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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-33572
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DIAMOND TRIUMPH AUTO GLASS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2758853
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 DIVISION STREET, KINGSTON, PENNSYLVANIA 18704
(Address, including zip code of principal executive offices)
(570) 287-9915
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or Section 15(d) of the Securities and 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 [ ]
As of August 14, 2002, there were 1,026,366 shares outstanding of Diamond's
Common Stock ($.01 par value) and 35,000 shares outstanding of Diamond's Series
A 12% Senior Redeemable Cumulative Preferred Stock ($.01 par value).
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DIAMOND TRIUMPH AUTO GLASS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets - June 30, 2002 and December 31, 2001 3
Condensed Statements of Operations - Three Months Ended June 30, 2002 and 2001 4
Condensed Statements of Operations - Six Months Ended June 30, 2002 and 2001 5
Condensed Statements of Cash Flows - Six Months Ended June 30, 2002 and 2001 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIAMOND TRIUMPH AUTO GLASS, INC.
CONDENSED BALANCE SHEETS
(Dollars in Thousands except per share amounts)
June 30, 2002 December 31, 2001
------------- -----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 9,115 $ 6,592
Accounts receivable, net 15,387 11,596
Other receivables 785 387
Inventories 15,436 16,757
Prepaid expenses 1,445 1,383
Deferred income taxes 3,009 3,540
-------- ---------
Total current assets 45,177 40,255
-------- ---------
Equipment and leasehold improvements, net 8,718 7,799
Deferred loan costs and senior notes discount, net 4,762 5,183
Deferred income taxes 37,047 38,111
Other assets 505 498
-------- ---------
Total assets $ 96,209 $ 91,846
-------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 11,087 $ 10,640
Accrued expenses:
Payroll and related items 5,940 4,678
Accrued interest 2,317 2,317
Accrued income taxes 1,611 1,679
Other 793 389
-------- ---------
Total accrued expenses 10,661 9,063
-------- ---------
Total current liabilities 21,748 19,703
-------- ---------
Long-term debt:
Credit facility - -
Senior notes 100,000 100,000
-------- ---------
Total long-term debt 100,000 100,000
-------- ---------
Total liabilities 121,748 119,703
-------- ---------
Series A 12% senior redeemable cumulative preferred stock - par value $0.01 per
share; authorized 100,000 shares; issued and outstanding 35,000 shares in
2002 and 2001, at liquidation preference value 57,850 54,530
-------- ---------
Stockholders' equity (deficit):
Common stock - par value $0.01 per share; authorized 1,100,000 shares; issued
and outstanding 1,026,366 shares in 2002, issued and outstanding 1,000,000
shares in 2001 10 10
Additional paid-in capital 38,470 41,263
Unearned restricted stock compensation (413) -
Retained earnings (accumulated deficit) (121,456) (123,660)
-------- ---------
Total stockholders' equity (deficit) (83,389) (82,387)
-------- ---------
Total liabilities and stockholders' equity (deficit) $ 96,209 $ 91,846
======== =========
See notes to condensed financial statements
3
DIAMOND TRIUMPH AUTO GLASS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------- ------------------
Net sales $54,404 $55,849
Cost of sales 15,050 15,511
------- -------
Gross profit 39,354 40,338
Operating expenses 33,311 31,812
------- -------
Income from operations 6,043 8,526
Other (income) expense:
Interest income (42) (70)
Interest expense 2,571 2,574
------- -------
2,529 2,504
------- -------
Income before provision for income taxes 3,514 6,022
Provision for income taxes 1,476 2,409
------- -------
Net income 2,038 3,613
Preferred stock dividends 1,685 1,497
------- -------
Net income applicable to common stockholders $ 353 $ 2,116
======= =======
See notes to condensed financial statements
4
DIAMOND TRIUMPH AUTO GLASS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
---------------- ----------------
Net sales $102,561 $105,906
Cost of sales 28,687 29,842
-------- --------
Gross profit 73,874 76,064
Operating expenses 65,034 61,657
-------- --------
Income from operations 8,840 14,407
Other (income) expense:
Interest income (103) (81)
Interest expense 5,143 5,161
-------- --------
5,040 5,080
-------- --------
Income before provision for income taxes 3,800 9,327
Provision for income taxes 1,596 3,731
-------- --------
Net income 2,204 5,596
Preferred stock dividends 3,320 2,950
-------- --------
Net (loss) income applicable to common stockholders $ (1,116) $ 2,646
======== ========
