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 June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-33572
--------------
DIAMOND TRIUMPH AUTO GLASS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2758853
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 DIVISION STREET, KINGSTON, PENNSYLVANIA 18704
(Address, including zip code of principal executive offices)
(570) 287-9915
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or Section 15(d) of the Securities and Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 Yes [ ] No [X]
As of August 16, 2004, there were 1,011,366 shares outstanding of
Diamond's Common Stock ($.01 par value) and 35,000 shares outstanding of
Diamond's Series A 12% Senior Cumulative Preferred Stock ($.01 par value).
DIAMOND TRIUMPH AUTO GLASS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2004 (unaudited) and December 31, 2003 .................... 3
Condensed Consolidated Statements of Operations (unaudited) -
Three Months Ended June 30, 2004 and 2003 .......................... 4
Condensed Consolidated Statements of Operations (unaudited) -
Six Months Ended June 30, 2004 and 2003 ............................ 5
Condensed Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended June 30, 2004 and 2003 ............................ 6
Notes to Unaudited Condensed Consolidated Financial Statements ......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................... 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ............................................................ 16
Item 4. Controls and Procedures ................................................ 17
Part II. Other Information
Item 1. Legal Proceedings ...................................................... 18
Item 6. Exhibits and Reports on Form 8-K ....................................... 19
Signature ....................................................................... 20
2
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except per share amounts)
June 30, 200 December 31, 2003
------------ -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,841 $ 35
Accounts receivable, net 12,712 10,353
Other receivables 392 402
Inventories 11,869 13,493
Prepaid expenses 1,550 1,783
Deferred income taxes 2,355 3,038
--------- ---------
Total current assets 30,719 29,104
--------- ---------
Equipment and leasehold improvements, net 5,689 6,547
Deferred loan costs and senior notes discount, net 2,366 2,706
Deferred income taxes 35,317 36,473
Other assets 493 502
--------- ---------
Total assets $ 74,584 $ 75,332
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 11,550 $ 12,492
Accrued expenses:
Payroll and related items 5,606 4,341
Accrued interest 1,852 1,859
Accrued income taxes 461 461
Other 2,148 1,141
--------- ---------
Total accrued expenses 10,067 7,802
--------- ---------
Total current liabilities 21,617 20,294
--------- ---------
Long-term debt:
Senior notes 79,758 79,758
Credit facility -- 2,500
--------- ---------
Total long-term debt 79,758 82,258
--------- ---------
Total liabilities 101,375 102,552
--------- ---------
Series A 12% senior redeemable cumulative preferred stock - par value
$0.01 per share; authorized 100,000 shares; issued and outstanding
35,000 shares in 2004 and 2003, at liquidation preference value 73,282 69,076
--------- ---------
Stockholders' equity (deficit):
Common stock, 2004 and 2003 par value $0.01 per share; authorized
1,100,000 shares; issued and outstanding 1,026,366 shares in 2004 and 2003 10 10
Additional paid-in capital 23,037 27,244
Deferred compensation (202) (255)
Retained earnings (accumulated deficit) (122,618) (122,995)
Common stock in treasury, at cost, 15,000 shares in 2004 and 2003 (300) (300)
--------- ---------
Total stockholders' equity (deficit) (100,073) (96,296)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 74,584 $ 75,332
========= =========
See notes to condensed consolidated financial statements
3
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
------------------ ------------------
Net sales $ 56,930 $ 59,790
Cost of sales 16,281 18,536
-------- --------
Gross profit 40,649 41,254
Operating expenses 35,988 36,492
-------- --------
Income from operations 4,661 4,762
Other (income) expense:
Interest income -- (6)
Interest expense 2,060 1,180
-------- --------
2,060 1,174
-------- --------
Income before provision for income taxes 2,601 3,588
Provision for income taxes 2,158 1,399
-------- --------
Net Income 443 2,189
Preferred stock dividends 2,135 1,896
-------- --------
Net (loss) income applicable to common
stockholders $ (1,692) $ 293
======== ========
See notes to condensed consolidated financial statements
4
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
---------------- ----------------
Net sales $ 110,306 $ 113,923
Cost of sales 31,467 34,773
--------- ---------
Gross profit 78,839 79,150
Operating expenses 72,474 70,887
--------- ---------
Income from operations 6,365 8,263
Other (income) expense:
Interest income -- (21)
Interest expense 4,149 3,578
--------- ---------
4,149 3,557
--------- ---------
Income before provision for income taxes 2,216 4,706
Provision for income taxes 1,839 1,835
--------- ---------
Net income 377 2,871
Preferred stock dividends 4,207 3,737
--------- ---------
Net loss applicable to common stockholders $ (3,830) $ (866)
========= =========
See notes to condensed consolidated financial statements
5
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands except per share amounts)
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
---------------- ----------------
OPERATING ACTIVITIES
Net cash provided by operating activities $ 4,625 $ 5,624
-------- --------
INVESTING ACTIVITIES
Capital expenditures (414) (711)
Proceeds from sale of equipment 86 45
Decrease in other assets 9 41
-------- --------
Net cash used in investing activities (319) (625)
-------- --------
FINANCING ACTIVITIES
Payment for redemption of senior notes -- (9,544)
Net Proceeds from credit facility 17,250 6,000
Payments on credit facility (19,750) (3,500)
-------- --------
Net cash used in financing activities (2,500) (7,044)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,806 (2,045)
Cash and cash equivalents, beginning of period 35 2,094
-------- --------
Cash and cash equivalents, end of period $ 1,841 $ 49
======== ========
See notes to condensed consolidated financial statements
6
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands except per share amounts)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the data for the interim periods
presented. The interim financial statements should be read in conjunction
with the audited financial statements and notes thereto contained in
Diamond's Annual Report on Form 10-K for the year ended December 31, 2003.
