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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-33572
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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2. Yes [ ] No [X]
As of May 15, 2003, there were 1,011,366 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).
DIAMOND TRIUMPH AUTO GLASS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2003 (unaudited) and December 31, 2002 .............. 3
Condensed Consolidated Statements of Operations - Three Months Ended
March 31, 2003 and 2002 (unaudited) ........................... 4
Condensed Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2003 and 2002 (unaudited) ........................... 5
Notes to Unaudited Condensed Consolidated Financial Statements ..... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ........................................................ 14
Item 4. Controls and Procedures ............................................ 14
Part II. Other Information
Item 1. Legal Proceedings .................................................. 15
Item 6. Exhibits and Reports on Form 8-K ................................... 15
Signature .......................................................... 16
Certifications ..................................................... 17
2
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except per share amounts)
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,791 $ 2,094
Accounts receivable, net 14,259 11,403
Other receivables 516 349
Inventories 14,756 15,712
Prepaid expenses 2,525 1,562
Deferred income taxes 4,132 4,277
--------- ---------
Total current assets 42,979 35,397
--------- ---------
Equipment and leasehold improvements, net 7,636 8,006
Deferred loan costs and senior notes discount, net 3,780 4,001
Deferred income taxes 35,642 35,932
Other assets 452 486
--------- ---------
Total assets $ 90,489 $ 83,822
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 12,833 $ 9,856
Accrued expenses:
Payroll and related items 6,039 5,729
Accrued interest 4,305 2,155
Accrued income taxes 362 451
Other 1,321 710
--------- ---------
Total accrued expenses 12,027 9,045
--------- ---------
Total current liabilities 24,860 18,901
--------- ---------
Long-term debt:
Senior notes 93,000 93,000
--------- ---------
Total long-term debt 93,000 93,000
--------- ---------
Total liabilities 117,860 111,901
--------- ---------
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 2003 and 2002, at liquidation preference value 63,214 61,373
--------- ---------
Stockholders' equity (deficit):
Common stock, 2003 and 2002 par value $0.01 per share; authorized
1,100,000 shares; issued and outstanding 1,026,366 shares in 2003 and 2002 10 10
Additional paid-in capital 33,106 34,947
Deferred compensation (334) (360)
Retained earnings (accumulated deficit) (123,067) (123,749)
Common stock in treasury, at cost, 15,000 shares in 2003 and 2002 (300) (300)
--------- ---------
Total stockholders' equity (deficit) (90,585) (89,452)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 90,489 $ 83,822
========= =========
See notes to condensed consolidated financial statements
3
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
Net sales $ 54,133 $ 48,157
Cost of sales 16,237 13,637
-------- --------
Gross profit 37,896 34,520
Operating expenses 34,395 31,723
-------- --------
Income from operations 3,501 2,797
Other (income) expense:
Interest income (15) (61)
Interest expense 2,398 2,572
-------- --------
2,383 2,511
-------- --------
Income before provision for income taxes 1,118 286
Provision for income taxes 436 120
-------- --------
Net income 682 166
Preferred stock dividends 1,841 1,635
-------- --------
Net loss applicable to common stockholders ($ 1,159) ($ 1,469)
======== ========
See notes to condensed consolidated financial statements
4
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
------- -------
OPERATING ACTIVITIES
Net cash provided by operating activities $ 5,023 $ 1,514
------- -------
INVESTING ACTIVITIES
Capital expenditures (382) (1,217)
Proceeds from sale of equipment 22 35
Decrease (increase) in other assets 34 (1)
------- -------
Net cash (used in) investing activities (326) (1,183)
------- -------
FINANCING ACTIVITIES
Deferred loan cost -- (50)
------- -------
Net cash provided by (used in) financing activities -- (50)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,697 281
Cash and cash equivalents, beginning of period 2,094 6,592
------- -------
Cash and cash equivalents, end of period $ 6,791 $ 6,873
======= =======
See notes to condensed consolidated financial statements
5
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED 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, 2002. 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 earnings before interest expense,
income taxes, depreciation and amortization expense ("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 March 31, 2003 and December 31, 2002, the
liquidation value of the Preferred Stock recorded on Diamond's
Balance Sheet was $63,214 and $61,373, respectively, which includes
dividends of $28,214 and $26,373, respectively.
