- --------------------------------------------------------------------------------
UNITED STATES
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 quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission File Number 001-15469
THERMOVIEW INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 61-1325129
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5611 Fern Valley Road 40228
Louisville, Kentucky (Zip Code)
(Address of principal executive offices)
(Registrant's telephone number, including area code, 502-968-2020)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 by Rule 12b.2 of the Exchange Act). Yes [ ] No [X]
As of April 30, 2003, 8,628,716 shares of the Registrant's common stock,
$.001 par value, were issued and outstanding.
- --------------------------------------------------------------------------------
THERMOVIEW INDUSTRIES, INC.
TABLE OF CONTENTS
Part I Financial Information
Item 1. Financial Statements..............................................1
Condensed Consolidated Balance Sheets.................................1
Condensed Consolidated Statements of Operations.......................2
Condensed Consolidated Statements of Cash Flows.......................3
Notes to Condensed Consolidated Financial Statements..................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......14
Item 4. Controls and Procedures..........................................14
Part II Other Information
Item 1. Legal Proceedings................................................15
Item 2. Changes in Securities and Use of Proceeds........................15
Item 3. Defaults Upon Senior Securities..................................15
Item 4. Submission of Matters to a Vote of Security Holders..............15
Item 5. Other Information................................................16
Item 6. Exhibits and Reports on Form 8-K.................................16
- -----
Item 1. Financial Statements
ThermoView Industries, Inc.
Condensed Consolidated Balance Sheets
December 31, March 31, 2003
--------------------- ---------------------
2002 (Unaudited)
Assets --------------------- ---------------------
Current assets:
Cash and equivalents $ 2,179,887 $ 1,456,975
Receivables:
Trade 3,340,577 3,092,934
Other 346,272 337,951
Costs in excess of billings on
uncompleted contracts 589,458 557,887
Inventories 2,104,966 1,961,751
Prepaid expenses and other current
assets 485,316 872,158
--------------------- ---------------------
Total current assets 9,046,476 8,279,656
Property and equipment, net 2,679,852 2,883,249
Other assets:
Goodwill, net 28,358,742 28,358,742
Other assets 408,094 443,319
--------------------- ---------------------
28,766,836 28,802,061
--------------------- ---------------------
Total assets $ 40,493,164 $ 39,964,966
===================== =====================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,698,212 $ 4,422,267
Accrued expenses 2,663,889 2,774,002
Billings in excess of costs on
uncompleted contracts 654,338 657,048
Income taxes payable 93,950 93,950
Current portion of long-term debt 324,368 298,232
--------------------- ---------------------
Total current liabilities 7,434,757 8,245,499
Long-term debt 17,012,156 17,242,876
Other long-term liabilities 135,494 92,537
Mandatorily redeemable preferred stock:
Series C, $.001 par value, 25,000
shares authorized; none issued -- --
Series D, $.001 par value (aggregate
redemption amount and liquidation
preference of $5,547,875 at December
31, 2002 and $5,712,029 at March 31,
2003); 1,500,000 shares authorized;
956,900 shares issued and outstanding
at December 31, 2002 and at March 31,
2003 5,547,875 5,712,029
Series E, $.001 par value (aggregate
redemption amount and liquidation
preference of $2,275,932 at December
31, 2002 and $2,343,275 at March 31,
2003); 500,000 shares authorized;
336,600 shares issued and outstanding
at December 31, 2002 and at March
31, 2003 2,275,932 2,343,275
Stockholders' equity:
Preferred stock, 2,975,000 shares authorized:
Series A, $.001 par value; none issued -- --
Series B, $.001 par value; none issued -- --
Common stock, $.001 par value; 25,000,000
shares authorized; 8,628,716 shares issued
and outstanding at December 31, 2002 and at
March 31, 2003 8,628 8,628
Paid-in capital 63,799,703 63,568,206
Accumulated deficit (55,721,381) (57,248,084)
--------------------- ---------------------
Total stockholders' equity 8,086,950 6,328,750
--------------------- ---------------------
Total liabilities and
stockholders' equity $ 40,493,164 $ 39,964,966
===================== =====================
See accompanying notes.
