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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 June 30, 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 August 14, 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 JUNE 30, 2003
INDEX
Page No.
--------
Part I. Financial Information
- -------------------------------
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2003 (unaudited) and December 31, 2002 ............... 3
Condensed Consolidated Statements of Operations - Three Months Ended
June 30, 2003 and 2002 (unaudited) ............................ 4
Condensed Consolidated Statements of Operations - Six Months Ended
June 30, 2003 and 2002 (unaudited) ............................ 5
Condensed Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2003 and 2002 (unaudited) ............................ 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 11
Item 3 Quantitative and Qualitative Disclosures about
Market Risk ........................................................ 15
Item 4. Controls and Procedures ............................................ 16
Part II. Other Information
Item 1. Legal Proceedings........................................ 17
Item 6. Exhibits and Reports on Form 8-K........................ 17
Signature............................................... 18
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)
June 30, 2003 December 31, 2002
---------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 49 $ 2,094
Accounts receivable, net 13,180 11,403
Other receivables 863 349
Inventories 14,527 15,712
Prepaid expenses 1,623 1,562
Deferred income taxes 3,667 4,277
--------- ---------
Total current assets 33,909 35,397
--------- ---------
Equipment and leasehold improvements, net 7,270 8,006
Deferred loan costs and senior notes discount, net 3,153 4,001
Deferred income taxes 34,707 35,932
Other assets 444 486
--------- ---------
Total assets $ 79,483 $ 83,822
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 11,109 $ 9,856
Accrued expenses:
Payroll and related items 5,626 5,729
Accrued interest 1,907 2,155
Accrued income taxes 317 451
Other 1,222 710
--------- ---------
Total accrued expenses 9,072 9,045
--------- ---------
Credit facility 2,500 --
Total current liabilities 22,681 18,901
--------- ---------
Long-term debt:
Senior notes 81,958 93,000
--------- ---------
Total long-term debt 81,958 93,000
--------- ---------
Total liabilities 104,639 111,901
--------- ---------
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 65,110 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 31,209 34,947
Deferred compensation (307) (360)
Retained earnings (accumulated deficit) (120,878) (123,749)
Common stock in treasury, at cost, 15,000 shares in 2003 and 2002 (300) (300)
--------- ---------
Total stockholders' equity (deficit) (90,266) (89,452)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 79,483 $ 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
June 30, 2003 June 30, 2002
------------------ ------------------
Net sales $ 59,790 $ 54,404
Cost of sales 18,536 15,050
-------- --------
Gross profit 41,254 39,354
Operating expenses 36,492 33,311
-------- --------
Income from operations 4,762 6,043
Other (income) expense:
Interest income (6) (42)
Interest expense 1,180 2,571
-------- --------
1,174 2,529
-------- --------
Income before provision for income taxes 3,588 3,514
Provision for income taxes 1,399 1,476
-------- --------
Net income 2,189 2,038
Preferred stock dividends 1,896 1,685
-------- --------
Net income applicable to common stockholders $ 293 $ 353
======== ========
See notes to condensed consolidated financial statements
4
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
---------------- ----------------
Net sales $ 113,923 $ 102,561
Cost of sales 34,773 28,687
--------- ---------
Gross profit 79,150 73,874
Operating expenses 70,887 65,034
--------- ---------
Income from operations 8,263 8,840
Other (income) expense:
Interest income (21) (103)
Interest expense 3,578 5,143
--------- ---------
3,557 5,040
--------- ---------
Income before provision for income taxes 4,706 3,800
Provision for income taxes 1,835 1,596
--------- ---------
Net income 2,871 2,204
Preferred stock dividends 3,737 3,320
--------- ---------
Net loss applicable to common stockholders ($ 866) ($ 1,116)
========= =========
See notes to condensed consolidated financial statements
5
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
---------------- ----------------
OPERATING ACTIVITIES
Net cash provided by operating activities $ 5,624 $ 4,807
------- -------
INVESTING ACTIVITIES
Capital expenditures (711) (2,296)
Proceeds from sale of equipment 45 69
Decrease (increase) in other assets 41 (7)
------- -------
Net cash (used in) investing activities (625) (2,234)
------- -------
FINANCING ACTIVITIES
Payment for redemption of senior notes (9,544) --
Net proceeds from credit facility 6,000 --
Payments on credit facility (3,500) --
Deferred loan cost -- (50)
------- -------
Net cash (used in) financing activities (7,044) (50)
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,045) 2,523
Cash and cash equivalents, beginning of period 2,094 6,592
------- -------
Cash and cash equivalents, end of period $ 49 $ 9,115
======= =======
See notes to condensed consolidated financial statements
6
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 June 30, 2003 and December 31, 2002, the
liquidation value of the Preferred Stock recorded on Diamond's Balance
Sheet was $65,110 and $61,373, respectively, which includes dividends
of $30,110 and $26,373, respectively.
