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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-33572
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DIAMOND TRIUMPH AUTO GLASS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2758853
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 DIVISION STREET, KINGSTON, PENNSYLVANIA 18704
(Address, including zip code of principal executive offices)
(570) 287-9915
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or Section 15(d) of the Securities and Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2 Yes [ ] No [X]
As of May 17, 2004, 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 MARCH 31, 2004
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2004 (unaudited) and December 31, 2003............. 3
Condensed Consolidated Statements of Operations (unaudited) -
Three Months Ended March 31, 2004 and 2003................... 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
Three Months Ended March 31, 2004 and 2003................... 5
Notes to Unaudited Condensed Consolidated Financial Statements.. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 15
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)
March 31, 2004 December 31, 2003
-------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,834 $ 35
Accounts receivable, net 12,200 10,353
Other receivables 358 402
Inventories 13,242 13,493
Prepaid expenses 1,643 1,783
Deferred income taxes 3,089 3,038
--------- ---------
Total current assets 32,366 29,104
--------- ---------
Equipment and leasehold improvements, net 6,217 6,547
Deferred loan costs and senior notes discount, net 2,524 2,706
Deferred income taxes 36,742 36,473
Other assets 469 502
--------- ---------
Total assets $ 78,318 $ 75,332
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 12,436 $ 12,492
Accrued expenses:
Payroll and related items 6,085 4,341
Accrued interest 3,701 1,859
Accrued income taxes 461 461
Other 1,635 1,141
--------- ---------
Total accrued expenses 11,882 7,802
--------- ---------
Total current liabilities 24,318 20,294
--------- ---------
Long-term debt:
Senior notes 79,758 79,758
Credit facility 1,500 2,500
--------- ---------
Total long-term debt 81,258 82,258
--------- ---------
Total liabilities 105,576 102,552
--------- ---------
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 2004 and 2003, at liquidation preference value 71,148 69,076
--------- ---------
Stockholders' equity (deficit):
Common stock, 2004 and 2003 par value $0.01 per share; authorized
1,100,000 shares; issued and outstanding 1,026,366 shares in 2004 and 2003 10 10
Additional paid-in capital 25,172 27,244
Deferred compensation (228) (255)
Retained earnings (accumulated deficit) (123,060) (122,995)
Common stock in treasury, at cost, 15,000 shares in 2004 and 2003 (300) (300)
--------- ---------
Total stockholders' equity (deficit) (98,406) (96,296)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 78,318 $ 75,332
========= =========
See notes to condensed consolidated financial statements
3
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
------------------ ------------------
Net sales $ 53,376 $ 54,133
Cost of sales 15,186 16,237
-------- --------
Gross profit 38,190 37,896
Operating expenses 36,485 34,395
-------- --------
Income from operations 1,705 3,501
Other (income) expense:
Interest income - (15)
Interest expense 2,089 2,398
-------- --------
2,089 2,383
-------- --------
(Loss) income before provision for income taxes (384) 1,118
Provision (benefit) for income taxes (319) 436
-------- --------
Net (loss) income (65) 682
Preferred stock dividends 2,072 1,841
-------- --------
Net loss applicable to common stockholders ($ 2,137) ($ 1,159)
======= =======
See notes to condensed consolidated financial statements
4
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
------------------ ------------------
OPERATING ACTIVITIES
Net cash provided by operating activities $ 3,064 $ 5,023
------- -------
INVESTING ACTIVITIES
Capital expenditures (321) (382)
Proceeds from sale of equipment 23 22
Decrease in other assets 33 34
------- -------
Net cash (used in) investing activities (265) (326)
------- -------
FINANCING ACTIVITIES
Proceeds from credit facility 8,250
Payments on credit facility (9,250) -
------- -------
Net cash (used in) financing activities (1,000) -
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,799 4,697
Cash and cash equivalents, beginning of period 35 2,094
------- -------
Cash and cash equivalents, end of period $ 1,834 $ 6,791
======= =======
See notes to condensed consolidated financial statements
5
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands except per share amounts)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are unaudited but, in the opinion
of management, reflect all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the data for the
interim periods presented. The interim financial statements should be
read in conjunction with the audited financial statements and notes
thereto contained in Diamond's Annual Report on Form 10-K for the year
ended December 31, 2003. 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 and net income, with
severe weather generating increased sales and net income, and mild
weather resulting in lower sales and net income. In addition, Diamond's
business is somewhat seasonal, with the first and fourth calendar
quarters traditionally its slowest periods of activity.
