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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission File Number 001-15469
THERMOVIEW INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 61-1325129
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1101 Herr Lane 40222
Louisville, Kentucky (Zip Code)
(Address of principal executive offices)
502-412-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 2000, 7,449,257 shares of the Registrant's common stock,
$.001 par value, were issued and outstanding.
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<PAGE>
THERMOVIEW INDUSTRIES, INC.
TABLE OF CONTENTS
Part I Financial Information
Item 1. Financial Statements..................................1
Condensed Consolidated Balance Sheets......................1
Condensed Consolidated Statements of Operations............3
Condensed Consolidated Statements of Cash Flows............4
Notes to Condensed Consolidated Financial Statements.......5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk......................................................26
Part II Other Information
Item 1. Legal Proceedings....................................28
Item 2. Changes in Securities and Use of Proceeds............28
Item 3. Defaults Upon Senior Securities......................28
Item 4. Submission of Matters to a Vote of Security Holders..28
Item 5. Other Information....................................29
Item 6. Exhibits and Reports on Form 8-K.....................29
-----
<PAGE>
3
<PAGE>
Item 1. Financial Statements
ThermoView Industries, Inc.
Condensed Consolidated Balance Sheets
December 31, June 30, 2000
Assets 1999 (Unaudited)
-----------------------------
Current assets:
Cash and equivalents $3,331,721 $ 845,458
Receivables:
Trade, net of allowance for doubtful accounts
of $276,000 in 1999 and $285,000 in 2000 5,062,127 4,490,991
Finance, net of unearned interest of $149,000
in 1999 and $155,081 in 2000 60,000 55,030
Related party 55,554 34,164
Other 337,482 355,052
Costs in excess of billings on uncompleted
contracts 1,274,073 1,691,330
Inventories, net of reserves of $165,000 in
2000 2,300,643 2,254,571
Prepaid expenses and other current assets 342,978 414,047
Deferred income taxes 322,000 -
-----------------------------
Total current assets 13,086,578 10,140,643
Property and equipment, net of accumulated
depreciation of $1,169,604 in 1999 and
$1,531,888 in 2000 3,679,179 3,243,677
Other assets:
Goodwill, net of accumulated amortization of
$3,645,468 in 1999 and $4,336,686 in 2000 74,162,341 61,851,354
Deferred income taxes 1,406,000 -
Finance receivables, net of unearned interest
of $1,092,411 and reserves of $200,000 in
1999 and unearned interest of $1,170,635 and
reserves of $565,500 in 2000 932,411 502,523
Other assets 704,675 777,047
-----------------------------
77,205,427 63,130,924
-----------------------------
Total assets $93,971,184 $76,515,244
=============================
<PAGE>
December 31, 1999 June 30, 2000
(Unaudited)
------------------------------
Liabilities and stockholders' equity Current liabilities:
Accounts payable $3,444,402 $4,662,363
Due to sellers of acquired businesses 1,000,000 450,000
Accrued expenses 3,278,924 3,992,588
Billings in excess of costs on uncompleted
contracts 930,732 1,273,787
Income taxes payable 116,784 73,334
Current portion of long-term debt 358,920 5,376,366
-----------------------------
Total current liabilities 9,129,762 15,828,438
Long-term debt 21,399,874 17,297,381
Due to sellers of acquired businesses 7,085,000 -
Other long-term liabilities 32,542 427,040
Mandatorily redeemable Series C convertible
preferred stock, $.001 par value
(aggregate redemption amount and liquidation
preference of $6,000,000); 25,000 shares authorized;
6,000 shares issued and outstanding 4,648,550 5,471,420
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized:
Series A, $.001 par value; none issued - -
Series B, $.001 par value; none issued - -
Series D, $.001 par value; 1,439,316 shares
issued and outstanding - 1,439
Common stock, $.001 par value; 25,000,000
shares authorized; 7,389,592 shares issued
and outstanding in 1999 and 7,449,257 shares
issued and outstanding in 2000 7,390 7,449
Paid-in capital 59,794,361 64,861,188
Accumulated deficit (8,126,295) (27,379,111)
-----------------------------
Total stockholders' equity 51,675,456 37,490,965
-----------------------------
Total liabilities and stockholders' equity $93,971,184 $76,515,244
=============================
See accompanying notes.
<PAGE>
ThermoView Industries, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
For the three For the six
months ended months ended
June 30, June 30,
--------------------- ---------------------
1999 2000 1999 2000
---- ---- ---- ----
Revenues $28,446,493 $27,230,072 $50,196,310 $48,706,488
Cost of revenues earned 12,738,104 12,967,297 22,502,359 23,349,374
----------------------- ------------------------
Gross profit 15,708,389 14,262,775 27,693,951 25,357,114
Selling, general and
administrative
expenses 13,847,495 14,619,093 25,389,692 27,707,146
Unusual charges - 10,745,000 - 10,745,000
Depreciation expense 236,326 283,157 439,531 545,723
Amortization expense 694,965 877,608 1,554,872 1,746,249
----------------------- ------------------------
Income (loss) from
operations 929,603 (12,262,083) 309,856 (15,387,004)
Interest expense (446,213) (1,149,005) (857,837) (2,242,325)
Interest income 38,335 37,391 100,666 105,513
----------------------- ------------------------
Income (loss) before
income taxes 521,725 (13,373,697) (447,315) (17,523,816)
Income tax provision 470,000 2,984,000 337,000 1,729,000
----------------------- ------------------------
Net income (loss) 51,725 (16,357,697) (784,315) (19,252,816)
Less preferred stock dividends:
Series A and B cash
dividends 421,346 - 846,076 -
Series C cash
dividends 143,605 - 143,605 100,800
Series C non-cash
dividends 1,464,290 540,435 1,464,290 1,010,070
Series D undeclared
dividends - 180,000 - 180,000
----------------------- ------------------------
Net loss attributable
to common
stockholders $(1,977,516)$(17,078,132)$(3,238,286)$(20,543,686)
======================= =======================
Basic and diluted loss
per common share $ (0.41) $ (2.16) $ (0.68) $ (2.60)
======================= =======================
Weighted average shares
outstanding 4,813,120 7,909,338 4,750,323 7,914,833
======================= =======================
See accompanying notes.
<PAGE>
ThermoView Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the six months
ended
June 30,
1999 2000
--------------------------
Operating activities
Net loss $ (784,315) $(19,252,816)
Adjustments to reconcile net loss to net
cash provided by (used in) operations:
Depreciation and amortization 1,994,403 2,291,972
Deferred income taxes 112,500 1,728,000
Accretion of debt discount - 799,998
Unusual charges - 10,745,000
Loss on finance receivables - 380,000
Other - 111,482
Changes in operating assets and
liabilities 1,582,360 2,448,932
-------------------------
Net cash provided by (used in) operating
activities 2,904,948 (747,432)
Investing activities
Acquisitions of businesses, net of cash
acquired (18,125,231) (1,002,795)
Payments for purchase of property and
equipment (1,229,011) (469,486)
Other (538,421) 39,053
-------------------------
Net cash used in investing activities (19,892,663) (1,433,228)
Financing activities
Increase in long-term debt 13,810,039 -
Payments of long-term debt (248,559) (204,803)
Proceeds from issuance of mandatorily
redeemable preferred stock and detachable
stock purchase warrants, net of fees 5,405,060 -
Preferred stock dividends paid in cash (989,681) (100,800)
-------------------------
Net cash provided by (used in) financing
activities 17,976,859 (305,603)
-------------------------
Net increase (decrease) in cash and
equivalents 989,144 (2,486,263)
Cash and equivalents at beginning of period 1,302,797 3,331,721
-------------------------
Cash and equivalents at end of period $2,291,941 $ 845,458
=========================
See accompanying notes.
