10-Q 1 a2063076z10-q.txt 10Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) ~~/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

FOR THE QUARTERLY PERIOD 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 333-54122 ------------------------ ATRIUM CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 75-2814598 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)

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 / / -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ATRIUM CORPORATION FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2001 INDEX

2 ATRIUM CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

The accompanying notes are an integral part of the consolidated financial statements. 3 ATRIUM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated financial statements. 4 ATRIUM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated financial statements. 5 ATRIUM CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated financial statements. 6 ATRIUM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the consolidated financial statements. 7 ATRIUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) 1. BASIS OF PRESENTATION: Atrium Corporation ("Atrium Corporation") is engaged in the manufacture and sale of windows and various building materials throughout the United States through its wholly-owned subsidiary Atrium Companies, Inc. ("Atrium Companies"). The unaudited consolidated financial statements of Atrium Corporation 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 Atrium Corporation's audited financial statements for the fiscal year ended December 31, 2000 included in the Form S-4 as filed with the Securities and Exchange Commission on May 17, 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. Atrium Corporation 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. Atrium Corporation 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 ATRIUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) 1. BASIS OF PRESENTATION: (CONTINUED) 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. Atrium Corporation 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 Atrium Corporation 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 Atrium Companies. 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 period and the divestitures have been excluded from operations for the full period.

9 ATRIUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) 1. BASIS OF PRESENTATION: (CONTINUED)

10 ATRIUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) 1. BASIS OF PRESENTATION: (CONTINUED)

2. ADOPTION OF SFAS NO. 133--ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: Atrium Corporation 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, Atrium Corporation 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 long-term liabilities. Atrium Corporation 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. Atrium Companies, 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 Atrium Atrium Companies 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 Atrium Companies 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. 11 ATRIUM CORPORATION 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) Atrium Corporation 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. Atrium Corporation 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, Atrium Corporation discontinues hedge accounting prospectively, as discussed below. Atrium Corporation 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 Atrium Corporation 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, Atrium Corporation 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, Atrium Companies 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 Atrium Companies. 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 12 ATRIUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) 3. SECURITIZATION OF ACCOUNTS RECEIVABLE: (CONTINUED) that portion of the ownership interest in the accounts receivable that is owned by AFC. In calculating the fair market value of Atrium Companies' 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 Atrium Companies 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 Atrium Companies' failure to maintain long-term unsecured debt ratios. Atrium Companies and AFC are in compliance with all related covenants as of September 30, 2001. The receivables sold to the Securitization Company are thus not reflected in Atrium Companies 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 Atrium Companies received from the sale was net of provisions for bad debts and transaction fees, which included placement fees and professional fees of approximately $840. The proceeds from the sale were used to repay debt under Atrium Companies Senior Credit Facility. Atrium Companies retains the servicing responsibilities for which it receives an annual servicing fee of .5% of the securitized accounts receivables. Atrium Companies 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:

Managed portfolio data:

During the third quarter of 2001, Atrium Companies 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 13 ATRIUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) 3. SECURITIZATION OF ACCOUNTS RECEIVABLE: (CONTINUED) 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. 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:

5. NOTES PAYABLE: Notes payable consisted of the following:

The Credit Agreement requires the Atrium Companies to meet certain financial tests pertaining to, interest coverage, fixed charge coverage and leverage. On May 15, 2001 and July 20, 2001, Atrium 14 ATRIUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) 5. NOTES PAYABLE: (CONTINUED) Companies amended its Credit Agreement with Amendments No. 1 and No. 2, and on June 29, 2001, Atrium Corporation amended its Purchase Agreement for the Senior Pay-In-Kind Notes (collectively "the Amendments"). The Amendments permit Atrium Corporation and Atrium Companies 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, Atrium Corporation and Atrium Companies were in compliance with all related covenants. 6. CONTINGENCIES: Atrium Companies 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 Atrium Corporation. In 1995, various Dallas-based factory employees became members of the Amalgamated Clothing and Textile Workers Union. On May 25, 2001, Atrium Companies entered into a renewed collective bargaining agreement which expires in May 2004. In addition, in connection with its Woodville, Texas operations, Atrium Companies is party to a collective bargaining arrangement due to expire in September 2004. The agreements cover approximately 1,200 of the Company's employees. Atrium Companies is involved in various stages of investigation and cleanup related to environmental protection matters, some of which relate to waste disposal sites. The potential costs related to such matters and the possible impact thereof on future operations are uncertain due in part to: the uncertainty as to the extent of pollution; the complexity of Government laws and regulations and their interpretations; the varying costs and effectiveness of alternative cleanup technologies and methods; the uncertain level of insurance or other types of recovery; and the questionable level of the Atrium Companies involvement. Atrium Companies was named in 1988 as a potentially responsible party ("PRP") in two superfund sites pursuant to the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (the Chemical Recycling, Inc. site in Wylie, Texas, and the Diaz Refinery site in Little Rock, Arkansas). Atrium Companies 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 Atrium Corporation's consolidated financial position, results of operations or liquidity. Atrium Companies 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. Atrium Companies has established a letter of credit of $250 to cover any costs of remediation exceeding the previous owner's escrow. Atrium Companies 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 Atrium Corporation's remaining operations. 15 ATRIUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) 7. ATRIUM CORPORATION ONLY FINANCIAL INFORMATION: CONDENSED BALANCE SHEETS