Preferred Stock:
At March 31, 2004 and December 31, 2003, the liquidation value of the
Preferred Stock recorded on Diamond's Balance Sheet was $71,148 and
$69,076, respectively, which includes dividends of $36,148 and $34,076,
respectively.
Borrowings:
Credit Facility - On March 27, 2000, Diamond entered into a revolving
credit facility (the "Credit Facility"), which had 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. On
November 26, 2003, Diamond amended the Credit Facility, which, among
other things extended the term for an additional three year period
through March 27, 2007. 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 $6,141
in outstanding letters of credit at March 31, 2004. Borrowings under
the Credit Facility bear interest, at Diamond's discretion, at either
the JP Morgan Chase Manhattan Bank Rate (as defined in the Credit
Facility) or LIBOR, plus a margin of 0.50% for the JP Morgan Chase
Manhattan Rate and 2.25% 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 (the "EBITDA Covenant"),
as well as restrictions on additional indebtedness, dividends and
certain other significant transactions. Diamond was not in compliance
with the EBITDA Covenant for the fiscal period ended March 31, 2004,
as Diamond's EBITDA level for the prior twelve months was approximately
$10.1 million. Diamond obtained a waiver as of March 31, 2004 with
respect to the EBITDA Covenant, and amended the Credit Facility with
respect to the EBITDA levels required to be maintained. $1,500 was
outstanding under the credit facility at March 31, 2004.
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 un-issued shares of common stock. As of
March 31, 2004, the Board of Directors had granted 22,175 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
6
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands except per share amounts)
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. 500 options were granted in 2003 and no
options were granted during the three months ended March 31, 2004.
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 requires that a company's financial statements
include certain disclosures about stock-based employee compensation
arrangements 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
compensation cost for Diamond's common stock options been determined
based upon the fair value of the options at the date of grant, as
prescribed under SFAS No. 123, as amended by SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure", Diamond's
net income (loss) would have been reduced to the following pro forma
amounts:
THREE MONTHS ENDED MARCH 31,
----------------------------
Net Income 2004 2003
-------- -------
As reported $ (65) $ 682
Add stock-based employee compensation expense
included in reported net income, net of tax 16 16
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (18) (18)
------- -------
Pro forma $ (67) $ 680
======= =======
The fair value of the options granted in 2003 was $2.63 using the
Black-Scholes option-pricing model with the following assumptions:
risk-free interest rate of 2.82%, volatility of 0% and expected
dividend yield of 0%.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"). The Interpretation requires
that a variable interest entity be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of
FIN 46 are effective for all variable interest entities created or
acquired after January 31, 2003. In December 2003, the
7
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands except per share amounts)
Financial Accounting Standards Board issued a revision to FIN 46
referred to as Interpretation No. 46 (R). Among other provisions, the
revision extended the adoption date of FIN 46 (R) to the first quarter
of 2004 for variable interest entities created prior to February 1,
2003. The adoption of this interpretation had no impact on Diamond's
consolidated financial statements.
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.
On November 17, 2003, Diamond entered into an employment agreement with
each of Kenneth Levine and Richard Rutta, pursuant to which Messrs.
