SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-33572
DIAMOND TRIUMPH AUTO GLASS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2758853
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 DIVISION STREET, KINGSTON, PENNSYLVANIA 18704
(Address, including zip code of principal executive offices)
(570) 287-9915
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or Section 15(d) of the Securities and Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 14, 2002, there were 1,011,366 shares outstanding of
Diamond's Common Stock ($.01 par value) and 35,000 shares outstanding of
Diamond's Series A 12% Senior Redeemable Cumulative Preferred Stock ($.01 par
value).
DIAMOND TRIUMPH AUTO GLASS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets - September 30, 2002 and
December 31, 2001...............................................3
Condensed Statements of Operations - Three Months Ended
September 30, 2002 and 2001.....................................4
Condensed Statements of Operations - Nine Months Ended
September 30, 2002 and 2001.....................................5
Condensed Statements of Cash Flows - Nine Months Ended
September 30, 2002 and 2001.....................................6
Notes to Condensed Financial Statements........................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk...................................................16
Item 4. Controls and Procedures.......................................16
Part II. Other Information
Item 1. Legal Proceedings.............................................18
Item 6. Exhibits and Reports on Form 8-K..............................18
Signature.............................................................19
Certifications........................................................20
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIAMOND TRIUMPH AUTO GLASS, INC.
CONDENSED BALANCE SHEETS
(Dollars in Thousands except per share amounts)
September 30, 2002 December 31, 2001
------------------ -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 12,013 $ 6,592
Accounts receivable, net 13,956 11,596
Other receivables 275 387
Inventories 16,601 16,757
Prepaid expenses 1,797 1,383
Deferred income taxes 3,002 3,540
--------- ---------
Total current assets 47,644 40,255
--------- ---------
Equipment and leasehold improvements, net 8,597 7,799
Deferred loan costs and senior notes discount, net 4,527 5,183
Deferred income taxes 37,033 38,111
Other assets 537 498
--------- ---------
Total assets $ 98,338 $ 91,846
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 11,793 $ 10,640
Accrued expenses:
Payroll and related items 5,643 4,678
Accrued interest 4,629 2,317
Accrued income taxes 1,596 1,679
Other 161 389
--------- ---------
Total accrued expenses 12,029 9,063
--------- ---------
Total current liabilities 23,822 19,703
--------- ---------
Long-term debt:
Credit facility -- --
Senior notes 100,000 100,000
--------- ---------
Total long-term debt 100,000 100,000
--------- ---------
Total liabilities 123,822 119,703
--------- ---------
Series A 12% senior redeemable cumulative preferred stock - par value $0.01 per
share; authorized 100,000 shares; issued and outstanding
35,000 shares in 2002 and 2001, at liquidation preference value 59,585 54,530
--------- ---------
Stockholders' equity (deficit):
Common stock, 2002 and 2001 par value $0.01 per share; authorized 1,100,000
shares; issued and outstanding 1,026,366 shares in 2002,
issued and outstanding 1,000,000 shares in 2001 10 10
Additional paid-in capital 36,734 41,263
Other Comprehensive Income (386) --
Retained earnings (accumulated deficit) (121,427) (123,660)
--------- ---------
Total stockholders' equity (deficit) (85,069) (82,387)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 98,338 $ 91,846
========= =========
See notes to condensed financial statements
3
DIAMOND TRIUMPH AUTO GLASS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Net sales $ 52,970 $ 52,304
Cost of sales 15,858 15,216
-------- --------
Gross profit 37,112 37,088
Operating expenses 34,565 32,083
-------- --------
Income from operations 2,547 5,005
Other (income) expense:
Interest income (75) (59)
Interest expense 2,572 2,571
-------- --------
2,497 2,512
-------- --------
Income before provision for income taxes 50 2,493
Provision for income taxes 21 999
-------- --------
Net income 29 1,494
Preferred stock dividends 1,735 1,542
-------- --------
Net (loss) applicable to common stockholders ($ 1,706) ($ 48)
======== ========
See notes to condensed financial statements
4
DIAMOND TRIUMPH AUTO GLASS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Net sales $ 155,531 $ 158,210
Cost of sales 44,545 45,058
--------- ---------
Gross profit 110,986 113,152
Operating expenses 99,599 93,740
--------- ---------
