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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 September 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 November 14, 2003, there were 1,011,366 shares outstanding of
Diamond's Common Stock ($.01 par value) and 35,000 shares outstanding of
Diamond's Series A 12% Senior Cumulative Preferred Stock ($.01 par value).
DIAMOND TRIUMPH AUTO GLASS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2003 (unaudited) and December 31, 2002............. 3
Condensed Consolidated Statements of Operations - Three
Months Ended September 30, 2003 and 2002 (unaudited)............. 4
Condensed Consolidated Statements of Operations - Nine Months
Ended September 30, 2003 and 2002 (unaudited).................... 5
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 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)
September 30, December 31,
2003 2002
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,760 $ 2,094
Accounts receivable, net 12,301 11,403
Other receivables 256 349
Inventories 13,634 15,712
Prepaid expenses 1,906 1,562
Deferred income taxes 3,608 4,277
--------- ---------
Total current assets 33,465 35,397
--------- ---------
Equipment and leasehold improvements, net 6,852 8,006
Deferred loan costs and senior notes discount, net 2,889 4,001
Deferred income taxes 34,600 35,932
Other assets 407 486
--------- ---------
Total assets $ 78,213 $ 83,822
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 12,713 $ 9,856
Accrued expenses:
Payroll and related items 5,641 5,729
Accrued interest 3,693 2,155
Accrued income taxes 288 451
Other 989 710
--------- ---------
Total accrued expenses 10,611 9,045
--------- ---------
Total current liabilities 23,324 18,901
--------- ---------
Long-term debt:
Senior notes 79,758 93,000
--------- ---------
Total long-term debt 79,758 93,000
--------- ---------
Total liabilities 103,082 111,901
--------- ---------
Series A 12% senior 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 67,064 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 29,256 34,947
Deferred compensation (281) (360)
Retained earnings (accumulated deficit) (120,618) (123,749)
Common stock in treasury, at cost, 15,000 shares in 2003 and 2002 (300) (300)
--------- ---------
Total stockholders' equity (deficit) (91,933) (89,452)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 78,213 $ 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
September 30, 2003 September 30, 2002
------------------ ------------------
Net sales $ 57,090 $ 52,970
Cost of sales 17,509 15,858
-------- --------
Gross profit 39,581 37,112
Operating expenses 37,117 34,565
-------- --------
Income from operations 2,464 2,547
Other (income) expense:
Interest income -- (75)
Interest expense 2,037 2,572
-------- --------
2,037 2,497
-------- --------
Income before provision for income taxes 427 50
Provision for income taxes 167 21
-------- --------
Net income 260 29
Preferred stock dividends 1,954 1,735
-------- --------
Net income applicable to common stockholders ($ 1,694) ($ 1,706)
======== ========
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)
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Net sales $ 171,013 $ 155,531
Cost of sales 52,282 44,545
--------- ---------
Gross profit 118,731 110,986
Operating expenses 108,004 99,599
--------- ---------
Income from operations 10,727 11,387
Other (income) expense:
Interest income (21) (178)
Interest expense 5,615 7,715
--------- ---------
5,594 7,537
--------- ---------
Income before provision for income taxes 5,133 3,850
Provision for income taxes 2,002 1,617
--------- ---------
Net income 3,131 2,233
Preferred stock dividends 5,691 5,055
--------- ---------
Net loss applicable to common stockholders ($ 2,560) ($ 2,822)
========= =========
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)
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
OPERATING ACTIVITIES
Net cash provided by operating activities $ 12,099 $ 8,424
-------- --------
INVESTING ACTIVITIES
Capital expenditures (981) (3,006)
Proceeds from sale of equipment 60 93
Decrease (increase) in other assets 78 (40)
-------- --------
Net cash (used in) investing activities (843) (2,953)
-------- --------
FINANCING ACTIVITIES
Payment for redemption of senior notes (11,590) --
Net proceeds from credit facility 6,000 --
Payments on credit facility (6,000) --
Deferred loan cost -- (50)
-------- --------
Net cash (used in) financing activities (11,590) (50)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (334) 5,421
Cash and cash equivalents, beginning of period 2,094 6,592
-------- --------
Cash and cash equivalents, end of period $ 1,760 $ 12,013
======== ========
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 September 30, 2003 and December 31, 2002, the
liquidation value of the Preferred Stock recorded on Diamond's
Balance Sheet was $67,064 and $61,373, respectively, which includes
dividends of $32,064 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 $6,391 in outstanding letters of credit at
September 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
September 30, 2003. There were no borrowings against the credit
facility as of September 30, 2003.