1
ThermoView Industries, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
For the three months ended
March 31,
---------------------------
2002 2003
------------ ------------
Revenues $ 20,657,262 $ 16,193,013
Cost of revenues earned 10,322,679 8,456,221
------------ ------------
Gross profit 10,334,583 7,736,792
Selling, general and administrative expenses 10,147,046 8,396,181
Depreciation expense 273,382 214,101
Amortization expense 34,647 5,064
------------ ------------
Loss from operations (120,492) (878,554)
Equity in earnings (loss) of joint venture 13,184 (26,207)
Interest expense (663,300) (632,130)
Interest income 15,679 9,764
------------ ------------
Loss before income taxes (754,929) (1,527,127)
Income tax benefit (6,420) (424)
------------ ------------
Loss before cumulative effect of an accounting
change (748,509) (1,526,703)
Cumulative effect of an accounting change--
charge for impairment of goodwill (30,000,000) --
------------ ------------
Net loss (30,748,509) (1,526,703)
Less non-cash Series D and E preferred stock
dividends (191,368) (231,497)
------------ ------------
Net loss attributable to common stockholders $(30,939,877) $ (1,758,200)
============ ============
Basic and diluted loss per common share:
Loss attributable to common stockholders $ (0.11) $ (0.19)
Cumulative effect of an accounting change (3.42) -
------------ ------------
Net loss attributable to common stockholders $ (3.53) $ (0.19)
============ ============
See accompanying notes.
2
ThermoView Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the three months ended
March 31,
---------------------------
2002 2003
---- ----
Operating activities
Net loss $(30,748,509) $(1,526,703)
Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Cumulative effect of an accounting change-
charge related to impairment of goodwill 30,000,000 --
Depreciation and amortization 308,029 219,165
Accretion of debt discount 197,676 188,160
Changes in operating assets and liabilities 529,548 837,829
------------- ------------
Net cash provided by (used in) operating activities 286,744 (281,549)
Investing activities
Payments for purchase of property and equipment (128,790) (280,713)
Other (7,653) (40,287)
------------- ------------
Net cash used in investing activities (136,443) (321,000)
Financing activities
Increase in long-term debt 14,411 --
Payments of long-term debt (122,214) (120,363)
------------- ------------
Net cash provided by (used in) financing activities (107,803) (120,363)
------------- ------------
Net increase in cash and equivalents 42,498 (722,912)
Cash and equivalents at beginning of period 2,387,583 2,179,887
------------- ------------
Cash and equivalents at end of period $ 2,430,081 $ 1,456,975
============= ============
See accompanying notes.
3
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
ThermoView Industries, Inc. ("ThermoView" or "the Company"), have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions in Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals), considered necessary for
a fair presentation have been included. ThermoView's business is subject to
seasonal variations. The demand for replacement windows and related home
improvement products is generally lower during the winter months due to
inclement weather. Demand for replacement windows is generally higher in the
second and third quarters. Operating results for the three-month period ended
March 31, 2003, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2003.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
2. Operating Losses and Negative Cash Flow
During the first quarter of 2003, the Company incurred a net loss to common
shareholders of $1,758,200, compared to a net loss, excluding the cumulative
effect of a change in accounting, in the first quarter of 2002 of $939,877. The
Company's net cash used by operating activities for the quarter was $281,549,
and the Company would have used more cash had it not been for an initial
slow-down in payment of routine invoices which caused accounts payable to
increase by $837,829. While some of this increase in accounts payable is
seasonal, the increase is more than $300,000 greater than occurred in the first
quarter of 2002.
Management believes that the decrease in sales, which was largely
responsible for the operating loss and reduction in cash flow, was primarily due
to severe winter weather in the Midwest markets, severe rain in the southern
California market, a sluggish economy, and the events in Iraq. Management
further believes that the worst effects of these matters are past.
The Company's loss by month declined as the quarter progressed. Following
is the net loss per month for each month in the first quarter of 2002 and 2003:
2002 2003
---- ----
January $ (503,905) $ (943,575)
February (360,605) (668,746)
March (75,367) (145,879)
The Company expects positive cash from operations beginning in the second
quarter. Average weekly cash collections during the first quarter were $1.3
4
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
2. Operating Losses and Negative Cash Flow (Continued)
million. Average weekly cash collections for the six weeks subsequent to March
31, 2003 were $1.4 million.
In the event the Company does not return to positive cash from operations,
the Company will not be able to meet its revised debt covenants, thereby making
its long-term debt currently due, and will need to re-evaluate its goodwill for
potential further impairment and related write-offs.