Diamond's results for interim periods are not normally indicative of
results to be expected for the fiscal year. Weather has historically
affected Diamond's sales and net income, with severe weather generating
increased sales and net income, and mild weather resulting in lower sales
and net income. In addition, Diamond's business is somewhat seasonal, with
the first and fourth calendar quarters traditionally its slowest periods
of activity.
Preferred Stock:
At June 30, 2004 and December 31, 2003, the liquidation value of the
Preferred Stock recorded on Diamond's Balance Sheet was $73,282 and
$69,076, respectively, which includes dividends of $38,282 and $34,076,
respectively.
Borrowings:
Credit Facility - On March 27, 2000, Diamond entered into a revolving
credit facility (the "Credit Facility"), which had an initial term of four
years and provides for revolving advances of up to the lesser of: (1)
$25,000; (2) the sum of 85% of Diamond's Eligible Accounts Receivable (as
defined in the Credit Facility) plus 85% of Diamond's Eligible Inventory
(as defined in the Credit Facility), less certain reserves; or (3) an
amount equal to 1.5 times Diamond's EBITDA (as defined in the Credit
Facility) for the prior twelve months. On November 26, 2003, Diamond
amended the Credit Facility, which, among other things extended the term
for an additional three year period through March 27, 2007. A portion of
the Credit Facility, not to exceed $10,000, is available for the issuance
of letters of credit, which generally have an initial term of one year or
less. Diamond had $6,141 in outstanding letters of credit at June 30,
2004. Borrowings under the Credit Facility bear interest, at Diamond's
discretion, at either the JP Morgan Chase Manhattan Bank Rate (as defined
in the Credit Facility) or LIBOR, plus a margin of 0.50% for the JP Morgan
Chase Manhattan Rate and 2.25% for the LIBOR Rate. In addition, a
commitment fee of 0.25% is charged against any unused balance of the
Credit Facility. Interest rates are subject to increases or reductions
based upon Diamond meeting certain EBITDA levels. The proceeds of the
Credit Facility are available for working capital requirements and for
general corporate purposes. The Credit Facility is secured by first
priority security interests in all of Diamond's tangible and intangible
assets. In addition, the Credit Facility contains certain restrictive
covenants including, among other things, the maintenance of a minimum
EBITDA level as of June 30, 2004 of $8,500 for the prior twelve months
(the "EBITDA Covenant"), as well as restrictions on additional
indebtedness, dividends and certain other significant transactions.
Diamond was in compliance with the EBITDA Covenant for the fiscal period
ended June 30, 2004. Diamond had no outstanding balance under the Credit
Facility at June 30, 2004.
Stock Option Plan:
In September 1998, the Board of Directors and stockholders of Diamond
approved and adopted the Diamond Triumph Auto Glass 1998 Stock Option Plan
(the "1998 Plan"). The 1998 Plan provides for the issuance of a total of
30,000 authorized and un-issued shares of common stock. As of June 30,
2004, the
7
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands except per share amounts)
Board of Directors had granted 22,175 options to key employees of Diamond
with an exercise price of $20.00 per share, which approximates fair value
at the date of grant. The options vest evenly over five years and may not
be exercised until the earlier of (a) 90 days after Diamond's Common Stock
has become publicly traded or (b) 91 days prior to the tenth anniversary
of the date of the grant. The 1998 Plan expires in September 2008. 500
options were granted in July 2003 and no options were granted during the
six months ended June 30, 2004.
Diamond accounts for its stock option plan under Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees,"
under which no compensation cost has been recognized for options issued to
employees at fair market value on the date of grant. In 1995, the
Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 established a fair value based
method of accounting for stock-based compensation plans. SFAS No. 123
requires that a company's financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the
method used to account for the plan.