During April and May 2003, Diamond repurchased $11,042 principal
amount of its senior notes for a repurchase price of $9,544. These
repurchases 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.
During September 2003, Diamond repurchased $2,200 principal amount
of its senior notes for a repurchase price of $2,046. This
repurchase resulted in a gain of $74 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.
7
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands except per share amounts)
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 September 30, 2003, the Board of Directors had
granted 24,925 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 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 and 500 options were
granted during the nine months ended September 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:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
Net Income 2003 2002 2003 2002
------- ------- ----- ----
As reported $ 3,131 $ 2,233 $ 260 $ 29
Add stock-based employee compensation expense
included in reported net income,
net of tax 48 82 16 16
Deduct total stock-based employee compensation
expense determined under
fair-value-based
method for all rewards, net of tax (55) (89) (18) (18)
------- ------- ----- ----
Pro forma $ 3,124 $ 2,226 $ 258 $ 27
======= ======= ===== ====
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%.
8
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands except per share amounts)
NOTE 2. PREFERRED STOCK
The stockholders of Diamond have, effective July 1, 2003, amended
its Charter with respect to its class of Preferred Stock, which
eliminated the April 10, 2010 mandatory redemption clause. There
was no impact of this amendment on Diamond's balance sheet.
NOTE 3. 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 position.
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. The adoption of SFAS No. 150 had no
impact on Diamond.
NOTE 4. 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 5. 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.
9
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands except per share amounts)
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, Pennsylvania 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
financial position. No amounts have been recorded in the
consolidated financial statements for any of these legal actions.
NOTE 6. 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 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 nine
months ended September 30, 2003 of approximately $2.1 million plus
possible interest and penalties, and any resulting increases in
current state tax expense for 2003.
Diamond continues to strongly believe that the Recapitalization
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 7. 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 $10.6 million at
September 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.
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 nine and three months ended September 30, 2003 and
2002.
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
2003 2002 2003 2002
-------------------- -------------------- -------------------- --------------------
$ % $ % $ % $ %
-------- -------------------------------- --------- -------------------------------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
Net Sales 171.0 100.0 155.5 100.0 57.1 100.0 53.0 100.0
Cost of Sales 52.3 30.6 44.5 28.6 17.5 30.6 15.9 30.0
-------- ---------- -------- ---------- -------- --------- --------- ---------
Gross Profit 118.7 69.4 111.0 71.4 39.6 69.4 37.1 70.0
Operating Expenses 108.0 63.1 99.6 64.1 37.1 65.0 34.6 65.3
-------- ---------- -------- ---------- -------- --------- --------- ---------
Income From Operations 10.7 6.3 11.4 7.3 2.5 4.4 2.5 4.7
Interest Income 0.0 0.0 (0.2) (0.1) 0.0 0.0 (0.1) (0.2)
Interest Expense 5.6 3.3 7.7 5.0 2.0 3.5 2.6 4.9
-------- ---------- -------- ---------- -------- --------- --------- ---------
5.6 3.3 7.5 4.8 2.0 3.5 2.5 4.7
-------- ---------- -------- ---------- -------- --------- --------- ---------
Income before provision for income taxes 5.1 3.0 3.9 2.5 0.5 0.9 0.0 0.0
Provision (Benefit) for income taxes 2.0 1.2 1.6 1.0 0.2 0.4 0.0 0.0
-------- ---------- -------- ---------- -------- --------- --------- ---------
Net income 3.1 1.8 2.3 1.5 0.3 0.5 0.0 0.0
======== ========== ======== ========== ======== ========= ========= =========
EBITDA (1) 12.8 7.5 13.7 8.8 3.1 5.4 3.4 6.4
(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.