Borrowings:
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 $6,116 in outstanding letters of
credit at June 30, 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 level of $10,500 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, 2003. At June 30, 2003,
Diamond had $2,500 of borrowings outstanding under the Credit Facility.
During April and May 2003, Diamond repurchased $11,042 principal amount
of its senior notes for a repurchase price of $9,544. This repurchase
resulted in a gain of $1,065 which was the difference between the
carrying value of the senior notes, including unamortized debt issuance
costs at the time of their repurchase, and the amount paid to
repurchase the senior notes. In accordance with SFAS No. 145, this gain
is included within interest expense.
Stock Option Plan:
In September 1998, the Board of Directors and stockholders of Diamond
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
June 30, 2003, the Board of Directors had granted 24,425 options to key
employees of Diamond 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 Diamond's Common Stock has
7
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands except per share amounts)
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 six months ended June 30, 2003.
Diamond 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 Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 No.123, Diamond 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
Diamond recognized compensation cost for its stock based compensation
plans consistent with the provisions of SFAS 123, Diamond's net income
would have been reduced to the following pro forma amounts:
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
------------------------- --------------------------
Net Income 2003 2002 2003 2002
------- ------- ------- -------
As reported $ 2,871 $ 2,204 $ 2,189 $ 2,038
Add stock-based employee compensation expense
included in reported net income, net
of tax 32 66 16 66
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax
(37) (71) (19) (69)
------- ------- ------- -------
Pro Forma $ 2,866 $ 2,199 $ 2,186 $ 2,035
------- ------- ------- -------
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
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 a
material impact on Diamond's results of operations or financial
positions.
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
8
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands except per share amounts)
modifications are required for fiscal years ending after December 15,
2002. Diamond has adopted the disclosure provisions of SFAS No. 148.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It applies specifically
to a number of financial instruments that companies have historically
presented within their financial statements either as equity or between
the liabilities section and the equity section, rather than as
liabilities. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective
at the beginning of the first interim period beginning after June 15,
2003. This will effect Diamond's accounting for its preferred stock
which has historically been presented between the liabilities and
equity section of Diamond's Balance Sheet. The effect of the adoption
of SFAS No. 150 for Diamond will be to present the preferred stock
within the equity section of the Balance Sheet. See "Note 7 -
Subsequent Event" for a discussion related to amending its Charter with
respect to its class of Preferred Stock.
NOTE 3. EXECUTIVE COMPENSATION
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.
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.
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
9
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands except per share amounts)
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.
Diamond 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
Diamond'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 Diamond'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 Diamond'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 six months ended June 30, 2003 of
approximately $1.9 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 has appealed 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 payments 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 $10,822 at June 30, 2003. No amounts have
been accrued related to this contingent obligation because Diamond does
not believe it is probable that the payments will be required.
NOTE 7. SUBSEQUENT EVENT
The stockholders of Diamond have, effective July 1, 2003, amended
Diamond's Charter with respect to its class of Preferred Stock, which
eliminated the April 1, 2010 mandatory redemption clause. In accordance
with SFAS No. 150, this amendment will cause the Preferred Stock to be
classified as an equity instrument rather than as a liability effective
July 1, 2003.
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 six and three months ended June 30, 2003 and 2002.