3. Income (Loss) per Common Share
Income (loss) per common share is calculated in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The
Company calculates basic earnings per common share using the weighted average
number of shares outstanding for the period. The weighted average number of
shares outstanding for the three month periods ended March 31, 2002 and 2003,
includes shares related to a stock purchase warrant that can be exercised for
nominal cash consideration. Outstanding shares for purposes of determining
diluted earnings per common share includes the weighted average number of shares
outstanding for basic earnings per share, plus the diluted effect of any common
share equivalents such as options or warrants in the calculation. As the Company
recorded losses attributable to operations before cumulative effect of an
accounting change for the three-month periods ended March 31, 2002 and 2003,
common share equivalents outstanding would be anti-dilutive. Accordingly, basic
and diluted earnings per share amounts are the same.
Weighted average shares outstanding were as follows:
Weighted Average
Period Shares Outstanding
----------------------------------------- ------------------
For the three months ended March 31, 2002 8,760,852
For the three months ended March 31, 2003 9,190,059
A reconciliation of loss attributable to common stockholders before
cumulative effect of an accounting change used in computing the per share
amounts for comparative quarters is as follows:
Three Months
Ended March 31,
2002 2003
--------- -----------
Loss before cumulative effect of an accounting change $(748,509) $(1,526,703)
Preferred stock dividends (191,368) (231,497)
---------- ------------
Loss attributable to common stockholders before
cumulative effect of an accounting change $(939,877) $(1,758,200)
========== ============
4. Stock Option Information
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to account for its employee stock options under APB No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no compensation cost
has been recognized for employee options except as noted above. Had compensation
cost for employee options been determined based on the fair value at the grant
5
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
4. Stock Option Information (Continued)
date consistent with SFAS No. 123, the Company's net income (loss) and income
(loss) per share would have been as follows:
2002 2003
------------- ------------
Net loss:
As reported $(30,748,509) $(1,526,703)
Pro forma (30,858,998) (1,547,508)
Net loss attributable to common stockholders:
As reported (30,939,877) (1,758,200)
Pro forma (31,050,366) (1,779,005)
Basic and diluted loss per common share:
Basic, As reported $ (3.51) $ (.17)
Diluted, As reported (3.51) (.17)
Basic, Pro forma (3.53) (.19)
Diluted, Pro forma (3.53) (.19)
The fair value of each option grant to employees was estimated on the
date of grant using the Black Schole9s option-pricing model with the following
weighted average assumptions:
2002 2003
--------------------- ---------------------
Interest rate 3.59% 2.59%
Dividends - -
Expected volatility 1.62 1.56
Expected life in years 5 5
5. Segment Information
For the three month periods ended March 31, 2002 and 2003, the Company's
business units had separate management teams and infrastructures that operate
primarily in the vinyl replacement windows, doors and related home improvement
products industry in various states in the Midwest and in Southern California.
The business units have been aggregated into two reportable operating segments:
manufacturing and retail.
Manufacturing
The manufacturing segment includes the businesses that manufacture and sell
vinyl replacement windows to the Company's retail segment and to unaffiliated
customers.
Retail
The retail segment includes the businesses that design, sell and install
vinyl replacement windows, doors and related home improvement products to
commercial and retail customers.
6
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
5. Segment Information (Continued)
Segment information for the three months ended March 31, was as follows:
For the three months Manu-
ended March 31, 2002 facturing Retail Corporate Consolidated
- ---------------------- ------------ ----------- ------------ --------------
Revenues from external
customers $ 1,031,898 $19,544,485 $ 80,879 $ 20,657,262
Intersegment revenues 158,386 -- -- 158,386
Income (loss) from
operations (97,774) 488,904 (511,622) (120,492)
Total assets 4,326,059 33,596,146 2,887,641 40,809,846
For the three months Manu-
ended March 31, 2003 facturing Retail Corporate Consolidated
- ---------------------- ------------ ----------- ------------ --------------
Revenues from external
customers $ 809,370 $15,306,763 $ 76,880 $ 16,193,013
Intersegment revenues 88,266 -- -- 88,266
Income (loss) from
operations (218,850) (49,526) (610,178) (878,554)
Total assets 3,908,427 34,633,707 1,422,832 39,964,966
6. Contingencies and Commitments
On November 19, 2001, Nelson E. Clemmens, former director and president of
ThermoView, filed an action titled Nelson E. Clemmens v. ThermoView Industries,
Inc., Civil Action No. 01-CI-07901 (Jefferson Circuit Court, November 19, 2001)
against ThermoView alleging subrogation and indemnity rights associated with Mr.