As allowed by SFAS No. 123, Diamond has elected to continue to account for
its employee stock-based compensation plans under APB Opinion No. 25, and
adopted only the disclosure requirements of SFAS No. 123. Had compensation
cost for Diamond's common stock options been determined based upon the
fair value of the options at the date of grant, as prescribed under SFAS
No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", Diamond's net income (loss)
would have been reduced to the following pro forma amounts:
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
------------------------- ---------------------------
Net Income 2004 2003 2004 2003
--------- --------- ---------- ---------
As reported $ 377 $ 2,871 $ 443 $ 2,189
Add stock-based employee compensation expense
included in reported net income, net of tax 9 32 4 16
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (10) (37) (5) (19)
------- ------- ------- -------
Pro forma $ 376 $ 2,866 $ 442 $ 2,186
======= ======= ======= =======
The fair value of the options granted in 2003 was $2.63 using the
Black-Scholes option-pricing model with the following assumptions:
risk-free interest rate of 2.82%, volatility of 0% and expected dividend
yield of 0%.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). The Interpretation requires that a
variable interest entity be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's
residual returns or both. The consolidation requirements of FIN 46 are
effective for all variable interest entities created or acquired after
January 31, 2003. In December 2003, the
8
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands except per share amounts)
Financial Accounting Standards Board issued a revision to FIN 46 referred
to as Interpretation No. 46(R). Among other provisions, the revision
extended the adoption date of FIN 46(R) to the first quarter of 2004 for
variable interest entities created prior to February 1, 2003. The adoption
of this interpretation had no impact on Diamond's consolidated financial
statements.
NOTE 3. EXECUTIVE COMPENSATION
On June 1, 2002 (the "Grant Date"), Norman Harris (the "Executive") and
Diamond entered into a Restricted Stock Agreement (the "Agreement")
pursuant to which the Executive purchased from Diamond 26,366 shares (the
"Restricted Shares") of Diamond's common stock, par value $0.01 per share,
for nominal consideration. The Agreement generally restricts the sale or
transferability of shares of Common Stock held by the Executive before the
Restrictions (as defined in the Agreement) have lapsed. The Executive has
all rights and privileges of a stockholder with respect to the Restricted
Shares, including voting rights and the right to receive dividends paid
with respect to the Restricted Shares. Generally, the Restricted Shares
vest and the Restrictions lapse: (i) with respect to 20% of the Restricted
Shares on the Grant Date; and (ii) with respect to 20% of the Restricted
Shares on each subsequent anniversary of the Grant Date until the
Restricted Shares are fully vested. Compensation expense, unearned
restricted stock compensation, and proceeds from common stock issued have
been recognized based on the vesting periods and an estimated fair market
value of $20 per share.
On November 17, 2003, Diamond entered into an employment agreement with
each of Kenneth Levine and Richard Rutta, pursuant to which Messrs. Levine
and Rutta agreed to serve as the Co-Chairmen of Diamond at an annual
salary of $320 each subject to annual review based on Diamond's and
Messrs. Levine and Rutta's performance. The employment agreements provide
for a term commencing on November 17, 2003 and ending on November 16,
2004. On March 15, 2004, the employment agreements were amended to reduce
the annual salary for Messrs. Levine and Rutta to $52 each. In addition to
their annual salary, Messrs. Levine and Rutta are eligible to receive a
bonus based upon the achievement of certain criteria. The employment
agreements also contain various severance, non-competition,
non-solicitation provisions, non-disclosure and assignment of inventions
provisions.
NOTE 4. LEGAL PROCEEDINGS
On May 2, 2002, Diamond filed an amended Complaint with the United States
District Court, Middle District of Pennsylvania against Safelite Glass
Corporation (the "Defendant"). Diamond alleges, among other things, that
the Defendant's conduct as (i) an operator of national telephone call
centers which takes first notice of loss calls from insureds of several of
the largest automobile insurers in the United States (the "Insurers");
(ii) a provider of various claims processing services to the Insurers as a
third-party administrator; and (iii) an operator of a network of retail
repair and replacement facilities who perform work for the Insurers as
Safelite affiliates, violated certain federal and state laws and gave rise
to other legal and equitable claims against the Defendant. Diamond alleges
that the Defendant engaged in various practices designed to divert
customers away from Diamond to the Defendant, and that Diamond has
suffered damages as a result of this conduct in an amount to be determined
at trial.
On November 1, 2002, the Defendant filed a counter claim against Diamond,
alleging, among other things, that Diamond has engaged and continues to
engage in publishing certain false and defamatory statements about the
Defendant to automobile insurance companies that are the Defendant's
clients. Defendant alleges that this alleged conduct has injured the
Defendant's goodwill and business reputation with its insurance
9
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollars in thousands except per share amounts)
clients and in the auto glass repair and replacement industry. Among other
things, the Defendant is seeking damages in an amount to be determined at
trial.
On February 3, 2003, Delbert Rice and Kenneth E. Springfield, Jr., on
behalf of themselves and all others similarly situated (the "Plaintiffs"),
filed a class action Complaint in the Court of Common Pleas of Luzerne
County, Pennsylvania against Diamond. Plaintiffs allege, among other
things, Diamond violated certain sections of the Pennsylvania Unfair Trade
Practices and Consumer Protection Law and common law. Plaintiffs allege
that this alleged conduct has caused monetary damages to Plaintiffs. Among
other things, Plaintiffs are seeking damages in an amount to be determined
at trial. Diamond believes Plaintiffs' allegations are without merit and
plans to vigorously contest this complaint.