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------- ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(dollars in millions) (dollars in millions)
Income from operations $ 10.7 $ 11.4 $ 2.5 $ 2.5
Depreciation and amortization 2.1 2.1 0.6 0.8
Interest Income 0.0 0.2 0.0 0.1
-------- -------- -------- --------
EBITDA $ 12.8 $ 13.7 $ 3.1 $ 3.4
======== ======== ======== ========
11
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Net Sales. Net sales for the nine-month period ended September 30, 2003
increased 10.0% to $171.0 million from $155.5 million as compared to the
nine-month period ended September 30, 2002. Installation units sold through
September 30, 2003 increased 15.2% compared to the nine-month period ended
September 30, 2002. Diamond's revenue per installation unit for the nine-month
period ended September 30, 2003 was 4.6% below the revenue per installation unit
for the nine-month period ended September 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 $118.7 million for the nine months ended
September 30, 2003 and $111.0 million for the nine months ended September 30,
2002. Gross profit decreased as a percentage of sales to 69.4% for the nine
months ended September 30, 2003 from 71.4% for the nine months ended September
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 $8.4 million or 8.4%
to $108.0 million during the nine-month period ended September 30, 2003 from
$99.6 million for the nine-month period ended September 30, 2002. Approximately
$2.1 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 $2.1 million for the nine-month
period ended September 30, 2003 was flat compared with the nine-month period
ended September 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 nine months ended
September 30, 2003 decreased by $0.7 million, or 6.1%, to $10.7 million from
$11.4 million for the nine months ended September 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 nine months ended September 30,
2003 decreased $2.1 million, or 27.3%, to $5.6 million from $7.7 million for the
nine months ended September 30, 2002. The decrease was due primarily to a net
gain of $1.1 million from the repurchase of $13.2 million in aggregate principal
of senior notes during the nine months ended September 30, 2003. The decrease
was also a direct result from reduced interest expense realized by the
repurchase of $20.2 million in aggregate principal amount of senior notes since
December 2002.
Net Income. Net income for the nine months ended September 30, 2003
increased by $0.8 million to $3.1 million from $2.3 million for the nine months
ended September 30, 2002. Net income as a percentage of sales increased 0.3% for
the nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002. The increase in net income and net income margin during the
nine months ended September 30, 2003 compared to the nine months ended September
30, 2002 was primarily due to the $1.1 million gain and related reduced interest
expense realized from the repurchase of senior notes during the nine months
ended September 30, 2003, which was partially offset by the impact of decreased
gross profit percentage and increased operating costs discussed above.
12
EBITDA. EBITDA for the nine months ended September 30, 2003 decreased 6.6%
to $12.8 million from $13.7 million for the nine months ended September 30,
2002. EBITDA as a percentage of sales decreased to 7.5% for the nine months
ended September 30, 2003 from 8.8% for the nine months ended September 30, 2002.
The decrease in EBITDA for the nine months ended September 30, 2003 was
primarily due to the decrease in gross profit percentage and increased operating
costs discussed above.
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Net Sales. Net sales for the three-month period ended September 30, 2003
increased 7.7% to $57.1 million from $53.0 million as compared to the
three-month period ended September 30, 2002. Installation units sold for the
three-month period ended September 30, 2003 increased 15.4% compared to the
three-month period ended September 30, 2002. Diamond's revenue per installation
unit for the three-month period ended September 30, 2003 was 6.8% below the
revenue per installation unit for the three-month period ended September 30,
2002. The increase in sales and installation units is primarily due to increased
demand. 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 $39.6 million for the three months ended
September 30, 2003 and $37.1 million for the three months ended September 30,
2002. Gross profit decreased as a percentage of sales to 69.4% for the three
months ended September 30, 2003 from 70.0% for the three months ended September
30, 2002. The decrease in gross profit percentage is due to the decrease in
average revenue per installation unit.