Clemmens' loss of guaranty collateral to PNC Bank. These claims are in
connection with the April 2000 amendment to ThermoView's previous bank debt with
PNC Bank, in which Stephen A. Hoffmann, Richard E. Bowlds, Nelson E. Clemmens
and Douglas I. Maxwell, III guaranteed $3,000,000 of our PNC Bank debt. In
January 2001, PNC seized the collateral pledged as security by the guarantors
for the loan guaranty. In March 2001, ThermoView reached settlements with
Messrs. Bowlds and Hoffmann for any claims that they may hold against us
regarding their loss of assets in connection with the guaranty. We did not reach
a settlement with Messrs. Clemmens and Maxwell with regard to guarantees of
$1,000,000. Following the initial discovery phase, Clemmens sought a judicial
determination that ThermoView's March 2001 assignment of the underlying debt
relieved him of a contractual obligation to refrain from asserting a claim of
repayment until the debt was ultimately satisfied. On September 30, 2002, the
Jefferson Circuit Court issued an order of summary judgment stating that
Clemmens could not assert a claim for repayment until the debt was ultimately
satisfied. Clemmens filed a motion with the court to reconsider the September
30, 2002, ruling. On February 26, 2003, the Jefferson Circuit Court reversed the
previous judgment granted to ThermoView and awarded judgment to Clemmens against
ThermoView. ThermoView sought a reconsideration of the February 26, 2003 ruling.
On March 9, 2003, the Jefferson Circuit Court upheld the previous ruling in
favor of Clemmens, and entered a final appealable judgment which allows Clemmens
to seek collection against ThermoView for the loss of collateral in the amount
of $500,000 plus interest at the rate of 10% annually beginning January 1, 2001
($112,500 through March 31, 2003). ThermoView intends to appeal this matter to
the Kentucky Court of Appeals and anticipates that the appeals process will take
over 12 months to complete. Maxwell has not asserted a claim for the loss of his
collateral as of the date of filing of this report. Maxwell could assert claims
for the same amount as Clemmens. Management has evaluated the potential loss
associated with Clemmens' litigation and Maxwell's unasserted claim and has
determined that the total loss to the Company will not exceed the $1 million
recorded liability associated with these matters. While ThermoView believes that
the ultimate resolution of this Clemmens' matter on appeal will be favorable to
7
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
6. Contingencies and Commitments (Continued)
ThermoView, an adverse final determination of our position regarding this matter
could have a material adverse effect on our cash flow.
The Company is subject to other legal proceedings and claims which have
arisen in the ordinary course of its business and have not been finally
adjudicated. Although there can be no assurance as to the ultimate disposition
of these matters, it is the opinion of the Company's management, based upon the
information available at this time, that the expected outcome of these matters,
individually or in the aggregate, will not have a material adverse effect on the
results of operations and financial condition of the Company.
In March 2000, the Company entered into a license agreement with Research
Frontiers Incorporated (Research Frontiers), a Delaware corporation with
headquarters located in Woodbury, New York, for the non-exclusive rights to
market windows which utilize variable light transmission technology developed by
Research Frontiers. The agreement provides for the payment of a royalty of 5% of
the net selling price of the licensed products as defined in the agreement to
Research Frontiers for products sold by the Company that incorporate such
technology. Additionally, the Company has agreed to pay to Research Frontiers an
annual minimum royalty of $100,000 for 2003. The royalty is payable in cash or
shares of the Company's common stock at the Company's option.
7. Subsequent Events
Subsequent to March 31, 2003, lenders have extended maturity dates on debt
another six months.
Maturity dates are revised as follows:
Amount of Obligation Original Revised
at March 31, 2003 Maturity Date Maturity Date
-------------------- -------------- -----------------
Series A, B and C
senior debt $9,703,880 March 31, 2004 September 30,2004
Senior subordinated
promissory note 4,732,359 April 30, 2004 October 31, 2004
Guarantor note 1,200,000 June 30, 2004 November 30, 2004
Also, the Series D and E preferred stock has a mandatory redemption feature
which requires 20% annual redemption over a period of five years commencing July
1, 2004. The preferred stockholders have agreed to revise the commencement date
of 20% annual redemption to January 1, 2005.
8
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
This report on Form 10-Q contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "estimates,"
"will," "should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy.
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in the
forward-looking statements as a result of any number of factors, most of which
are beyond the control of management. These factors include operating losses,
continued and increased expenses, non-cash dividends and interest related to our
financings, adverse judgments to the Company, and restrictions imposed by our
senior and subordinated debt.
Although we believe that the expectations and assumptions reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
The following should be read in conjunction with the response to Part I,
Item 1. of this Report and the Company's audited consolidated financial
statements contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002. Any capitalized terms used but not defined in this Item
have the same meaning given to them in the Form 10-K.