See notes to condensed financial statements
5
DIAMOND TRIUMPH AUTO GLASS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
---------------- ----------------
OPERATING ACTIVITIES
Net cash provided by operating activities $ 4,807 $ 7,969
------- -------
INVESTING ACTIVITIES
Capital expenditures (2,296) (1,486)
Proceeds from sale of equipment 69 210
Increase in other assets (7) (125)
------- -------
Net cash used in investing activities (2,234) (1,401)
------- -------
FINANCING ACTIVITIES
Net proceeds from credit facility - 2,500
Payments on credit facility - (3,000)
Deferred loan cost (50) (55)
------- -------
Net cash (used in) financing activities $ (50) $ (555)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,523 6,013
Cash and cash equivalents, beginning of period 6,592 25
------- -------
Cash and cash equivalents, end of period $ 9,115 $ 6,038
======= =======
See notes to condensed financial statements
6
DIAMOND TRIUMPH AUTO GLASS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands except per share amounts)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are unaudited but, in the opinion
of management, reflect all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the data for the
interim periods presented. The interim financial statements should be
read in conjunction with the audited financial statements and notes
thereto contained in Diamond's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001. Diamond's results for interim
periods are not normally indicative of results to be expected for the
fiscal year. Weather has historically affected Diamond's sales, net
income and EBITDA, with severe weather generating increased sales, net
income and EBITDA and mild weather resulting in lower sales, net
income and EBITDA. In addition, Diamond's business is somewhat
seasonal, with the first and fourth calendar quarters traditionally
its slowest periods of activity.
Preferred Stock - At June 30, 2002 and December 31, 2001, the
liquidation value of the Preferred Stock recorded on Diamond's Balance
Sheet was $57,850 and $54,530, respectively, which includes dividends
of $22,850 and $19,530, respectively, added to the liquidation value.
Long-Term Debt:
Credit Facility - On March 27, 2000, Diamond entered into a revolving
credit facility (the "Credit Facility"). The Credit Facility has an
initial term of four years and provides for revolving advances of up
to the lesser of: (1) $25,000; (2) the sum of 85% of Diamond's
Eligible Accounts Receivable (as defined in the Credit Facility) plus
85% of Diamond's Eligible Inventory (as defined in the Credit
Facility), less certain reserves; or (3) an amount equal to 1.5 times
Diamond's EBITDA (as defined in the Credit Facility) for the prior
twelve months. A portion of the Credit Facility, not to exceed $5,000,
is available for the issuance of letters of credit, which generally
have an initial term of one year or less. Borrowings under the Credit
Facility bear interest, at Diamond's discretion, at either the Chase
Manhattan Bank Rate (as defined in the Credit Facility) or LIBOR, plus
a margin of 0.25% for the Chase Manhattan Rate and 2.0% for the LIBOR
Rate. In addition, a commitment fee of 0.25% is charged against any
unused balance of the Credit Facility. Interest rates are subject to
increases or reductions based upon Diamond meeting certain EBITDA
levels. The proceeds of the Credit Facility are available for working
capital requirements and for general corporate purposes. The Credit
Facility is secured by first priority security interests in all of
Diamond's tangible and intangible assets. In addition, the Credit
Facility contains certain restrictive covenants including, among other
things, the maintenance of a minimum EBITDA level for the prior twelve
months, as well as restrictions on additional indebtedness, dividends
and certain other significant transactions. Diamond was in compliance
with these covenants at June 30, 2002. At June 30, 2002, Diamond did
not have any borrowings outstanding under the Credit Facility.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002 Diamond implemented Statement of Financial Accounting
Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
This statement rescinds Statements No. 4 and 64 and establishes APB
Opinion No. 30 as the criteria to be used in reporting gains and
losses from extinguishment of debt. Statement No. 145 rescinds
Statement No. 44, which dealt with accounting requirements for the
effects of transition to the provisions of the Motor Carrier Act of
1980. Statement No. 145 also requires that certain lease modifications
that have economic effects similar to sale-leaseback transactions be
accounted for in the same manner as sale-leaseback transactions.
