- --------------------------------------------------------------------------------
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 June 30, 2004
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 July 31, 2004, 8,638,716 shares of the Registrant's common stock,
$.001 par value, were issued and outstanding.
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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............................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......20
Item 4. Controls and Procedures..........................................20
Part II Other Information
Item 1. Legal Proceedings................................................21
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities.................................................22
Item 3. Defaults upon Senior Securities..................................22
Item 4. Submission of Matters to a Vote of Security Holders..............22
Item 5. Other Information................................................22
Item 6. Exhibits and Reports on Form 8-K.................................23
- -----
Item 1. Financial Statements
ThermoView Industries, Inc.
Condensed Consolidated Balance Sheets
December 31 June 30, 2004
2003 (Unaudited)
Assets
Current assets:
Cash and equivalents..................... $ 211,449 $ 584,853
Restricted cash.......................... 300,000 480,000
Receivables:
Trade, net of allowance for doubtful
accounts of $345,000 in 2003 and
$347,166 in 2004...................... 3,096,229 4,955,963
Other................................... 140,444 166,982
Costs in excess of billings on uncompleted
contracts............................. 560,617 571,141
Inventories.............................. 1,960,611 2,399,276
Prepaid expenses and other current assets 645,027 1,328,967
---------------- ----------------
Total current assets........................ 6,914,377 10,487,182
Property and equipment, net of depreciation. 2,676,003 2,803,120
Other assets:
Goodwill................................. 28,358,742 28,358,742
Other assets............................. 544,787 504,991
--------------- ----------------
28,903,529 28,863,733
Total assets................................ $ 38,493,909 $ 42,154,035
================ ================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable......................... $ 4,048,388 $ 5,788,443
Accrued expenses......................... 2,072,902 2,997,841
Billings in excess of costs on uncompleted
contracts.............................. 541,697 713,399
Income taxes payable..................... 65,602 65,502
Current portion of long-term debt........ 544,795 837,716
---------------- ----------------
Total current liabilities................... 7,273,384 10,402,900
Long-term debt.............................. 16,510,303 17,427,247
Preferred shares subject to mandatory
redemption................................ 7,593,520 7,897,752
Other long-term liabilities................. 471,489 659,418
---------------- ----------------
Total long-term liabilities................. 31,848,696 25,984,417
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, 2003 and
8,638,716 shares issued and outstanding
at June 30, 2004........................ 8,628 8,638
Paid-in capital.......................... 64,531,209 64,537,449
Accumulated deficit...................... (57,894,624) (58,779,368)
---------------- -----------------
Total stockholders' equity.................. 6,645,213 5,766,718
---------------- ----------------
Total liabilities and stockholders' equity.. $ 38,493,909 $ 42,154,035
================ ================
See accompanying notes.
1
ThermoView Industries, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
For the three months ended For the six months ended
June 30, June 30,
-------------------------- --------------------------
2003 2004 2003 2004
---- ---- ---- ----
Revenues $ 18,112,855 $ 19,110,765 $ 34,305,868 $ 33,949,906
Cost of revenues earned 9,244,077 9,750,022 17,700,298 17,617,122
------------ ------------ ------------ ------------
Gross profit 8,868,778 9,360,743 16,605,570 16,332,784
Selling, general and admini-
strative expenses 8,487,674 7,901,823 16,883,855 15,382,421
Unusual credit-gain on
conversion of debt to
warrants (796,000) - (796,000) -
Depreciation expense 199,642 228,303 413,743 440,901
Amortization expense 5,065 12,982 10,129 25,964
------------ ------------ ------------ ------------
Income from operations 972,397 1,217,635 93,843 483,498
Equity in earnings (loss)
of joint venture (20,017) (1,164) (46,224) (4,499)
Interest expense (706,366) (600,067) (1,338,496) (1,368,718)
Interest income 6,965 4,634 16,729 10,195
------------ ------------ ------------ ------------
Income (loss) before
income taxes 252,979 621,038 (1,274,148) (879,524)
Income tax expense
(benefit) 12,653 1,843 12,229 5,221
------------ ------------ ------------ ------------
Net income (loss) 240,326 619,195 (1,286,377) (884,745)
Less non-cash Series
D and E preferred stock
dividends (240,997) - (472,494) -
Plus benefit of Series D
preferred stock
redemption 796,000 - 796,000 -
------------ ------------ ------------ ------------
555,003 - 323,506 -
------------ ------------ ------------ ------------
Net income (loss)
attributable to common
stockholders $ 795,329 $ 619,195 $ (962,871) $ (884,745)
============ ============ ============ ============
Basic income (loss) per common share:
Net income (loss)
attributable to common
stockholders $ 0.09 $ 0.07 $ (0.10) $ (0.10)
============ ============ ============ ============
Diluted income (loss) per common share:
Net income (loss)
attributable to common
stockholders $ 0.08 $ 0.06 $ (0.10) $ (0.10)
============ ============ ============ ============
See accompanying notes.
2
ThermoView Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the six months ended
June 30,
---------------------------
2003 2004
---- ----
Operating activities
Net loss $(1,286,377) $ (884,745)
Adjustments to reconcile net loss to
net cash provided by (used in) operations:
Depreciation and amortization 423,872 466,865
Accretion of debt discount 376,320 213,094
Accrued interest on preferred shares
subject to redemption - 304,232
Interest added to principal - 605,583
Unusual credit-gain on conversion of
debt to warrants (796,000) -
Equity in (income) loss of joint venture 46,224 4,499
Changes in operating assets and liabilities (179,499) (182,806)
------------ ------------
Net cash provided by (used in) operating activities (1,415,460) 526,722
Investing activities
Payments for purchase of property and equipment (418,154) (180,945)
Other (137,650) 9,333
------------ ------------
Net cash used in investing activities (555,804) (171,612)
Financing activities
Amount escrowed for special purposes - (180,000)
Increase in long-term debt - 349,993
Payments of long-term debt (243,854) (345,878)
Increase in other long-term liabilities 100,000 187,929
Exercise of options - 6,250
------------ ------------
Net cash (used) in financing activities (143,854) 18,294
------------ ------------
Net increase (decrease) in cash and equivalents (2,115,118) 373,404
Cash and equivalents at beginning of period 2,179,887 211,449
------------ ------------
Cash and equivalents at end of period $ 64,769 $ 584,853
============ ============
See accompanying notes.