Overview
We design, manufacture, sell and install custom vinyl replacement windows
for residential and retail commercial customers. We also sell and install
replacement doors, home textured exterior coatings, vinyl siding, patio decks,
patio enclosures, cabinet refacings and kitchen and bathroom remodeling
products, as well as residential roofing.
Business Segments
Our subsidiaries have separate management teams and infrastructures and
operate in two reportable operating segments: retail and manufacturing.
Retail. Our retail segment consists of our subsidiaries that design, sell
and install custom vinyl replacement windows, doors and related home improvement
products to commercial and retail customers. Our retail segment derives its
revenues from the sale and installation of thermal replacement windows, storm
windows and doors, patio decks, patio enclosures, vinyl siding and other home
improvement products. Our retail segment recognizes revenues on the completed
contract method. A contract is considered complete when the home improvement
product has been installed. Gross profit in the retail segment represents
revenues after deducting product and installation labor costs.
Manufacturing. Our manufacturing segment consists of our subsidiary that
manufactures and sells vinyl replacement windows to one of our retail companies
and to unaffiliated customers. Our manufacturing segment recognizes revenues
when products are shipped. Gross profit in the manufacturing segment represents
9
revenues after deducting product costs (primarily glass, vinyl and hardware),
window fabrication labor and other manufacturing expenses.
Historical Results Of Operations
Three months ended March 31, 2002 Compared to Three Months Ended March 31,
2003
Three Months ended
March 31,
-------------------
2002 2003
-------- --------
(In thousands)
Revenues $ 20,657 $ 16,193
Cost of revenues earned 10,322 8,456
-------- --------
Gross profit 10,335 7,737
Selling, general and administrative expenses 10,147 8,396
Depreciation expense 273 215
Amortization expense 35 5
-------- --------
Loss from operations (120) (879)
Equity in earnings (loss) of joint venture 13 (26)
Interest expense (663) (632)
Interest income 15 10
-------- --------
Loss before income taxes (755) (1,527)
Income tax benefit 6 --
-------- --------
Loss before cumulative effect of an accounting change (749) (1,527)
Cumulative effect of an accounting change -
charge for impairment of goodwill (30,000) --
-------- --------
Net loss (30,749) (1,527)
Less non-cash Series D and E preferred stock dividends (191) (231)
-------- --------
Net loss attributable to common stockholders $(30,940) $ (1,758)
-------- --------
Revenues. Revenues decreased from $20.7 million for the first quarter of
2002 to $16.2 million for the first quarter of 2003. Revenues during the first
quarter of 2003 were negatively impacted by severe winter weather in our Midwest
markets, rain in our Southern California market, the sluggish economy and the
events in Iraq. All of our retail operations and our manufacturing operation
reported less revenues in the first quarter of 2003 compared to 2002.
Gross Profit. Gross profit, which represents revenues less cost of revenues
earned, decreased from $10.3 million in the first quarter of 2002 to $7.7
million in the first quarter of 2003. The reduction in the amount of gross
profit is consistent with the reduced revenue discussed above. As a percentage
of revenues, gross profit decreased from 50.0% in the first quarter of 2002 to
47.8% in the first quarter of 2003. This decrease results primarily because some
costs at our subsidiaries are fixed and these fixed costs are more significant
relative to the lower volumes in the first quarter of 2003 compared to the first
quarter of 2002.
10
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased from $10.1 million in the first quarter of
2002 to $8.4 million in the first quarter of 2003. Selling, general and
administrative expenses as a percentage of revenue increased from 49.1% in the
first quarter of 2002 to 51.8% in the first quarter of 2003. The increase in
selling, general and administrative expenses as a percentage of revenues in the
first quarter of 2003 results primarily from the fixed nature of certain
expenses relative to the lower volumes.
Depreciation Expense. Depreciation expense decreased from $273,000 in the
first quarter of 2002 to $215,000 in the first quarter of 2003, reflecting a
fairly constant amount of property and equipment.
Interest Expense. Interest expense decreased from $663,000 in 2002 to
$632,000 in 2003. This decrease results from the $2.0 million reduction in debt
during 2002.
Income Tax Benefit. Due to operating losses, management concluded that it
is more likely than not that our deferred tax assets will not be realized.
Accordingly, we established a valuation allowance against all deferred tax
assets, and no deferred income taxes have been recorded in 2002 or 2003. Income
tax benefit in the first quarter of 2002 relates to some minor state tax
refunds.
Non-Cash Dividends. Non-cash dividends in the first quarter of 2002 and
2003 represent accrued dividends on the Series D and E preferred stock.