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
------------------------------------ ---------------------------------
2003 2002 2003 2002
--------------- ---------------- -------------- --------------
$ % $ % $ % $ %
----- ----- ----- ----- ---- ----- ---- -----
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
Net Sales .............................. 113.9 100.0 102.6 100.0 59.8 100.0 54.4 100.0
Cost of Sales .......................... 34.7 30.5 28.7 28.0 18.5 30.9 15.0 27.6
----- ----- ----- ----- ---- ----- ---- -----
Gross Profit ........................... 79.2 69.5 73.9 72.0 41.3 69.1 39.4 72.4
Operating Expenses ..................... 70.9 62.2 65.1 63.5 36.5 61.1 33.3 61.2
----- ----- ----- ----- ---- ----- ---- -----
Income From Operations ................. 8.3 7.3 8.8 8.6 4.8 8.0 6.1 11.2
Interest Income ........................ -- -- (0.1) (0.1) -- -- -- --
Interest Expense ....................... 3.6 3.2 5.1 5.0 1.2 2.0 2.6 4.8
----- ----- ----- ----- ---- ----- ---- -----
3.6 3.2 5.0 4.9 1.2 2.0 2.6 4.8
----- ----- ----- ----- ---- ----- ---- -----
Income before provision for income taxes 4.7 4.1 3.8 3.7 3.6 6.0 3.5 6.4
Provision (Benefit) for income taxes ... 1.8 1.6 1.6 1.6 1.4 2.3 1.5 2.8
----- ----- ----- ----- ---- ----- ---- -----
Net income ............................. 2.9 2.5 2.2 2.1 2.2 3.7 2.0 3.7
===== ===== ===== ===== ==== ===== ==== =====
EBITDA (1) ............................. 9.7 8.5 10.3 10.0 5.4 9.0 6.8 12.5
(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.
Six Months Ended Three Months Ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(dollars in millions) (dollars in millions)
Income from operations $ 8.3 $ 8.8 $ 4.8 $ 6.1
Depreciation and amortization 1.4 1.4 0.6 0.7
Interest Income 0.0 0.1 0.0 0.0
--------------------------------------------
EBITDA $ 9.7 $ 10.3 $ 5.4 $ 6.8
============================================
11
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Net Sales. Net sales for the six-month period ended June 30, 2003
increased 11.0% to $113.9 million from $102.6 million as compared to the
six-month period ended June 30, 2002. Installation units sold through June 30,
2003 increased 15.1% compared to the six-month period ended June 30, 2002.
Diamond's revenue per installation unit for the six-month period ended June 30,
2003 was 3.5% below the revenue per installation unit for the six-month period
ended June 30, 2002. 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 $79.2 million for the six months ended
June 30, 2003 and $73.9 million for the six months ended June 30, 2002. Gross
profit decreased as a percentage of sales to 69.5% for the six months ended June
30, 2003 from 72.0% for the six months ended June 30, 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 by $5.8 million or
8.9% to $70.9 million during the six-month period ended June 30, 2003 from $65.1
million for the six-month period ended June 30, 2002. Approximately $1.8 million
of increased operating expenses are 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.
Depreciation and amortization expense of $1.4 million for the six-month
period ended June 30, 2003 was even with the six-month period ended June 30,
2002. Increases in depreciation and amortization expense related to certain
sales, billing, and financial system software and computer hardware were 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, 2003 decreased by $.5 million, or 5.7%, to $8.3 million from $8.8
million for the six months ended June 30, 2002. This decrease was primarily due
to the decrease in gross profit percentage and increased operating costs
discussed above.
Interest Expense. Interest expense for the six months ended June 30,
2003 decreased $1.5 million, or 29.4%, to $3.6 million from $5.1 million for the
six months ended June 30, 2002. The decrease was due primarily to a net gain of
$1.1 million from the repurchase of $11.0 million in aggregate principal of
senior notes in April and May 2003. The decrease was also a direct result from
reduced interest expense realized by the repurchase of $18.0 million in
aggregate principal amount of senior notes since December 2002.
Net Income. Net income for the six months ended June 30, 2003 increased
by $0.7 million to $2.9 million from $2.2 million for the six months ended June
30, 2002. Net income as a percentage of sales increased 0.4% for the six months
ended June 30, 2003 compared to the six months ended June 30, 2002. The increase
in net income and net income margin during the six months ended June 30, 2003
compared to the six months ended June 30, 2002 was primarily due to the $1.1
million gain realized from the repurchase of senior notes during April and May
2003, which was partially offset by the impact of decreased gross profit
percentage and increased operating costs discussed above.