Diamond is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
Diamond's financial condition, results of operations or financial
position. No amounts have been recorded in the consolidated financial
statements for any of these legal actions.
NOTE 5. INCOME TAXES
As disclosed in the Company's 10-K for the year ended December 31, 2003,
the Internal Revenue Service has concluded its audit of the tax periods
ended December 31, 1998, 1999, and 2000. As a result of this audit, the
Internal Revenue Service issued a notice of proposed adjustments on
February 20, 2002, which included a disallowance of the tax-deductible
goodwill resulting from Diamond's March 31, 1998 Recapitalization
Transaction (as defined in Diamond's 10-K for the year ended December 31,
2003). The Internal Revenue Service has asserted that the Recapitalization
Transaction did not qualify as a stock purchase, and accordingly, that the
election under Internal Revenue Code Section 338(h)(10) was not valid. As
a result, if the IRS position is sustained, tax-deductible goodwill would
not be recognizable by Diamond.
The proposed adjustments by the Internal Revenue Service would result in
$7.6 million of federal tax deficiencies owed by Diamond for the period
December 31, 1998 through December 31, 2003, plus possible interest and
penalties and any resultant increases in current state tax expense for
this period. Additionally, the deferred tax asset established in 1998
would be eliminated, as well as net operating loss carryforwards from
previous deductions of the tax goodwill. The carrying amount of these
assets at December 31, 2003 was approximately $37.0 million.
Diamond strongly believes that the Recapitalization Transaction is
properly accounted for, and has appealed the Internal Revenue Service's
proposed adjustment. If such appeal is ultimately unsuccessful, the
Internal Revenue Service's proposed adjustment would have a material
adverse affect on Diamond's liquidity, cash flows, balance sheet and
results of operations.
NOTE 6. CONTINGENT GUARANTEED COMMITMENTS
Diamond leases certain vehicles under operating leases having lease terms
of 367 days. The leases have monthly renewal options. The vehicle lease
agreement provides for terminal lease payments for guaranteed residual
values reduced by actual proceeds from the vehicle sale in the event the
lease is not renewed. The contingent guaranteed residual value payment
commitment was $11.5 million at June 30, 2004. No amounts have been
accrued related to this contingent obligation because Diamond does not
believe it is probable that the payments will be required.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Diamond is a leading provider of automotive glass replacement and repair
services in the United States. At June 30, 2004, Diamond operated a
network of 257 automotive glass service centers, approximately 1,100
mobile installation vehicles and six distribution centers in 45 states.
Diamond serves all of its customers' automotive glass replacement and
repair needs, offering windshields, tempered glass and other related
products. Sales, net income and EBITDA for the six months ended June 30,
2004 were $110.3 million, $0.4 million and $7.5 million, respectively.
Sales, net income and EBITDA for the three months ended June 30, 2004 were
$56.9 million, $0.4 million and $5.2 million, respectively.
Weather has historically affected Diamond's sales and net income, with
severe weather generating increased sales and net income and mild weather
resulting in lower sales and net income. In addition, Diamond's business
is somewhat seasonal, with the first and fourth quarters traditionally its
slowest period of activity. Diamond believes these seasonal trends will
continue for the foreseeable future.
The price of replacement automotive glass is based in part on list prices
developed by the National Auto Glass Specification ("NAGS"), an
independent third party. Prices charged by participants in the automotive
glass replacement industry are independently determined using varying
percentage discounts from the NAGS price list. The impact of NAGS price
changes on Diamond's financial results depends on the level of discounts
Diamond grants to its customers and the level of discounts that Diamond
can obtain from its glass suppliers. Effective January 1, 1999, NAGS
significantly modified its published list prices in order to bring actual
prices more in line with published list prices. Although NAGS has not
materially modified its published list prices since January 1, 1999, NAGS
has made periodic modifications to its published list prices subsequent to
that date, including a series of price changes effective January 2003 that
resulted in a 4% to 5% decrease in overall list prices. NAGS modified its
published list prices in January 2004 which resulted in moderate decreases
in overall list prices.
Diamond believes that, due to its sole focus on automotive glass
replacement and repair, it has one of the lowest cost structures in the
automotive glass replacement and repair industry. Diamond's low cost
structure enables it to serve all markets of the industry, which is
comprised of: (1) individual consumers; (2) commercial customers,
including commercial fleet leasing companies, rental car companies, car
dealerships, body shops, utilities and government agencies; and (3)
insurance customers, including referrals from local agents, claims offices
and centralized call centers. While the largest participant in the
industry primarily focuses on servicing automotive glass insurance claims
(including providing related insurance claims processing services) and
also manufactures automotive glass, Diamond has strategically positioned
itself solely as a provider of automotive glass replacement and repair
services to a balanced mix of individual, commercial and insurance
customers.
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 six and three
months ended June 30, 2004 and 2003.