Cumulative Effect of Accounting Change. The non-cash impairment charge of
$30 million resulted from the adoption of SFAS No. 142 in the first quarter of
2002. The impairment was determined by comparing fair values derived using cash
flow analysis to current carrying values of goodwill.
Liquidity And Capital Resources
As of March 31, 2003, we had cash and equivalents of $1.5 million, working
capital of $34,000, $17.2 million of long-term debt, net of current maturities,
and $8.1 million of mandatorily redeemable preferred stock.
Our operating activities for the three months ended March 31, 2002,
provided $287,000 of cash. Our operating activities for the three months ended
March 31, 2003, used $282,000 of cash.
The use of $136,000 of cash for investing activities for the three months
ended March 31, 2002 related primarily to the acquisition of property and
equipment. The use of $321,000 of cash for investing activities for the three
months ended March 31, 2003, related primarily to the acquisition of property
and equipment.
We used $108,000 in cash for financing activities in the three months ended
March 31, 2002, primarily for repayment of debt. We used $120,000 of cash for
financing activities in the three months ended March 31, 2003 for repayment of
debt.
During the first quarter of 2003, the Company incurred a net loss to common
shareholders of $1,758,200, compared to a net loss, excluding the cumulative
effect of a change in accounting, in the first quarter of 2002 of $939,877. The
Company's net cash used by operating activities for the quarter was $281,549,
11
and the Company would have used more cash had it not been for an initial
slow-down in payment of routine invoices which caused accounts payable to
increase by $837,829. While some of this increase in accounts payable is
seasonal, the increase is more than $300,000 greater than occurred in the first
quarter of 2002.
Management believes that the decrease in sales, which was largely
responsible for the operating loss and reduction in cash flow, was primarily due
to severe winter weather in the Midwest markets, severe rain in the southern
California market, a sluggish economy, and the events in Iraq. Management
further believes that the worst effects of these matters are past.
The Company's loss by month declined as the quarter progressed. Following
is the net loss per month for each month in the first quarter of 2002 and 2003:
2002 2003
---- ----
January $ (503,905) $ (943,575)
February (360,605) (668,746)
March (75,367) (145,879)
The Company expects positive cash from operations beginning in the second
quarter. Average weekly cash collections during the first quarter were $1.3
million. Average weekly cash collections for the six weeks subsequent to March
31, 2003 were $1.4 million.
In the event the Company does not return to positive cash from operations,
the Company will not be able to meet its revised debt covenants, thereby making
its long-term debt currently due, and will need to re-evaluate its goodwill for
potential further impairment and related write-offs.
Our cash flow could be negatively impacted by an adverse final
determination in the Nelson E. Clemmens' litigation. The adverse judgment could
result in our requirement to pay $500,000 plus 10% interest accrued from January
1, 2001 until paid. We have recorded $500,000 as long-term debt on our balance
sheet, but we have not recorded the interest amounting to $112,500 through March
31, 2003. Management intends to appeal the latest decision and expects that it
will take over twelve months to complete the appeal process.
We are required to maintain certain financial ratios and to comply with
various other covenants and restrictions under the terms of the financing
agreements, including restrictions as to additional financings, the payment of
dividends and the incurrence of additional indebtedness. We did not meet one of
our covenants at December 31, 2002. Effective December 31, 2002, our lenders
have reset certain covenants for periods through March 31, 2004 to accommodate
compliance. Based on these reset covenants, management believes that we will be
able to comply. After adjusting the covenants, we are in compliance with all
covenants as of December 31, 2002 and March 31, 2003.
Under our financing arrangements, substantially all of our assets are
pledged as collateral. In March 2001, GE Equity and a group of our officers and
directors purchased from PNC Bank the PNC note due from ThermoView in the
original principal amount of $15 million representing our credit facility. PNC
Bank in January 2001 had declared the credit facility in default for covenant
12
violations. In connection with the purchase of the PNC Note by GE Equity and
others, all defaults were waived.
If we default in the future under our debt arrangements, the lenders can,
among other items, accelerate all amounts owed and increase interest rates on
our debt. An event of default could result in the loss of our subsidiaries
because of the pledge of our ownership in all of our subsidiaries to the
lenders. As of December 31, 2002 and March 31, 2003, we are not in default under
any of our debt arrangements.
We believe that our cash flow from operations will allow us to meet our
anticipated needs during at least the next 12 months for:
o debt service requirements;
o working capital requirements;
o planned property and equipment capital expenditures;
o expanding our retail segment;
o offering new technologically improved products to our customers; and
o integrating more thoroughly the advertising and marketing programs of our
regional subsidiaries into a national home-remodeling business.