Levine and Rutta agreed to serve as the Co-Chairmen of Diamond at an
annual salary of $320 each subject to annual review based on Diamond's
and Messrs. Levine and Rutta's performance. The employment agreements
provide for a term commencing on November 17, 2003 and ending on
November 16, 2004. On March 15, 2004, the employment agreements were
amended to reduce the annual salary for Messrs. Levine and Rutta to $52
each. In addition to their annual salary, Messrs. Levine and Rutta are
eligible to receive a bonus based upon the achievement of certain
criteria. The employment agreements also contain various severance,
non-competition, non-solicitation provisions, non-disclosure and
assignment of inventions provisions.
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 gave 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
8
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands except per share amounts)
clients and in the auto glass 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 5. INCOME TAXES
As disclosed in the Company's 10-K for the year ended December 31,
2003, the Internal Revenue Service has concluded its audit of the tax
periods ended December 31, 1998, 1999, and 2000. As a result of this
audit, the Internal Revenue Service issued a notice of proposed
adjustments on February 20, 2002, which included a disallowance of the
tax-deductible goodwill resulting from Diamond's March 31, 1998
Recapitalization Transaction (as defined in Diamond's 10-K for the year
ended December 31, 2003). The Internal Revenue Service has asserted
that the Recapitalization Transaction did not qualify as a stock
purchase, and accordingly, that the election under Internal Revenue
Code Section 338(h)(10) was not valid. As a result, if the IRS position
is sustained, tax-deductible goodwill would not be recognizable by
Diamond.
The proposed adjustments by the Internal Revenue Service would result
in $7.6 million of federal tax deficiencies owed by Diamond for the
period December 31, 1998 through December 31, 2003, 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, 2003 was approximately
$37.0 million.
Diamond strongly believes that the Recapitalization Transaction is
properly accounted for, and has appealed the Internal Revenue Service's
proposed adjustment. If such appeal is 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 $10.8 million at March 31, 2004. No
amounts have been accrued related to this contingent obligation because
Diamond does not believe it is probable that the payments will be
required.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Diamond is a leading provider of automotive glass replacement and
repair services in the United States. At March 31, 2004, Diamond
operated a network of 270 automotive glass service centers,
approximately 1,100 mobile installation vehicles and six distribution
centers in 45 states. Diamond serves all of its customers' automotive
glass replacement and repair needs, offering windshields, tempered
glass and other related products. Sales, net income (loss) and EBITDA
for the three months ended March 31, 2004 were $53.4 million, $(0.1)
million and $2.3 million, respectively.
Weather has historically affected Diamond's sales and net income, with
severe weather generating increased sales and net income and mild
weather resulting in lower sales and net income. In addition, Diamond's
business is somewhat seasonal, with the first and fourth quarters
traditionally its slowest period of activity. Diamond believes these
seasonal trends will continue for the foreseeable future.
The price of replacement automotive glass is based in part on list
prices developed by the National Auto Glass Specification ("NAGS"), an
independent third party. Prices charged by participants in the
automotive glass replacement industry are independently determined
using varying percentage discounts from the NAGS price list. The impact
of NAGS price changes on Diamond's financial results depends on the
level of discounts Diamond grants to its customers and the level of
discounts that Diamond can obtain from its glass suppliers. Effective
January 1, 1999, NAGS significantly modified its published list prices
in order to bring actual prices more in line with published list
prices. Although NAGS has not materially modified its published list
prices since January 1, 1999, NAGS has made periodic modifications to
its published list prices subsequent to that date, which includes a
series of price changes effective January 2003 that has resulted in a
4% to 5% decrease in overall list prices. NAGS modified its published
list prices in January 2004 which resulted in moderate decreases in
overall list prices.
Diamond believes that, due to its sole focus on automotive glass
replacement and repair, it has one of the lowest cost structures in the
automotive glass replacement and repair industry. Diamond's low cost
structure enables it to serve all markets of the industry, which is
comprised of: (1) individual consumers; (2) commercial customers,
including commercial fleet leasing companies, rental car companies, car
dealerships, body shops, utilities and government agencies; and (3)
insurance customers, including referrals from local agents, claims
offices and centralized call centers. While the largest participant in
the industry primarily focuses on servicing automotive glass insurance
claims (including providing related insurance claims processing
services) and also manufactures automotive glass, Diamond has
strategically positioned itself solely as a provider of automotive
glass replacement and repair services to a balanced mix of individual,
commercial and insurance customers.