3
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(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 U.S. generally accepted accounting principles 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 six-month period ended June 30, 2004, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2004.
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, 2003.
2. Operating Losses and Negative Cash Flow
During the second quarter of 2004, the Company produced a net income
attributable to common shareholders of $619,195, compared to $795,329 during the
second quarter of 2003. However, the net income of $795,329 in second quarter
2003 includes $796,000 of gain on conversion of debt to warrants and another
$796,000 of benefit of Series D preferred stock redemption. If net income is
re-stated to exclude these unusual gains, net income attributable to common
shareholders would reflect a loss in the amount of $796,671 in second quarter
2003 and therefore the net income of $619,195 reported in this second quarter is
an improvement of $1,415,866 over the same quarter last year.
The Company's net cash provided by operating activities for the first six
months of 2004 was $526,722 as compared to net cash used in operating activities
of $1,415,460 during the same period in 2003. The following table details three
significant items that impacted cash during these comparative periods and
illustrates their impact on the net cash provided or used by operating
activities:
Six Months Ended June 30
2003 2004
---------- ----------
Net cash provided by (used in) operating activities (1,415,460) 526,722
Unusual credit-gain on conversion of debt to warrants 796,000 -
Accrued interest on preferred shares subject to redemption - (304,232)
Interest added to principal - (605,583)
---------- ----------
Net cash (used in) operating activities-adjusted for
unusual items (619,460) (383,093)
========= ==========
4
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
2. Operating Losses and Negative Cash Flow (Continued)
Accounts payable increased by $1,740,055 from December 31, 2003, to June
30, 2004. This increase in accounts payable of $1,740,055 is $1,466,351 more
than the $273,704 increase in accounts payable that occurred in the six months
of 2003. A significant part of the increase in accounts payable in the first six
months of 2004 is attributable to agreements with vendors to extend the due
dates of certain accounts payable and a sharp increase in revenue and trade
receivables. During the first six months of 2004, trade receivables increased by
$1,859,734 as compared to $189,057 in the first six months of 2003.
Revenue increased by approximately $1 million when comparing the second
quarter 2003 to second quarter 2004. The increase in revenue was due to many
factors that included higher consumer confidence, positive economic indicators,
as well as a concentrated marketing and advertising efforts.
In addition to increased revenues, management was successful in their
concerted effort at reducing selling, general and administrative expenses.
Selling, general and administrative expenses were reduced by over $500,000 in
the second quarter 2004 as compared to the second quarter of 2003 with a total
savings of approximately $1.5 million for the first six months ending June 30,
2004 as compared to the first six months of 2003. Cost cutting, accounting
centralization and standardization, and best practices efficiencies continue to
be an integral part of management's strategies going forward.
The Company's net income and loss by month, as follows, reflects the
seasonality of the remodeling industry with losses occurring during the first
four to five months of the year followed by positive net incomes in May and June
of 2004 and positive net income for June of 2003. The following is the net
income (loss) for each month during the first six months of 2003 and 2004:
2003 2004
---- ----
January $ (943,575) $ (729,086)
February (668,746) (586,954)
March (145,879) (187,899)
April (48,917) (68,981)
May (578,627) 143,230
June 1,422,873 544,945
----------------- -----------------
Six Month YTD $ (962,871) $ (884,745)
=========== ===========
The above net income of $1,422,873 for June, 2003, includes $796,000 of
gain on conversion of debt to warrants and another $796,000 of benefit of Series
D preferred stock redemption. If the June 2003, net income is re-stated to
exclude these unusual gains, net income attributable to common shareholders
would reflect a loss in the amount of $169,127 in June 2003 and therefore the
net income of $544,945 reported in June, 2004 is an improvement of $714,072 over
the same month last year.
The Company projected positive cash from operations beginning in the second
quarter of 2004. Average weekly cash collections during the first quarter of
5
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
2. Operating Losses and Negative Cash Flow (Continued)
2004 were $1.17 million. Average weekly cash collections for the second quarter
of 2004 were $1.40 million with a net cash provided by operating activities of
$526,722 for the six months ended June 30, 2004.
In the event the Company returns to negative cash from operations, the
Company may 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 six month periods ended June 30, 2003 and 2004,
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 for the six-month periods ended June
30, 2003 and 2004, 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 June 30, 2003 9,190,059
For the three months ended June 30, 2004 9,200,059
Weighted Average
Period Shares Outstanding
---------------------------------------- ------------------
For the six months ended June 30, 2003 9,190,059
For the six months ended June 30, 2004 9,199,510
A reconciliation of basic to diluted share amounts used in computing the
per share amounts for the three months ended June 30, 2003 and 2004 is as
follows:
Three Months
Ended June 30,
2003 2004
---- ----
Basic - weighted average shares outstanding 9,190,059 9,200,059
Dilutive effect of stock options and warrants 528,613 950,878
---------- -----------
Diluted - weighted average shares outstanding
and assumed conversions 9,718,672 10,150,937
========== ==========
As the Company recorded losses attributable to operations for the six-month
periods ended June 30, 2003 and 2004, common share equivalents outstanding would
6
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
3. Income (Loss) per Common Share (Continued)
be anti-dilutive. Accordingly, basic and diluted earnings per share amounts are
the same.
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
date consistent with SFAS No. 123, the Company's net income (loss) and income
(loss) per share for the three months and six months ended June 30 would have
been as follows:
Three Months Six Months
Ended June 30, Ended June 30,
--------------- -----------------
2003 2004 2003 2004
---- ---- ---- ----
Net income (loss):
As reported $240,326 $619,195 $(1,286,377) $(884,745)
Pro forma 219,567 614,450 (1,327,941) (894,235)
Net income (loss) attributable
to common stockholders:
As reported 795,329 619,195 (962,871) (884,745)
Pro forma 774,570 614,450 (1,004,435) (894,235)
Basic and diluted income
(loss) per common share:
Basic, As reported $ .09 $ .07 $ (.10) $ (.10)
Diluted, As reported .08 .06 (.10) (.10)
Basic, Pro forma .09 .07 (.11) (.10)
Diluted, Pro forma .08 .06 (.11) (.10)
The fair value of each option grant to employees was estimated on the date
of grant using the Black Scholes option-pricing model. There were no options
granted in 2003 or during the first six months of 2004.