In connection with adjusting certain covenants in loan agreements, the
preferred shareholders agreed to modify terms of their agreements such that
except under limited circumstances, cash dividend payments will not be required
until July 31, 2004.
We also believe in the longer term that cash will be sufficient to meet our
needs. However, we do not expect to continue our acquisition program soon. In
October 2002, we opened a new retail sales office in Phoenix, Arizona, and are
working to open two new retail offices in the upper midwest and in a
southeastern state in 2003. Also, we have and are investing in the development
of Alter-Lite light-control windows and a new line of climate resistant, highly
durable Compozit(TM) windows. In addition, we intend to more thoroughly
integrate the advertising and marketing programs of our regional subsidiaries
into a national home-remodeling business over the next two years. These various
initiatives we expect will require cash from $300,000 to $400,000 in the next
twelve months.
On or before our debt begins to mature in September 2004 (under recent
extensions), we anticipate either extending the term of our current financing or
refinancing it.
We do not expect annual capital expenditures for the next three years to
significantly vary from amounts reported for the last three years, which have
been in the range of $500,000 to $900,000 annually.
Pending Litigation
ThermoView does not anticipate any significant adverse effect on our
results of operations through December 2003 because of the Clemmens litigation
described in Part II, Item 1, Legal Proceedings. Although ThermoView believes
13
that we will prevail upon appeal of the claim, an adverse outcome in this action
could have a material adverse effect on our cash flow.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
In March 2001, we restructured our debt and, as a result, all of our debt
is fixed rate debt. Interest rate changes would result in gains or losses in the
market value of our fixed-rate debt due to the differences between the current
market interest rates and the rates governing these instruments. With respect to
our fixed-rate debt currently outstanding, a 10% change in interest rates (for
example, from 10% to 11%) would not have resulted in a significant change in the
fair value of our fixed-rate debt.
Item 4. Controls and Procedures
As of March 31, 2003, and within the 90-day period prior to the filing date
of this report, an evaluation was carried out under the supervision and with the
participation of ThermoView's management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that ThermoView's disclosure
controls and procedures are, to the best of their knowledge, effective to ensure
that information required to be disclosed by ThermoView in reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. Subsequent to March 31, 2003, our Chief Executive Officer and
Chief Financial Officer have concluded that there were no significant changes in
ThermoView's internal controls or in other factors that could significantly
affect our internal controls, including any corrective actions with regard to
significant deficiencies or material weaknesses.
14
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
On November 19, 2001, Nelson E. Clemmens, former director and president of
ThermoView, filed an action titled Nelson E. Clemmens v. ThermoView Industries,
Inc., Civil Action No. 01-CI-07901 (Jefferson Circuit Court, November 19, 2001)
against ThermoView alleging subrogation and indemnity rights associated with Mr.
Clemmens' loss of guaranty collateral to PNC Bank. These claims are in
connection with the April 2000 amendment to ThermoView's previous bank debt with
PNC Bank, in which Stephen A. Hoffmann, Richard E. Bowlds, Nelson E. Clemmens
and Douglas I. Maxwell, III guaranteed $3,000,000 of our PNC Bank debt. In
January 2001, PNC seized the collateral pledged as security by the guarantors
for the loan guaranty. In March 2001, ThermoView reached settlements with
Messrs. Bowlds and Hoffmann for any claims that they may hold against us
regarding their loss of assets in connection with the guaranty. We did not reach
a settlement with Messrs. Clemmens and Maxwell with regard to guarantees of
$1,000,000. Following the initial discovery phase, Clemmens sought a judicial
determination that ThermoView's March 2001 assignment of the underlying debt
relieved him of a contractual obligation to refrain from asserting a claim of
repayment until the debt was ultimately satisfied. On September 30, 2002, the
Jefferson Circuit Court issued an order of summary judgment stating that
Clemmens could not assert a claim for repayment until the debt was ultimately
satisfied. Clemmens filed a motion with the court to reconsider the September
30, 2002, ruling. On February 26, 2003, the Jefferson Circuit Court reversed the
previous judgment granted to ThermoView and awarded judgment to Clemmens against
ThermoView. ThermoView sought a reconsideration of the February 26, 2003 ruling.