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EBITDA. EBITDA for the six months ended June 30, 2003 decreased by $0.6
million, or 5.8%, to $9.7 million from $10.3 million for the six months ended
June 30, 2002. EBITDA as a percentage of sales decreased to 8.5% for the six
months ended June 30, 2003 from 10.0% for the six months ended June 30, 2002.
The decrease in EBITDA for the six months ended June 30, 2003 was primarily due
to the decrease in gross profit percentage and increased operating costs
discussed above.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Net Sales. Net sales for the three-month period ended June 30, 2003
increased 9.9% to $59.8 million from $54.4 million as compared to the
three-month period ended June 30, 2002. Installation units sold for the
three-month period ended June 30, 2003 increased 15.3% compared to the
three-month period ended June 30, 2002. Diamond's revenue per installation unit
for the three-month period ended June 30, 2003 was 5.0% below the revenue per
installation unit for the three-month period ended June 30, 2002. 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 $41.3 million for the three months ended
June 30, 2003 and $39.4 million for the three months ended June 30, 2002. Gross
profit decreased as a percentage of sales to 69.1% for the three months ended
June 30, 2003 from 72.4% for the three months ended June 30, 2002. The decrease
in gross profit percentage is due to the decrease in average revenue per
installation unit and an increase in average cost per installation unit.
Operating Expenses. Operating expenses increased by $3.2 million or
9.6% to $36.5 million during the three-month period ended June 30, 2003 from
$33.3 million for the three-month period ended June 30, 2002. Approximately $0.8
million of increased operating expenses are 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.
Depreciation and amortization expense for the period ended June 30,
2003 decreased by $0.1 million, or 14.3%, to $0.6 million from $0.7 million for
the three months ended June 30, 2002. Increases in depreciation and amortization
expense related to certain sales, billing, and financial system software and
computer hardware were 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, 2003 decreased by $1.3 million, or 21.3%, to $4.8 million from
$6.1 million for the three months ended June 30, 2002. This decrease was
primarily due to the decrease in gross profit percentage and increased operating
costs discussed above.
Interest Expense. Interest expense for the three months ended June 30,
2003 decreased $1.4 million, or 53.8%, to $1.2 million from $2.6 million for the
three months ended June 30, 2002. The decrease was due primarily to a net gain
of $1.1 million from the repurchase of $11.0 million in aggregate principal
amount of senior notes in April and May 2003. The decrease was also a direct
result from reduced interest expense realized by the repurchase of $18.0 million
in aggregate principal amount of senior notes since December 2002.
Net Income. Net income for the three months ended June 30, 2003
increased by $0.2 million to $2.2 million from $2.0 million for the three months
ended June 30, 2002. Net income as a percentage of sales for the three months
ended June 30, 2003 compared to the three months ended June 30, 2002
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remained flat at 3.7%. The increase in net income during the three months ended
June 30, 2003 compared to the three months ended June 30, 2002 was primarily due
to the $1.1 million gain realized from the repurchase of senior notes during
April and May 2003, which was partially offset by the impact of decreased gross
profit percentage and increased operating costs discussed above.
EBITDA. EBITDA for the three months ended June 30, 2003 decreased by
$1.4 million, or 20.6%, to $5.4 million from $6.8 million for the three months
ended June 30, 2002. EBITDA as a percentage of sales decreased to 9.0% for the
three months ended June 30, 2003 from 12.5% for the three months ended June 30,
2002. The decrease in EBITDA for the three months ended June 30, 2003 was
primarily due to the decrease in gross profit percentage and increased operating
costs 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 or 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. Diamond may from
time to time repurchase Notes in the open market.
Net Cash Provided by Operating Activities. Net cash provided by
operating activities for the six months ended June 30, 2003 increased by $.8
million to $5.6 million from $4.8 million for the six months ended June 30,
2002. The change was primarily attributable to an increase in Diamond's net
earnings, as well as an increase in accounts payable, which were partially
offset by a decrease in accounts receivables, a decrease in accrued expenses and
a gain on the extinguishment of debt.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the six months ended June 30, 2003 decreased $1.6 million to $0.6
million from $2.2 million used in investing activities for the six months ended
June 30, 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 six months ended June 30, 2003 was $7.0 million compared to
$0.1 million used in financing activities in the six months ended June 30, 2002.