5. Long-term Debt and Mandatorily Redeemable Preferred Stock
On June 30, 2003, the Company restructured its long-term debt and preferred
stock. GE Equity holds Series A debt, Series C debt and other subordinated debt.
Under the restructuring agreements, GE Equity reduced the interest rate on both
Series A and C debt from 10% to 8% and from 12% to 8% on the subordinated debt.
Additionally, GE Equity converted $1 million of the subordinated debt to 680,000
common stock warrants at 28 cents per share. These warrants are exercisable
through March 22, 2013 and were determined to have a fair value of $204,000.
ThermoView's Series A and C debt maturities were extended by two years to June
30, 2006, and to July 31, 2006 for the subordinated debt.
ThermoView's preferred stock holders also converted $1 million worth of
Series D preferred stock to 680,000 common stock warrants at 28 cents per share.
These warrants are exercisable through June 30, 2013 and were determined to have
a fair value of $204,000. Also, the Series D and E preferred stock holders
7
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
5. Long-term Debt and Mandatorily Redeemable Preferred Stock (Continued)
agreed to reduce the dividend rate on the remainder of the preferred holdings
from 12% to 8%, to defer cash dividends until the Series A and B debt is
retired, and to extend the date for mandatory redemption to August 31, 2006.
The restructured debt agreements require ThermoView to pay $100,000 toward
principal each month commencing November 2004, as well as monthly interest
beginning in October 2004. The debt restructuring also calls for payments of
excess cash toward principal two times per year, at the option of the lender.
Excess cash is defined as amounts over $1 million at the two measurement dates.
Under terms of the restructured debt agreements, ThermoView must achieve
certain quarterly and/or trailing twelve-month EBITDA levels as well as fixed
charge coverage ratios and current asset to current liability ratios. The first
measurement date for EBITDA levels is June 30, 2004 and the first measurement
date for the fixed charge coverage ratios and current asset to current liability
ratios is September 30, 2004. ThermoView was in compliance with all covenants as
of June 30, 2004.
The holder of $1.2 million of notes in connection with obligations related
to guarantors of a bank revolving line of credit also agreed to extend the due
date of the notes from June 2004 to September 30, 2006.
The Financial Accounting Standards Board (FASB) issued SFAS 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equities," effective for companies for the first interim period
beginning after June 15, 2003. The rule requires accounting for some financial
instruments as liabilities that under previous guidance were accounted for as
equity or between liabilities and equity ("mezzanine"). The Company has
previously reported mandatorily redeemable preferred stock series D and E, in
prior periods, in the mezzanine section of the balance sheet. With the Company's
adoption of this standard on July 1, 2003, the mandatorily redeemable preferred
stock is included as a component of liabilities and described as "preferred
shares subject to mandatory redemption," as of September 30, 2003. Prior periods
are not restated when SFAS 150 is applied.
Preferred shares subject to mandatory redemption is comprised of the
following:
Series D: Par value of $.001 with an aggregate redemption amount and
liquidation preference of $5,081,832 at December 31, 2003. Total shares
authorized - 1,500,000 shares; shares issued and outstanding of 756,900 as
of December 31, 2003, and June 30, 2004. The date of the mandatory
redemption is August 31, 2006.
Series E: Par value of $.001 with an aggregate redemption amount and
liquidation preference of $2,511,689 at December 31, 2003. Total shares
authorized - 500,000; shares issued and outstanding of 336,600 as of
December 31, 2003, and June 30, 2004. The date of the mandatory redemption
is August 31, 2006.
8
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
5. Long-term Debt and Mandatorily Redeemable Preferred Stock (Continued)
In addition, upon adoption of SFAS 150, dividends or other distributions on
mandatorily redeemable preferred stock are reported as interest expense on
mandatorily redeemable preferred stock in the statement of operations.
6. Segment Information
For the six-month periods ended June 30, 2003 and 2004, 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 sell and install vinyl
replacement windows, doors and related home improvement products to commercial
and retail customers.
Segment information for the three months and six months ended June 30 was
as follows:
For the three months Manufac-
ended June 30, 2003 turing Retail Corporate Consolidated
- ------------------- ---------- ------------ ----------- ------------
Revenues from external
customers $1,521,814 $16,279,342 $ 311,699 $18,112,855
Intersegment revenues 298,335 - - 298,335
Unusual credit-gain on
conversion of
debt to warrants - - 796,000 796,000
Income (loss) from
operations 214,761 399,267 358,369 972,397
Total assets 4,130,163 34,205,205 659,401 38,994,769
For the three months Manufac-
ended June 30, 2004 turing Retail Corporate Consolidated
- ------------------- ---------- ------------ ----------- ------------
Revenues from external
customers $2,421,824 $16,611,478 $ 77,463 $19,110,765
Intersegment revenues 803,973 - - 803,973
Income (loss) from
Operations 679,812 938,783 (400,960) 1,217,635
Total assets 4,539,126 33,322,859 4,292,050 42,154,035
9
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
6. Segment Information (Continued)
For the six months Manufac-
ended June 30, 2003 turing Retail Corporate Consolidated
- ------------------- ---------- ------------ ----------- ------------
Revenues from external
customers $2,331,184 $31,586,105 $ 388,579 $34,305,868
Intersegment revenues 386,701 - - 386,701
Unusual credit-gain on
conversion of
debt to warrants - - 796,000 796,000
Income (loss) from
operations (4,085) 349,741 (251,813) 93,843
For the six months Manufac-
ended June 30, 2004 turing Retail Corporate Consolidated
- ------------------- ---------- ------------ ----------- ------------
Revenues from external
customers $3,049,043 $30,747,575 $ 153,288 $ 33,949,906
Intersegment revenues 1,235,356 - - 1,235,356
Income (loss) from
operations 528,080 868,032 (912,614) 483,498
7. 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 May 9, 2003, the Jefferson Circuit Court upheld the previous ruling in favor
of Clemmens, and entered a final appealable judgment which allowed 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
($175,000 through June 30, 2004). On May 19, 2003, ThermoView appealed the
10
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
7. Contingencies and Commitments (Continued)
judgment issued to Clemmens to the Kentucky Court of Appeals. ThermoView
submitted its Appellant's Brief to the Kentucky Court of Appeals on December 22,
2003, and the appeal remains pending.