<PAGE>
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. Basis of Presentation and Management's Plans
The accompanying unaudited condensed consolidated financial statements of
ThermoView Industries, Inc. ("ThermoView" or "the Company"), have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the ordinary
course of business. The carrying amounts of assets and liabilities presented in
the financial statements do not purport to represent realizable or settlement
values. However, the Company has suffered recurring operating losses, has a
working capital deficit at June 30, 2000, and used cash in its operations during
the six month period ended June 30, 2000. The Company also violated debt
covenants at certain dates during the six month period ended June 30, 2000.
Although lenders have waived the defaults, the debt covenant violations together
with the other factors mentioned above currently raise substantial doubt about
the Company's ability to continue as a going concern. The more significant
factors giving rise to management's concern in the second quarter of 2000 were
that the second quarter operating results were well below plan and that a
significant working capital deficit arose in the second quarter due to the
operating losses and a recently negotiated requirement to pay down $5 million of
PNC Bank, N.A. debt by December 27, 2000. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
It is management's opinion that the going concern basis of reporting its
financial condition and results of operations is appropriate at this time based
upon, among other things, the Company achieving the goals described below. The
Company plans to increase cash flows and to take steps towards achieving
profitable operating results through increased management focus on improving the
Company's retail segment's operating results, the closure of unprofitable
operations, and reduction of corporate administrative expenditures. As more
fully discussed in Note 8, steps have already been taken by management to close
unprofitable operations. Steps have also been taken to reduce administrative
expenditures principally by terminating corporate employees. Also, as more fully
discussed in Note 6, the Company intends to refinance its $15 million credit
facility owed to PNC Bank, N.A.
<PAGE>
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. Basis of Presentation and Management's Plans (Continued)
These unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions in
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals),
considered necessary for a fair presentation have been included. ThermoView's
business is subject to seasonal variations. The demand for replacement windows
and related home improvement products is generally lower during the winter
months due to inclement weather. Demand for replacement windows is generally
higher in the second and third quarters. Operating results for the three and six
month periods ended June 30, 2000, are not necessarily indicative of the results
that may be expected for the year ended December 31, 2000.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
Results of operations for the six month period ended June 30, 1999,
includes the operating results of the Thermo-Shield Companies from acquisition
date on March 1, 1999. Assuming Thermo-Shield Companies had been acquired as of
January 1, 1999, the Company's consolidated results of operations for the six
months ended June 30, 1999 are as shown:
Revenues $52,698,127
Net loss (756,356)
Net loss applicable to common stockholders (3,210,327)
Basic and diluted loss per common share (.67)
2. Inventories
Inventories consist principally of components for the manufacturing of
windows such as glass, vinyl and other composites.
3. Loss per Common Share
Loss per common share is calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The
Company calculates basic earnings per common share using the weighted average
number of shares outstanding for the period. The weighted average number of
shares outstanding for the three and six month periods ended June 30, 2000,
includes shares related to a stock purchase warrant that can be exercised for
nominal cash consideration. Diluted earnings per common share include both the
weighted average number of shares and any common share equivalents such as
options or warrants in the calculation. As the Company recorded losses for the
three and six month periods ended June 30, 1999 and 2000, common share
equivalents outstanding would be anti-dilutive, and as such, have not been
included in weighted average shares outstanding.
4. Income Taxes
The income tax provision for the three and six month periods ended June
30, 1999 differs from the amount computed by applying the statutory U.S. Federal
income tax rate to income (loss) before income taxes primarily as a result of
state taxes and non-deductible goodwill amortization.
<PAGE>
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
4. Income Taxes (Continued)
At December 31, 1999 and March 31, 2000, the Company reported $1,728,000
and $2,983,000, respectively, of deferred income tax assets. Due to operating
losses incurred during the three month period ended June 30, 2000, the Company
is now forecasting a taxable loss for the year ending December 31, 2000.
Management has concluded that it is more likely than not that the Company's
deferred tax assets will not be realized and, accordingly, the deferred tax
assets at June 30, 2000, have been fully offset by a valuation allowance. As a
result, the income tax provision for the three and six month periods ended June
30, 2000 includes the effect of recognizing a valuation allowance against the
deferred tax assets that existed at the beginning of such periods.
5. Segment Information
For the three and six month periods ended June 30, 1999 and 2000, the
Company's business units had separate management teams and infrastructures that
operate primarily in the vinyl replacement windows, doors and related home
improvement products industry in various states in the Midwest and in Southern
California. The business units have been aggregated into three reportable
operating segments: manufacturing, retail and financial services.
<PAGE>
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
5. Segment Information (Continued)
Manufacturing
The manufacturing segment includes the businesses that manufacture and
sell vinyl replacement windows to the Company's retail segment and to
unaffiliated customers.
Retail
The retail segment includes the businesses that design, sell and install
vinyl replacement windows, doors and related home improvement products to
commercial and retail customers.
Financial Services
The financial services segment finances credit sales of the retail
segment. Key Home Credit, ThermoView's Owensboro, Kentucky, finance subsidiary,
was closed in July 2000 since expanding the subsidiary would have required
considerable capital. Management decided that the Company could more effectively
employ capital to expand its high margin retail business.
Segment information for the three month and six month periods ended June
30, was as follows:
For the three
months Financial
ended June 30, 1999 Manufacturing Retail Services Corporate Consolidated
------------------- ------------- ------ -------- --------- ------------
Revenues from
external customers $2,172,408 $26,240,832 $15,987 $17,266 $28,446,493
Intersegment
revenues 2,488,493 - - - 2,488,493
Income (loss) from
operations 278,718 1,917,739 (82,952)(1,183,902) 929,603
Total assets 11,463,241 70,311,769 1,027,153 2,752,277 85,554,440
For the three
months
ended June 30, 2000
Revenues from
external customers $2,056,794 $25,155,837 $ 17,441 $ - $27,230,072
Intersegment
revenues 1,418,455 - - - 1,418,455
Restructuring
charges (3,843,652) (6,901,348) - - (10,745,000)
Loss from operations (4,419,090) (5,872,652) (455,583)(1,514,758) (12,262,083)
Total assets 8,038,263 67,255,220 610,931 610,830 76,515,244
For the six months
ended June 30, 1999
Revenues from
external customers $3,422,494 $46,712,374 $ 34,002 $ 27,440 $50,196,310
Intersegment
revenues 4,344,282 - - - 4,344,282
Income (loss) from
operations 232,426 2,594,115 (163,898)(2,352,787) 309,856
Total assets 11,463,241 70,311,769 1,027,153 2,752,277 85,554,440
For the six months
ended June 30, 2000
Revenues from
external customers $3,106,841 $45,569,278 $ 30,369 $ - $48,706,488
Intersegment revenues 3,111,485 - - - 3,111,485
Restructuring charges (3,843,652) (6,901,348) - - (10,745,000)
Loss from operations (5,070,819) (6,973,351) (532,980)(2,809,854) (15,387,004)
Total assets 8,038,263 67,255,220 610,931 610,830 76,515,244
<PAGE>
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
6. Financing Arrangements
The Company is required to maintain certain financial ratios and to comply
with various other covenants and restrictions under the terms of its financing
agreements, including restrictions as to the payment of dividends, and the
incurrence of additional indebtedness. The Company violated covenants at certain
dates during the six month period ended June 30, 2000. The Company's principal
lenders, PNC Bank, N.A., and GE Capital Equity Investments, Inc. ("GE"), have
waived these covenant violations through June 30, 2000. Debt covenants have been
amended with the most restrictive covenants being a requirement to pay PNC Bank,
N.A., $5 million by December 27, 2000 and a debt service coverage test as
defined in the amended debt agreement. Although the Company believes it will be
able to comply with the amended debt covenants, it is reasonably possible it may
not be able to comply. In this event, PNC Bank, N.A., and GE will have the right
to demand payment of the total amounts due them, including the amounts
classified as long-term obligations in the accompanying condensed consolidated
balance sheet as of June 30, 2000.