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 $10,000, is available for the issuance of
letters of credit, which generally have an initial term of one year
or less. Diamond had $5,541 in outstanding letters of credit at
March 31, 2003. 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 0.75% for
the Chase Manhattan Rate and 2.50% 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 of $10,500 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 March 31, 2003. At
March 31, 2003, Diamond did not have any borrowings outstanding
under the Credit Facility.
Stock Option Plan:
In September 1998, the Board of Directors and stockholders of the
Company approved and adopted the Diamond Triumph Auto Glass 1998
Stock Option Plan (the "1998 Plan"). The 1998 Plan provides for the
issuance of a total of 30,000 authorized and unissued shares of
common stock. As of March 31, 2003, the Board of Directors had
granted 28,225 options to key employees of the Company with an
exercise price of $20.00 per share, which approximates fair value at
the date of grant. The options vest evenly over five years and may
not be exercised until the earlier of (a) 90 days after the
Company's Common Stock has become publicly traded or (b) 91 days
prior to the tenth anniversary of the date of the grant. The 1998
Plan expires in September 2008. No options were granted in 2002 or
in the three months ended March 31, 2003.
The Company accounts for its stock option plan under Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees," under which no compensation cost has been
recognized for options issued to employees at fair market value on
the date of grant. In 1995, the Financial Accounting
6
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands except per share amounts)
Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 established a fair value based method of
accounting for stock-based compensation plans. SFAS No. 123, as
amended by SFAS No. 148, requires that a company's financial
statements include certain disclosures about stock-based employee
compensation arrangement regardless of the method used to account
for the plan.
As allowed by SFAS 123, the Company has elected to continue to
account for its employee stock-based compensation plans under APB
Opinion No. 25, and adopted only the disclosure requirements of SFAS
No. 123. Had the Company recognized compensation cost for its stock
based compensation plans consistent with the provisions of SFAS 123,
the Company's net income would have been reduced to the following
pro forma amounts:
THREE MONTHS ENDED MARCH 31,
--------------------------
2003 2002
----- -----
Net income $ 682 $ 166
As reported
Add stock-based employee compensation expense 16 --
included in reported net income, net of tax
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (18) (2)
----- -----
Pro forma $ 680 $ 164
----- -----
The fair value of the options granted of $2.84 is estimated using the
Black-Scholes option-pricing model with the following assumptions: risk-free
interest rate of 4.65%, volatility of 0% and expected dividend yield of 0%.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
During June 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." Such Standard requires costs associated with
exit or disposal activities (including restructurings), to be
recognized when costs are incurred, rather than at a date of
commitment to an exit or disposal plan. SFAS No. 146 nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Under SFAS No. 146, a liability related to an exit
or disposal activity is not recognized until such liability has
actually been incurred whereas under EITF Issue No. 94-3 a liability
was recognized at the time of a commitment to an exit or disposal
plan. The provisions of this standard are effective for disposal
activities initiated after December 31, 2002. The adoption of SFAS
No. 146 did not have any impact on the financial statements.
In November 2002, the FASB issued Interpretation No. 45, which
elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation
are effective for guarantees issued or modified after December 31,
2002. The disclosure requirements were effective for financial
statements for interim or annual periods ending after December 15,
2002. Diamond adopted the initial recognition provisions of
Interpretation No. 45 in January of 2003. The initial adoption of
Interpretation No. 45 did not have an initial impact on our results
of operations or financial positions.
7
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands except per share amounts)
In December 2002, the FASB issued SFAS No. 148, which amends SFAS
No. 123, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends
the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements. Certain
of the disclosure modifications are required for fiscal years ending
after December 15, 2002. Diamond has adopted the disclosure
provisions of SFAS No. 148.
In January 2003, the FASB issued Interpretation No. 46, which
addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interest in variable
interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31,
2003. The application of this Interpretation did not have any effect
on the Company's financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". This
Statement amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities".
This Statement is effective, except for certain provisions, for
contracts entered into or modified after June 30, 2003. Diamond does
not expect adoption of SFAS No. 149 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
8
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands except per share amounts)
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.