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
2004 2003 2004 2003
------------- ---------------- -------------- -------------
$ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- -----
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
Net Sales ....................................... 110.3 100.0 113.9 100.0 56.9 100.0 59.8 100.0
Cost of Sales ................................... 31.5 28.6 34.7 30.5 16.3 28.6 18.5 30.9
----- ----- ----- ----- ----- ----- ----- -----
Gross Profit .................................... 78.8 71.4 79.2 69.5 40.6 71.4 41.3 69.1
Operating Expenses .............................. 72.5 65.7 70.9 62.2 35.9 63.1 36.5 61.0
----- ----- ----- ----- ----- ----- ----- -----
Income From Operations .......................... 6.3 5.7 8.3 7.3 4.7 8.3 4.8 8.0
Interest Income ................................. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Interest Expense ................................ 4.1 3.7 3.6 3.2 2.1 3.7 1.2 2.0
----- ----- ----- ----- ----- ----- ----- -----
4.1 3.7 3.6 3.2 2.1 3.7 1.2 2.0
----- ----- ----- ----- ----- ----- ----- -----
(Loss) income before provision for income taxes . 2.2 2.0 4.7 4.1 2.6 4.6 3.6 6.0
Provision for income taxes ...................... 1.8 1.6 1.8 1.6 2.2 3.9 1.4 2.3
----- ----- ----- ----- ----- ----- ----- -----
Net (loss) income ............................... 0.4 0.4 2.9 2.5 0.4 0.7 2.2 3.7
===== ===== ===== ===== ===== ===== ===== =====
EBITDA (1) ...................................... 7.5 6.8 9.7 8.5 5.2 9.1 5.4 9.0
(1) EBITDA represents net income before interest, taxes, depreciation and
amortization. EBITDA and the related ratios presented in this table are
measures of Diamond's performance that are not required by, or presented
in accordance with, GAAP. EBITDA is not a measurement of Diamond's
financial performance under GAAP and should not be considered an
alternative to net income, operating income or any other performance
measures derived in accordance with GAAP or as an alternative to cash flow
from operating activities as a measure of our liquidity.
Diamond presents EBITDA because it considers it an important supplemental
measure of its performance and believes it is frequently used by
securities analysts, investors and other interested parties in the
evaluation of companies in its industry, many of which present EBITDA when
reporting their results.
Diamond believes issuers of "high yield" securities also present EBITDA
because investors, analysts and rating agencies consider it useful in
measuring the ability of those issuers to meet debt service obligations.
Diamond believes EBITDA is an appropriate supplemental measure of debt
service capacity, because cash expenditures on interest are, by
definition, available to pay interest, and tax expense is inversely
correlated to interest expense because tax expense goes down as deductible
interest expense goes up; depreciation and amortization are non-cash
charges.
Diamond also uses EBITDA for the following purposes: (i) its executives'
compensation plans base incentive compensation payments on its EBITDA
performance measured against budgets; and (ii) its
12
credit agreement and its indenture for its Notes use EBITDA to measure
Diamond's compliance with covenants such as interest coverage and debt
incurrence.
EBITDA has limitations as an analytical tool, and should not be considered
in isolation, or as a substitute for analysis of Diamond's results as
reported under GAAP. Some of these limitations are:
- EBITDA does not reflect our cash expenditures, or future
requirements, for capital expenditures or contractual commitments;
- EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
- EBITDA does not reflect the significant interest expense, or the
cash requirements necessary to service interest or principal
payments, on our debt;
- Although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized will often have to be
replaced in the future, and EBITDA does not reflect any cash
requirements for such replacements; and
- Other companies in Diamond's industry may calculate EBITDA
differently than Diamond does, limiting its usefulness as a
comparative measure.
Because of these limitations, EBITDA should not be considered as a measure
of discretionary cash available to Diamond to invest in the growth of its
business. Diamond compensates for these limitations by relying primarily
on its GAAP results and using EBITDA only supplementally. See the
Statements of Cash Flows included in our financial statements.
Reconciliation of EBITDA to net income follows for the periods indicated:
Six Months Ended Three Months Ended
June 30, June 30,
-------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
(dollars in millions) (dollars in millions)
Net income........................... $0.4 $2.9 $0.4 $2.2
Interest expense..................... 4.1 3.6 2.1 1.2
Depreciation and amortization........ 1.2 1.4 .5 .6
Provision for income taxes........... 1.8 1.8 2.2 1.4
---- ---- ---- ----
EBITDA.......................... $7.5 $9.7 $5.2 $5.4
==== ==== ==== ====
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Net Sales. Net sales for the six-month period ended June 30, 2004
decreased 3.2% to $110.3 million from $113.9 million as compared to the
six-month period ended June 30, 2003. Installation units sold through June
30, 2004 decreased 0.6% compared to the six-month period ended June 30,
2003. Diamond's revenue per installation unit for the six-month period
ended June 30, 2004 was 3.1% below the revenue per installation unit for
the six-month period ended June 30, 2003. The decrease in sales and
revenue per installation unit sold was primarily due to pricing pressures
experienced throughout the industry.