In August 2000, PNC Bank, N.A., extended the maturity date of $10 million
of ThermoView's $15 million credit facility from May 1, 2001 to July 1, 2001. In
connection with waiving defaults at June 30, 2000, as noted above, PNC Bank,
N.A. is requiring the Company to repay $5 million of the credit facility by
December 27, 2000. Accordingly, $5 million of the credit facility is included in
the current portion of long-term debt as of June 30, 2000.
PNC Bank, N.A. is also not permitting the payment of any cash dividends on
the Company's Series C or Series D preferred stock until the earlier of
repayment of the entire $15 million credit facility or September 30, 2001.
Although $5 million is the only amount currently due, management intends to
pursue refinancing the entire $15 million credit facility prior to December 31,
2000. Alternatives to a complete refinancing before December 31, 2000, would be
to refinance only the $5 million portion currently due or to sell the Company's
manufacturing facility in North Dakota to raise sufficient funds to retire the
$5 million due in December 2000. Although management intends to aggressively
pursue these alternatives, there is no assurance that sufficient funds will be
available by December 2000 to retire the $5 million of debt (see Note 1
describing going concern uncertainty). Four stockholders of the Company (one of
whom is also an officer and director of the Company) continue to guarantee a
total of $3 million of the credit facility for fees equal to an annual rate of
10%.
The Series C mandatorily redeemable preferred stock has a quarterly
dividend payment requirement to be paid with 70% cash and 30% Company common
stock. The annual dividend rate is 9.6%. Also, in conjunction with the issuance
of the Series C preferred stock, the Company issued warrants to purchase up to a
total of 400,000 shares of common stock at $21.00 per share (the number of
shares and exercise price being subject to adjustment in certain circumstances)
at any time until April 22, 2004. Additionally, the Company and the Funds
entered into a registration rights agreement whereby the Company agreed to
register 150% of the shares of common stock issuable upon conversion of the
Series C preferred stock and exercise of the warrants. The Company filed a
registration statement on Form S-1 with the Securities and Exchange Commission
(SEC) in December 1999 registering the aforementioned shares. The Company has
agreed to keep the registration statement effective for four years after the
date the SEC declared the registration statement effective unless the Funds have
sold all of the common stock covered by the registration statement or unless the
Funds may sell the common stock without volume restrictions pursuant to Rule 144
under the Securities Act of 1933, as amended. For every month in which (i) the
Company has failed to keep the registration statement effective as required, or
(ii) the common stock is not listed or quoted on a national securities exchange,
the Funds have the right to require the Company to pay them a cash penalty equal
to 2% of the product of the number of shares of Series C preferred stock then
outstanding and $1,000. The registration rights agreement also grants the Funds
certain other demand and piggy-back registration rights.
As mentioned above, the Series C preferred stock agreement contains terms
that require increases in the number of common shares exercisable under stock
purchase warrants and adjustments to the exercise price of such warrants, as
well as increases in the number of common shares issuable upon conversion of the
preferred shares, in certain circumstances. Also, the GE subordinated debt
agreement contains terms that require increases in the number of common shares
exercisable under a stock purchase warrant in certain circumstances. In May
2000, one of the stipulated circumstances occurred causing increases.
Accordingly, the two funds holding the mandatorily redeemable preferred stock
now have warrants to purchase 600,000 shares (increased from 400,000 shares) of
common stock at $12.00 per share (reduced from $18.00 per share) and are
entitled to convert their preferred shares into 500,000 shares (increased from
400,000 shares) of common stock. Also, GE now has warrants to purchase 561,343
shares (increased from 555,343 shares) of common stock at $.03 per share. An
additional 306,000 shares of common stock have been reserved for future issuance
to accommodate the foregoing reset provisions.
In August 2000, the two funds holding the mandatorily redeemable preferred
stock agreed to be paid dividends with 100% Company common stock until such time
as the normal quarterly dividend payments of part cash, part common stock are
again permitted in accordance with terms of the PNC Bank, N.A. agreement.
Payment of the cash portion of the dividend in common stock will be dilutive.
Assuming the stock dividend continues for five quarters at a market trading
price of $1 per share, the Company would be required to issue approximately
500,000 additional shares of its common stock to the two funds in lieu of cash
dividends. Also in August 2000, the two funds temporarily waived their right to
keep their registration effective, and will not impose the penalties permitted
under the agreement during the waiver period which extends through May 31, 2001.
<PAGE>
6. Financing Arrangements (Continued)
In April 2000, the Company completed negotiations to satisfy its
obligations under certain earn-out provisions with previous owners of the
Company's subsidiaries. As a result of the negotiations, the Board of Directors
authorized 1,500,000 shares of 12% Series D cumulative preferred stock ($.001
par value and $5.00 stated value), and the Company then issued 1,417,000 shares
to the previous owners in lieu of cash to satisfy $7,085,000 of obligations to
them. An additional 22,316 shares of Series D preferred stock have been issued
to compensate the previous owners for interest earned amounting to $111,580
prior to settlement of the obligations. The Series D preferred stock is senior
to the common stock of the Company and is on parity with the Series C preferred
stock. The Series D preferred stock will pay cumulative dividends at the rate of
$.60 per share annually, or an annual rate of 12% subject to the availability of
such funds and the consent of the senior lender of the Company. As previously
discussed, the senior lender is not currently permitting payment of these
dividends. The Series D preferred stock has an aggregate liquidation preference
of $7,196,580 plus accumulated and unpaid dividends which amounted to $180,000
as of June 30, 2000. The shares of Series D preferred stock are redeemable by
the Company at its option, in whole or in part, for cash or common stock that
equals the liquidation value of the shares redeemed. The shares of Series D
preferred stock are not convertible into common stock, have no voting rights and
contain no registration rights. A venture capital firm loaned one of the
previous owners $1,500,000 at 12% interest, and collateralized the loan with the
previous owner's 1,113,500 shares of 12% Series D cumulative preferred stock. A
stockholder, who also is an officer and director of the Company, and a
stockholder and former director of the Company have an ownership interest in the
venture capital firm.
7. Contingencies
The Company entered into a 90-day listing agreement in October 1999 with
IPO.COM, Inc. under which the Company authorized IPO.COM to include its
prospectus on the IPO.COM web site. In addition to hosting the Company's
prospectus, IPO.COM provided summary material relating to the Company and its
initial public offering on its web site. The IPO.COM web site also provided a
direct link to the Company's web site. Although the Company did not intend to
create an agency relationship with IPO.COM, and while the Company believes that
IPO.COM is not and has not acted as its agent, the listing agreement may have
created an agency relationship. If IPO.COM is deemed the Company's agent
pursuant to the listing agreement, the summarized material contained in the
IPO.COM web site relating to the Company and its initial public offering and the
information contained in the Company's web site could constitute a prospectus
that does not meet the requirements of the Securities Act of 1933. If the
summarized materials relating to the Company in the IPO.COM web site or the
materials contained in the Company's web site did constitute a violation of the
Securities Act of 1933, investors in the initial public offering would have the
right, for a period of one year from the date of their purchase of common stock,
to obtain recovery of the consideration they paid for their common stock or, if
these persons had already sold the common stock, to sue the Company for damages
resulting from their purchase of common stock. These damages could total up to
approximately $6.9 million, plus interest, if these investors seek recovery or
damages after an entire loss of their investment. Any recovery or damages could
adversely impact the Company's liquidity during the period in which a refund is
paid. Although the Company cannot be certain as to the ultimate disposition of
this matter, it is the opinion of the Company's management, based upon the
information available to it, including the advice of legal counsel, that the
expected outcome of this matter will not significantly affect the results of
operations and financial condition of the Company.
<PAGE>
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
7. Contingencies (Continued)
On March 3, 2000, Pro Futures Bridge Capital Fund, L.P. and Bridge Capital
Partners, Inc. Defined Benefit Pension Plan filed an action titled PRO FUTURES
BRIDGE CAPITAL FUND, L.P. V. THERMOVIEW INDUSTRIES, INC., ET AL., Civil Action
No. 00CV0559 (Colo. Dist. Ct., March 3, 2000) against ThermoView, its directors,
certain officers, an employee and a stockholder alleging breach of contract,
common law fraud, fraudulent misstatements and omissions in connection with the
sale of securities, negligent misrepresentations and breach of fiduciary duty.