On June 6, 2003, ThermoView, with the guarantee of GE Capital Equity,
posted a supercedeas bond in the amount of $690,000 with the Jefferson Circuit
Court to prevent Clemmens from enforcing the judgment awarded to him during the
pendency of the appeal of this matter. In order to secure the supercedeas bond,
ThermoView entered into an agreement with GE Capital Equity to deposit funds
monthly into a sinking fund to serve as security for the amount of the
supercedeas bond. Pursuant to this agreement, ThermoView made payments of
$50,000 monthly for the months of July through December, 2003 and $30,000
monthly during the months January through June, 2004. At June 30, 2004, $480,000
is included on the accompanying balance sheet as restricted cash. Under the
agreement, ThermoView must make additional payments to the sinking fund such
that the balance of the sinking fund will be no less than $690,000 by November
1, 2004. In consideration for the agreement, ThermoView has agreed to pay to GE
Capital Equity Investments a fee of 2.5% of the face amount of the bond upon
issuance and has granted GE Capital Equity a first priority lien on its assets
to secure any amounts drawn on the bond.
In the event that ThermoView prevails upon the appeal and no amounts are
drawn upon the bond, the balance of the sinking fund will be applied to the
Series A and B notes of ThermoView on a pro-rata basis. 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 believes that ThermoView has recorded adequate liabilities
on its balance sheet as of June 30, 2004. 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
will have a material adverse effect on our cash flow.
11
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 ThermoView, 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 our audited consolidated financial statements
contained in our Annual Report on Form 10-K for the year ended December 31,
2003. 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.
In April 1998, we acquired Thermo-Tilt Window Company, which was
established in 1987. Since that time, we have acquired 12 retail and
manufacturing businesses which had been in operation an average of approximately
11 years. During 2000, we closed two manufacturing businesses and one retail
business. In June of 2004, we closed our Wheeling, Illinois retail office and
opened two new stores, one in Peoria, Illinois and one in Paducah, Kentucky,
specializing in the sales and installation of windows, siding and doors. These
two new stores have been modeled according to our best practices study and
feature a state of the art showroom and concentrated media advertising campaigns
rather than telemarketing. At June 30, 2004, we had 793 full-time and 157
part-time employees. We had facilities in 11 states, primarily in the Midwest
and southern California, and conduct business in 21 states. For the six months
ended June 30, 2003, we generated consolidated revenues of approximately $34
million, and for the six months ended June 30, 2004, we generated consolidated
revenues of approximately $34 million.
Our initial business plan focused on an aggressive acquisition program to
build a vertically integrated company in the vinyl window business. We intended
to aggressively develop in the manufacturing, retail, and finance segments. We
closed our finance subsidiary, two acquired manufacturing businesses and one
12
acquired retail business in 2000. Although we have scaled back on manufacturing
and eliminated our finance subsidiary, we continue to search for strategic
alliances and business development opportunities that may be beneficial to us in
the manufacturing, retail and finance segments.
o We continue to work closely with all of our window manufacturers in
the production of our current windows and in the development of
windows using new technologies.
o In October 2001, we formed a joint venture with Royal Group
Technologies Limited, headquartered in Ontario, Canada, to manufacture
leading edge thermoplastic extrusions. The Compozit extrusions are
stronger than vinyl, withstand weather and climate extremes, are
impact resistant and can be produced in many colors. The joint
venture's revenue approximated $2.5 million in 2002 and $2.0 million
in 2003. By the end of 2004, we intend that the joint venture will
supply these extrusions to all of the manufacturers supplying our
retail operations. We own 40% of the joint venture operation.
o We plan to introduce, in late 2004, a new Compozit window of our own
design and continue to explore the market for enhanced products to
expand the market areas of our existing retail subsidiaries.
o Since we continue to assist our customers in obtaining financing for
about 36% of our sales, we have negotiated economically beneficial
strategic alliances with the companies that provide financing to our
customers.
Our custom vinyl replacement windows are manufactured by a combination of
internal and external manufacturers. Both are capable of supplying quality
windows on a timely basis at competitive prices.
Because we did not have the available capital upon completion of our
initial public offering in December 1999 to pursue our initial acquisition
strategy, we shifted our focus to the growth of the retail segment and the
introduction of new or enhanced products and product lines in addition to the
development of new advertising and marketing programs that foster cross-selling
of product lines to our existing customer bases.
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 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
installation is substantially complete. Gross profit in the retail segment
represents revenues after deducting product and installation labor costs.
13
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
revenues after deducting product costs (primarily glass, vinyl and hardware),
window fabrication labor and other manufacturing expenses.
Historical Results of Operations
For the three months ended For the six months ended
June 30, June 30,
--------------------------- --------------------------
2003 2004 2003 2004
---- ---- ---- ----
Revenues $ 18,112,855 $ 19,110,765 $ 34,305,868 $ 33,949,906
Cost of revenues earned 9,244,077 9,750,022 17,700,298 17,617,122
------------ ------------ ------------ ------------
Gross profit 8,868,778 9,360,743 16,605,570 16,332,784
Selling, general and
administrative expenses 8,487,674 7,901,823 16,883,855 15,382,421
Unusual credit-gain on
conversion of debt to
warrants (796,000) - (796,000) -
Depreciation expense 199,642 228,303 413,743 440,901
Amortization expense 5,065 12,982 10,129 25,964
------------ ------------ ------------ ------------
Income from operations 972,397 1,217,635 93,843 483,498
Equity in earnings (loss)
of joint venture (20,017) (1,164) (46,224) (4,499)
Interest expense (706,366) (600,067) (1,338,496) (1,368,718)
Interest income 6,965 4,634 16,729 10,195
------------ ------------ ------------ ------------
Income (loss) before
income taxes 252,979 621,038 (1,274,148) (879,524)
Income tax expense (benefit) 12,653 1,843 12,229 5,221
------------ ------------ ------------ ------------
Net income (loss) 240,326 619,195 (1,286,377) (884,745)
Less non-cash Series D
and E preferred stock
dividends (240,997) - (472,494) -
Plus benefit of Series
D preferred stock
redemption 796,000 - 796,000 -
------------ ------------ ------------ ------------
555,003 - 323,506 -
------------ ------------ ------------ ------------
Net income (loss)
attributable to common
stockholders $ 795,329 $ 619,195 $ (962,871) $ (884,745)
============ ============ ============ ============
Three months ended June 30, 2004 Compared to Three Months Ended June 30, 2003
Revenues. Revenues increased from $18.1 million for the second quarter of
2003 to $19.1 million for the second quarter of 2004. The $1.0 million increase
in revenue from second quarter 2003 to second quarter 2004 was due to many
factors that included higher consumer confidence, positive economic indicators
and a concentrated marketing and advertising effort orchestrated by our national
marketing and advertising managers and an emphasis by our subsidiary managers on
job completions during the second quarter of 2004.
