE), net......... 12 -- (88) -- (76)
------- ------- ------- ------- --------
Income (loss) before income taxes
and extraordinary charge.......... 2,079 (1,220) 1,105 -- 1,964
PROVISION (BENEFIT) FOR INCOME
TAXES............................. 355 -- 34 -- 389
------- ------- ------- ------- --------
NET INCOME (LOSS)................... $ 1,724 $(1,220) $ 1,071 $ -- $ 1,575
======= ======= ======= ======= ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<Page>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
NET SALES.......................... $155,997 $ -- $265,116 $(24,155) $396,958
COST OF GOODS SOLD................. 99,363 -- 192,612 (24,522) 267,453
-------- ------- -------- -------- --------
Gross profit....................... 56,634 -- 72,504 367 129,505
-------- ------- -------- -------- --------
OPERATING EXPENSES:
Selling, delivery, general and
administrative expenses
(excluding stock compensation,
securitization and amortization
expense)......................... 38,372 -- 48,528 (80) 86,820
Stock compensation expense....... -- -- 506 -- 506
Securitization expense........... -- 1,220 (55) -- 1,165
Amortization expense............. 5,012 -- 5,740 -- 10,752
-------- ------- -------- -------- --------
SELLING, DELIVERY, GENERAL AND
ADMINISTRATIVE EXPENSES.......... 43,384 1,220 54,719 (80) 99,243
Special charges.................. -- -- 275 -- 275
-------- ------- -------- -------- --------
43,384 1,220 54,994 (80) 99,518
-------- ------- -------- -------- --------
Income (loss) from
operations..................... 13,250 (1,220) 17,510 447 29,987
INTEREST EXPENSE................... 12,388 -- 16,579 -- 28,967
OTHER INCOME (EXPENSE), net........ 48 -- 75 (133) (10)
-------- ------- -------- -------- --------
Income (loss) before income taxes
and extraordinary charge......... 910 (1,220) 1,006 314 1,010
PROVISION (BENEFIT) FOR INCOME
TAXES............................ 778 -- 121 -- 899
-------- ------- -------- -------- --------
NET INCOME (LOSS).................. $ 132 $(1,220) $ 885 $ 314 $ 111
======== ======= ======== ======== ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<Page>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
NET SALES........................................ $ 61,445 $63,338 $(11,462) $113,321
COST OF GOODS SOLD............................... 55,395 47,904 (11,515) 91,784
-------- ------- -------- --------
Gross profit..................................... 6,050 15,434 53 21,537
-------- ------- -------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative
expenses (excluding amortization expense)...... 20,001 12,319 (80) 32,240
Amortization expense........................... 1,054 1,023 -- 2,077
-------- ------- -------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE
EXPENSES....................................... 21,055 13,342 (80) 34,317
Special charges................................ 153 (28) -- 125
-------- ------- -------- --------
21,208 13,314 (80) 34,442
-------- ------- -------- --------
Income (loss) from operations................ (15,158) 2,120 133 (12,905)
INTEREST EXPENSE................................. 5,127 4,089 -- 9,216
OTHER INCOME (EXPENSE), net...................... (43) 783 (133) 607
-------- ------- -------- --------
Income (loss) before income taxes................ (20,328) (1,186) -- (21,514)
PROVISION (BENEFIT) FOR INCOME TAXES............. (6,763) (82) -- (6,845)
-------- ------- -------- --------
NET INCOME (LOSS)................................ $(13,565) $(1,104) $ -- $(14,669)
======== ======= ======== ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<Page>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
NET SALES....................................... $235,780 $179,357 $(31,742) $383,395
COST OF GOODS SOLD.............................. 190,765 133,098 (31,902) 291,961
-------- -------- -------- --------
Gross profit.................................... 45,015 46,259 160 91,434
-------- -------- -------- --------
OPERATING EXPENSES:
Selling, delivery, general and administrative
expenses (excluding amortization expense)..... 65,269 30,996 (240) 96,025
Amortization expense.......................... 3,633 3,054 -- 6,687
-------- -------- -------- --------
SELLING, DELIVERY, GENERAL AND ADMINISTRATIVE
EXPENSES...................................... 68,902 34,050 (240) 102,712
Special charges............................... 24,473 1,235 -- 25,708
-------- -------- -------- --------
93,375 35,285 (240) 128,420
-------- -------- -------- --------
Income (loss) from operations............... (48,360) 10,974 400 (36,986)
INTEREST EXPENSE................................ 16,571 10,374 -- 26,945
OTHER INCOME (EXPENSE), net..................... 102 1,739 (400) 1,441
-------- -------- -------- --------
Income (loss) before income taxes............... (64,829) 2,339 -- (62,490)
PROVISION (BENEFIT) FOR INCOME TAXES............ (17,164) 1,838 -- (15,326)
-------- -------- -------- --------
NET INCOME (LOSS)............................... $(47,665) $ 501 $ -- $(47,164)
======== ======== ======== ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<Page>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES.... $ 10,302 $(14,252) $ 33,045 $ 5,869 $ 34,964