These claims are in connection with the mandatory conversion of ThermoView's 10%
Series A convertible preferred stock, held by the two funds, into common stock
upon completion of the initial public offering in December 1999, and purchases
by the two funds of ThermoView's common stock from ThermoView stockholders. The
funds are seeking rescission of their purchases of the Series A preferred stock
in the amount of $3,250,000, plus interest and unspecified damages in connection
with their purchases of the common stock. ThermoView has filed a notice to
dismiss certain claims and an answer denying liability in the remainder of the
claims. ThermoView has also exercised an election for the removal of the action
to the US District Court of Colorado, and the matter has been designated by the
US District Court as Civil Action No. 00-B-722. Pro Futures has filed a motion
to remand the action back to the original venue. The court has not rendered an
opinion on the motion to remand. A scheduling order has been entered
establishing a trial date in December 2001. While ThermoView believes that the
claims are without merit and intends to vigorously defend the suit, it is too
early in the process to predict the likely outcome of the matter.
The Company is subject to other legal proceedings and claims which have
arisen in the ordinary course of its business and have not been finally
adjudicated. Although there can be no assurance as to the ultimate disposition
of these matters, it is the opinion of the Company's management, based upon the
information available at this time, that the expected outcome of these matters,
individually or in the aggregate, will not have a material adverse effect on the
results of operations and financial condition of the Company.
8. Unusual Charges
As a result of the Company's decisions to reduce emphasis on the
manufacturing segment and to enhance cash flow and profitability of the
Company's retail operations, the Company recorded unusual charges of $10,745,000
in the quarter ended June 30, 2000.
The unusual charges specifically relate to management's and the Board's
decisions to close and abandon two ThermoView subsidiaries as follows:
Operation Activity
Precision Window Mfg., Inc. Manufacturer of windows in St.
(Precision) Louis, Missouri
American Home Developers Co., Retailer of primarily textured
Inc. coatings in Los Angeles, California
(American Home Developers)
<PAGE>
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
8. Unusual Charges (Continued)
The Company's results of operations for the three and six month periods
ended June 30, include the following amounts for these entities:
Income (Loss) from
Operations Before
For the three months ended June 30, 1999 Revenues Unusual Charges
---------------------------------------- -------- ---------------
Precision $1,968,808 $ 162,592
American Home Developers 1,221,833 (35,388)
For the three months ended June 30, 2000
----------------------------------------
Precision 1,180,080 (863,629)
American Home Developers 803,152 (150,718)
For the six months ended June 30, 1999
--------------------------------------
Precision 3,640,985 296,784
American Home Developers 2,185,773 (82,446)
For the six months ended June 30, 2000
--------------------------------------
Precision 2,710,377 (1,366,365)
American Home Developers 1,473,200 (328,335)
The unusual charges consist of the following:
American
Home
Precision Developers Total
Goodwill write-off $ 3,075,484 $6,891,348 $9,966,832
Write down of tangible assets to
net realizable value 568,168 10,000 578,168
Additional warranty reserve 200,000 - 200,000
----------- ---------- ----------
$ 3,843,652 $6,901,348 $10,745,000
=========== ========== ===========
<PAGE>
The Board of Directors in January 2000 authorized management to seek
buyers for the Company's two manufacturing subsidiaries. Management did not
intend to dispose of these subsidiaries if the transaction resulted in a loss to
ThermoView. However, Precision had significant operating losses in the first and
second quarters of 2000, and management has not been successful in locating a
purchaser of the business. Because of the poor operating performance of
Precision in the first half of 2000 and anticipated future losses, management
and the Board decided in June 2000 to close this subsidiary and abandon the
business including Precision's product lines and customer relationships. The
Company anticipates completion of this process in August 2000. The writedown of
tangible assets to net realizable value noted above relates to Precision's
inventories and equipment which are expected to be sold below cost based on
current estimates of selling prices. Precision's warranty reserve has been
adjusted for the expected increase in warranty costs which will occur as a
result of having to use an outside party to perform warranty work once Precision
is closed. Precision's manufacturing facilities are leased under an agreement
which expires in December 2004 and has remaining rental payments of $1,100,000
as of June 30, 2000. The Company believes this facility can be subleased for
rents at least equal to the rental obligation and, therefore, expects no
significant loss on this commitment.
As discussed in Note 6, management may dispose of the North Dakota
manufacturing subsidiary to generate sufficient funds to satisfy the requirement
to repay the $5 million of PNC Bank, N.A. credit facility by December 2000.
However, since the North Dakota subsidiary is profitable, management prefers not
to sell it if there are suitable alternatives to refinance the $5 million
required payment and if a satisfactory sales price cannot be achieved for the
business. No loss on the sale of the North Dakota manufacturing subsidiary has
been recognized at June 30, 2000, even though a loss on sale may be likely,
since management has not yet made a decision to sell the subsidiary.
ThermoView's investment in the subsidiary amounts to approximately $6.9 million
at June 30, 2000. Since the subsidiary's estimated future cash flows are
sufficient to recover the related assets, there is no current impairment of
long-lived assets relative to this subsidiary as ThermoView continues to own and
operate it as a manufacturing business.
American Home Developers incurred losses and had negative cash flow in the
first six months of 2000. Since this subsidiary sold to a different customer
base and the development of its product mix was moving contrary to the
diversified home improvement product mix of ThermoView's other southern
California locations, management concluded in June 2000 that closing this
unprofitable operation and abandoning its underlying business was a better
alternative than trying to merge the subsidiary with other ThermoView
businesses. The operation was closed in July 2000.
9. Stockholders' Equity
In March 2000, 12,500 shares of common stock having a fair value of
$50,000 were issued to satisfy the Company's obligation for royalty payments
under a license agreement with Research Frontiers Incorporated.
<PAGE>
THERMOVIEW INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
9. Stockholders' Equity (Continued)
On April 30, 2000, 18,000 shares of common stock having a fair value of
$43,884 were issued as additional consideration for a 1998 acquisition. In
addition, 76,263 shares of common stock were taken back by ThermoView relating
to a 1999 acquisition that did not achieve its first year's targeted earnings
for the year ended February 29, 2000. The 76,263 shares were originally valued
at $1,298,469, and this amount has now been reversed from goodwill and
stockholders' equity.
In June 2000, the Company's stockholders approved a reduction in preferred
authorized shares from 50 million to 5 million and a reduction in common
authorized shares from 100 million to 25 million. In addition, the Company's
stockholders authorized the Company to issue up to 3.75 million shares of common
stock in one or more private placements.
On June 20, 2000, the Board of Directors approved, subject to stockholder
approval, the 2000 stock option plan (the "2000 Plan"). Under the 2000 Plan,
qualified or non-qualified stock options may be granted to key employees and
nonemployee directors of the Company. The exercise price and terms of any
options granted are determined at the date of grant.
The remaining shares available for grant under the 1999 Plan as of the
close of business on September 30, 2000, are to be transferred to and reserved
for issuance under the 2000 Plan. After transfer of 1999 Plan remaining shares
to the 2000 Plan, 1,400,000 shares are to be reserved for issuance under the
2000 Plan.
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
This report on Form 10-Q contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "estimates,"
"will," "should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy.
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in the
forward-looking statements as a result of any number of factors, most of which
are beyond the control of management. These factors include operating losses,
continued and increased expenses, non-cash dividends and interest related to our
financings, restrictions imposed by our line of credit and subordinated debt,
consumer finance division losses, quality control of the manufacturing of our
products and delays in their delivery, and our inability to meet obligations to
the former owners of acquired businesses for satisfying future period financial
targets.
Although we believe that the expectations and assumptions reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
The following should be read in conjunction with the response to Part I,
Item 1. of this Report and the Company's audited consolidated financial
statements contained in the Company's Annual Report on Form 10-K. Any
capitalized terms used but not defined in this Item have the same meaning given
to them in the Form 10-K.