Gross Profit. Gross profit, which represents revenues less cost of revenues
earned, increased from $8.9 million in the second quarter of 2003 to $9.4
million in the second quarter of 2004. The increase in the amount of gross
profit is consistent with the increased revenue discussed above. As a percentage
14
of revenues, gross profit remained constant at 49% in the second quarter of 2003
and in the second quarter of 2004.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased from $8.5 million in the second quarter of
2003 to $7.9 million in the second quarter of 2004. Selling, general and
administrative expenses, as a percentage of revenue, decreased from 46.9% in the
second quarter of 2003 to 41.3% in the second quarter of 2004. The decrease in
selling, general and administrative expenses in the second quarter of 2004
results from our efforts to cut costs, centralize accounting and standardization
with best practices efficiencies while at the same time searching for new
revenue growth and increased shareholder value. In addition, we continue to
focus on economies of scale with marketing and advertising efforts, centralizing
various phone room functions, national media plans and expanded use of various
media types. We now have more marketing resources and talent while continuing to
streamline many areas of operations.
Depreciation Expense. Depreciation expense increased from $199,642 in the
second quarter of 2003 to $228,303 in the second quarter of 2004, reflecting an
increase in the amount of property and equipment.
Interest Expense. Interest expense decreased by $106,299 from $706,366 in
the second quarter of 2003 to $600,067 in the second quarter of 2004. The
decrease is the result of the restructure of long-term debt, which reduced the
amount of debt we owe and reduced the interest rates on the debt less the
adoption of a new accounting standard. The benefit to interest expense of the
restructuring of long-term debt, which is approximately $262,000, was lessened
by the adoption of the Financial Accounting Standards Board (FASB) SFAS 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equities" wherein dividends or other distributions on
mandatorily redeemable preferred stock are reported as interest expense. The
adoption of the above standard results in $155,414 of interest expense on the
redeemable preferred stock for the three month period ended June 30, 2004. See
Note 5 of the Notes to Condensed Consolidated Financial Statements.
Income Tax Expense (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 2003 or 2004.
Income tax expense (benefit) in the second quarter of 2003 and 2004 relates to
some minor state tax refunds and minor state tax expense.
Non-Cash Dividends. Non-cash dividends in the second quarter of 2003
represents accrued dividends on the Series D and E preferred stock.
Benefit of Series D Preferred Stock Redemption. The benefit of Series D
preferred stock redemption in 2003 represents a gain on redemption of $1 million
of Series D stock for warrants to purchase 680,000 shares of our common stock
exercised at 28 cents per share.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
Revenues. Revenues decreased from $34.3 million for the first six months of
2003 to $33.9 million for the first six months of 2004, which is a 1.1% decrease
in revenue. Revenues during the first three months of 2004 were negatively
impacted by severe winter weather in our Midwest markets, rain in our Southern
15
California market, the sluggish economy, the events in Iraq, and new
telemarketing laws. We believe the worst effects of these matters are past and
the $1.0 million increase in revenue in the second quarter of 2004 over the
second quarter 2003 further supports our opinion that the overall business
climate has improved and favorable weather conditions will support an
improvement in installations during our prime selling and installing months,
which are May through September.
Gross Profit. Gross profit, which represents revenues less cost of revenues
earned, decreased from $16.6 million in the first six months of 2003 to $16.3
million in the first six months of 2004. The reduction in the gross profit is
caused by the reduced revenue discussed above. The gross profit margin
percentage decreased slightly from 48.4% to 48.1%. Although the drop in gross
margin percentage was minor, it is a serious concern and we have implemented
changes, such as price adjustments, in an effort to improve our financial
performance going forward.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased from $16.9 million in the first six months of
2003 to $15.4 million in the first six months of 2004. Selling, general and
administrative expenses as a percentage of revenue decreased from 49.2% in the
first six months of 2003 to 45.3% in the first six months of 2004. The decrease
in selling, general and administrative expenses in the first six months of 2004
results from our efforts to cut costs, centralize accounting and standardization
with best practices efficiencies while at the same time searching for new
revenue growth and increased shareholder value. In addition, we continue to
focus on economies of scale with marketing and advertising efforts, centralizing
various phone room functions, national media plans and expanded use of various
media types. We now have more marketing resources and talent while continuing to
streamline many areas of operations.
Unusual Credit. The unusual credit in 2003 represents a gain from
converting $1 million of debt to 680,000 common stock warrants issued at 28
cents per share.
Depreciation Expense. Depreciation expense increased from $413,743 in the
first six months of 2003 to $440,901 in the first six months of 2004, reflecting
an increase in the amount of property and equipment.
Interest Expense. Interest expense increased by $30,222 from $1,338,496 in
the first six months of 2003 to $1,368,718 in the first six months of 2004. The
increase is the result of the combination of an accounting change and the
restructure of long-term debt. The debt restructure reduced the amount of debt
we owe and reduced the interest rates on the debt. The benefit to interest
expense of the restructuring of long-term debt, which is approximately $334,000,
was lessened by the adoption of the Financial Accounting Standards Board (FASB)
SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equities" wherein dividends or other distributions on
mandatorily redeemable preferred stock are reported as interest expense. The
adoption of the above standard results in $304,232 of interest expense on the
redeemable preferred stock in the six month period ended June 30, 2004. See Note
5 of the Notes to Condensed Consolidated Financial Statements.