Diamond does not expect adoption of SFAS No. 145 to have a material
impact on its financial statements.
7
DIAMOND TRIUMPH AUTO GLASS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands except per share amounts)
In 2001, Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposition of Long-Lived Assets"
was issued. This standard establishes one accounting model to be used
for measuring impairment of long-lived assets. Diamond does not expect
adoption of SFAS No. 144 to have a material impact on its financial
statements.
NOTE 3. EXECUTIVE COMPENSATION
On June 1, 2002, Diamond entered into an employment agreement with
Norman Harris (the "Executive") pursuant to which Mr. Harris agreed to
serve as the Chief Executive Officer of Diamond at an annual salary of
$400 (the "Base Salary"), subject to annual review based on Diamond's
and the Executive's performance. The employment agreement provides for
an initial term of four years beginning on June 1, 2002 and ending on
June 1, 2006. In addition to the Base Salary, the Executive is
eligible to receive a bonus based upon the achievement of certain
criteria to be mutually agreed upon by the Executive and the Board of
Directors of Diamond. The employment agreement also contains various
severance, non-competition, non-solicitation provisions,
non-disclosure and assignment of inventions provisions.
On June 1, 2002 (the "Grant Date"), the Executive and Diamond entered
into a Restricted Stock Agreement (the "Agreement") pursuant to which
the Executive purchased from Diamond 26,366 shares (the "Restricted
Shares") of Diamond's common stock, par value $0.01 per share, for
nominal consideration. The Agreement generally restricts the sale or
transferability of shares of Common Stock held by the Executive before
the Restrictions (as defined in the Agreement) have lapsed. The
Executive has all rights and privileges of a stockholder with respect
to the Restricted Shares, including voting rights and the right to
receive dividends paid with respect to the Restricted Shares.
Generally, the Restricted Shares vest and the Restrictions lapse: (i)
with respect to 20% of the Restricted Shares on the Grant Date and;
(ii) with respect to 20% of the Restricted Shares on each subsequent
anniversary of the Grant Date until the Restricted Shares are fully
vested. Compensation expense, unearned restricted stock compensation,
and proceeds from common stock issued have been recognized based on
the vesting periods and an estimated fair market value of $20 per
share.
NOTE 4. LEGAL PROCEEDINGS
On May 2, 2002, Diamond filed an amended Complaint with the United
States District Court, Middle District of Pennsylvania against
Safelite Glass Corporation (the "Defendant"). Diamond alleges, among
other things, that the Defendant's conduct as (i) an operator of
national telephone call centers which takes first notice of loss calls
from insureds of several of the largest automobile insurers in the
United States (the "Insurers"); (ii) a provider of various claims
processing services to the Insurers as a third-party administrator
and; (iii) an operator of a network of retail repair and replacement
facilities who perform work for the Insurers as Safelite affiliates,
violated certain federal and state laws and give rise to other legal
and equitable claims against the Defendant. Diamond alleges that the
Defendant engaged in various practices designed to divert customers
away from Diamond to the Defendant, and that Diamond has suffered
damages as a result of this conduct in an amount to be determined at
trial.
8
NOTE 5. INCOME TAXES
As disclosed in the Company's 10-K for the year ended December 31,
2001, on February 20, 2002 the Internal Revenue Service issued a
notice of proposed adjustments, which included disallowance of
Diamond's tax deductible goodwill from Diamond's March 31, 1998
recapitalization Transaction (as defined in the Company's 10-K for
the year ended December 31, 2001).