-------- -------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment........................... (2,998) -- (9,102) -- (12,100)
Proceeds from sales of assets......... -- -- 101 -- 101
Other assets.......................... -- -- (1,648) -- (1,648)
-------- -------- -------- ------- --------
Net cash used in investing
activities...................... (2,998) -- (10,649) -- (13,647)
-------- -------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit
facility............................ -- -- (5,000) -- (5,000)
Scheduled principal payments on term
notes............................... -- -- (24,354) -- (24,354)
Contributions from Atrium Corp, net... -- -- 8,008 -- 8,008
Payment of other notes payable........ -- -- (230) -- (230)
Checks drawn in excess of book
balances............................ -- -- 3,169 -- 3,169
Capitalized deferred financing
costs................................. -- -- (388) -- (388)
-------- -------- -------- ------- --------
Net cash used in financing
activities...................... -- -- (18,795) -- (18,795)
-------- -------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 7,304 (14,252) 3,601 5,869 2,522
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................ (34,019) -- 31,236 7,429 4,646
-------- -------- -------- ------- --------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................ $(26,715) $(14,252) $ 34,837 $13,298 $ 7,168
======== ======== ======== ======= ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<Page>
ATRIUM COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
GUARANTOR
SUBSIDIARIES PARENT ELIMINATIONS CONSOLIDATED
------------ -------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES............ $ (9,826) $ 7,733 $ 6,625 $ 4,532
-------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.... (2,522) (8,402) -- (10,924)
Proceeds from sales of assets................. -- 2,801 -- 2,801
Transfer to restricted cash................... -- (23,930) -- (23,930)
Net proceeds from divestitures of Wing and
Atrium Wood assets.......................... -- 6,382 -- 6,382
Proceeds from sale of equity securities....... -- 620 -- 620
Other assets.................................. -- (3,441) -- (3,441)
-------- -------- ------- --------
Net cash used in investing activities..... (2,522) (25,970) -- (28,492)
-------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of other notes payable................ -- (233) -- (233)
Net borrowings under revolving credit
facility...................................... -- 16,230 -- 16,230
Scheduled principal payments on term notes.... -- (1,500) -- (1,500)
Contributions from Atrium Corp, net........... -- 5,327 -- 5,327
Capitalized deferred financing costs.......... -- (426) -- (426)
Checks drawn in excess of bank balances....... -- 6,659 -- 6,659
-------- -------- ------- --------
Net cash provided by financing
activities................................ -- 26,057 -- 26,057
-------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (12,348) 7,820 6,625 2,097
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD........................................ (23,144) 19,956 4,482 1,294
-------- -------- ------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD........ $(35,492) $ 27,776 $11,107 $ 3,391
======== ======== ======= ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<Page>
8. 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 its
common stock. This amount was contributed to the Company net of transaction
expenses of $1,126 incurred in connection with the registration of the Atrium
Corporation Senior Pay-In-Kind Notes, $897 for distributions to Atrium
Corporation for the repurchase of stock options and $19 for cash used in
operating activities.
9. TRANSACTIONS:
ALENCO ASSET PURCHASE
On August 17, 2001, the Company entered into an asset purchase agreement
with Alenco Holding Corporation (f.k.a. Reliant Building Products) whereby the
Company purchased assets comprised primarily of machinery and equipment located
in Gallatin, Tennessee for $1,326. The transaction has been accounted for as a
purchase and accordingly the assets have been recorded at cost, which represents
fair market value.
ROYAL ASSET SALE
On September 10, 2001, the Company and its subsidiary, Thermal
Industries, Inc., entered into an asset sale agreement with Royal Group
Technologies Limited ("Royal") to sell the assets of Thermal's vinyl extrusion
operation for $3,800. The completion of the transaction will occur in a series
of four closings, the first of which begins on October 1, 2001 and the final
closing ending on December 17, 2001. The Company expects to record a gain on the
sale of the assets of approximately $1,000 in the fourth quarter. Additionally,
the Company entered into a supply agreement with Royal for a period of five
years at current market prices for minimum quantities.
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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
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 third
quarter ended and the nine months ended September 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 September 30,
2001 and December 31, 2000.