CONDENSED STATEMENTS OF OPERATIONS

16 ATRIUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) 7. ATRIUM CORPORATION ONLY FINANCIAL INFORMATION: (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS

8. CAPITAL CONTRIBUTION: During May of 2001, Atrium Corporation received a capital contribution from the current equity sponsors of $10,050, which represents the proceeds from the issuance of 7,730,768 shares of Atrium Corporation's Class A shares. 9. TRANSACTIONS: ALENCO ASSET PURCHASE On August 17, 2001, Atrium Companies entered into an asset purchase agreement with Alenco Holding Corporation (f.k.a. Reliant Building Products) whereby Atrium Companies purchased assets comprised primarily of machinery and equipment located in Gallatin, Tennessee for $1,326. The 17 ATRIUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) 9. TRANSACTIONS: (CONTINUED) transaction has been accounted for as a purchase and accordingly the assets have been recorded at cost, which approximates fair market value. ROYAL ASSET SALE On September 10, 2001, Atrium Companies 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. Atrium Companies expects to record a gain on the sale of the assets approximately $1,000 in the fourth quarter. Additionally, Atrium Companies entered into a supply agreement with Royal for a period of five years at current market prices for certain minimum qualities. 18 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 Atrium Corporation 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 Atrium Corporation or the Atrium Corporation's management, identify forward-looking statements. Such statements reflect the current views of Atrium Corporation with respect to the risks and uncertainties regarding the operations and the results of operations of Atrium Corporation 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 Atrium Corporation 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. Atrium Companies 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 Atrium Companies' 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 Atrium Companies' Wing and Wood operations. Atrium Companies 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 19 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 $1,254 from $32,240 (28.5% of net sales during the third quarter of 2000) to $30,986 (22.0% of net sales during the third quarter of 2001) and decreased $9,200 from $96,025 (25.0% of net sales during the first nine months of 2000) to $86,825 (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. Atrium Companies 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. SPECIAL CHARGES. During the second and third quarters of 2001, Atrium Corporation 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 $1,926 from $9,495 during the third quarter of 2000 to $11,421 during the third quarter of 2001 and increased $5,713 from $28,904 during the first nine months of 2000 to $34,617 during the first nine months of 2001. The increase in interest expense was 20 due primarily to the additional debt of $38,000, under the Credit Facility, and the $36,500 Senior Pay-In-Kind notes issued in connection with the acquisition of Ellison. In addition, the increase in interest expense includes the amortization of additional deferred financing costs. LIQUIDITY AND CAPITAL RESOURCES Cash generated from operations and availability under Atrium Companies' Revolving Credit Facility and availability under Atrium Companies' Accounts Receivable Securitization Facility are the 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 $34,945 during the first nine months of 2001 ($37,344 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 $18,776 ($29,971 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 under Atrium Companies' Senior Credit Facility as 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 Atrium Companies 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 September 30, 2004. Additionally, Atrium Companies has entered into an accounts receivable securitization program which will make additional funds available 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, Atrium Corporation 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, Atrium Corporation 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, Atrium Corporation had $20,100 available under the securitization facility, net of securitizations of $29,900. CAPITAL EXPENDITURES Atrium Corporation 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 Atrium Corporation's continued efforts to increase efficiency through automation at its various divisions as well as to increase plant capacity at Atrium Companies' Dallas-based aluminum and vinyl operations. Atrium Corporation 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. 21 The ability of Atrium Corporation to meet its debt service and working capital obligations and capital expenditure requirements is dependant, however, upon the future performance of Atrium Corporation and its subsidiaries which, in turn, will be subject to general economic conditions and to financial, business and other factors, including factors beyond Atrium Corporation'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. Atrium Corporation 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. Atrium Corporation 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. Atrium Corporation 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 Atrium Corporation on January 1, 2002. Atrium Corporation 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK MARKET RISK Atrium Corporation is exposed to market risk from changes in interest rates and commodity pricing. Atrium Corporation uses derivative financial instruments on a limited basis to hedge economic exposures including interest rate protection agreements and forward commodity delivery agreements. Atrium Corporation does not enter into derivative financial instruments or other financial instruments for speculative trading purposes. On November 1, 2000, Atrium Companies entered into a $100,000 interest rate swap agreement to limit the effect of changes in interest rates on long-term borrowings. Under the agreement Atrium 22 Companies 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, Atrium Companies 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, Atrium Companies 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 Atrium Corporation 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, Atrium Corporation 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. Atrium Corporation expects that none of this liability will require adjustment to expense within the next twelve months. Atrium Corporation 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. Atrium Companies, 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, Atrium Corporation 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 1/2 years. All derivatives are recognized on the balance sheet at their fair-value. On the date that the Atrium Companies 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. Atrium Corporation 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. Atrium Corporation 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 Atrium Corporation discontinues hedge accounting prospectively, as discussed below. 23 Atrium Corporation 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 Atrium Corporation 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, Atrium Corporation will carry the derivative at its fair-value on the balance sheet, recognizing changes in the fair-value in current-period earnings. 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Atrium Corporation 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 Atrium Corporation. 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, Atrium Companies 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, Atrium Companies 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. 25 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. 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)

ATRIUM CORP 10-Q