The proposed adjustments by the Internal Revenue Service would result
in $3.8 million of federal tax deficiencies owed by Diamond for the
period December 31, 1998 through December 31, 2000, plus possible
interest and penalties and any resultant increases in current state
tax expense for this period. Additionally, the deferred tax asset
established in 1998 would be eliminated, as well as net operating loss
carryforwards from previous deductions of the tax goodwill. The
carrying amount of these assets at December 31, 2001 is approximately
$39.1 million. In addition, Diamond would be responsible to fund a
current federal tax liability for 2001 and for the six months ended
June 30, 2002 of approximately $2.8 million and $1.3 million,
respectively, plus possible interest and penalties, and any resultant
increases in current state tax expense for 2001 and 2002.
Diamond continues to strongly believe that the Transaction was
properly accounted for, and plans to appeal the Internal Revenue
Service's proposed adjustment. If such appeal were ultimately
unsuccessful, the Internal Revenue Service's proposed adjustment would
have a material adverse affect on Diamond's liquidity, cash flows,
balance sheet and results of operations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes Diamond's historical results of
operations and historical results of operations as a percentage of
sales for the six and three months ended June 30, 2002 and 2001.
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
-------------------------------------- ----------------------------------
2002 2001 2002 2001
---------------- ---------------- -------------- ---------------
$ % $ % $ % $ %
----- ----- ----- ----- ---- ----- ---- -----
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
Net Sales 102.6 100.0 105.9 100.0 54.4 100.0 55.8 100.0
Cost of Sales 28.7 28.0 29.8 28.1 15.0 27.6 15.5 27.8
----- ----- ----- ----- ---- ----- ---- -----
Gross Profit 73.9 72.0 76.1 71.9 39.4 72.4 40.3 72.2
Operating Expenses 65.1 63.5 61.7 58.3 33.3 61.2 31.8 57.0
----- ----- ----- ----- ---- ----- ---- -----
Income From Operations 8.8 8.6 14.4 13.6 6.1 11.2 8.5 15.2
Interest Income (0.1) (0.1) (0.1) (0.1) - - (0.1) (0.2)
Interest Expense 5.1 5.0 5.2 4.9 2.6 4.8 2.6 4.7
----- ----- ----- ----- ---- ----- ---- -----
5.0 4.9 5.1 4.8 2.6 4.8 2.5 4.5
----- ----- ----- ----- ---- ----- ---- -----
Income before provision for income taxes 3.8 3.7 9.3 8.8 3.5 6.4 6.0 10.8
Provision for income taxes 1.6 1.6 3.7 3.5 1.5 2.8 2.4 4.3
----- ----- ----- ----- ---- ----- ---- -----
Net income 2.2 2.1 5.6 5.3 2.0 3.7 3.6 6.5
===== ===== ===== ===== ==== ===== ==== =====
EBITDA(1) 10.3 10.0 15.7 14.8 6.8 12.5 9.2 16.5
- ------------
(1) EBITDA represents income before taxes, interest expense, depreciation and
amortization expense. While EBITDA is not intended to represent cash flow
from operations as defined by GAAP and should not be considered as an
indicator of operating performance or an alternative to cash flow (as
measured by GAAP), as a measure of liquidity, it is included herein to
provide additional information with respect to Diamond's ability to meet
its future debt service, capital expenditure and working capital
requirements.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net Sales. Net sales for the six months ended June 30, 2002 decreased by
$3.3 million, or 3.1%, to $102.6 million from $105.9 million for the six months
ended June 30, 2001. For the six months ended June 30, 2002, installation units
decreased 3.9% and revenue per installation unit increased an average of 0.8%.
The decrease in units sold is primarily due to the historically mild winter
weather conditions experienced throughout a large portion of the United States
and the recessionary economic climate, which resulted in weaker industry demand.
The increase in Diamond's average revenue per installation unit is attributable
to general price increases and to Diamond's sales mix.
Gross Profit. Gross profit for the six months ended June 30, 2002 decreased
by $2.2 million, or 2.9%, to $73.9 million from $76.1 million for the six months
ended June 30, 2001. Gross profit increased as a percentage of sales to 72.0%
for the six months ended June 30, 2002 from 71.9% for the six months ended June
30, 2001. The decrease in gross profit for the six months ended June 30, 2002
was primarily due to a decrease in net sales compared to the six months ended
June 30, 2001 which was partially offset by the increased average revenue per
installation unit.