On November 1, 2002, the Defendant filed a counter claim against
Diamond, alleging, among other things, that Diamond has engaged and
continues to engage in publishing certain false and defamatory
statements about the Defendant to automobile insurance companies
that are the Defendant's clients. Defendant alleges that this
alleged conduct has injured the Defendant's goodwill and business
reputation with its insurance clients and in the autoglass repair
and replacement industry. Among other things, the Defendant is
seeking damages in an amount to be determined at trial.
On February 3, 2003, Delbert Rice and Kenneth E. Springfield, Jr.,
on behalf of themselves and all others similarly situated (the
"Plaintiffs"), filed a class action Complaint in the Court of Common
Pleas of Luzerne County against Diamond. Plaintiffs allege, among
other things, Diamond violated certain sections of the Pennsylvania
Unfair Trade Practices and Consumer Protection Law and common law.
Plaintiffs allege that this alleged conduct has caused monetary
damages to Plaintiffs. Among other things, Plaintiffs are seeking
damages in an amount to be determined at trial. Diamond believes
Plaintiffs' allegations are without merit and plans to vigorously
contest this complaint.
The Company is involved in various claims and legal actions arising
in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material
adverse effect on the Company's financials, results of operations or
liquidity. No amounts have been recorded in the consolidated
financial statements for any of these legal actions.
NOTE 5. INCOME TAXES
As disclosed in the Company's 10-K for the year ended December 31,
2002, 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, 2002).
The proposed adjustments by the Internal Revenue Service would
result in $7.3 million of federal tax deficiencies owed by Diamond
for the period December 31, 1998 through December 31, 2002, 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,
2002 is approximately $36.5 million. In addition, Diamond would be
responsible to fund a current federal tax liability for the three
months ended March 31, 2003 of approximately $0.4 million plus
possible interest and penalties, and any resulting increases in
current state tax expense for 2003.
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.
Note 6. CONTINGENT GUARANTEED COMMITMENTS
Diamond leases certain vehicles under operating leases having lease
terms of 367 days. The leases have monthly renewal options. The
vehicle lease agreement provides for terminal lease payment for
guaranteed residual values reduced by actual proceeds from the
vehicle sale in the event the lease is not renewed. The contingent
guaranteed residual value payment commitment was $9,809 at March 31,
2003. No amounts have been accrued for related to this contingent
obligation because Diamond does not believe it is probable that the
payments will be required.
9
NOTE 7. SUBSEQUENT EVENTS
Diamond repurchased $11,042 principal amount of its senior notes in
open market transactions during April and May of 2003 resulting in
an aggregate financial statement gain.
10
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 three months ended March 31, 2003 and 2002.
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------
2003 2002
------------------------- --------------------------
$ % $ %
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Net Sales 54.1 100.0 48.2 100.0
Cost of Sales 16.2 29.9 13.7 28.4
----- ----- ----- -----
Gross Profit 37.9 70.1 34.5 71.6
Operating Expenses 34.4 63.6 31.7 65.8
----- ----- ----- -----
Income From Operations 3.5 6.5 2.8 5.8
Interest Income -- -- (0.1) (0.2)
Interest Expense 2.4 4.4 2.6 5.4
----- ----- ----- -----
2.4 4.4 2.5 5.2
----- ----- ----- -----
Income before provision for income taxes 1.1 2.0 0.3 0.6
Provision (Benefit) for income taxes 0.4 0.7 0.1 0.2
----- ----- ----- -----
Net income 0.7 1.3 0.2 0.4
===== ===== ===== =====
EBITDA (1) 4.3 7.9 3.5 7.3
----- ----- ----- -----
(1) EBITDA is defined as earnings before interest expense, taxes,
depreciation and amortization, which for Diamond is income from
operations plus depreciation and amortization and interest income.
EBITDA is not a measurement of financial performance under
accounting principles generally accepted in the United States of
America, or GAAP, and should not be considered in isolation or as an
alternative to income from operations, net income, cash flows from
operating activities or any other measure of performance or
liquidity derived in accordance with GAAP. EBITDA is presented
because Diamond believes it is an indicative measure of its
operating performance and its ability to meet its debt service
requirements and is used by investors and analysts to evaluate
companies in its industry as a supplement to GAAP measures
Not all companies calculate EBITDA using the same methods;
therefore, the EBITDA figures set forth herein may not be comparable
to EBITDA reported by other companies. A substantial portion of
Diamond's EBITDA must be dedicated to the payment of interest on its
outstanding indebtedness and to service other commitments, thereby
reducing the funds available to Diamond for other purposes.