NET SALES. Net sales increased by $27,525 from $113,321 during the third
quarter of 2000 to $140,846 during the third quarter of 2001 and increased
$13,563 from $383,395 during the first nine months of 2000 to $396,958 during
the first nine months of 2001. The increase during the third quarter was
primarily the result of the $37,689 in net sales from the acquisition of
Ellison. The Company also experienced increases during the third quarter from
its vinyl window operations (excluding the Ellison acquisition) of $4,273. The
increases were offset by $9,318 in net sales from the divestiture of the
Company's Wing and Wood operations during the third quarter of 2000. The
increase during the first nine months of 2001 was primarily the result of
$103,069 in net sales from the acquisition of Ellison and increases of $7,883
from the vinyl window operations. These increases were partially offset by the
loss of $91,569 in net sales from the divestiture of the Company's Wing and Wood
operations. The Company also experienced decreases during the first nine months
of 2001 from its aluminum window operations as a result of inclement weather in
the first quarter and softer demand in the second and third quarters. These
operations net sales decreased $7,935, or 4.9%, compared to the first nine
months of 2000 and $5,078, or 8.9%, compared to the third quarter of 2000.
COST OF GOODS SOLD. Cost of goods sold improved from 81.0% of net sales
during the third quarter of 2000 to 66.5% of net sales during the third quarter
of 2001 and from 76.2% of net sales during the first nine months of 2000 to
67.4% of net sales during the first nine months of 2001. The improvement over
prior year is primarily attributable to the divestitures of Wing and Wood during
2000. During the third quarter of 2000, Wing and Wood had a cost of goods sold
as a percent of net sales of 267.3% and 116.5%, respectively. During the first
nine months of 2000, Wing and Wood had a cost of goods sold as a percent of net
sales of 106.9% and 124.4%, respectively. These improvements were partially
offset by increases at the aluminum and vinyl divisions (excluding the Ellison
acquisition). The aluminum
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division's cost of goods sold increased from 74.5% of net sales during the third
quarter of 2000 to 77.6% of net sales during the third quarter of 2001 and from
73.0% of net sales during the first nine months of 2000 to 76.6% of net sales
during the first nine months of 2001. The vinyl divisions cost of goods sold
increased from 61.8% of net sales during the third quarter of 2000 to 62.4% of
net sales during the third quarter of 2001 and from 62.9% of net sales during
the first nine months of 2000 to 63.4% of net sales during the first nine months
of 2001. These increases were due to a number of factors including energy
surcharges on materials, higher insurance costs related to workers'
compensation, moving expenses associated with plant consolidations, and lease
costs at new facilities. The LIFO reserve expense during the third quarter of
2000 was $1,288 and the LIFO reserve benefit was $349 during the third quarter
of 2001. The LIFO reserve expense during the first nine months of 2000 was
$1,881 and the LIFO reserve benefit was $619 during the first nine 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 $1,259 from $32,240 (28.5% of net
sales during the third quarter of 2000) to $30,981 (22.0% of net sales during
the third quarter of 2001) and decreased $9,205 from $96,025 (25.0% of net sales
during the first nine months of 2000) to $86,820 (21.9% of net sales during the
first nine months of 2001). The third quarter of 2000 included $6,965 and $1,500
from the divested divisions of Wing and Wood, respectively. The third quarter of
2001 included $6,770 from the acquisition of Ellison. The first nine months of
2000 included $27,627 and $3,163 from the divested divisions of Wing and Wood,
respectively. The first nine months of 2001 included $19,621 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 remained consistent with prior
year at 22.0% of net sales during the third quarter for each year and improved
from 22.4% of net sales during the first nine months of 2000 to 21.9% of net
sales during the first nine months of 2001. If the Wing and Wood divestitures
and the Ellison acquisition had both occurred on January 1, 2000, delivery
expense would have improved from 6.4% of net sales during the third quarter of
2000 to 5.7% of net sales during the third quarter of 2001 and improved from
6.1% of net sales during the first nine months of 2000 to 5.9% of net sales
during the first nine months of 2001. General and administrative expenses
increased from 7.6% of net sales during the third quarter of 2000 to 8.3% of net
sales during the third quarter of 2001 while improving from 8.1% of net sales
during the first nine months of 2000 to 7.8% of net sales during the first nine
months of 2001. The Company continues to gain operating leverage from its sales
growth and its acquisitions. Selling expenses remained flat at 8.0% of net sales
for the third quarter and 8.2% of net sales for the nine months, primarily as a
result of the variable nature of commissions.
AMORTIZATION EXPENSE. Amortization expense increased $1,542 from $2,077
during the third quarter of 2000 to $3,619 during the third quarter of 2001 and
increased $4,065 from $6,687 during the first nine months of 2000 to $10,752
during the first nine 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 and third quarters of 2001, the Company
recorded one time charges of $275 relating to non-capitalizable legal fees
incurred to amend the Credit Facility. During the second and third quarters of
2000, the Company recorded a one time charge of $25,708, of which $24,473
related to the write-off of certain intangible assets and the write-down of
certain assets related to sale of Wing and $1,235 related to the write-down of
certain assets at the Wood.