10
Operating Expenses. Operating expenses for the six months ended June 30,
2002 increased by $3.4 million, or 5.5%, to $65.1 million from $61.7 million
for the six months ended June 30, 2001. Operating expenses increased as a
percentage of sales to 63.5% for the six months ended June 30, 2002 from 58.3%
for the six months ended June 30, 2001. The increase in operating expense
during the six months ended June 30, 2002 compared to the six months ended June
30, 2001 was primarily due to an increase in service center costs related to
expansion, primarily for wages and wage related expenses, advertisement and
promotional expenses and occupancy costs. The increase in operating expenses
was also due to a general increase in wages and wage related expenses
experienced primarily at service centers combined with an increase in insurance
expense due to rising insurance premiums and an increase in advertisement and
promotional expenses.
Depreciation and amortization expense for the six month period ended June
30, 2002 increased by $0.2 million, or 16.7%, to $1.4 million from $1.2 million
for the six months ended June 30, 2001. This increase was primarily due to the
amortization and depreciation expense related to certain sales, billing and
financial systems software and computer hardware implemented in the latter half
of 2001 and the first half of 2002. This increase was partially offset by a
decrease in expense due to the increased use of a master fleet leasing program
for the lease of mobile installation and distribution service vehicles.
Income From Operations. Income from operations for the six months ended
June 30, 2002 decreased by $5.6 million, or 38.9%, to $8.8 million from $14.4
million for the six months ended June 30, 2001. This decrease was primarily due
to the decrease in net sales and increase in operating expenses as discussed
above.
Interest Expense. Interest expense for the six months ended June 30, 2002
decreased $0.1 million to $5.1 million from $5.2 million for the six months
ended June 30, 2001. Cash interest expense was $4.7 million for the six months
ended June 30, 2002 and June 30, 2001. The decrease was primarily due to a
reduction in outstanding borrowings under the Company's Credit Facility during
the six months ended June 30, 2002 compared to the six months ended June 30,
2001.
Net Income. Net income for the six months ended June 30, 2002 decreased by
$3.4 million to $2.2 million from $5.6 million for the six months ended June 30,
2001. Net income as a percentage of sales decreased to 2.1% for the six months
ended June 30, 2002 from 5.3% for the six months ended June 30, 2001. The
decrease in net income and net income margin during the six months ended June
30, 2002 compared to the six months ended June 30, 2001 was primarily due to the
impact of decreased net sales and increased operating expenses.
EBITDA. EBITDA for the six months ended June 30, 2002 decreased by $5.4
million, or 34.4%, to $10.3 million from $15.7 million for the six months ended
June 30, 2001. EBITDA as a percentage of sales decreased to 10.0% for the six
months ended June 30, 2002 from 14.8% for the six months ended June 30, 2001.
The decrease in EBITDA and EBITDA margin for the six months ended June 30, 2002
was primarily due to the decrease in net sales and increase in operating
expenses as discussed above.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Net Sales. Net sales for the three months ended June 30, 2002 decreased by
$1.4 million, or 2.5%, to $54.4 million from $55.8 million for the three months
ended June 30, 2001. During the three months ended June 30, 2002, installation
units decreased by 2.9% and revenue per installation unit increased an average
of 0.5%. The decrease in units sold is primarily due to the historically mild
winter weather conditions experienced throughout a large portion of the United
States and the recessionary economic climate, which resulted in weaker industry
demand. The increase in Diamond's average revenue per installation unit is
attributable to general price increases and to Diamond's sales mix.
Gross Profit. Gross profit for the three months ended June 30, 2002
decreased by $0.9 million, or 2.2%, to $39.4 million from $40.3 million for the
three months ended June 30, 2001. Gross profit increased as a percentage of
sales to 72.4% for the three months ended June 30, 2002 from 72.2% for the three
11
months ended June 30, 2001. The decrease in gross profit for the three months
ended June 30, 2002 was primarily due to a decrease in net sales compared to the
three months ended June 30, 2001, which was partially offset by the increased
average revenue per installation unit.