Overview
We design, manufacture, sell and install custom vinyl replacement windows
for residential and retail commercial customers. We also sell and install
replacement doors, home textured coatings, vinyl siding, patio decks, patio
enclosures, cabinet refacings and kitchen and bathroom remodeling products. We
have financed a portion of our customers' purchases through Key Home Credit, our
consumer finance subsidiary. However, our finance subsidiary was closed in July
2000 since expanding the subsidiary would have required considerable capital. We
anticipate a greater reliance on strategic relationships with unaffiliated
companies to improve our operations in the manufacturing and financial services
business segments.
Business Segments
Our subsidiaries have separate management teams and infrastructures and
operate in three reportable operating segments: retail, manufacturing and
financial services.
Retail. Our retail segment consists of our subsidiaries that design, sell
and install custom vinyl replacement windows, doors and related home improvement
products to commercial and retail customers. Our retail segment derives its
revenues from the sale and installation of thermal replacement windows, storm
windows and doors, patio decks, patio enclosures, vinyl siding and other home
improvement products. Our retail segment recognizes revenues on the completed
contract method. A contract is considered complete when the home improvement
product has been installed. Gross profit in the retail segment represents
revenues after deducting product and installation labor costs.
Manufacturing. Our manufacturing segment consists of our subsidiaries that
manufacture and sell vinyl replacement windows to our retail segment and to
unaffiliated customers. Sales from the manufacturing segment to our retail
segment have been a larger percentage of our manufacturing revenues in recent
years, however, this trend will not continue as our retail subsidiaries are
obtaining windows manufactured from unaffiliated vendors. We believe that with
our present retail volume, we can achieve lower product cost and more consistent
product quality by outsourcing to high volume window manufacturers rather than
to expand our internal manufacturing. Our manufacturing segment recognizes
revenues when products are shipped. Gross profit in the manufacturing segment
represents revenues after deducting product costs (primarily glass, vinyl and
hardware), window fabrication labor and other manufacturing expenses.
Consistent with our shift to outsourced manufacturing, our Board of
Directors in January 2000 authorized us to seek buyers for our two manufacturing
subsidiaries. We did not intend to dispose of these subsidiaries if the
transaction resulted in a loss to ThermoView. However, Precision Window Mfg.,
Inc., our manufacturing subsidiary in St. Louis, Missouri, had significant
operating losses in the first and second quarters of 2000, and we have not been
successful in locating a purchaser of the business. Because of the poor
operating performance in the first half of 2000 and anticipated future losses,
management and the Board decided in June 2000 to close the subsidiary. We may
also dispose of our North Dakota manufacturing subsidiary to generate sufficient
funds to satisfy a requirement to repay $5 million of the PNC Bank credit
facility by December 27, 2000. However, since our North Dakota subsidiary is
profitable, we prefer not to sell it if there are suitable alternatives to
refinance the $5 million required payment and if we cannot secure a satisfactory
sales price for the business.
Financial Services. Our financial services segment has financed credit
sales of our retail segment. We closed Key Home Credit, ThermoView's Owensboro,
Kentucky, finance subsidiary, in July 2000 since expanding the subsidiary would
have required considerable capital. We decided that we could more effectively
employ capital to expand our retail business.
Historical Results Of Operations
For the three
months ended June For the six months
30, ended June 30,
---------------------------------------
1999 2000 1999 2000
---- ---- ---- ----
(In thousands)
Revenues...................... $28,446 $27,230 $50,196 $48,706
Cost of revenues earned....... 12,738 12,967 22,502 23,349
----------------------------------------
Gross profit.................. 15,708 14,263 27,694 25,357
Selling, general and
administrative expenses... 13,847 14,619 25,390 27,707
Restructuring charges......... - 10,745 - 10,745
Depreciation expense.......... 237 283 439 547
Amortization expense.......... 695 878 1,555 1,746
----------------------------------------
Income (loss) from operations. 929 (12,262) 310 (15,388)
Interest expense.............. (446) (1,149) (858) (2,242)
Interest income............... 38 37 101 106
----------------------------------------
Income (loss) before income
taxes...................... 521 (13,374) (447) (17,524)
Income tax provision.......... 470 2,984 337 1,729
----------------------------------------
Net income (loss)............. 51 (16,358) (784) (19,253)
Less preferred stock dividends:
Series A and B cash dividends 421 - 846 -
Series C cash dividends..... 144 - 144 101
Series C non-cash dividends. 1,464 540 1,464 1,010
Series D undeclared dividends - 180 - 180
---------------------------------------
- - -
Net loss attributable to
common stockholders........ $(1,978) $(17,078)$(3,238) $(20,544)
=======================================
Three Months Ended June 30, 2000 Compared to June 30, 1999
Revenues. Revenues decreased from $28.4 million in 1999 to $27.2 million
in 2000. This revenue decrease of $1.2 million is due primarily to fluctuations
in quarterly revenues for certain subsidiaries. Revenues from Thermo-Shield
decreased $1.7 million due to (a) changing its lead generation strategy, which
should improve its long-term performance but have an adverse effect on
short-term operating performance and cash flows; and (b) the closing of two of
its branch operations that were unprofitable. Precision Window Mfg., Inc.
(Precision), one of our manufacturers, and two of the retailers to which it
provides windows, The Rolox Companies (Rolox) and ThermoView of Missouri,
collectively reported $1.0 million less revenues in the second quarter of 2000
than in the similar period in 1999. Despite improving production capacity to
more normal levels at Precision at the beginning of the second quarter of 2000,
we continued to experience quality control and delivery problems. These problems
negatively impacted the results at Precision. The quality and delivery problems
also adversely impacted Rolox and ThermoView of Missouri. We are in the process
of closing Precision and are now buying windows from a third party. Decreases
were partially offset by revenue gains due to product diversification in two of
our retail subsidiaries.
Gross Profit. Gross profit, which represents revenues less cost of
revenues earned, decreased from $15.7 million in the second quarter of 1999 to
$14.3 million in the second quarter of 2000. This decline principally results
from less revenue as explained above, and the poor operating performance at
Precision, Rolox and ThermoView of Missouri. As a percentage of revenues, gross
profit decreased from 55.2% in the second quarter of 1999 to 52.4% in the second
quarter of 2000. This decrease results primarily because some costs at our
subsidiaries are fixed and these fixed costs are more significant relative to
the lower volumes in the second quarter of 2000 compared to the second quarter
of 1999, and because of the production inefficiencies at Precision.
Cost of revenues earned includes the cost of glass, vinyl, hardware,
fabrication labor and manufacturing overhead for the manufacturing segment. For
the retail segment, cost of revenues earned includes the cost of vinyl windows,
doors, textured coating, vinyl siding, and other home improvement products
purchased plus installation costs and other indirect materials and labor.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $13.8 million in the second quarter of
1999 to $14.6 million in the second quarter of 2000. The increase in selling,
general and administrative expenses is largely due to additional corporate
office expenses in the second quarter of 2000 over the second quarter of 1999
amounting to approximately $264,000, as well as an estimated loss on finance
receivables of $380,000. The higher corporate expenses in the second quarter of
2000 are principally due to consulting fees and other professional services.
Selling, general and administrative expenses include sales commissions,
advertising expenses, rent expense, corporate operating costs and other general
and administrative expenses.
Unusual Charges. Unusual charges for the second quarter of 2000 amounting
to $10.7 million represent primarily goodwill write offs for two of our
subsidiaries which are being closed, Precision and American Home Developers,
plus other asset write offs and expense accruals required by these closures.
Depreciation Expense. Depreciation expense increased from $236,000 in the
second quarter of 1999 to $283,000 in the second quarter of 2000 as a result of
capital expenditures in 1999 and 2000.