13
Gross Profit. Gross profit was $78.8 million for the six months
ended June 30, 2004 and $79.1 million for the six months ended June 30,
2003. Gross profit increased as a percentage of sales to 71.5% for the six
months ended June 30, 2004 from 69.5% for the six months ended June 30,
2003. The decrease in gross profit is due to a decrease in average revenue
per installation unit. The increase in gross profit percentage is
primarily due to decreased product costs, which is due to the continued
leveraging of Diamond's purchasing power and to enhanced inventory
management as a result of increased system functionality from our recently
upgraded MIS platform.
Operating Expenses. Operating expenses increased by $1.6 million or
2.3% to $72.5 million during the six-month period ended June 30, 2004 from
$70.9 million for the six-month period ended June 30, 2003. The increase
in operating expenses was due to an increase in wages and wage related
expenses primarily at the service center level, due to increased
installation capacity, wage rate pressures and general wage increases. The
increase in operating expenses was also due to an increase in occupancy
costs primarily due to normal rental rate increases and an increase in
vehicle fuel costs due to rising prices. We also experienced an increase
in vehicle lease expense due to the continued retirement of owned vehicles
that are replaced with leased vehicles, and accelerated amortization of
leased vehicle lives in order to more closely align our lease obligation
upon termination of the lease with expected vehicle market values. These
increases were partially offset by a decrease in vehicle maintenance
expense, which is partially the result of continued efforts in our fleet
management to more aggressively recycle leased vehicles out of the fleet
on an earlier basis and attempt to reduce significant repair expenditures
related to those vehicles.
Depreciation and amortization expense for the six-month period ended
June 30, 2004 decreased by $0.2 million or 14.3% to $1.2 million from $1.4
for the six-month period ended June, 2003. This was primarily due to
decreases in depreciation expense for computer hardware, sales audit
software, and POS software that became fully depreciated.
Income From Operations. Income from operations for the six months
ended June 30, 2004 decreased by $1.9 million, or 22.9%, to $6.4 million
from $8.3 million for the six months ended June 30, 2003. This decrease
was primarily due to the increased operating costs which were partially
offset by increased gross profit discussed above.
Interest Expense. Interest expense for the six months ended June 30,
2004 increased $0.5 million, or 13.9%, to $4.1 million from $3.6 million
for the six months ended June 30, 2003. The increase in interest expense
is primarily due to the recording of a net gain of $1.1 million from the
repurchase of senior notes during the six months ended June 30, 2003,
which reduced interest expense for that period. There was no similar
repurchase activity during the six months ended June 30, 2004. The
increase for the six months ended June 30, 2004 was partially offset by
decreased interest expense as a direct result of the repurchase of $13.2
million face amount of senior notes during 2003.
Net Income. Net income for the six months ended June 30, 2004
decreased by $2.5 million to $0.4 million of net income from $2.9 million
of net income for the six months ended June 30, 2003. Net income as a
percentage of sales decreased 2.1% for the six months ended June 30, 2004
compared to the six months ended June 30, 2003. The decrease in net income
and net income margin during the six months ended June 30, 2004 compared
to the six months ended June 30, 2003 was primarily due to the increased
operating expenses discussed above, and also due to recording a net gain
of $1.1 million in 2003 from the repurchase of senior notes discussed
above.
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30,
2003
Net Sales. Net sales for the three-month period ended June 30, 2004
decreased 4.8% to $56.9 million from $59.8 million as compared to the
three-month period ended June 30, 2003. Installation units
14
sold for the three months ended June 30, 2004 decreased 3.7% compared to
the three months ended June 30, 2003. Diamond's revenue per installation
unit for the three-month period ended June 30, 2004 was 1.6% below the
revenue per installation unit for the three-month period ended June 30,
2003. The decrease in installation units sold is primarily due to weaker
industry demand. The decrease in revenue per installation unit sold is
primarily due to pricing pressures experienced throughout the industry.
The decrease in sales is due to the decreases in installation units sold
and revenue per installation unit.
Gross Profit. Gross profit was $40.6 million for the three months
ended June 30, 2004 and $41.3 million for the three months ended June 30,
2003. Gross profit increased as a percentage of sales to 71.4% for the
three months ended June 30, 2004 from 69.1% for the three months ended
June 30, 2003. The decrease in gross profit is due to a decrease in
average revenue per installation unit. The increase in gross profit
percentage is primarily due to decreased product costs, which is due to
the continued leveraging of our purchasing power and to enhanced inventory
management as a result of increased system functionality from our recently
upgraded MIS platform.
Operating Expenses. Operating expenses decreased by $0.6 million or
1.6% to $35.9 million during the three-month period ended June 30, 2004
from $36.5 million for the three-month period ended June 30, 2003. The
decrease in operating expenses is due to a decrease in vehicle maintenance
expense, which is partially the result of continued efforts in our fleet
management to more aggressively recycle leased vehicles out of the fleet
on an earlier basis in an attempt to significantly reduce repair
expenditures related to those vehicles. The decrease in operating expense
is also due to decreases in advertising and promotional, and shop
maintenance expenses. These decreases were partially offset by an increase
in operating expenses due to an increase in wages and wage related
expenses primarily at the service center level, due to increased
installation capacity, wage rate pressures and general wage increases. We
experienced an increase in occupancy costs primarily due to normal rental
rate increases and an increase in vehicle fuel costs due to rising prices.