Operating Expenses. Operating expenses for the three months ended June 30,
2002 increased by $1.5 million, or 4.7%, to $33.3 million from $31.8 million
for the three months ended June 30, 2001. Operating expenses increased as a
percentage of sales to 61.2% for the three months ended June 30, 2002 from
57.0% for the three months ended June 30, 2001. The increase in operating
expense during the three months ended June 30, 2002 compared to the three
months ended June 30, 2001 was primarily due to an increase in service center
costs related to expansion, primarily for wages and wage related expenses,
advertisement and promotional expenses and occupancy costs. The increase in
operating expenses was also due to a general increase in wages and wage related
expenses experienced primarily at service centers combined with an increase in
insurance expense due to rising insurance premiums and an increase in
advertisement and promotional expenses.
Depreciation and amortization expense for the period ended June 30, 2002
increased by $0.1 million, or 16.7%, to $0.7 million from $0.6 million for the
three months ended June 30, 2001. This increase was primarily due to the
amortization and depreciation expense related to certain sales, billing and
financial systems software and computer hardware implemented in the latter half
of 2001 and the first half of 2002. This increase was partially offset by a
decrease in expense due to the increased use of a master fleet leasing program
for the lease of mobile installation and distribution service vehicles.
Income From Operations. Income from operations for the three months ended
June 30, 2002 decreased by $2.4 million, or 28.2%, to $6.1 million from $8.5
million for the three months ended June 30, 2001. This decrease was primarily
due to the decrease in net sales and increase in operating expenses as discussed
above.
Interest Expense. Interest expense remained at $2.6 million for the three
months ended June 30, 2002 and 2001. Cash interest expense also remained at $2.3
million for the three months ended June 30, 2002 and 2001.
Net Income. Net income for the three months ended June 30, 2002 decreased
by $1.6 million to $2.0 million from $3.6 million for the three months ended
June 30, 2001. Net income as a percentage of sales decreased to 3.7% for the
three months ended June 30, 2002 from 6.5% for the three months ended June 30,
2001. The decrease in net income and net income margin during the three months
ended June 30, 2002 compared to the three months ended June 30, 2001 was
primarily due to the impact of decreased net sales and increased operating
expenses.
EBITDA. EBITDA for the three months ended June 30, 2002 decreased by $2.4
million, or 26.1%, to $6.8 million from $9.2 million for the three months ended
June 30, 2001. EBITDA as a percentage of sales decreased to 12.5% for the three
months ended June 30, 2002 from 16.5% for the three months ended June 30, 2001.
The decrease in EBITDA for the three months ended June 30, 2002 was primarily
due to the decrease in net sales and increase in operating expenses as discussed
above.
12
LIQUIDITY AND CAPITAL RESOURCES
Diamond's need for liquidity will arise primarily from the interest payable
on its 9 1/4% Senior Notes (the "Notes"), its Credit Facility and the funding of
Diamond's capital expenditures and working capital requirements. There are no
mandatory principal payments on the Notes prior to their maturity on April 1,
2008 and, except to the extent that the amount outstanding under the Credit
Facility exceeds the borrowing base, no required payments of principal on the
Credit Facility prior to its expiration on March 27, 2004.
Net Cash Provided by Operating Activities. Net cash provided by operating
activities for the six months ended June 30, 2002 decreased by $3.2 million to
$4.8 million from $8.0 million for the six months ended June 30, 2001. The
change was primarily attributable to a decrease in Diamond's net earnings and a
$4.6 million increase in accounts receivable which was partially offset by a
$1.3 million decrease in inventory and $1.6 million increase in accrued
expenses.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the six months ended June 30, 2002 increased $0.8 million to $2.2
million from $1.4 million used in investing activities for the six months ended
June 30, 2001. The primary reason for the variance was an increase in capital
expenditures.
Net Cash Used in Financing Activities. Net cash used in financing
activities in the six months ended June 30, 2002 was $0.1 million compared to
$0.6 million used in financing activities in the six months ended June 30, 2001.
The primary reasons for this decrease in cash used by financing activities was
the lack of borrowing on the Credit Facility during the six months ended June
30, 2002.
Capital Expenditures. Capital expenditures for the six months ended June
30, 2002 were $2.3 million, as compared to $1.5 million for the six months ended
June 30, 2001. Capital expenditures for the six months ended June 30, 2002 were
made primarily to fund the continued upgrade of Diamond's management information
systems.