10
RESULTS OF OPERATIONS
The following table summarizes Diamond's historical results of
operations and historical results of operations as a percentage of
sales for the three months ended March 31, 2004 and 2003.
THREE MONTHS ENDED MARCH 31,
--------------------------
2004 2003
------------- -----------
$ % $ %
----- ------ ---- -----
(DOLLARS IN MILLIONS)
Net Sales ....................................... 53.4 100.0 54.1 100.0
Cost of Sales ................................... 15.2 28.5 16.2 29.9
---- ----- ---- -----
Gross Profit .................................... 38.2 71.5 37.9 70.1
Operating Expenses .............................. 36.5 68.4 34.4 63.6
---- ----- ---- -----
Income From Operations .......................... 1.7 3.2 3.5 6.5
Interest Income ................................. 0.0 0.0 0.0 -
Interest Expense ................................ 2.1 3.9 2.4 4.4
---- ----- ---- -----
2.1 3.9 2.4 4.4
---- ----- ---- -----
(Loss) income before provision for income taxes.. (0.4) (0.7) 1.1 2.0
Provision (Benefit) for income taxes ............ (0.3) (0.5) 0.4 0.7
---- ----- ---- -----
Net (loss) income ............................... (0.1) (0.2) 0.7 1.3
==== ===== ==== =====
EBITDA (1) ...................................... 2.3 4.3 4.3 7.9
(1) EBITDA represents net income before interest, taxes,
depreciation and amortization. EBITDA and the related ratios
presented in this table are measures of Diamond's performance
that are not required by, or presented in accordance with,
GAAP. EBITDA is not a measurement of Diamond's financial
performance under GAAP and should not be considered an
alternative to net income, operating income or any other
performance measures derived in accordance with GAAP or as an
alternative to cash flow from operating activities as a
measure of our liquidity.
Diamond presents EBITDA because it considers it an important
supplemental measure of its performance and believes it is
frequently used by securities analysts, investors and other
interested parties in the evaluation of companies in its
industry, many of which present EBITDA when reporting their
results.
Diamond believes issuers of "high yield" securities also
present EBITDA because investors, analysts and rating agencies
consider it useful in measuring the ability of those issuers
to meet debt service obligations. Diamond believes EBITDA is
an appropriate supplemental measure of debt service capacity,
because cash expenditures on interest are, by definition,
available to pay interest, and tax expense is inversely
correlated to interest expense because tax expense goes down
as deductible interest expense goes up; depreciation and
amortization are non-cash charges.
Diamond also uses EBITDA for the following purposes: (i) its
executives' compensation plans base incentive compensation
payments on its EBITDA performance measured against budgets;
and (ii) its
11
credit agreement and its indenture for its Notes use EBITDA to
measure Diamond's compliance with covenants such as interest
coverage and debt incurrence.
EBITDA has limitations as an analytical tool, and should not
be considered in isolation, or as a substitute for analysis of
Diamond's results as reported under GAAP. Some of these
limitations are:
- EBITDA does not reflect our cash expenditures, or
future requirements, for capital expenditures or
contractual commitments;
- EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
- EBITDA does not reflect the significant interest
expense, or the cash requirements necessary to
service interest or principal payments, on our debt;
- Although depreciation and amortization are non-cash
charges, the assets being depreciated and amortized
will often have to be replaced in the future, and
EBITDA does not reflect any cash requirements for
such replacements; and
- Other companies in Diamond's industry may calculate
EBITDA differently than Diamond does, limiting its
usefulness as a comparative measure.
Because of these limitations, EBITDA should not be considered
as a measure of discretionary cash available to Diamond to
invest in the growth of its business. Diamond compensates for
these limitations by relying primarily on its GAAP results and
using EBITDA only supplementally. See the Statements of Cash
Flows included in our financial statements.