We also experienced an increase in vehicle lease expense due to the
continued retirement of owned vehicles that are replaced with leased
vehicles, and accelerated amortization of leased vehicle lives in order to
more closely align our lease obligation upon termination of the lease with
expected vehicle market values.
Depreciation and amortization expense for the three-month period
ended June 30, 2004 decreased by $0.1 million or 16.7% to $0.5 million
from $0.6 million for the three-month period ended June 30, 2003. This was
primarily due to decreases in depreciation expense for computer hardware,
sales audit software, and POS software that became fully depreciated.
Income From Operations. Income from operations for the three months
ended June 30, 2004 decreased by $.1 million, or 2.1%, to $4.7 million
from $4.8 million for the three months ended June 30, 2003. This decrease
was primarily due to the decreased gross profit discussed above, which was
partially offset by decreased operating expenses.
Interest Expense. Interest expense for the three months ended June
30, 2004 increased $0.9 million, or 75.0%, to $2.1 million from $1.2
million for the three months ended June 30, 2003. The increase in interest
expense is primarily due to the recording of a net gain of $1.1 million
from the repurchase of senior notes during the three months ended June 30,
2003, thereby reducing interest expense for that period. There was no
similar repurchase activity during the three months ended June 30, 2004.
This increase was partially offset by decreased interest expense as a
direct result of the repurchase of $13.2 million face amount of senior
notes during 2003.
Net Income. Net income for the three months ended June 30, 2004
decreased by $1.8 million to $0.4 million net income from $2.2 million of
net income for the three months ended June 30, 2003. Net income as a
percentage of sales decreased 2.9% for the three months ended June 30,
2004 compared to the three months ended June 30, 2003. The decrease in net
income and net income margin during the three months ended June 30, 2004
compared to the three months ended June 30, 2003 was primarily due to
recording the net gain of $1.1 million from the repurchase of senior notes
discussed above.
15
LIQUIDITY AND CAPITAL RESOURCES
Diamond's need for liquidity will arise primarily from the interest
payable on its 9-1/4% Senior Notes (the "Notes"), its Credit Facility and
the funding of Diamond's capital expenditures and working capital
requirements. There are no mandatory principal payments on the Notes prior
to their maturity on April 1, 2008 and, except to the extent that the
amount outstanding under the Credit Facility exceeds the borrowing base,
no required payments of principal on the Credit Facility prior to its
expiration on March 27, 2007. Diamond may from time to time repurchase
Notes in the open market.
Net Cash Provided by Operating Activities. Net cash provided by
operating activities for the six months ended June 30, 2004 decreased by
$1.0 million to $4.6 million from $5.6 million for the six months ended
June 30, 2003. The decrease was primarily due to a decrease in Diamond's
net income for the six-month period ended June 30, 2004 as compared to the
six-month period ended June 30, 2003, as discussed above, which was
partially offset by a decrease in inventory due to enhanced inventory
management as a result of increased system functionality from our recently
upgraded MIS platform.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the six months ended June 30, 2004 decreased $0.3 million
to $0.3 million from $0.6 million for the six months ended June 30, 2003.
The decrease is primarily due to a decrease in capital expenditures.
Net Cash Used in Financing Activities. Net cash used in financing
activities for the six months ended June 30, 2004 was $2.5 million
compared to $7.0 million used in financing activities for the six months
ended June 30, 2003. The decrease is due to $9.5 million of payments for
repurchase of senior notes during the six months ended June 30, 2003.
There were no similar transactions during the six months ended June 30,
2004. This decrease was partially offset by a decrease in net borrowings
during the six months ended June 30, 2004 compared to the six months ended
June 30, 2003.
Capital Expenditures. Capital expenditures for the six months ended
June 30, 2004 were $0.4 million, as compared to $0.7 million for the six
months ended June 30, 2003. The decrease is due to a decrease in vehicle
and software related expenditures, which were partially offset by
increases in computer hardware and leasehold improvements.
Liquidity. Management believes that Diamond will have adequate
capital resources and liquidity to satisfy its debt service obligations,
working capital needs and capital expenditure requirements for the
foreseeable future. Diamond's capital resources and liquidity are expected
to be provided by Diamond's net cash provided by operating activities and
borrowings under the Credit Facility. See " -- Notes to Condensed
Consolidated Financial Statements - Note 5 - Income Tax" for a discussion
of the Internal Revenue Service's proposed adjustments with respect to
Diamond's tax treatment of its Recapitalization Transaction (as defined in
Diamond's 10-K for the year ended December 31, 2003).