INTEREST EXPENSE. Interest expense increased $243 from $9,216 during the
third quarter of 2000 to $9,459 during the third quarter of 2001 and increased
$2,022 from $26,945 during the first nine months
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of 2000 to $28,967 during the first nine 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. In addition, the
increase in interest expense includes the amortization of additional deferred
financing costs incurred in connection with the acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations and availability under the Companies'
Revolving Credit Facility and availability under the Company's Accounts
Receivable Securitization Facility are the Company's principal sources of
liquidity. During the first nine months of 2001, cash was primarily used for
increases in working capital, capital expenditures and debt payments. Net cash
provided by operating activities was $34,964 during the first nine months of
2001 ($37,363 during the third quarter of 2001) compared to $4,532 during the
first nine months of 2000 ($13,760 during the third quarter of 2000). The
increase in cash provided by operating activities is largely due the receipt of
proceeds from the accounts receivable securitization during the third quarter of
2001. Net cash used in investing activities during the first nine months of 2001
was $13,647 (2,636 during the third quarter of 2001) compared to $28,492 during
the first nine months of 2000 ($24,112 during the third quarter of 2000). The
decrease in cash used in investing activities was due primarily to the transfer
of restricted cash as a result of the Wing and Atrium Wood divestitures during
the third quarter of 2000. The current year capital expenditures are related to
increasing plant capacity and automation. Cash used in financing activities
during the first nine months of 2001 was $18,795 ($29,996 during the third
quarter of 2001) compared to cash provided by financing activities of $26,057
during the first nine months of 2000 ($10,480 during the third quarter of 2000).
The decrease from prior year was due to debt repayments required as a result of
the accounts receivable securitization during 2001 and higher borrowings on the
Company's credit facility during 2000.
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 September 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 September 30, 2004. Additionally, the Company
has entered into an accounts receivable securitization program which will make
additional funds available to the Company depending on working capital levels.
At September 30, 2001, we had $31,705 of availability under the revolving
facility, net of borrowings of $14,000 and outstanding letters of credit
totaling $1,295. As of November 13, 2001, the Company had cash of $3,348 and
$31,205 of availability under the Revolving Credit Facility, net of borrowings
of $14,500 and outstanding letters of credit totaling $1,295. At September 30,
2001, the Company had $22,200 of availability under the securitization facility,
subject to borrowing based requirements, net of securitizations of $27,800. As
of November 13, 2001, the Company had $20,100 available under the securitization
facility, net of securitizations of $29,900.
CAPITAL EXPENDITURES
The Company had cash capital expenditures of $12,100 during the first nine
months of 2001 ($3,431 during the third quarter of 2001) compared to $10,924
during the first nine months of 2000 ($6,606 during the third quarter of 2000).
Capital expenditures during the first nine 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.
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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.
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. The Company adopted SFAS No. 140 in the third quarter upon
consummation of the asset securitization transaction discussed in Note 3.
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 September 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.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
the Company on January 1, 2003. The Company is currently assessing the impact of
SFAS No. 143 and has not yet determined the effects, if any, it will have on its
consolidated financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 is effective for the Company on January 1, 2002. The Company is
currently assessing the impact of SFAS No. 144 and has not yet determined the
effects, if any, it will have on its consolidated financial position or results
of operations.
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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 September 30, 2001, the fair-value of the hedging instruments is a
liability of $8,865 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 September 30, 2001, the
Company had $141,620 of notional amount in outstanding interest rate swaps with
third parties. The maximum length of the interest rate swaps currently in place
as of September 30, 2001 is approximately 2 1/4 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
September 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
On August 14, 2001, in accordance with Item 5 of Form 8-K, the Company
filed a Report on Form 8-K to announce that 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 ("AFC") of the
Company. On July 31, 2001, AFC entered into an agreement with Fairway
Finance Corp., agented by BMO Nesbitt Burns, whereby AFC sold a pro rata
share of the trade receivable portfolio for an aggregate payments of up
to $50,000.
On September 21, 2001, in accordance with Item 5 of Form 8-K, the Company
filed a Report on Form 8-K to announce that Royal Group Technologies
Limited (RYG: TSE, NYSE) has entered into agreements with Atrium
Companies Inc. to acquire the extrusion assets of Atrium's subsidiary,
Thermal Industries, Inc and to supply extruded profiles to Thermal
Industries' fabricating operations.
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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: November 14, 2001 By: /s/ JEFF L. HULL
-----------------------------------------
Jeff L. Hull
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
Date: November 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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