Reconciliation of EBITDA to net income follows for the periods
indicated:
Three Months Ended
March 31,
---------------------
2004 2003
------- ------
(dollars in millions)
Net income (loss) .................. $ (0.1) $ 0.7
Interest expense ................... 2.1 2.4
Depreciation and amortization ...... 0.6 0.8
Provision (Benefit) for income taxes (0.3) 0.4
------ ------
EBITDA ........................ $ 2.3 $ 4.3
====== ======
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH
31, 2003
Net Sales. Net sales for the three-month period ended March
31, 2004 decreased 1.3% to $53.4 million from $54.1 million as compared
to the three-month period ended March 31, 2003. Installation units sold
through March 31, 2004 increased 2.8% compared to the three-month
period ended March 31, 2003. Diamond's revenue per installation unit
for the three-month period ended March 31, 2004 was 4.7% below the
revenue per installation unit for the three-month period ended March
31, 2003. The decrease in sales and revenue per installation unit sold
was primarily due to pricing pressures experienced throughout the
industry.
12
Gross Profit. Gross profit was $38.2 million for the three
months ended March 31, 2004 and $37.9 million for the three months
ended March 31, 2003. Gross profit increased as a percentage of sales
to 71.5% for the three months ended March 31, 2004 from 70.1% for the
three months ended March 31, 2003. The increase in gross profit and
gross profit percentage is primarily due to decreased product costs,
which is due to the continued leveraging of our purchasing power and
to enhanced inventory management as a result of increased system
functionality from our recently upgraded MIS platform.
Operating Expenses. Operating expenses increased by $2.1
million or 6.1% to $36.5 million during the three-month period ended
March 31, 2004 from $34.4 million for the three-month period ended
March 31, 2003. The increase in operating expenses was due to an
increase in wages and wage related expenses primarily at the service
center level, due to increased installation capacity, wage rate
pressures and general wage increases. The increase in operating
expenses was also due to an increase in advertisement and promotional
expenses, and an increase in occupancy costs primarily due to normal
rental rate increases. We also experienced an increase in vehicle
maintenance costs and an increase in vehicle lease expense due to the
continued retirement of owned vehicles that are replaced with leased
vehicles, and accelerated amortization of leased vehicle lives in order
to more closely align our lease obligation upon termination of the
lease with expected vehicle market values.
Depreciation and amortization expense for the three-month
period ended March 31, 2004 decreased by $0.2 million or 25.0% to $0.6
million from $0.8 for the three month period ended March 31, 2003. This
was primarily due to decreases in depreciation expense for computer
hardware, sales audit software, and POS software that became fully
depreciated.
Income From Operations. Income from operations for the three
months ended March 31, 2004 decreased by $1.8 million, or 51.4%, to
$1.7 million from $3.5 million for the three months ended March 31,
2003. This decrease was primarily due to the increased operating costs
which were partially offset by increased gross profit discussed above.
Interest Expense. Interest expense for the three months ended
March 31, 2004 decreased $0.3 million, or 12.5%, to $2.1 million from
$2.4 million for the three months ended March 31, 2003. The decrease
was a direct result of the repurchase of $13.2 million face amount of
senior notes during 2003.
Net Income. Net income for the three months ended March 31,
2004 decreased by $0.8 million to a ($0.1) million net loss from $0.7
million of net income for the three months ended March 31, 2003. Net
income as a percentage of sales decreased 1.5% for the three months
ended March 31, 2004 compared to the three months ended March 31, 2003.
The decrease in net income and net income margin during the three
months ended March 31, 2004 compared to the three months ended March
31, 2003 was primarily due to the increased operating expenses which
were partially offset by increased gross profit and decreased interest
expense discussed above.