Income from operations 11,387 19,412
Other (income) expense:
Interest income (178) (140)
Interest expense 7,715 7,732
--------- ---------
7,537 7,592
--------- ---------
Income before provision for income taxes 3,850 11,820
Provision for income taxes 1,617 4,730
--------- ---------
Net income 2,233 7,090
Preferred stock dividends 5,055 4,492
--------- ---------
Net (loss) income applicable to common stockholders ($ 2,822) $ 2,598
========= =========
See notes to condensed financial statements
5
DIAMOND TRIUMPH AUTO GLASS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
OPERATING ACTIVITIES
Net cash provided by operating activities $ 8,424 $ 10,000
-------- --------
INVESTING ACTIVITIES
Capital expenditures (3,006) (2,732)
Proceeds from sale of equipment 93 214
Increase in other assets (40) (141)
-------- --------
Net cash used in investing activities (2,953) (2,659)
-------- --------
FINANCING ACTIVITIES
Net proceeds from credit facility -- 2,500
Payments on credit facility -- (3,000)
Deferred loan cost (50) (55)
-------- --------
Net cash (used in) financing activities ($ 50) ($ 555)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,421 6,786
Cash and cash equivalents, beginning of period 6,592 25
-------- --------
Cash and cash equivalents, end of period $ 12,013 $ 6,811
======== ========
See notes to condensed financial statements
6
DIAMOND TRIUMPH AUTO GLASS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands except per share amounts)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the data for the
interim periods presented. The interim financial statements should be
read in conjunction with the audited financial statements and notes
thereto contained in Diamond's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001. Diamond's results for interim
periods are not normally indicative of results to be expected for the
fiscal year. Weather has historically affected Diamond's sales, net
income and earnings before interest expense, income taxes, depreciation
and amortization expense ("EBITDA"), with severe weather generating
increased sales, net income and EBITDA and mild weather resulting in
lower sales, net income and EBITDA. In addition, Diamond's business is
somewhat seasonal, with the first and fourth calendar quarters
traditionally its slowest periods of activity.
Preferred Stock - At September 30, 2002 and December 31, 2001, the
liquidation value of the Preferred Stock recorded on Diamond's Balance
Sheet was $59,585 and $54,530, respectively, which includes dividends
of $24,585 and $19,530, respectively.
Long-Term Debt:
Credit Facility - On March 27, 2000, Diamond entered into a revolving
credit facility (the "Credit Facility"). The Credit Facility has an
initial term of four years and provides for revolving advances of up to
the lesser of: (1) $25,000; (2) the sum of 85% of Diamond's Eligible
Accounts Receivable (as defined in the Credit Facility) plus 85% of
Diamond's Eligible Inventory (as defined in the Credit Facility), less
certain reserves; or (3) an amount equal to 1.5 times Diamond's EBITDA
(as defined in the Credit Facility) for the prior twelve months. A
portion of the Credit Facility, not to exceed $5,000, is available for
the issuance of letters of credit, which generally have an initial term
of one year or less. Borrowings under the Credit Facility bear
interest, at Diamond's discretion, at either the Chase Manhattan Bank
Rate (as defined in the Credit Facility) or LIBOR, plus a margin of
0.50% for the Chase Manhattan Rate and 2.25% for the LIBOR Rate. In
addition, a commitment fee of 0.25% is charged against any unused
balance of the Credit Facility. Interest rates are subject to increases
or reductions based upon Diamond meeting certain EBITDA levels. The
proceeds of the Credit Facility are available for working capital
requirements and for general corporate purposes. The Credit Facility is
secured by first priority security interests in all of Diamond's
tangible and intangible assets. In addition, the Credit Facility
contains certain restrictive covenants including, among other things,
the maintenance of a minimum EBITDA of $10,500 level for the prior
twelve months, as well as restrictions on additional indebtedness,
dividends and certain other significant transactions. Diamond was in
compliance with these covenants at September 30, 2002. At September 30,
2002, Diamond did not have any borrowings outstanding under the Credit
Facility.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002 Diamond adopted Statement of Financial Accounting
Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
This statement rescinds Statements No. 4 and 64 and establishes APB
Opinion No. 30 as the criteria to be used in reporting gains and losses
from extinguishment of debt. Statement No. 145 rescinds Statement No.