Operating Expenses. Operating expenses increased by $2.5 million or 7.2%
to $37.1 million during the three-month period ended September 30, 2003 from
$34.6 million for the three-month period ended September 30, 2002. Approximately
$0.3 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 three months ended September
30, 2003 decreased by $0.2 million, or 25.0%, to $0.6 million from $0.8 million
for the three months ended September 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 of $2.5 million for the
three months ended September 30, 2003 was flat compared to the three months
ended September 30, 2002. Income from operations decreased as a percentage of
sales to 4.4% for the three months ended September 30, 2003 from 4.7% for the
three months ended September 30, 2002, which 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 September
30, 2003 decreased $.6 million, or 23.1%, to $2.0 million from $2.6 million for
the three months ended September 30, 2002. The decrease was due primarily to a
gain from the repurchase of $2.2 million in aggregate principal amount of senior
notes in September 2003. The decrease was also a direct result from reduced
interest expense realized by the repurchase of $20.2 million in aggregate
principal amount of senior notes since December 2002.
Net Income. Net income for the three months ended September 30, 2003
increased by $0.3 million to $.3 million compared to the three months ended
September 30, 2002. Net income as a percentage
13
of sales for the three months ended September 30, 2003 increased .5% compared to
the three months ended September 30, 2002. The increase in net income during the
three months ended September 30, 2003 compared to the three months ended
September 30, 2002 was primarily due to the gain and related reduced interest
expense realized from the repurchase of senior notes, 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 September 30, 2003 decreased by
$.3 million, or 8.8%, to $3.1 million from $3.4 million for the three months
ended September 30, 2002. EBITDA as a percentage of sales decreased to 5.4% for
the three months ended September 30, 2003 from 6.4% for the three months ended
September 30, 2002. The decrease in EBITDA for the three months ended September
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 expects
to renew the Credit Facility prior to its expiration. 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 nine months ended September 30, 2003 increased by $3.7
million to $12.1 million from $8.4 million for the nine months ended September
30, 2002. The change was primarily attributable to an increase in Diamond's net
earnings, as well as a decrease in accounts receivable and inventories, which
were partially offset by a gain on the extinguishment of debt.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the nine months ended September 30, 2003 decreased $2.1 million
to $0.8 million from $3.0 million used in investing activities for the nine
months ended September 30, 2002. The primary reason for the variance was a
decrease in capital expenditures discussed below.
Net Cash Used in Financing Activities. Net cash used in financing
activities for the nine months ended September 30, 2003 was $11.6 million
compared to $0.1 million used in financing activities in the nine months ended
September 30, 2002. The primary reason for this increase in cash used by
financing activities was due to the repurchase of senior notes during the nine
months ended September 30, 2003.
Capital Expenditures. Capital expenditures for the nine months ended
September 30, 2003 were $1.0 million, as compared to $3.0 million for the nine
months ended September 30, 2002. The decrease is due to the higher costs
incurred during the nine months ended September 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 6 - 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).
14
RELATED PARTY TRANSACTIONS
On July 1, 2003, Diamond entered into an employment agreement with
Michael A. Sumsky, 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, subject to
annual review based on Diamond's and Mr. Sumsky's performance. The
employment agreement provides for a term commencing on July 1, 2003
and ending on December 31, 2004. In addition to his annual salary,
Mr. Sumsky 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.
On November 1, 2003, Diamond entered into an amendment to that
certain lease agreement dated July 1, 2000 between Richard Rutta &
Kenneth Levine Real Estate Partnership, a partnership wholly owned
by Richard Rutta and Kenneth Levine, and Diamond for certain leased
premises located at 220 Division Street, Kingston, PA 18704. The
amendment increased the square footage being leased to Diamond from
102,075 square feet to 206,080 square feet and increased the total
annual rent from $235,787 to $465,740. The annual rent shall be
increased by four percent on January 1, 2004 and each January 1st
thereafter.
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
September 30, 2003, Diamond had no outstanding borrowings 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."
15
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,
Pennsylvania 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
------ -----------
10.2 Amended Lease Agreement, dated November 1, 2003, between
Diamond Triumph Auto Glass, Inc. and Richard Rutta & Kenneth
Levine Real Estate Partnership.
31.3 Sarbanes-Oxley Section 302(a) Certification of the Chief
Executive Officer.
31.4 Sarbanes-Oxley Section 302(a) Certification of the Chief
Financial Officer.
32.3 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.
17
32.4 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.
(B) REPORTS ON FORM 8-K
Form 8-K filed on August 14, 2003, reporting that Diamond Triumph Auto
Glass, Inc. issued a press release announcing its operating and financial
results for the quarter ended June 30, 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: November 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