13
LIQUIDITY AND CAPITAL RESOURCES
Diamond's need for liquidity will arise primarily from the
interest payable on its 9-1/4% Senior Notes (the "Notes"), its Credit
Facility and the funding of Diamond's capital expenditures and working
capital requirements. There are no mandatory principal payments on the
Notes prior to their maturity on April 1, 2008 and, except to the
extent that the amount outstanding under the Credit Facility exceeds
the borrowing base, no required payments of principal on the Credit
Facility prior to its expiration on March 27, 2007. As discussed in
Diamond's Notes to Condensed Consolidated Financial Statements, Note 1,
Diamond was not in compliance with the EBITDA Covenant as of March 31,
2004 and obtained a waiver as of March 31, 2004 with respect to the
EBITDA Covenant. Diamond also amended the Credit Facility with respect
to the EBITDA levels required to be maintained. 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 three months ended March 31, 2004
decreased by $1.9 million to $3.1 million from $5.0 million for the
three months ended March 31, 2003. The change was primarily
attributable to a decrease in Diamond's earnings for the three month
period ended March 31, 2004 as compared to the three month period ended
March 31, 2003.
Net Cash Used in Investing Activities. Net cash used in
investing activities for the three months ended March 31, 2004 remained
flat at $0.3 million compared to the three months ended March 31, 2003.
Net Cash Used in Financing Activities. Net cash used in
financing activities for the three months ended March 31, 2004 was $1.0
million compared to $0.0 used in financing activities in the three
months ended March 31, 2003. This increase is a direct result of net
repayments on Credit Facility borrowings during the first quarter of
2004. Diamond had no borrowings under the Credit Facility during the
first quarter of 2003, and had no outstanding Credit Facility debt as
of March 31, 2003.
Capital Expenditures. Capital expenditures for the three
months ended March 31, 2004 were $0.3 million, as compared to $0.4
million for the three months ended March 31, 2003. The decrease is due
to a decrease in vehicle and software related expenditures, which were
partially offset by increases in computer hardware and leasehold
improvements.
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
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, 2003).
RELATED PARTY TRANSACTIONS
On November 17, 2003, Diamond entered into an employment
agreement with each of Kenneth Levine and Richard Rutta, pursuant to
which Messrs. Levine and Rutta agreed to serve as the Co-Chairmen of
Diamond at an annual salary of $320,000, subject to annual review based
on Diamond's and Messrs. Levine and Rutta's performance. The employment
agreements provide for a term commencing on November 17, 2003 and
ending on November 16, 2004. On March 15, 2004, the employment
agreements were amended to reduce the annual salary for Messrs. Levine
and Rutta to $52,000. In addition to their annual salary, Messrs.
Levine and Rutta are eligible to receive a bonus based upon the
achievement of certain criteria. The employment agreements also contain
various severance, non-competition, non-solicitation provisions,
non-disclosure and assignment of inventions provisions.
14
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 2007. Borrowings
under the Credit Facility bear interest, at Diamond's discretion, at
either the JP Morgan Chase Manhattan Bank Rate (as defined in the
Credit Facility) or LIBOR, plus a margin of 0.50% for the JP Morgan
Chase Manhattan Rate and 2.25% for the LIBOR Rate. In addition, a
commitment fee of 0.25% is charged against any unused balance of the
Credit Facility. Interest rates are subject to increases or reductions
based upon Diamond meeting certain EBITDA levels. At March 31, 2004,
Diamond had $1.5 million of 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, 2003 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.
16
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 gave 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 auto glass 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
- ------- -----------------------------------------------------------------------
10.1 Waiver and Amendment Number Eight to Financing Agreement, dated March
27, 2000, between The CIT Business Group/Business Credit, Inc. and
Diamond Triumph Auto Glass, Inc.
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.
17
(b) REPORTS ON FORM 8-K
Form 8-K filed on March 31, 2004, reporting that Diamond
Triumph Auto Glass, Inc. issued a press release announcing its
operating and financial results for the year ended December
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: May 17, 2004 By: /s/ Michael A. Sumsky
------------------------------------------
Name: Michael A. Sumsky
Title: President,
Chief Financial Officer and General
Counsel (Principal Financial and
Chief Accounting Officer)
18