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Diamond has a revolving Credit Facility that provides for revolving
advances of up to $25.0 million, and matures in March 2007. Borrowings
under the Credit Facility bear interest, at Diamond's discretion, at
either the JP Morgan Chase Manhattan Bank Rate (as defined in the Credit
Facility) or LIBOR, plus a margin of 0.50% for the JP Morgan Chase
Manhattan Rate and 2.25% for the LIBOR Rate. In addition, a commitment fee
of 0.25% is charged against any unused balance of the Credit Facility.
Interest rates are subject to increases or reductions based upon Diamond
meeting certain EBITDA levels. At June 30, 2004, Diamond had no
outstanding borrowings under the Credit Facility.
16
FORWARD-LOOKING STATEMENTS
Readers are cautioned that there are statements contained in this
report which are "forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Act").
Forward-looking statements include statements which are predictive in
nature, which depend upon or refer to future events or conditions, which
include words such as "expects," "anticipates," "intends," "plans,"
"believes," "will," "estimates," or similar expressions. In addition, any
statements concerning future financial performance (including future
revenues, earnings or growth rates), ongoing business strategies or
prospects, and possible future actions, which may be provided by
management, are also forward-looking statements as defined by the Act.
Forward-looking statements are based on current expectations and
projections about future events and are subject to risks, uncertainties,
and assumptions about Diamond, economic and market factors and the
industries in which Diamond does business, among other things. These
statements are not guarantees of future performance and Diamond has no
specific intention to update these statements.
These forward-looking statements, like any forward-looking
statements, involve risks and uncertainties that could cause actual
results to differ materially from those projected or anticipated. The
risks and uncertainties include the effect of overall economic and
business conditions, the demand for Diamond's products and services,
regulatory uncertainties, the impact of competitive products and pricing,
changes in customers' ordering patterns and potential system
interruptions. This list should not be construed as exhaustive. Diamond's
annual report on Form 10-K in respect of the fiscal year ended December
31, 2003 discusses certain of these risks and uncertainties under the
caption "Factors Affecting Future Performance."
ITEM 4 CONTROLS AND PROCEDURES
Diamond maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in Diamond's
Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission's rules and forms and that such information is accumulated and
communicated to Diamond's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), Diamond carried out an
evaluation, under the supervision and with the participation of Diamond's
management, including Diamond's Chief Executive Officer and Diamond's
Chief Financial Officer, of the effectiveness of the design and operation
of Diamond's disclosure controls and procedures as of the end of the
quarter covered by this report. Based on the foregoing, Diamond's Chief
Executive Officer and Chief Financial Officer concluded that Diamond's
disclosure controls and procedures were effective at the reasonable
assurance level.
There has been no change in Diamond's internal controls over
financial reporting during Diamond's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect,
Diamond's internal controls over financial reporting.
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 gave rise to other legal and
equitable claims against the Defendant. Diamond alleges that the Defendant
engaged in various practices designed to divert customers away from Diamond to
the Defendant, and that Diamond has suffered damages as a result of this conduct
in an amount to be determined at trial.
On November 1, 2002, the Defendant filed a counter claim against Diamond,
alleging, among other things, that Diamond has engaged and continues to engage
in publishing certain false and defamatory statements about the Defendant to
automobile insurance companies that are the Defendant's clients. Defendant
alleges that this alleged conduct has injured the Defendant's goodwill and
business reputation with its insurance clients and in the auto glass repair and
replacement industry. Among other things, the Defendant is seeking damages in an
amount to be determined at trial.
On February 3, 2003, Delbert Rice and Kenneth E. Springfield, Jr., on
behalf of themselves and all others similarly situated (the "Plaintiffs"), filed
a class action Complaint in the Court of Common Pleas of Luzerne County,
Pennsylvania against Diamond. Plaintiffs allege, among other things, Diamond
violated certain sections of the Pennsylvania Unfair Trade Practices and
Consumer Protection Law and common law. Plaintiffs allege that this alleged
conduct has caused monetary damages to Plaintiffs. Among other things,
Plaintiffs are seeking damages in an amount to be determined at trial. Diamond
believes Plaintiffs' allegations are without merit and plans to vigorously
contest this complaint.
Diamond is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
Diamond's financial condition, results of operations or liquidity. No amounts
have been recorded in the consolidated financial statements for any of these
legal actions.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
31.3 Sarbanes-Oxley Section 302(a) Certification of the Chief
Executive Officer.
31.4 Sarbanes-Oxley Section 302(a) Certification of the Chief
Financial Officer.
32.3 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Chief Executive Officer.
32.4 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Chief Financial Officer.
(B) REPORTS ON FORM 8-K
Form 8-K filed on May 17, 2004, reporting that Diamond Triumph Auto Glass,
Inc. issued a press release announcing its operating and financial results
for the quarter ended March 31, 2004.
19
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: August 16, 2004 By: /s/ Michael A. Sumsky
----------------------------------------
Name: Michael A. Sumsky
Title: President,
Chief Financial Officer and
General Counsel (Principal Financial
and Chief Accounting Officer)
20