Liquidity. Management believes that Diamond will have adequate capital
resources and liquidity to satisfy its debt service obligations, working capital
needs and capital expenditure requirements, including those related to the
opening of new service centers and distribution centers for the foreseeable
future. Diamond's capital resources and liquidity are expected to be provided by
Diamond's net cash provided by operating activities and borrowings under the
Credit Facility. See "--Notes to Financial Statements -- Note 5 -- Income Tax"
for a discussion of the Internal Revenue Service's proposed adjustments with
respect to Diamond's tax treatment of its recapitalization Transaction (as
defined in the Company's 10-K for the year ended December 31, 2001) entered
into by Diamond and other parties in January 1998.
CONTRACTUAL CASH OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The following summarizes Diamond's contractual cash obligations and other
commercial commitments as of June 30, 2002.
PAYMENTS DUE BY PERIOD (DOLLARS IN THOUSANDS)
---------------------------------------------------------
CONTRACTUAL CASH OBLIGATIONS TOTAL LESS THAN 1 YEAR AFTER 5 YEARS
-------- ---------------- -------------
Long Term Debt $100,000 100,000
Operating Leases 1,137 1,137 -
-------- ------- -------
Total Contractual Cash Obligations $101,137 1,137 100,000
======== ======= =======
AMOUNT OF COMMITMENT
EXPIRATION PER PERIOD
(DOLLARS IN THOUSANDS)
--------------------------------
OTHER COMMERCIAL COMMITMENTS TOTAL AMTS 1-3 YEARS
COMMITTED ---------
----------
Standby Letters of Credit $ 4,296 4,296
Operating Lease - Contingent Guaranteed
Residual Value $10,070 10,070
------- -------
Total Commercial Commitments $14,366 $14,366
======= =======
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RELATED PARTY TRANSACTIONS
On June 1, 2002, Diamond entered into an employment agreement with Norman Harris
(the "Executive") pursuant to which Mr. Harris agreed to serve as the Chief
Executive Officer of Diamond at an annual salary of $400,000 (the "Base
Salary"), subject to annual review based on Diamond's and the Executive's
performance. The employment agreement provides for an initial term of four years
beginning on June 1, 2002 and ending on June 1, 2006. In addition to the Base
Salary, the Executive is eligible to receive a bonus based upon the achievement
of certain criteria to be mutually agreed upon by the Executive and the Board of
Directors of Diamond. The employment agreement also contains various severance,
non-competition, non-solicitation provisions, non-disclosure and assignment of
inventions provisions.
On June 1, 2002 (the "Grant Date"), the Executive and Diamond entered into a
Restricted Stock Agreement (the "Agreement") pursuant to which the Executive
purchased from Diamond 26,366 shares (the "Restricted Shares") of Diamond's
common stock, par value $0.01 per share, for nominal consideration. The
Agreement generally restricts the sale or transferability of shares of Common
Stock held by the Executive before the Restrictions (as defined in the
Agreement) have lapsed. The Executive has all rights and privileges of a
stockholder with respect to the Restricted Shares, including voting rights and
the right to receive dividends paid with respect to the Restricted Shares.
Generally, the Restricted Shares vest and the Restrictions lapse: (i) with
respect to 20% of the Restricted Shares on the Grant Date and; (ii) with
respect to 20% of the Restricted Shares on each subsequent anniversary of the
Grant Date until the Restricted Shares are fully vested. Compensation expense,
unearned restricted stock compensation, and proceeds from common stock issued
have been recognized based on the vesting periods and an estimated fair market
value of $20 per share.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Diamond has a revolving Credit Facility that provides for revolving
advances of up to $25.0 million, and matures in March 2004. Borrowings
under the Credit Facility bear interest, at Diamond's discretion, at
either the Chase Manhattan Bank Rate (as defined in the Credit
Facility) or LIBOR, plus a margin of 0.25% for the Chase Manhattan
Rate and 2.0% for the LIBOR Rate. In addition, a commitment fee of
0.25% is charged against any unused balance of the Credit Facility.