Amortization Expense. Amortization expense increased from $695,000 in the
second quarter of 1999 to $878,000 in the second quarter of 2000. This increase
results from additional amortization expense in the second quarter of 2000 at
several subsidiaries as the former owners secured an increase to our purchase
price of their entities by achieving post-acquisition earnings targets.
Interest Expense. Interest expense increased from $446,000 in the second
quarter of 1999 to $1.1 million in the second quarter of 2000 primarily as a
result of interest, including accreted discount, on the $10.0 million senior
subordinated promissory note with GE Capital, which began accruing in mid-1999,
as well as interest on additional amounts borrowed under the PNC Bank credit
facility in the first quarter of 1999.
Income Tax Provision. The provision for income taxes in the second quarter
of 1999 differs from the amount computed by applying the statutory U.S. Federal
income tax rate to loss before income taxes primarily as a result of state taxes
and non-deductible goodwill amortization. At March 31, 2000, the Company
reported $3.0 million of deferred income tax assets. Due to operating losses
incurred during the three month period ended June 30, 2000, we are now
forecasting a taxable loss for the year ending December 31, 2000. Management has
concluded that it is more likely than not that the Company's deferred tax assets
will not be realized and, accordingly, the deferred tax assets at June 30, 2000
have been fully offset by a valuation allowance. As a result, the income tax
provision for the three month period ended June 30, 2000, includes the effects
of recognizing a valuation allowance against the deferred tax assets that
existed at March 31, 2000.
Series A and B Cash Dividends. There were no cash dividends for the second
quarter of 2000 on our Series A and Series B preferred stock since the preferred
stock was converted into shares of our common stock effective December 31, 1999.
Series C Cash Dividends. PNC Bank did not permit us to pay cash dividends
on the Series C preferred stock for the second quarter of 2000.
Series C Non-Cash Dividends. Non-cash dividends of $540,000 for the second
quarter of 2000 represent accretion of the discount on the mandatorily
redeemable Series C preferred stock related to the value of the detachable stock
purchase warrants issued to the Series C preferred stockholders and stock
dividends paid to these stockholders. Non-cash dividends of $1.5 million for the
second quarter of 1999 relate to a beneficial conversion feature of the
mandatorily redeemable Series C convertible preferred stock issued in April
1999, as well as accretion of the discount of the stock.
Series D Undeclared Dividends. PNC Bank is currently not permitting
payment of dividends on our Series D preferred stock which was issued in April
2000.
Six Months Ended June 30, 2000 Compared to June 30, 1999
Revenues. Revenues decreased from $50.2 million in 1999 to $48.7 million
in 2000. Revenues decreased $1.5 million or 3% due primarily to fluctuations in
revenues for certain subsidiaries. Precision, Rolox, and ThermoView of Missouri
collectively reported $1.9 million less revenues in the first half of 2000 than
in the similar period in 1999. This reduced revenue was due to the negative
effects of Precision's quality control and delivery problems noted above, as
well as a significant decline in production during the first quarter of 2000
resulting from the relocation of our Precision manufacturing plant in St. Louis,
Missouri, in the first quarter of 2000. Precision's production decline not only
reduced revenues of Precision, but also caused revenue reductions at the retail
operations due to Precision's inability to produce and deliver windows during
the plant relocation. Additionally, American Home Developers' revenue decreased
$713,000 in the first half of 2000 as compared to the first half of 1999 as the
operation was in the process of being closed.
We partially offset the revenue reduction discussed above by $1.2 million
more revenue reported in the first half of 2000 due principally to product
diversification in two of our retail subsidiaries.
Gross Profit. Gross profit decreased from $27.7 million in the first half
of 1999 to $25.4 million in the first half of 2000. This decline principally
results from less revenue as explained above, and the poor operating performance
at Precision, Rolox and ThermoView of Missouri. As a percentage of revenues,
gross profit decreased from 55.2% in the second half of 1999 to 52.1% in the
second half of 2000. This decrease results primarily because some costs at our
subsidiaries are fixed and these fixed costs are more significant relative to
the lower volumes in the first half of 2000 compared to the first half of 1999.
The fixed costs of Thermo-Shield for the first half of 2000 were higher than the
first half of 1999 because Thermo-Shield was acquired March 1, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $25.4 million in the first half of 1999
to $27.7 million in the first half of 2000. The $2.3 million increase in
selling, general and administrative expenses is partially due to the timing of
certain advertising and lead generation expenses for Thomas Construction
amounting to $525,000 in 2000. Also, two more months of Thermo-Shield's
operations (which were acquired on March 1, 1999) in the first half of 2000
cause an increase over the first half of 1999 of $1.4 million, and additional
corporate office expenses in the first half of 2000 over the first half of 1999
cause an increase of approximately $533,000. The higher corporate expenses in
the first quarter of 2000 are principally due to consulting fees and other
professional services. The first half of 2000 also includes an estimated loss on
finance receivables of $380,000. We partially offset these increases by $322,000
principally due to the elimination of administrative expenses of TD Windows and
the discontinuance of ThermoView Ad Group in the fourth quarter of 1999.
Unusual Charges. Unusual charges for the second half of 2000 amounting to
$10.7 million represent primarily goodwill write offs for two of our
subsidiaries which are being closed, Precision and American Home Developers,
plus other asset write offs and expense accruals required by these closures.
Depreciation Expense. Depreciation expense increased from $439,000 in the
first half of 1999 to $547,000 in the first half of 2000 as a result of capital
expenditures in 1999 and 2000.
Amortization Expense. Amortization expense increased from $1.6 million in
the first half of 1999 to $1.7 million in the first half of 2000. This increase
primarily results from additional amortization expense in the first half of 2000
at several subsidiaries as the former owners secured an increase to our purchase
price of their entities by achieving post-acquisition earnings targets.
Interest Expense. Interest expense increased from $858,000 in the first
half of 1999 to $2.2 million in the first half of 2000 primarily as a result of
interest, including accreted discount, on the $10.0 million senior subordinated
promissory note with GE Capital, which began accruing in mid-1999, as well as
interest on additional amounts borrowed under the PNC Bank credit facility in
the fist quarter of 1999.
Income Tax Provision. The provision for income taxes in the first half of
1999 differs from the amount computed by applying the statutory U.S. Federal
income tax rate to loss before income taxes primarily as a result of state taxes
and non-deductible goodwill amortization. At December 31, 1999, the Company
reported $1.7 million of deferred income tax assets. Due to operating losses
incurred during the first half of 2000, we are now forecasting a taxable loss
for the year ending December 31, 2000. Management has concluded that it is more
likely than not that the Company's deferred tax assets will not be realized and,
accordingly, the deferred tax assets at June 30, 2000 have been fully offset by
a valuation allowance. As a result, the income tax provision for the six month
period ended June 30, 2000, includes the effects of recognizing a valuation
allowance against the deferred tax assets that existed at December 31, 1999.
Series A and B Cash Dividends. There were no cash dividends for the first
two quarters of 2000 on our Series A and Series B preferred stock, since the
preferred stock was converted into shares of our common stock effective December
31, 1999.
Series C Cash Dividends. PNC Bank did not permit us to pay any cash
dividends on our Series C preferred stock in the second quarter of 2000. The
first quarter of 1999 did not have any cash dividend on the Series C preferred
since it was issued in April 1999.
Series C Non-Cash Dividends. Non-cash dividends of $1.0 million for the
first two quarters of 2000 represent accretion of the discount on the
mandatorily redeemable Series C preferred stock related to the value of the
detachable stock purchase warrants issued to the Series C preferred stockholders
and stock dividends paid to these stockholders. Non-cash dividends of $1.5
million for the second half of 1999 relate to a beneficial conversion feature of
the mandatorily redeemable Series C convertible preferred stock issued in April
1999, as well as accretion on the discount of the stock.
Series D Undeclared Dividends. PNC Bank is currently not permitting
payment of these dividends on our Series D preferred stock which was issued in
April 2000.