44, which dealt with accounting requirements for the effects of
transition to the provisions of the Motor Carrier Act of 1980.
Statement No. 145 also requires that certain lease modifications that
have economic effects similar to sale-leaseback transactions be
accounted for in the same manner as sale-leaseback transactions.
Adoption of SFAS No. 145 did not have a material impact on Diamond's
financial statements.
7
DIAMOND TRIUMPH AUTO GLASS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands except per share amounts)
In August 2001 Diamond adopted SFAS No. 144, "Accounting for the
Impairment or Disposition of Long-Lived Assets" which is effective for
fiscal years beginning after December 15, 2001. This Statement
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of" and APB Opinion No.
30. SFAS No. 144 established a single accounting model to be used for
measuring impairment of long-lived assets. Adoption of SFAS No. 144 did
not have a material impact on Diamond's financial statements.
During June 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." Such Standard requires costs associated with exit
or disposal activities (including restructurings), to be recognized
when costs are incurred, rather than at a date of commitment to an exit
or disposal plan. SFAS No. 146 nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." Under SFAS No. 146, a
liability related to an exit or disposal activity is not recognized
until such liability has actually been incurred whereas under EITF
Issue No. 94-3 a liability was recognized at the time of a commitment
to an exit or disposal plan. The provisions of this standard are
effective for disposal activities initiated after December 31, 2002.
Diamond does not expect adoption of SFAS No. 146 to have a material
impact on its financial statements.
NOTE 3. EXECUTIVE COMPENSATION
On June 1, 2002, Diamond entered into an employment agreement with
Norman Harris (the "Executive") pursuant to which Mr. Harris agreed to
serve as the Chief Executive Officer of Diamond at an annual salary of
$400 (the "Base Salary"), subject to annual review based on Diamond's
and the Executive's performance. The employment agreement provides for
an initial term of four years beginning on June 1, 2002 and ending on
June 1, 2006. In addition to the Base Salary, the Executive is eligible
to receive a bonus based upon the achievement of certain criteria to be
mutually agreed upon by the Executive and the Board of Directors of
Diamond. The employment agreement also contains various severance,
non-competition, non-solicitation provisions, non-disclosure and
assignment of inventions provisions.
On June 1, 2002 (the "Grant Date"), the Executive and Diamond entered
into a Restricted Stock Agreement (the "Agreement") pursuant to which
the Executive purchased from Diamond 26,366 shares (the "Restricted
Shares") of Diamond's common stock, par value $0.01 per share, for
nominal consideration. The Agreement generally restricts the sale or
transferability of shares of Common Stock held by the Executive before
the Restrictions (as defined in the Agreement) have lapsed. The
Executive has all rights and privileges of a stockholder with respect
to the Restricted Shares, including voting rights and the right to
receive dividends paid with respect to the Restricted Shares.
Generally, the Restricted Shares vest and the Restrictions lapse: (i)
with respect to 20% of the Restricted Shares on the Grant Date; and
(ii) with respect to 20% of the Restricted Shares on each subsequent
anniversary of the Grant Date until the Restricted Shares are fully
vested. Compensation expense, unearned restricted stock compensation,
and proceeds from common stock issued have been recognized based on the
vesting periods and an estimated fair market value of $20 per share.
8
DIAMOND TRIUMPH AUTO GLASS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands except per share amounts)
NOTE 4. LEGAL PROCEEDINGS
On May 2, 2002, Diamond filed an amended Complaint with the United
States District Court, Middle District of Pennsylvania against Safelite
Glass Corporation (the "Defendant"). Diamond alleges, among other
things, that the Defendant's conduct as (i) an operator of national
telephone call centers which takes first notice of loss calls from
insureds of several of the largest automobile insurers in the United
States (the "Insurers"); (ii) a provider of various claims processing
services to the Insurers as a third-party administrator; and (iii) an
operator of a network of retail repair and replacement facilities who
perform work for the Insurers as Safelite affiliates, violated certain
federal and state laws and give rise to other legal and equitable
claims against the Defendant. Diamond alleges that the Defendant
engaged in various practices designed to divert customers away from
Diamond to the Defendant, and that Diamond has suffered damages as a
result of this conduct in an amount to be determined at trial.