On March 9, 2003, the Jefferson Circuit Court upheld the previous ruling in
favor of Clemmens, and entered a final appealable judgment which allows Clemmens
to seek collection against ThermoView for the loss of collateral in the amount
of $500,000 plus interest at the rate of 10% annually beginning January 1, 2001
($112,500 through March 31, 2003). ThermoView intends to appeal this matter to
the Kentucky Court of Appeals and anticipates that the appeals process will take
over 12 months to complete. Maxwell has not asserted a claim for the loss of his
collateral as of the date of filing of this report. Maxwell could assert claims
for the same amount as Clemmens. Management has evaluated the potential loss
associated with Clemmens' litigation and Maxwell's unasserted claim and has
determined that the total loss to the Company will not exceed the $1 million
recorded liability associated with these matters. While ThermoView believes that
the ultimate resolution of this Clemmens' matter on appeal will be favorable to
ThermoView, an adverse final determination of our position regarding this matter
could have a material adverse effect on our cash flow.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
15
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
See Index to Exhibits.
(b) Reports on Form 8-K.
(1) On February 20, 2003, ThermoView filed a Form 8-K under Item 5. Other
Events and Regulation FD Disclosure reporting the scheduled March 3,
2003 announcement of fourth quarter and full-year 2002 financial
results.
(2) On February 26, 2003, ThermoView filed a Form 8-K under Item 5. Other
Events and Regulation FD Disclosure reporting an adverse ruling in the
civil action styled Nelson E. Clemmens v. ThermoView Industries, Inc.,
Civil Action No. 01-CI-07901 (Jefferson Circuit Court, November 19,
2001).
(3) On March 3, 2003, ThermoView filed a Form 8-K under Item 5. Other
Events and Regulation FD Disclosure reporting financial results for
the fourth quarter and for the full 2002 fiscal year.
16
SIGNATURES
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.
ThermoView Industries, Inc.
Date: May 15, 2003 By: /s/ Charles L. Smith
----------------------------------------
Charles L. Smith,
Chief Executive Officer
(principal executive officer)
Date: May 15, 2003 By: /s/ James J. TerBeest
----------------------------------------
James J. TerBeest,
Chief Financial Officer
(principal financial and
accounting officer)
Charles L. Smith and James J. TerBeest, being the Chief Executive Officer
and Chief Financial Officer, respectively, of ThermoView Industries, Inc.,
hereby certify as of this 15th day of May, 2003, that the Form 10-Q for the
Quarter ended March 31, 2003, fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information
contained in the Form 10-Q fairly presents, in all material respects, the
financial condition and results of operations of ThermoView Industries, Inc.
By: /s/ Charles L. Smith
----------------------------------------
Charles L. Smith,
Chief Executive Officer
By: /s/ James J. TerBeest
----------------------------------------
James J. TerBeest,
Chief Financial Officer
17
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
*10.110 -- Ninth Amendment to Loan Agreement dated as of March 28, 2003 by and
among GE Capital Equity Investment, Inc. and registrant, et al.
*10.111 -- Fifth Amendment to Securities Purchase Agreement dated as of March 28
2003 by and among GE Capital Equity Investment, Inc. and registrant,
et al.
*10.112 -- Consent to Amendment of Series D preferred stock dated March 28, 2003
by and among registrant and preferred shareholders.
*10.113 -- Consent to Amendment of Series E preferred stock dated March 28, 2003
by and among registrant and preferred shareholders.
99.1 -- Section 906 Certification of Charles L. Smith for the Quarter ended
March 31, 2003.
99.2 -- Section 906 Certification of James J. TerBeest for the Quarter ended
March 31, 2003.
- ----------
o Previously filed as an exhibit to ThermoView Industries, Inc.'s Form 10-K
for period ending 12/31/2002 and incorporated herein by reference.
18
CERTIFICATION EXHIBIT 99.1
I, Charles L. Smith, certify that:
1) I have reviewed this quarterly report on Form 10-Q of ThermoView
Industries, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Signature and Title: /s/ Charles L. Smith Date: May 15, 2003
--------------------------------- ---------------------
Chief Executive Officer
A signed original of this written statement required by Section 906 of the
Sarbanes-Oxley Act of 2002 has been provided to ThermoView Industries, Inc. and
will be retained by ThermoView Industries, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.
19
CERTIFICATION EXHIBIT 99.2
I, James J. TerBeest, certify that:
1) I have reviewed this quarterly report on Form 10-Q of ThermoView
Industries, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Signature and Title: /s/ James J. TerBeest Date: May 15, 2003
------------------------ ---------------------------
Chief Financial Officer
A signed original of this written statement required by Section 906 of the
Sarbanes-Oxley Act of 2002 has been provided to ThermoView Industries, Inc. and
will be retained by ThermoView Industries, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.
20