Liquidity And Capital Resources
As of June 30, 2000, we had cash and equivalents of $845,000, a working
capital deficit of $5.7 million, $17.3 million of long-term debt, net of current
maturities, and $5.5 million of mandatorily redeemable preferred stock. Our
operating activities for the six months ended June 30, 2000, used $747,000 of
cash. Our operating activities for the six months ended June 30, 1999, provided
$2.9 million of cash.
The use of cash for investing activities for the six months ended June 30,
2000, relates primarily to additional consideration paid under terms of a 1999
acquisition agreement which accounts for the use of $1.0 million of cash.
Investing activities also included investments in property and equipment of
$469,000 in the six months ended June 30, 2000. During the six months ended June
30, 1999, we used $18.1 million for acquisitions, invested $1.2 million in
property and equipment and used $538,000 for other purposes.
Financing activities in the six months ended June 30, 2000, utilized
$306,000 of cash, comprised of a payment of $101,000 for preferred stock cash
dividends and $205,000 for repayment of debt. The major sources of cash provided
by financing activities for the six months ended June 30, 1999, were borrowings
from our PNC Bank credit facility of $8.7 million, related party borrowings of
$5.1 million, and issuance of mandatorily redeemable preferred stock of $5.4
million net of fees. We used $990,000 to pay dividends on our preferred stock
and $249,000 to repay debt in the first six months of 1999.
As of the date of this Form 10-Q, we have borrowed the entire amount
available to us under our $15 million PNC Bank line of credit. The $15 million
line of credit and $10 million subordinated debt owed to GE Capital require us
to comply with affirmative and negative covenants. We must maintain various
financial ratios and these lenders may restrict us from incurring other debt. We
may not pay cash dividends on our common stock, and as discussed below cash
dividends on our preferred stock, while the line of credit and the subordinated
debt are outstanding. We are also subject to other restrictions, including
restrictions pertaining to significant corporate transactions and management
changes.
We violated PNC Bank and GE Capital covenants at certain dates during the
six month period ended June 30, 2000. The covenant violations resulted largely
from losses during the twelve-month period prior to covenant measurement dates.
Because of losses, we currently have no excess cash available for unanticipated
working capital purposes. PNC Bank and GE Capital have waived these covenant
violations and have amended financial covenants to accommodate compliance in the
future. The most restrictive of the amended covenants is the requirement to
repay $5 million of the PNC Bank line of credit as well as to meet debt service
coverage ratios as defined in the debt agreements. Although we believe that we
will be able to comply with the amended debt covenants, it is reasonably
possible we may not be able to comply. In this event, PNC Bank and GE Capital
will have the right to demand payment of the total amounts due them including
the amounts classified as long-term obligations at June 30, 2000.
We have secured the line of credit by substantially all of our personal
property and by a pledge to PNC Bank of all of our ownership interests in our
subsidiaries. The line of credit requires that any company acquired by us must
become a borrower under the line of credit. Additionally, the line of credit
obligates us to pay a quarterly unused loan fee and other fees and expenses.
Four stockholders of the Company (one of whom is also an officer and director of
the Company) guarantee a total of $3 million of the credit facility for fees
equal to an annual rate of 10%.
If we default under the line of credit, PNC Bank could, among other items,
cease all advances, accelerate all amounts owed to PNC Bank and increase the
interest rate on the line of credit. If we default under the subordinated debt
documents, GE Capital could, among other items, accelerate all amounts owed to
GE Capital, subject to the rights of PNC Bank as our senior lender under the
line of credit. Under either the PNC Bank line of credit or the GE Capital
subordinated debt, an event of default could result in the loss of our
subsidiaries because of the pledge of our ownership in all of our subsidiaries
to PNC Bank and on a subordinated basis to GE Capital.
In August 2000, PNC Bank extended the maturity date of $10 million of our
$15 million line of credit from May 1, 2001 to July 1, 2001. In connection with
waiving defaults at June 30, 2000, PNC Bank is requiring us to repay $5 million
of the line of credit by December 27, 2000. Accordingly, we have included $5
million of the line of credit in the current portion of long-term debt as of
June 30, 2000. PNC Bank is also not permitting the payment of any cash dividends
on our Series C or Series D preferred stock until the earlier of repayment of
the entire $15 million line of credit or September 30, 2001.
We have suffered recurring operating losses, have a working capital
deficit at June 30, 2000, and used cash in operations during the six month
period ended June 30, 2000. As previously discussed, we also violated debt
covenants during the six months ended June 30, 2000. Although lenders have
waived the defaults, the debt covenant violations together with these other
factors currently raise substantial doubt about our ability to continue as a
going concern. (The more significant factors giving rise to management's concern
in the second quarter of 2000 were that the second quarter operating results
were well below plan and that a significant working capital deficit arose in the
second quarter due to the operating losses and a recently negotiated requirement
to pay down $5 million of PNC Bank, N.A. debt by December 27, 2000.)
We plan to increase cash flows and to take steps toward achieving
profitable operating results through increased management focus on improving our
retail segment's operating results, the closure of unprofitable operations, and
reduction of corporate administrative expenditures. We have already taken steps
to close the following unprofitable operations:
o Precision Window Mfg., Inc., our window manufacturer in St. Louis,
Missouri.
o American Home Developers Co., Inc., our retail subsidiary that sells
primarily textured coatings in Los Angeles, California.
o Key Home Credit, our finance subsidiary in Owensboro, Kentucky.
We have taken steps to reduce administrative expenditures principally by
terminating corporate employees.
As discussed previously, we may dispose of Thermal Line Windows, our
Mandan, North Dakota, manufacturing subsidiary, to generate sufficient funds to
satisfy the requirement to repay $5 million of our PNC Bank line of credit by
December 27, 2000. However, since the North Dakota subsidiary is profitable,
management prefers not to sell it if there are suitable alternatives to
refinance the $5 million required payment and if we cannot secure a satisfactory
price for the business. Although $5 million is the only amount currently due, we
intend to pursue refinancing the entire $15 million credit facility prior to
December 31, 2000. Alternatives to a refinancing before December 31, 2000, would
be to refinance only the $5 million portion currently due or to sell Thermal
Line as discussed above. Although we intend to aggressively pursue these
alternatives, there is no assurance that we will have sufficient funds available
by December 27, 2000 to retire the $5 million.
In August 2000, the two funds holding the mandatorily redeemable preferred
stock agreed to be paid dividends with 100% of our common stock until such time
as the normal quarterly dividend payments of part cash, part common stock are
again permitted in accordance with terms of the PNC Bank agreement. Payment of
the cash portion of the dividend in common stock will be dilutive. Assuming the
stock dividend continues for five quarters at a market trading price of $1 per
share, we would be required to issue approximately 500,000 additional shares of
our common stock to the two funds in lieu of cash dividends. Also in August
2000, the two funds temporarily waived their right to keep their registration
effective, and will not impose the penalties permitted under the agreement
during the waiver period which extends through May 31, 2001.
Except for the $5 million required payment to PNC Bank by December 27,
2000, we believe that our cash flow from operations will allow us to meet our
anticipated needs during at least the next 12 months for:
o payment of the interest on our line of credit and subordinated debt;
o working capital requirements; and
o planned property and equipment capital expenditures.
Originally, we intended to continue our acquisition program with a
combination of cash, common stock and seller debt used to finance the primary
portion of consideration and we anticipated the cash needed for acquisitions to
come principally from an expanded bank line and future common stock offerings.
Currently, we do not have an expanded bank line nor do we anticipate a common
stock offering in the near term to fund acquisitions or unanticipated operating
needs. Due to our current liquidity problems, unavailable capital, and our need
to focus on improving the profitability of existing operations, we have decided
to suspend acquisition activity and the opening of new retail market locations
in the near term. In terms of improving the profitability of existing
operations, management is in particular focusing attention on Thermo-Shield as
this subsidiary transitions to a new lead generation strategy. An unsuccessful
transition will adversely impact future profitability and cash flow and would
then potentially result in asset impairment issues at this subsidiary. Our
investment in this subsidiary amounts to $5.9 million at June 30, 2000.