On November 1, 2002, the Defendant filed a counter claim against
Diamond, alleging, among other things, that Diamond has engaged and
continues to engage in publishing certain false and defamatory
statements about the Defendant to automobile insurance companies that
are the Defendant's clients. Defendant alleges that this alleged
conduct has injured the Defendant's goodwill and business reputation
with its insurance clients and in the autoglass repair and replacement
industry. Among other things, the Defendant is seeking damages in an
amount to be determined at trial.
NOTE 5. INCOME TAXES
As disclosed in the Company's 10-K for the year ended December 31,
2001, on February 20, 2002 the Internal Revenue Service issued a notice
of proposed adjustments, which included disallowance of Diamond's tax
deductible goodwill from Diamond's March 31, 1998 recapitalization
Transaction (as defined in the Company's 10-K for the year ended
December 31, 2001).
The proposed adjustments by the Internal Revenue Service would result
in $3.8 million of federal tax deficiencies owed by Diamond for the
period December 31, 1998 through December 31, 2000, plus possible
interest and penalties and any resultant increases in current state
tax expense for this period. Additionally, the deferred tax asset
established in 1998 would be eliminated, as well as net operating loss
carryforwards from previous deductions of the tax goodwill. The
carrying amount of these assets at December 31, 2001 is approximately
$39.1 million. In addition, Diamond would be responsible to fund a
current federal tax liability for 2001 and for the nine months ended
September 30, 2002 of approximately $2.8 million and $1.2 million,
respectively, plus possible interest and penalties, and any resulting
increases in current state tax expense for 2001 and 2002.
Diamond continues to strongly believe that the Transaction was properly
accounted for and plans to appeal the Internal Revenue Service's
proposed adjustment. If such appeal were ultimately unsuccessful, the
Internal Revenue Service's proposed adjustment would have a material
adverse affect on Diamond's liquidity, cash flows, balance sheet and
results of operations.
9
DIAMOND TRIUMPH AUTO GLASS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands except per share amounts)
NOTE 6. SUBSEQUENT EVENTS
On November 1, 2002, Diamond made an aggregate investment of $300 as a
capital contribution in DT Subsidiary Corp. (the "Subsidiary"), a
corporation wholly owned by Diamond. Also, on November 1, 2002, the
Subsidiary entered into a Stock Sale Agreement with Michael A. Sumsky,
President and Chief Financial Officer, (the "Seller"), pursuant to
which the Seller sold to the Subsidiary 15,000 shares of Diamond's
common stock, par value $0.01 per share, for consideration of $20 per
share.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes Diamond's historical results of
operations and historical results of operations as a percentage of
sales for the nine and three months ended September 30, 2002 and 2001.
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- ----------------------------------
2002 2001 2002 2001
----------------- --------------- -------------- --------------
$ % $ % $ % $ %
------ ----- ----- ----- ---- ----- ---- -----
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
Net Sales....................................155.5 100.0 158.2 100.0 53.0 100.0 52.3 100.0
Cost of Sales................................ 44.5 28.6 45.1 28.5 15.9 30.0 15.2 29.1
------ ----- ----- ----- ---- ----- ---- -----
Gross Profit.................................111.0 71.4 113.1 71.5 37.1 70.0 37.1 70.9
Operating Expenses............................99.6 64.1 93.7 59.2 34.6 65.3 32.1 61.4
------ ----- ----- ----- ---- ----- ---- -----
Income From Operations........................11.4 7.3 19.4 12.3 2.5 4.7 5.0 9.6
Interest Income...............................(0.2) (0.1) (0.1) (0.1) (0.1) (0.2) (0.1) (0.2)
Interest Expense............................. .7.7 5.0 7.7 4.9 2.6 4.9 2.6 5.0
------ ----- ----- ----- ---- ----- ---- -----
7.5 4.8 7.6 4.8 2.5 4.7 2.5 4.8
------ ----- ----- ----- ---- ----- ---- -----
Income before provision for income taxes..... 3.9 2.5 11.8 7.5 - - 2.5 4.8
Provision for income taxes................... 1.6 1.0 4.7 3.0 - - 1.0 1.9
------ ----- ----- ----- ---- ----- ---- -----
Net income................................... 2.3 1.5 7.1 4.5 - - 1.5 2.9
====== ===== ===== ===== ==== ===== ==== =====
EBITDA (1) 13.7 8.8 21.4 13.5 3.4 6.4 5.7 10.9
------------
(1) EBITDA represents income before income taxes, interest expense,
depreciation and amortization expense. While EBITDA is not intended to
represent cash flow from operations as defined by Generally Accepted
Accounting Principles ("GAAP") and should not be considered as an
indicator of operating performance or an alternative to cash flow (as
measured by GAAP), as a measure of liquidity, it is included herein to
provide additional information with respect to Diamond's ability to
meet its future debt service, capital expenditure and working capital
requirements.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
Net Sales. Net sales for the nine months ended September 30,
2002 decreased by $2.7 million, or 1.7%, to $155.5 million from $158.2
million for the nine months ended September 30, 2001. For the nine
months ended September 30, 2002, installation units decreased 3.2% and
revenue per installation unit increased an average of 1.4%. The
decrease in units sold is primarily due to the historically mild winter
weather conditions experienced throughout a large portion of the United
States and the recessionary economic climate, which resulted in weaker
industry demand. The increase in Diamond's average revenue per
installation unit is attributable to general price increases and to
Diamond's sales mix.