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.
16
Accordingly, we established a valuation allowance against all deferred tax
assets, and no deferred income taxes have been recorded in 2003 or 2004. Income
tax expense in the first six months of 2004 relates to state taxes.
Non-Cash Dividends. Non-cash dividends in the first six months of 2003
represent accrued dividends on the Series D and E preferred stock.
Benefit of Series D Preferred Stock Redemption. The benefit in 2003
represents a gain on redemption of $1 million of Series D stock for 680,000
common stock warrants issued at 28 cents per share.
Liquidity and Capital Resources
As of June 30, 2004, we had cash and equivalents of $584,853, $17.4 million
of long-term debt, net of current maturities, and $7.9 million of mandatorily
redeemable preferred stock.
Operating activities for the six months ended June 30, 2004, provided
$526,722 of cash. Our operating activities for the six months ended June 30,
2003, used $1,415,460 of cash. The net cash provided by operating activities for
the first six months of 2004 was $526,722 as compared to net cash used in
operating activities of $1,415,460 during the same period in 2003. The following
table details three significant items that impacted cash during these
comparative periods and illustrates their impact on the net cash provided or
used by operating activities:
Six Months Ended June 30
2003 2004
---------- ----------
Net cash provided by (used in) operating activities (1,415,460) 526,722
Unusual credit-gain on conversion of debt to warrants 796,000 -
Accrued interest on preferred shares subject to redemption - (304,232)
Interest added to principal - (605,583)
---------- ----------
Net cash (used in) operating activities-adjusted for
unusual items (619,460) (383,093)
========= ==========
The use of $555,804 of cash for investing activities for the six months
ended June 30, 2003 related primarily to the acquisition of property and
equipment, which represented $418,154 of the cash used for investing activities.
The use of $171,612 of cash for investing activities for the same six months
ended June 30, 2004, which is $384,192 less than the same period last year,
reflects our efforts to preserve cash.
Cash provided in financing activities in the six months ended June 30,
2004, was $18,294. This amount represents increases in long-term debt of
$349,993, and increases in other long-term liabilities of $187,929, less
payments of long-term debt of $345,878, and $180,000 escrowed for special
purposes. See Note 7 of the Notes to The Condensed Consolidated Financial
Statements, Nelson E. Clemmens v. ThermoView Industries, Inc., Civil Action No.
01-CI-07901 (Jefferson Circuit Court, November 19, 2001). In the six months
ended June 30, 2003, we used $143,854 of cash in financing activities,
reflecting the repayment of debt.
During the second quarter of 2004, operations produced net income
attributable to common shareholders of $619,195, compared to $795,329 during the
second quarter of 2003. However, the net income of $795,329 in second quarter
2003 includes $796,000 of gain on conversion of debt to warrants and another
$796,000 of benefit of Series D preferred stock redemption. If net income is
17
re-stated to exclude these unusual gains, net income attributable to common
shareholders would reflect a loss in the amount of $796,671 in second quarter
2003 and therefore the net income of $619,195 reported in this second quarter is
an improvement of $1,415,866 over the same quarter last year.
Accounts payable increased by $1,740,055 from December 31, 2003, to June
30, 2004. This increase is $1,466,351 more than the $273,704 increase in
accounts payable that occurred in the first six months of 2003. A significant
part of the increase in accounts payable in the first six months of 2004 is
attributable to agreements with vendors to extend the due dates of certain
accounts payable and a sharp increase in revenue and trade receivables. During
the first six months of 2004, trade receivables increased by $1,859,734 as
compared to $189,057 in the first six months of 2003.
Revenue increased by $997,910 when comparing the second quarter 2004 to
second quarter 2003. The increase in revenue was due to many factors that
included higher consumer confidence, helped by positive economic indicators, as
well as a concentrated marketing and advertising effort orchestrated by our
national marketing and advertising managers, and an emphasis by subsidiary
management on job completions during the second quarter of 2004.
In addition to increased revenues, profits were enhanced by successful
efforts at reducing selling, general and administrative expenses. Selling,
general and administrative expenses were reduced by over $.5 million in the
second quarter 2004 as compared to the second quarter of 2003 with a total
savings of approximately $1.5 million for the first six months ending June 30,
2004 as compared to the first six months of 2003. Cost cutting, accounting
centralization and standardization and best practices efficiencies continue to
be an integral part of management's strategies going forward.
The net income and loss by month, as follows, reflects the seasonality of
the remodeling industry with losses occurring during the first four to five
months of the year followed by positive net incomes in May and June of 2004 and
positive net income for June of 2003. The following is the net income (loss)
attributable to shareholders for each month during the first six months of 2003
and 2004:
2003 2004
---- ----
January $ (943,575) $ (729,086)
February (668,746) (586,954)
March (145,879) (187,899)
April (48,917) ( 68,981)
May (578,627) 143,230
June 1,422,873 544,945
---------------- ----------------
Six Month YTD $ (962,871) $ (884,745)
================ ================
The above net income of $1,422,873 for June, 2003, includes $796,000 of
gain on conversion of debt to warrants and another $796,000 of benefit of Series
D preferred stock redemption. If the June 2003, net income is re-stated to
exclude these unusual gains, net income attributable to common shareholders
would reflect a loss in the amount of $169,127 in June 2003 and therefore the
net income of $544,945 reported in June, 2004 is an improvement of $714,072 over
the same month last year.
18
We projected positive cash from operations beginning in the second quarter
of 2004. Average weekly cash collections during the first quarter of 2004 were
$1.17 million. Average weekly cash collections for the second quarter of 2004
were $1.40 million with net cash provided by operating activities of $526,722
for the six months ended June 30, 2004.
In the event we return to negative cash from operations, we may not be able
to meet our revised debt covenants thereby making our long-term debt currently
due and we will need to re-evaluate our goodwill for potential further
impairment and related write-offs.
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, 2003. Effective December 31, 2003, our lenders
have reset certain covenants for periods through June 30, 2004, to accommodate
compliance. Based on these reset covenants, management believes that we will be
able to comply. We are in compliance with all covenants as of June 30, 2004.