The primary reason for this increase in cash used by financing activities was
due to the repurchase of senior notes, which were partially offset by net
proceeds from borrowings under our credit facility during the six months ended
June 30, 2003.
Capital Expenditures. Capital expenditures for the six months ended
June 30, 2003 were $0.7 million, as compared to $2.3 million for the six months
ended June 30, 2002. The decrease is due to the higher costs incurred during the
six months ended June 30, 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 Condensed Consolidated 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 Diamond's 10-K for the year ended
December 31, 2002).
ACCOUNTING STANDARDS NOT YET ADOPTED
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
applies specifically to a number of financial instruments that companies have
historically presented within
14
their financial statements either as equity or between the liabilities
section and the equity section, rather than as liabilities. SFAS No.
150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. This will affect
Diamond's accounting for its preferred stock which has historically
been presented between the liabilities and equity section of Diamond's
Balance Sheet. The effect of the adoption of SFAS No. 150 for Diamond
will be to present the preferred stock within the equity section of the
Balance Sheet. See "--Notes to Condensed Consolidated Financial
Statements - Note 7-Subsequent Event"for a discussion related to
amending Diamond's Charter with respect to its class of Preferred
Stock.
RELATED PARTY TRANSACTIONS
On July 1, 2003, Diamond entered into an employment agreement with
Michael A. Sumsky (the "Executive"), pursuant to which Mr. Sumsky
agreed to serve as the President, Chief Financial Officer, Secretary
and General Counsel of Diamond at an annual salary of $350,000 (the
"Base Salary"), subject to annual review based on Diamond's and the
Executive's performance. The employment agreement provides for a term
commencing on July 1, 2003 and ending on December 31, 2004. In addition
to the Base Salary, the Executive is eligible to receive a bonus based
upon the achievement of certain criteria. The employment agreement also
contains various severance, non-competition, non-solicitation
provisions, non-disclosure and assignment of inventions provisions.
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 June 30, 2003, Diamond had $2.5 million of
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.
Diamond's 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."
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ITEM 4 CONTROLS AND PROCEDURES
Diamond maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in
Diamond's Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission's rules and forms and that such information is
accumulated and communicated to Diamond's management, including its
Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure. In designing
and evaluating the disclosure controls and procedures, management
recognizes 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 is required to
apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As required by SEC Rule 13a-15(b), Diamond carried out an
evaluation, under the supervision and with the participation of
Diamond's management, including Diamond's Chief Executive Officer and
Diamond's Chief Financial Officer, of the effectiveness of the design
and operation of Diamond's disclosure controls and procedures as of the
end of the quarter covered by this report. Based on the foregoing,
Diamond's Chief Executive Officer and Chief Financial Officer concluded
that Diamond's disclosure controls and procedures were effective at the
reasonable assurance level.
There has been no change in Diamond's internal controls over
financial reporting during Diamond's most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect,
Diamond's internal controls over financial reporting.
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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.
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.
Diamond 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
Diamond'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
------ -----------
10.1 Employment Agreement, dated July 1, 2003, between Diamond
Triumph Auto Glass, Inc. and Michael A. Sumsky
31.1 Sarbanes-Oxley Section 302(a) Certification of the Chief
Executive Officer.
31.2 Sarbanes-Oxley Section 302(a) Certification of the Chief
Financial Officer.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
the Chief Executive Officer.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
the Chief Financial Officer.
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(B) REPORTS ON FORM 8-K
Form 8-K filed on May 15, 2003, reporting that Diamond Triumph Auto
Glass, Inc. issued a press release announcing its operating and
financial results for the quarter ended March 31, 2003.
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, 2003 By: /s/ Michael A. Sumsky
----------------------------------------
Name: Michael A. Sumsky
Title: President,
Chief Financial Officer and General
Counsel (Principal Financial and Chief
Accounting Officer)
18