We will need additional sources of financing in the longer term to expand
the market areas of our existing retail subsidiaries and to make further
acquisitions should we determine to do so in the future. Any required additional
financing may not be available on terms favorable to us, or at all. If adequate
funds are not available on acceptable terms, we may be unable to fund additional
acquisitions, successfully promote our products, open new locations, or develop
new or enhanced products, any of which could lower our revenues and net income,
if we achieve profitability in the future. If we raise additional funds by
issuing equity securities, stockholders may experience dilution of their
ownership interest and the newly issued securities may have rights superior to
those of our common stock. If we issue or incur debt to raise funds, we may be
subject to limitations on our operations.
Pending Litigation
ThermoView does not anticipate any significant adverse effect on our
results of operations or cash flow through December 2000 because of the Pro
Futures litigation described in Part II - Other Information, Item 1. Legal
Proceedings. Although ThermoView believes the claims in this litigation are
without merit and intends to vigorously defend the suit, an adverse outcome,
thereafter, in this action could have a material adverse effect on our results
of operations and cash flow.
The shares in the initial public offering may have been offered or sold in
violation of the Securities Act of 1933.
ThermoView entered into a 90-day listing agreement in October 1999 with
IPO.COM, Inc. under which ThermoView authorized IPO.COM to include its
prospectus on the IPO.COM web site. In addition to hosting ThermoView's
prospectus, IPO.COM provided summary material relating to ThermoView and its
initial public offering on its web site. The IPO.COM web site also provided a
direct link to the ThermoView web site. Although ThermoView did not intend to
create an agency relationship with IPO.COM, and while ThermoView believes that
IPO.COM is not and has not acted as its agent, the listing agreement may have
created an agency relationship. If IPO.COM is deemed ThermoView's agent pursuant
to the listing agreement, the summarized material contained in the IPO.COM web
site relating to ThermoView and the initial public offering and the information
contained in the ThermoView web site could constitute a prospectus that does not
meet the requirements of the Securities Act of 1933. If the summarized materials
relating to ThermoView in the IPO.COM web site or the materials contained in the
ThermoView web site did constitute a violation of the Securities Act of 1933,
investors in the initial public offering would have the right, for a period of
one year from the date of their purchase of common stock, to obtain recovery of
the consideration they paid for their common stock or, if these persons had
already sold the common stock, to sue ThermoView for damages resulting from
their purchase of common stock. These damages could total up to approximately
$6.9 million, plus interest, based on the initial public offering price of $5.50
per share for 1,255,000 shares, if these investors seek recovery or damages
after an entire loss of their investment. Any recovery or damages could
adversely impact ThermoView's liquidity during the period in which a refund is
paid. Although ThermoView cannot be certain as to the ultimate disposition of
this matter, it is the opinion of ThermoView's management, based upon the
information available to it, including the advice of legal counsel, that the
expected outcome of this matter will not significantly affect the results of
operations and financial condition of ThermoView.
Seasonality
Historically, our results of operations have fluctuated on a seasonal
basis. We have experienced lower levels of sales and profitability during the
period from mid-November to mid-March, impacting the first and fourth quarters
of each year. Inclement weather conditions in the winter and spring months in
our markets located in the north central United States, which limit our ability
to install exterior home improvement products, reduces demand for windows,
doors, vinyl siding and related products. Our intention is to expand our
southern California markets and to enter other markets in the Southwest and
southern United States to reduce the impact of seasonality if we have the
available capital.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Changes in interest rates expose us to market risk. As of June 30, 2000,
approximately 60% of our debt portfolio consisted of variable-rate debt and
approximately 40% consisted of fixed-rate debt. With respect to the
variable-rate debt, a hypothetical 100 basis point increase in interest rates
would increase our annual interest expense by approximately $150,000 as of June
30, 2000.
Interest rate changes would result in gains or losses in the market value
of our fixed-rate debt due to the differences between the current market
interest rates and the rates governing these instruments. With respect to our
fixed-rate debt outstanding at June 30, 2000, a 10% change in interest rates
would not have resulted in a significant change in the fair value of our
fixed-rate debt.
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 3, 2000, Pro Futures Bridge Capital Fund, L.P. and Bridge Capital
Partners, Inc. Defined Benefit Pension Plan filed an action titled PRO FUTURES
BRIDGE CAPITAL FUND, L.P. V. THERMOVIEW INDUSTRIES, INC., ET AL., Civil Action
No. 00CV0559 (Colo. Dist. Ct., March 3, 2000) against ThermoView, its directors,
certain officers, an employee and a stockholder alleging breach of contract,
common law fraud, fraudulent misstatements and omissions in connection with the
sale of securities, negligent misrepresentations and breach of fiduciary duty.
These claims are in connection with the mandatory conversion of ThermoView's 10%
Series A convertible preferred stock, held by the two funds, into common stock
upon completion of the initial public offering in December 1999, and purchases
by the two funds of ThermoView's common stock from ThermoView stockholders. The
funds are seeking rescission of their purchases of the Series A preferred stock
in the amount of $3,250,000, plus interest and unspecified damages in connection
with their purchases of the common stock. ThermoView has filed a notice to
dismiss certain claims and an answer denying liability in the remainder of the
claims. ThermoView has also exercised an election for the removal of the action
to the US District Court of Colorado, and the matter has been designated by the
US District Court as Civil Action No. 00-B-722. Pro Futures has filed a motion
to remand the action back to the original venue. The court has not rendered an
opinion on the motion to remand. The court has entered a scheduling order
establishing a trial date in December 2001. While ThermoView believes that the
claims are without merit and intends to vigorously defend the suit, it is too
early in the process to predict the likely outcome of the matter.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
a. ThermoView held its annual meeting of stockholders on June 20, 2000, at
10:00 a.m., eastern daylight time, at the Louisville Marriott East, 1903
Embassy Square Boulevard, Louisville, Kentucky.
b. At the annual meeting, stockholders elected three individuals as Class I
members of our Board of Directors.
Broker Non
Name For Against Withheld Abstentions Votes
---- --- ------- -------- ----------- -----
Robert C. Pearson 4,392,863 449,371
Ronald L. Carmicle 4,392,863 449,371
Raymond C.Dauenhauer 4,392,863 449,538
The following directors remained on the Board of Directors as Class II and
Class III directors immediately after the annual meeting:
Class II Class III
-------- ---------
J. Sherman Henderson, III Stephen A. Hoffmann
Rodney H. Thomas Nelson E. Clemmens
Robert Pearson and Nelson E. Clemmens resigned as directors by
correspondence dated July 6 and July 13, 2000, respectively. The
resignations were accepted by the Board on July 13, 2000.
c. In addition to the election of three directors, the stockholders voted
on the following matters:
(i) Approved an amendment to our restated certificate of incorporation
reducing the authorized number of shares of our common stock from 100
million to 25 million shares and our preferred stock from 50 million
to 5 million shares.
Broker
For Against Abstained Abstentions Non Votes
--- ------- --------- ----------- ---------
2,439,271 48,139 13,567
(ii) Authorized the issuance of 3.75 million shares of our common stock
upon the terms and conditions described in the proxy statement.
Broker
For Against Abstained Abstentions Non Votes
--- ------- --------- ----------- ---------
2,109,880 349,488 36,609
(iii) Ratified the selection of Ernst & Young LLP as our independent
auditors for the 2000 fiscal year.
Broker
For Against Abstained Abstentions Non Votes
--- ------- --------- ----------- ---------
4,826,158 4,050 12,193
d. Not applicable.
Item 5. Other Information
None. Effective July 15, 2000, Leigh Ann Barney resigned as our Treasurer
and as President to Key home Credit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 31), which index is incorporated herein
by reference.
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ThermoView Industries, Inc.
Date: August 18, 2000 By: /s/ John H. Cole....
-----------------------
John H. Cole,
Chief Financial Officer
(principal financial and accounting officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
27.1 -- Financial Data Schedule
----------