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
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, 2003 and June 30, 2004, 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.
19
We believe, in the long term, cash will be sufficient to meet our needs. In
October 2002, we opened a new retail sales office in Phoenix, Arizona, and in
June, 2004, we opened two new retail offices, one in Peoria, Illinois and one in
Paducah, Kentucky. All three retail locations are meeting or exceeding our
expectations and will be an integral part of our plans to open additional retail
offices next year to grow sales in our retail segments. We have and are
investing in the development of a new line of climate resistant, highly durable,
Compozit(TM) window systems that exceed the durability of the components of the
current replacement window. In addition, we continue to integrate the
advertising and marketing programs of our regional subsidiaries into a national
home-remodeling business.
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 2004 because of the Clemmens litigation
described in Part II, Item 1, Legal Proceedings. Although we believe that we
will prevail upon appeal of the claim, an adverse outcome in this action will
have a material adverse effect on our cash flow.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In June 2003, we restructured our debt and all of our debt continues to be
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 June 30, 2004, 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 Rules 13a-15(e) and 15d-15(e)
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 June 30, 2004, 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.
20
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 May 9, 2003, the Jefferson Circuit Court upheld the previous ruling in favor
of Clemmens, and entered a final appealable judgment which allowed 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
($175,000 through June 30, 2004). On May 19, 2003, ThermoView appealed the
judgment issued to Clemmens to the Kentucky Court of Appeals. ThermoView
submitted its Appellant's Brief to the Kentucky Court of Appeals on December 22,
2003, and the appeal remains pending.
On June 6, 2003, ThermoView, with the guarantee of GE Capital Equity,
posted a supercedeas bond in the amount of $690,000 with the Jefferson Circuit
Court to prevent Clemmens from enforcing the judgment awarded to him during the
pendency of the appeal of this matter. In order to secure the supercedeas bond,
ThermoView entered into an agreement with GE Capital Equity to deposit funds
monthly into a sinking fund to serve as security for the amount of the
supercedeas bond. Pursuant to this agreement, ThermoView made payments of
$50,000 monthly for the months of July through December, 2003 and $30,000
monthly during the months January through June, 2004. At June 30, 2004, $480,000
is included on the accompanying balance sheet as restricted cash. Under the
agreement, ThermoView must make additional payments to the sinking fund such
that the balance of the sinking fund will be no less than $690,000 by November
1, 2004. In consideration for the agreement, ThermoView has agreed to pay to GE
Capital Equity Investments a fee of 2.5% of the face amount of the bond upon
issuance and has granted GE Capital Equity a first priority lien on its assets
to secure any amounts drawn on the bond.
In the event that ThermoView prevails upon the appeal and no amounts are
drawn upon the bond, the balance of the sinking fund will be applied to the
Series A and B notes of ThermoView on a pro-rata basis. Maxwell has not asserted
21
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 believes that ThermoView has recorded adequate liabilities
on its balance sheet as of June 30, 2004. 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
will have a material adverse effect on our cash flow.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
a. ThermoView held its annual meeting of stockholders on May 12, 2004, at
10:00 A.M., eastern daylight time, at the Hurstbourne Country Club,
Louisville, Kentucky.
b. At the annual meeting, stockholders elected two individuals as Class II
members of our Board of Directors.
Broker
Non
Name For Against Withheld Abstentions Votes
---- --------- ------- -------- ----------- -----
J. Sherman Henderson, III 6,937,778 6,299 0 44,033 0
George T. Underhill, III 6,943,876 201 0 44,033 0
The following directors remained on the Board of Directors as Class I and
Class III directors immediately after the annual meeting:
Class I Directors Class III Directors
Name Name
- ---- ----
Raymond C. Dauenhauer, Jr. Robert L. Cox
Bruce C. Merrick Stephen A. Hoffmann
Charles L. Smith
c. Not applicable.
d. Not applicable.
Item 5. Other Information
On August 16, 2004, ThermoView issued a press release reporting financial
results for the second quarter. The press release is filed herewith as Exhibit
99.1.
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
See Index to Exhibits.
(b) Reports on Form 8-K.
(1) On April 12, 2004, ThermoView filed a Form 8-K under Item 5. Other
Events and Regulation FD Disclosure reporting the resignation of
Jeffrey L. Fisher as chief financial officer effective May 2, 2004,
and the appointment of David A. Anderson as chief financial officer
effective May 3, 2004.
23
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: August 16, 2004 By: /s/ Charles L. Smith
-----------------------------------------
Charles L. Smith,
Chief Executive Officer
(principal executive officer)
Date: August 16, 2004 By: /s/ David A. Anderson
-----------------------------------------
David A. Anderson,
Chief Financial Officer
(principal financial and accounting officer)
24
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
31.1 -- Rule 13a-14(a) Certification of Charles L. Smith for the
Form 10-Q for the quarter ended June 30, 2004.
31.2 -- Rule 13a-14(a) Certification of David A. Anderson for the
Form 10-Q for the quarter ended June 30, 2004.
32.1 -- 18 U.S.C. Section 1350 Certifications of Charles L. Smith
and David A. Anderson for the Form 10-Q for the quarter
ended June 30, 2004.
99.1 -- News Release of ThermoView Industries, Inc. announcing
second quarter financial results dated August 16, 2004.
25
CERTIFICATION Exhibit 31.1
I, Charles L. Smith, certify that:
1) I have reviewed this quarterly report on Form 10-Q for the quarter ended
June 30, 2004 of ThermoView Industries, Inc.;
2) Based on my knowledge, this 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
report;
3) Based on my knowledge, the financial statements and other financial
information included in this 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 report;
4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures; and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Signature and Title: /s/ Charles L. Smith Date: August 16, 2004
------------------------- ---------------------
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.
26
CERTIFICATION Exhibit 31.2
I, David A. Anderson, certify that:
1) I have reviewed this quarterly report on Form 10-Q for the quarter ended
June 30, 2004 of ThermoView Industries, Inc.;
2) Based on my knowledge, this 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
report;
3) Based on my knowledge, the financial statements and other financial
information included in this 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 report;
4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures; and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Signature and Title: /s/ David A. Anderson Date: August 16, 2004
------------------------ ----------------------
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.