Gross Profit. Gross profit for the nine months ended September
30, 2002 decreased by $2.1 million, or 1.9%, to $111.0 million from
$113.1 million for the nine months ended September 30, 2001. Gross
profit decreased as a percentage of sales to 71.4% for the nine months
ended September 30, 2002 from 71.5% for the nine months ended September
30, 2001. The decrease in gross profit for the nine months ended
September 30, 2002 was primarily due to a decrease in net sales
compared to the nine months ended September 30, 2001.
11
Operating Expenses. Operating expenses for the nine months
ended September 30, 2002 increased by $5.9 million, or 6.3%, to $99.6
million from $93.7 million for the nine months ended September 30,
2001. Operating expenses increased as a percentage of sales to 64.1%
for the nine months ended September 30, 2002 from 59.2% for the nine
months ended September 30, 2001. Approximately $4.6 million of
increased operating expenses during the nine months ended September 30,
2002 compared to the nine months ended September 30, 2001 was directly
related to service center expansion, primarily for wages and wage
related expenses, advertisement and promotional expenses and occupancy
costs. The increase in operating expenses was also due to a general
increase in wages and wage related expenses experienced primarily at
service centers combined with an increase in insurance expense due to
rising insurance premiums, an increase in advertisement and promotional
expenses and an increase in depreciation expense due to continued
investment in our MIS infrastructure. We experienced some leveraging
against these expense increases with reduced costs in the shop
maintenance and vehicle related expense categories.
Depreciation and amortization expense for the nine month
period ended September 30, 2002 increased by $0.4 million, or 22.2%, to
$2.2 million from $1.8 million for the nine months ended September 30,
2001. This increase was primarily due to the amortization and
depreciation expense related to certain sales, billing and financial
systems software and computer hardware implemented in the latter half
of 2001 and first half of 2002. This increase was partially offset by a
decrease in expense due to the increased use of a master fleet leasing
program for the lease of mobile installation and distribution service
vehicles.
Income From Operations. Income from operations for the nine
months ended September 30, 2002 decreased by $8.0 million, or 41.2%, to
$11.4 million from $19.4 million for the nine months ended September
30, 2001. This decrease was primarily due to the decrease in net sales
and increase in operating expenses as discussed above.
Interest Expense. Interest expense remained at $7.7 million
for the nine months ended September 30, 2002 and 2001. Cash interest
expense also remained at $7.0 million for the nine months ended
September 30, 2002 and 2001.
Net Income. Net income for the nine months ended September 30,
2002 decreased by $4.8 million to $2.3 million from $7.1 million for
the nine months ended September 30, 2001. Net income as a percentage of
sales decreased to 1.5% for the nine months ended September 30, 2002
from 4.5% for the nine months ended September 30, 2001. The decrease in
net income and net income margin during the nine months ended September
30, 2002 compared to the nine months ended September 30, 2001 was
primarily due to the impact of decreased net sales and increased
operating expenses.