Interest rates are subject to increases or reductions based upon
Diamond meeting certain EBITDA levels. At June 30, 2002, Diamond did
not have any borrowings outstanding under the Credit Facility.
FORWARD-LOOKING STATEMENTS
Readers are cautioned that there are statements contained in this report
which are "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements
include statements which are predictive in nature, which depend upon or refer to
future events or conditions, which include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," or similar
expressions. In addition, any statements concerning future financial performance
(including future revenues, earnings or growth rates), ongoing business
strategies or prospects, and possible future actions, which may be provided by
management, are also forward-looking statements as defined by the Act.
Forward-looking statements are based on current expectations and projections
about future events and are subject to risks, uncertainties, and assumptions
about Diamond, economic and market factors and the industries in which Diamond
does business, among other things. These statements are not guarantees of future
performance and Diamond has no specific intention to update these statements.
These forward-looking statements, like any forward-looking statements,
involve risks and uncertainties that could cause actual results to differ
materially from those projected or anticipated. The risks and uncertainties
include the effect of overall economic and business conditions, the demand for
Diamond's products and services, regulatory uncertainties, the impact of
competitive products and pricing, changes in customers' ordering patterns and
potential system interruptions. This list should not be construed as exhaustive.
Our annual report on Form 10-K in respect of the fiscal year ended December 31,
2001 discusses certain of these risks and uncertainties under the caption
"Factors Affecting Future Performance."
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 2, 2002, Diamond filed an amended Complaint with the United States
District Court, Middle District of Pennsylvania against Safelite Glass
Corporation (the "Defendant"). Diamond alleges, among other things, that the
Defendant's conduct as (i) an operator of national telephone call centers which
takes first notice of loss calls from insureds of several of the largest
automobile insurers in the United States (the "Insurers"); (ii) a provider of
various claims processing services to the Insurers as a third-party
administrator and; (iii) an operator of a network of retail repair and
replacement facilities who perform work for the Insurers as Safelite affiliates,
violated certain federal and state laws and give rise to other legal and
equitable claims against the Defendant. Diamond alleges that the Defendant
engaged in various practices designed to divert customers away from Diamond to
the Defendant, and that Diamond has suffered damages as a result of this conduct
in an amount to be determined at trial.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 1, 2002 (the "Grant Date"), Norman Harris ("the Executive") and
Diamond entered into a Restricted Stock Agreement (the "Agreement") pursuant to
which the Executive purchased from Diamond 26,366 shares (the "Restricted
Shares") of Diamond's common stock, par value $0.01 per share, for nominal
consideration. The Agreement generally restricts the sale or transferability of
shares of Common Stock held by the Executive before the Restrictions (as
defined in the Agreement) have lapsed. The Executive has all rights and
privileges of a stockholder with respect to the Restricted Shares, including
voting rights and the right to receive dividends paid with respect to the
Restricted Shares. Generally, the Restricted Shares vest and the Restrictions
lapse: (i) with respect to 20% of the Restricted Shares on the Grant Date and;
(ii) with respect to 20% of the Restricted Shares on each subsequent
anniversary of the Grant Date until the Restricted Shares are fully vested.
Compensation expense, unearned restricted stock compensation, and proceeds from
common stock issued have been recognized based on the vesting periods and an
estimated fair market value of $20 per share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Employment Agreement, dated June 1, 2002, between Diamond Triumph Auto Glass, Inc.
and Norman Harris
10.2 Restricted Stock Agreement, dated June 1, 2002, between Diamond Triumph Auto Glass, Inc and Norman Harris
10.3 Letter Agreement, dated June 1, 2002, between Diamond Triumph Auto Glass, Inc., Green Equity Investors II,
L.P., Kenneth Levine, Richard Rutta and Norman Harris.
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended June 30,
2002.
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SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
DIAMOND TRIUMPH AUTO GLASS, INC.
Date: August 14, 2002 By: /s/ Michael A. Sumsky
------------------------------------
Name: Michael A. Sumsky
Title: President,
Chief Financial Officer and General
Counsel (Principal Financial and Chief
Accounting Officer)
17