27
Exhibit 32.1
18 U.S.C. Section 1350 Certifications
Charles L. Smith and David A. Anderson, being the Chief Executive Officer
and Chief Financial Officer, respectively, of ThermoView Industries, Inc.,
hereby certify as of this 16th day of August, 2004, that the Form 10-Q for the
Quarter ended June 30, 2004, 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/ David A. Anderson
-----------------------------------------
David A. Anderson,
Chief Financial Officer
28
Exhibit 99.1
NEWS RELEASE
FOR IMMEDIATE RELEASE
ThermoView Industries Inc. Reports Positive Income for Second Quarter 2004.
LOUISVILLE, Ky. (August 16, 2004) - ThermoView Industries Inc. (AMEX: THV),
which designs, manufactures and markets home improvements under the brand name
"THV: America's Home Improvement Company," today reported financial results for
the second quarter ending June 30, 2004.
Second quarter 2004 revenues were up 5.5% to $19.1 million, compared to
year-ago quarterly revenues of $18.1 million. The net income attributable to
common shareholders was approximately $619,000 or 7 cents per basic share and 6
cents per diluted share. In the same quarter of 2003, net income attributable to
common shareholders was approximately $795,000 or 9 cents per basic share and 8
cents per diluted share. The second quarter of 2003 included $796,000 in unusual
gains from the conversion of debt to warrants.
"I am pleased to report that ThermoView's second quarter revenues have
increased compared to 2003" said Charles L. Smith, CEO and President of
ThermoView. Smith continued, "These second quarter results are some of the best
results in the history of ThermoView's reported second quarter earnings. We
believe that these positive results are a culmination of the companies' efforts
on both cost cutting and top-line growth. We believe that we are on the right
track in attempting to meet our future projections and can move forward with
more confidence."
In addition, Smith stated that ThermoView met their aggressive goal of
opening two new model THV stores in the prospective June time frames. "We are
seeing positive results after only 45 actual business days," said Smith. "Both
THV stores have been well received by the public with the Paducah, KY office
exceeding initial expectations. Our new marketing model in these locations
(Paducah, KY and Peoria, IL) has been at the forefront of this model THV test.
Although it is early, these stores are positive representations of our best
practices model in action. We believe that these new stores could set the
standard for THV to obtain continuous growth."
ThermoView's August 16 conference call and webcast
ThermoView will hold a webcast at 2:00 p.m. EDT on August 16, 2004 to allow
securities analysts and shareholders the opportunity to hear management discuss
the company's quarterly results and update progress on current operational and
administrative initiatives. Live audio of the conference call can be accessed
from http://www.thv.com, or http://www.vcall.com/CEPage.asp?ID=89008. First time
listeners should visit www.vcall.com in advance to download and install any
necessary audio software.
About ThermoView Industries, Inc.
ThermoView is a national company that designs, manufactures, markets and
installs high-quality replacement windows and doors as part of a full-service
array of home improvements for residential homeowners. ThermoView's common stock
is listed on the American Stock Exchange under the ticker symbol "THV."
Additional information on ThermoView Industries is available at
http://www.thv.com .
29
Safe harbor statement
Statements in this news release that are not descriptions of historical
facts are forward-looking statements that are subject to risks and
uncertainties. Words such as "expect," "intends," "believes," "plans,"
"anticipates" and "likely" also identify forward-looking statements. All
forward-looking statements are based on current facts and analyses. Actual
results may differ materially from those currently anticipated due to a number
of factors including, but not limited to our history of operating losses,
anticipated future losses, competition, future capital needs, the need for
market acceptance, dependence upon third parties, disruption of vital
infrastructure, general economic downturn and intellectual property rights. All
forward-looking statements are made pursuant to the Securities Litigation Reform
Act of 1995. Additional information on factors that may affect the business and
financial results of the Company can be found in filings of the Company with the
Securities and Exchange Commission.
Contacts:
David A. Anderson, Chief Financial Officer, ThermoView Industries, Inc.,
502-968-2020.
30
ThermoView Industries, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
For the three months ended For the six months ended
June 30, June 30,
-------------------------- --------------------------
2003 2004 2003 2004
---- ---- ---- ----
Revenues $ 18,112,855 $ 19,110,765 $ 34,305,868 $ 33,949,906
Cost of revenues earned 9,244,077 9,750,022 17,700,298 17,617,122
------------ ------------ ------------ ------------
Gross profit 8,868,778 9,360,743 16,605,570 16,332,784
Selling, general and admini-
strative expenses 8,487,674 7,901,823 16,883,855 15,382,421
Unusual credit-gain on
conversion of debt to
warrants (796,000) - (796,000) -
Depreciation expense 199,642 228,303 413,743 440,901
Amortization expense 5,065 12,982 10,129 25,964
------------ ------------ ------------ ------------
Income from operations 972,397 1,217,635 93,843 483,498
Equity in earnings (loss)
of joint venture (20,017) (1,164) (46,224) (4,499)
Interest expense (706,366) (600,067) (1,338,496) (1,368,718)
Interest income 6,965 4,634 16,729 10,195
------------ ------------ ------------ ------------
Income (loss) before
income taxes 252,979 621,038 (1,274,148) (879,524)
Income tax expense
(benefit) 12,653 1,843 12,229 5,221
------------ ------------ ------------ ------------
Net income (loss) 240,326 619,195 (1,286,377) (884,745)
Less non-cash Series
D and E preferred stock
dividends (240,997) - (472,494) -
Plus benefit of Series D
preferred stock
redemption 796,000 - 796,000 -
------------ ------------ ------------ ------------
555,003 - 323,506 -
------------ ------------ ------------ ------------
Net income (loss)
attributable to common
stockholders $ 795,329 $ 619,195 $ (962,871) $ (884,745)
============ ============ ============ ============
Basic income (loss) per common share:
Net income (loss)
attributable to common
stockholders $ 0.09 $ 0.07 $ (0.10) $ (0.10)
============ ============ ============ ============
Diluted income (loss) per common share:
Net income (loss)
attributable to common
stockholders $ 0.08 $ 0.06 $ (0.10) $ (0.10)
============ ============ ============ ============
See accompanying notes.
31