EBITDA. EBITDA for the nine months ended September 30, 2002
decreased by $7.7 million, or 36.0%, to $13.7 million from $21.4
million for the nine months ended September 30, 2001. EBITDA as a
percentage of sales decreased to 8.8% for the nine months ended
September 30, 2002 from 13.5% for the nine months ended September 30,
2001. The decrease in EBITDA and EBITDA margin for the nine months
ended September 30, 2002 was primarily due to the decrease in net sales
and increase in operating expenses as discussed above.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
Net Sales. Net sales for the three months ended September 30,
2002 increased by $0.7 million, or 1.3%, to $53.0 million from $52.3
million for the three months ended September 30, 2001. During the three
months ended September 30, 2002, installation units decreased by 1.8%
and revenue per installation unit increased an average of 2.9%. The
increase in sales for the quarter ended September 2002 compared to the
quarter ended September 2001 is primarily due to the decrease in sales
experienced in September 2001 immediately following the events of
September 11th. The increase in sales is also attributable to the
increase in Diamond's average revenue per installation unit, which is
attributable to general price increases and to Diamond's sales mix. The
decrease in units sold is primarily due to the recessionary economic
climate, which resulted in weaker industry demand.
12
Gross Profit. Gross profit was $37.1 million for the three
months ended September 30, 2002 and September 30, 2001. Gross profit
decreased as a percentage of sales to 70.0% for the three months ended
September 30, 2002 from 70.9% for the three months ended September 30,
2001. The decrease in gross profit percentage is due to an increase in
average cost per unit, which was partially offset by the increase in
average revenue per installation unit as discussed above.
Operating Expenses. Operating expenses for the three months
ended September 30, 2002 increased by $2.5 million, or 7.8%, to $34.6
million from $32.1 million for the three months ended September 30,
2001. Operating expenses increased as a percentage of sales to 65.3%
for the three months ended September 30, 2002 from 61.4% for the three
months ended September 30, 2001. Approximately $1.7 million of
increased operating expense during the three months ended September 30,
2002 compared to the three months ended September 30, 2001 was directly
related to service center expansion, primarily for wages and wage
related expenses, advertisement and promotional expenses and occupancy
costs. The increase in operating expenses was also due to a general
increase in wages and wage related expenses experienced primarily at
service centers combined with an increase in sales and marketing
expenses, insurance expense due to rising insurance premiums and
advertisement and promotional expenses.
Depreciation and amortization expense for the period ended
September 30, 2002 increased by $0.1 million, or 16.7%, to $0.7 million
from $0.6 million for the three months ended September 30, 2001. This
increase was primarily due to the amortization and depreciation expense
related to certain sales, billing and financial systems software and
computer hardware implemented in the latter half of 2001 and the first
half of 2002. This increase was partially offset by a decrease in
expense due to the increased use of a master fleet leasing program for
the lease of mobile installation and distribution service vehicles.
Income From Operations. Income from operations for the three
months ended September 30, 2002 decreased by $2.5 million, or 50.0%, to
$2.5 million from $5.0 million for the three months ended September 30,
2001. This decrease was primarily due to the increase in operating
expenses as discussed above.
Interest Expense. Interest expense remained at $2.6 million
for the three months ended September 30, 2002 and 2001. Cash interest
expense also remained at $2.3 million for the three months ended
September 30, 2002 and 2001.
Net Income. Net income for the three months ended September
30, 2002 decreased by $1.5 million to $0.0 million from $1.5 million
for the three months ended September 30, 2001. Net income as a
percentage of sales decreased 2.9% for the three months ended September
30, 2002 compared to the three months ended September 30, 2001. The
decrease in net income and net income margin during the three months
ended September 30, 2002 compared to the three months ended September
30, 2001 was primarily due to the impact of increased operating
expenses discussed above.
EBITDA. EBITDA for the three months ended September 30, 2002
decreased by $2.3 million, or 40.4%, to $3.4 million from $5.7 million
for the three months ended September 30, 2001. EBITDA as a percentage
of sales decreased to 6.4% for the three months ended September 30,
2002 from 10.9% for the three months ended September 30, 2001. The
decrease in EBITDA for the three months ended September 30, 2002 was
primarily due to the increase in operating expenses as discussed above.
13
LIQUIDITY AND CAPITAL RESOURCES
Diamond's need for liquidity will arise primarily from the
interest payable on its 9-1/4% Senior Notes (the "Notes"), its Credit
Facility and the funding of Diamond's capital expenditures and working
capital requirements. There are no mandatory principal payments on the
Notes prior to their maturity on April 1, 2008 and, except to the
extent that the amount outstanding under the Credit Facility exceeds
the borrowing base, no required payments of principal on the Credit
Facility prior to its expiration on March 27, 2004.