Accordingly, EBITDA does not represent an amount of funds that is
available for management's discretionary use.
Three Months Ended March 31,
-----------------------
2003 2002
---- ----
(dollars in millions)
Income from operations $3.5 $2.8
Depreciation and amortization 0.8 0.6
Interest Income 0.0 0.1
---- ----
EBITDA $4.3 $3.5
==== ====
11
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED
MARCH 31, 2002
Net Sales. Net sales for the three-month period ended March
31, 2003 increased 12.4% to $54.1 million from $48.2 million as
compared to the three-month period ended March 31, 2002.
Installation units sold through March 31, 2003 increased 14.8%
compared to the three-month period ended March 31, 2002. Diamond's
revenue per installation unit for the three-month period ended March
31, 2003 was 1.8% below the three-month period ended March 31, 2002
revenue per installation unit. The increase in sales and
installation units is primarily due to the increase in demand due to
harsh winter weather conditions. The decrease in revenue per
installation unit is primarily due to a series of price changes made
to the list prices developed by the National Auto Glass
Specifications ("NAGS"), an independent third party. These price
changes, effective January 2003, have resulted in a 4% to 5%
decrease in overall list prices.
Gross Profit. Gross profit was $37.9 million for the three
months ended March 31, 2003 and $34.5 million for the three months
ended March 31, 2002. Gross profit decreased as a percentage of
sales to 70.1% for the three months ended March 31, 2003 from 71.6%
for the three months ended March 31, 2002. The decrease in gross
profit percentage is due to a decrease in average revenue per
installation unit and an increase in average cost per installation
unit.
Operating Expenses. Operating expenses increased $2.6 million,
or 8.3%,compared to the three-month period ended March 31, 2002.
Approximately $1.1 million of increased operating expense is
directly related to expansion in service centers, primarily for
wages and wage related expenses, advertisement and promotional
expenses and occupancy costs. The increase in operating expenses was
also due to an increase in wages and wage related expense, primarily
at the service centers, due to an increase in unit demand and to
general wage increases, an increase in insurance expense due to
rising insurance premiums, an increase in advertisement and
promotional expenses and an increase in vehicle fuel costs due to
rising prices and increased consumption. We also experienced an
increase in vehicle lease expense due to an increase in fleet size
to support expansion and continued replacement of owned vehicles
with leased vehicles. These increases were partially offset by
savings in office supplies, professional fees, shop maintenance,
telephone and vehicle maintenance expense categories.
Depreciation and amortization expense increased by $0.2
million to $0.8 million for the three-month period ended March 31,
2003 from $0.6 million for the three-month period ended March 31,
2002. This increase was primarily due to increased depreciation and
amortization expense related to certain sales, billing and financial
system software and computer hardware. 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 March 31, 2003 increased by $0.7 million, or 25.2%, to
$3.5 million from $2.8 million for the three months ended March 31,
2002. This increase was primarily due to the increase in revenue as
discussed above.
Interest Expense. Interest expense for the three months ended
March 31, 2003 decreased $0.2 million, or 6.8%, to $2.4 million from
$2.6 million for the three months ended March 31, 2002. The decrease
was a direct result from reduced interest expense realized by the
repurchase of $7.0 million in senior notes in December 2002.
Net Income. Net income for the three months ended March 31,
2003 increased by $0.5 million to $0.7 million from $0.2 million for
the three months ended March 31, 2002. Net income as a percentage of
sales increased 0.9% for the three months ended March 31, 2003
compared to the three months ended March 31, 2002. The increase in
net income and net income margin during the three months ended March
31, 2003 compared to the three months ended March 31, 2002 was
primarily due to the impact of increased sales discussed above.
EBITDA. EBITDA for the three months ended March 31, 2003
increased by $0.8 million, or 21.3%, to $4.3 million from $3.5
million for the three months ended March 31, 2002. EBITDA as a
percentage of sales increased to 7.9% for the three months ended
March 31, 2003 from 7.3% for the three
12
months ended March 31, 2002. The increase in EBITDA for the three
months ended March 31, 2003 was primarily due to the increase in
sales as discussed above.