Net Cash Provided by Operating Activities. Net cash provided
by operating activities for the nine months ended September 30, 2002
decreased by $1.6 million to $8.4 million from $10.0 million for the
nine months ended September 30, 2001. The change was primarily
attributable to a decrease in Diamond's net earnings, which was
partially offset by increases in depreciation and amortization,
accounts payable and accrued expenses and a decrease in inventory and
deferred income taxes.
Net Cash Used in Investing Activities. Net cash used in
investing activities for the nine months ended September 30, 2002
increased $0.3 million to $3.0 million from $2.7 million used in
investing activities for the nine months ended September 30, 2001. The
primary reason for the variance was an increase in capital
expenditures.
Net Cash Used in Financing Activities. Net cash used in
financing activities in the nine months ended September 30, 2002 was
$0.1 million compared to $0.6 million used in financing activities in
the nine months ended September 30, 2001. The primary reasons for this
decrease in cash used by financing activities was the lack of borrowing
on the Credit Facility during the nine months ended September 30, 2002.
Capital Expenditures. Capital expenditures for the nine months
ended September 30, 2002 were $3.0 million, as compared to $2.7 million
for the nine months ended September 30, 2001. Capital expenditures for
the nine months ended September 30, 2002 were made primarily to fund
the continued upgrade of Diamond's management information systems.
Liquidity. Management believes that Diamond will have adequate
capital resources and liquidity to satisfy its debt service
obligations, working capital needs and capital expenditure
requirements, including those related to the opening of new service
centers and distribution centers for the foreseeable future. Diamond's
capital resources and liquidity are expected to be provided by
Diamond's net cash provided by operating activities and borrowings
under the Credit Facility. See " -- Notes to Financial Statements -
Note 5 - Income Tax" for a discussion of the Internal Revenue Service's
proposed adjustments with respect to Diamond's tax treatment of its
Recapitalization Transaction (as defined in the Company's 10-K for the
year ended December 31, 2001) entered into by Diamond and other parties
in January 1998.
14
CONTRACTUAL CASH OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The following summarizes Diamond's contractual cash obligations and other
commercial commitments as of September 30, 2002.
PAYMENTS DUE BY PERIOD (DOLLARS IN THOUSANDS)
-----------------------------------------------
CONTRACTUAL CASH OBLIGATIONS Total Less than 1 year After 5 years
- ---------------------------- -------- ---------------- -------------
Long Term Debt $100,000 -- 100,000
Operating Leases 1,045 1,045 --
-------- ----- -------
Total Contractual Cash Obligations $101,045 1,045 100,000
======== ===== =======
AMOUNT OF COMMITMENT
EXPIRATION PER PERIOD
(DOLLARS IN THOUSANDS)
-------------------------
OTHER COMMERCIAL COMMITMENTS TOTAL AMTS
COMMITTED 1-3 YEARS
--------- ---------
Standby Letters of Credit $ 4,296 4,296
Operating Lease - Contingent Guaranteed Residual Value $ 9,917 9,917
------- -----
Total Commercial Commitments $14,213 $14,213
======= =======
RELATED PARTY TRANSACTIONS
On November 1, 2002, Diamond made an aggregate investment of $300,000 as a
capital contribution in DT Subsidiary Corp. (the "Subsidiary"), a corporation
wholly owned by Diamond. Also, on November 1, 2002, the Subsidiary entered into
a Stock Sale Agreement with Michael A. Sumsky, President and Chief Financial
Officer, (the "Seller"), pursuant to which the Seller sold to the Subsidiary
15,000 shares of Diamond's common stock, par value $0.01 per share, for
consideration of $20 per share.
15
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Diamond has a revolving Credit Facility that provides for revolving
advances of up to $25.0 million, and matures in March 2004. Borrowings
under the Credit Facility bear interest, at Diamond's discretion, at
either the Chase Manhattan Bank Rate (as defined in the Credit
Facility) or LIBOR, plus a margin of 0.50% for the Chase Manhattan Rate
and 2.25% for the LIBOR Rate. In addition, a commitment fee of 0.25% is
charged against any unused balance of the Credit Facility. Interest
rates are subject to increases or reductions based upon Diamond meeting
certain EBITDA levels. At September 30, 2002, Diamond did not have any
borrowings outstanding under the Credit Facility.
FORWARD-LOOKING STATEMENTS
Readers are cautioned that there are statements contained in
this report which are "forward-looking" statements within the meaning
of the Private Securities Litigation Reform Act of 1995 (the "Act").
Forward-looking statements include statements which are predictive in
nature, which depend upon or refer to future events or conditions,
which include words such as "expects," "anticipates," "intends,"
"plans," "believes," "will," "estimates," or similar expressions. In
addition, any statements concerning future financial performance
(including future revenues, earnings or growth rates), ongoing business
strategies or prospects, and possible future actions, which may be
provided by management, are also forward-looking statements as defined
by the Act. Forward-looking statements are based on current
expectations and projections about future events and are subject to
risks, uncertainties, and assumptions about Diamond, economic and
market factors and the industries in which Diamond does business, among
other things. These statements are not guarantees of future performance
and Diamond has no specific intention to update these statements.
These forward-looking statements, like any forward-looking
statements, involve risks and uncertainties that could cause actual
results to differ materially from those projected or anticipated. The
risks and uncertainties include the effect of overall economic and
business conditions, the demand for Diamond's products and services,
regulatory uncertainties, the impact of competitive products and
pricing, changes in customers' ordering patterns and potential system
interruptions. This list should not be construed as exhaustive. Our
annual report on Form 10-K in respect of the fiscal year ended December
31, 2001 discusses certain of these risks and uncertainties under the
caption "Factors Affecting Future Performance."
ITEM 4 CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed in the
Company's Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and the Company's Chief Financial Officer, of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective.
16
There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date the Company completed its
evaluation.
17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 2, 2002, Diamond filed an amended Complaint with the United
States District Court, Middle District of Pennsylvania against Safelite Glass
Corporation (the "Defendant"). Diamond alleges, among other things, that the
Defendant's conduct as (i) an operator of national telephone call centers which
takes first notice of loss calls from insureds of several of the largest
automobile insurers in the United States (the "Insurers"); (ii) a provider of
various claims processing services to the Insurers as a third-party
administrator and; (iii) an operator of a network of retail repair and
replacement facilities who perform work for the Insurers as Safelite affiliates,
violated certain federal and state laws and give rise to other legal and
equitable claims against the Defendant. Diamond alleges that the Defendant
engaged in various practices designed to divert customers away from Diamond to
the Defendant, and that Diamond has suffered damages as a result of this conduct
in an amount to be determined at trial.
On November 1, 2002, the Defendant filed a counter claim against
Diamond, alleging, among other things, that Diamond has engaged and continues to
engage in publishing certain false and defamatory statements about the Defendant
to automobile insurance companies that are the Defendant's clients. Defendant
alleges that this alleged conduct has injured the Defendant's goodwill and
business reputation with its insurance clients and in the autoglass repair and
replacement industry. Among other things, the Defendant is seeking damages in an
amount to be determined at trial.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
none
(B) REPORTS ON FORM 8-K
Form 8-K filed on August 14, 2002 reporting that each of the Chief
Executive Officer, Norman Harris, and the Chief Financial Officer,
Michael A. Sumsky, of Diamond Triumph Auto Glass, Inc. submitted to the
Securities and Exchange Commission sworn statements pursuant to 18
U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley
Act of 2002.
18
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
DIAMOND TRIUMPH AUTO GLASS, INC.
Date: November 14, 2002 By: /s/ Michael A. Sumsky
--------------------------------------
Name: Michael A. Sumsky
Title: President,
Chief Financial Officer and General
Counsel (Principal Financial and Chief
Accounting Officer)
19
I, Norman Harris, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Diamond Triumph Auto
Glass, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary in
order to make the statement 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 the
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.
Date: November 14, 2002 By: /s/ Norman Harris
-----------------------
Chief Executive Officer
20
I, Michael A. Sumsky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Diamond Triumph Auto
Glass, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary in
order to make the statement 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 the
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.
Date: November 14, 2002 By: /s/ Michael A. Sumsky
-----------------------
Chief Financial Officer
21