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 three months ended March 31, 2003
increased by $3.5 million to $5.0 million from $1.5 million for the
three months ended March 31, 2002. The change was primarily
attributable to an increase in Diamond's net earnings, as well as an
increase in accounts payable and a decrease in inventories, which
were partially offset by an increase in receivables, prepaid
expenses and a decrease in accrued expenses.
Net Cash Used in Investing Activities. Net cash used in
investing activities for the three months ended March 31, 2003
decreased $0.9 million to $0.3 million from $1.2 million used in
investing activities for the three months ended March 31, 2002. The
primary reason for the variance was a decrease in capital
expenditures.
Net Cash Used in Financing Activities. Net cash used in
financing activities for the three months ended March 31, 2003 was
$0.0 million compared to $0.1 million used in financing activities
in the three months ended March 31, 2002. The primary reason for
this decrease in cash used by financing activities was due to the
timing of funding of certain debt maintenance cost during the three
months ended March 31, 2003.
Capital Expenditures. Capital expenditures for the three months
ended March 31, 2003 were $0.4 million, as compared to $1.2 million
for the three months ended March 31, 2002. The decrease is due to
the higher costs incurred during the three months ended March 31,
2002 related to 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, 2002).
ACCOUNTING STANDARDS NOT YET ADOPTED
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". This
Statement amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities".
This Statement is effective, except for certain provisions, for
contracts entered into or modified after June 30, 2003. Diamond does
not expect adoption of SFAS No. 149 to have a material impact on its
financial statements.
13
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 0.75% for the Chase
Manhattan Rate and 2.50% 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
March 31, 2003, 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," "will," "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, 2002 discusses certain of these risks and
uncertainties under the caption "Factors Affecting Future
Performance."
ITEM 4 CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed in
the Company's Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. In designing
and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily
was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and the Company's Chief Financial Officer,
of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were
effective.
There have been no significant changes in the Company's
internal controls or in other factors that could significantly
affect the internal controls subsequent to the date the Company
completed its evaluation.
14
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.
On November 1, 2002, the Defendant filed a counter claim against
Diamond, alleging, among other things, that Diamond has engaged and
continues to engage in publishing certain false and defamatory statements
about the Defendant to automobile insurance companies that are the
Defendant's clients. Defendant alleges that this alleged conduct has
injured the Defendant's goodwill and business reputation with its
insurance clients and in the autoglass repair and replacement industry.
Among other things, the Defendant is seeking damages in an amount to be
determined at trial.
On February 3, 2003, Delbert Rice and Kenneth E. Springfield, Jr.,
on behalf of themselves and all others similarly situated (the
"Plaintiffs"), filed a class action Complaint in the Court of Common Pleas
of Luzerne County against Diamond. Plaintiffs allege, among other things,
Diamond violated certain sections of the Pennsylvania Unfair Trade
Practices and Consumer Protection Law and common law. Plaintiffs allege
that this alleged conduct has caused monetary damages to Plaintiffs. Among
other things, Plaintiffs are seeking damages in an amount to be determined
at trial. Diamond believes Plaintiffs' allegations are without merit and
plans to vigorously contest this complaint.
The Company is involved in various claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's financials, results of operations or liquidity. No
amounts have been recorded in the consolidated financial statements for
any of these legal actions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as created
by Section 906 of the Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
Form 8-K filed on April 2, 2003, reporting that Diamond
Triumph Auto Glass, Inc. issued a press release announcing its
operating and financial results for the year ended December
31, 2002.
Form 8-K filed on April 9, 2003, reporting that Diamond
Triumph Auto Glass, Inc. held a teleconference following the
announcement of its operating and financial results for the
year ended December 31, 2002.
15
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: May 15, 2003 By: /s/ Michael A. Sumsky
----------------------------------------
Name: Michael A. Sumsky
Title: President,
Chief Financial Officer and General
Counsel (Principal Financial and Chief
Accounting Officer)
16
I, Norman Harris, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Diamond Triumph Auto
Glass, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary in
order to make the statement made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which the
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003 By: /s/ Norman Harris
---------------------------
Chief Executive Officer
17
I, Michael A. Sumsky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Diamond Triumph Auto
Glass, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary in
order to make the statement made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which the
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003 By: /s/ Michael A. Sumsky
---------------------------
Chief Financial Officer
18