Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 333-33572
DIAMOND TRIUMPH AUTO GLASS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-2758853
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
220 Division Street, Kingston, Pensylvania 18704
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (570) 287-9915
----------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
----------------------
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 [ ] No [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
----------------------
There is no public market for the registrant's stock. The registrant
had 1,000,000 shares of Common Stock (the "Common Stock"), par value $0.01 per
share, and 35,000 shares of Series A 12% Senior Redeemable Cumulative Preferred
Stock (the "Preferred Stock"), par value $0.01 per share, outstanding as of
March 31, 2000.
Documents Incorporated by Reference:
None.
Diamond is not subject to the reporting requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934. Any forward-looking statements made by
Diamond herein are not guarantees of future performance, and actual results may
differ materially from those in such forward-looking statements as a result of
various factors. The factors include but are not limited to risk factors
discussed under "Factors Affecting Future Performance," beginning on page 6.
Capitalized terms used herein but not defined herein have the meanings assigned
to them in Diamond's Offering Memorandum relating to the Notes dated March 26,
1998, unless otherwise indicated.
PART I
ITEM 1. BUSINESS
Overview
Diamond is a leading provider of automotive glass replacement and
repair services in the Northeast, Mid-Atlantic, Midwest, Southeast and Southwest
regions of the United States. At December 31, 1999, Diamond operated a network
of 226 automotive glass service centers, approximately 1,041 mobile installation
vehicles and four distribution centers in 39 states. Diamond serves all of its
customers' automotive glass replacement and repair needs, offering windshields,
tempered glass and other related products. Sales and EBITDA for the year ended
December 31, 1999 were $164.5 million and $13.8 million, respectively.
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 segments of the industry, which is comprised of: (1)
individual consumers; (2) commercial customers, including commercial fleet
leasing and rental car companies, car dealers, body shops and government
agencies; and (3) insurance customers, including referrals from local agents,
claims offices and centralized call centers. Diamond's 1999 sales to individual
consumers, commercial customers and insurance customers represented 28.6%, 41.5%
and 29.9% of total sales, respectively. While the two largest participants in
the industry primarily focus on servicing automotive glass insurance claims
(including providing related insurance claims processing services) and also
manufacture 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.
Diamond's sole focus on automotive glass replacement and repair,
combined with its aggressive cost controls, strong purchasing power and
efficient internal distribution system, have positioned Diamond as one of the
lowest cost providers of automotive glass replacement and repair services. These
competitive attributes, together with localized marketing efforts, have enabled
Diamond's new service centers to quickly establish a base of local consumer and
commercial installation business from which Diamond plans to grow all three of
its customer segments.
Diamond's financial performance reflects attractive service
center-level economics. The cash required to open a new service center,
including inventory net of trade payables, averages $33,000. In 1999, over 75%
of Diamond's installations and repairs were performed by mobile technicians at a
customer's home or workplace. Due to the high percentage of mobile installations
and repairs which Diamond performs, service centers are typically located in
commercial or industrial areas, where rents are generally available at low cost.
In 1999, Diamond's 102 mature service centers (service centers open for four
years or longer) averaged approximately $956,000 in sales and approximately
$200,000 of branch operating profit per location. For the year ended December
31, 1999, approximately 82% of Diamond's service centers that had been open for
at least fifteen months achieved positive branch operating profitability.
Diamond believes that the high volume of its automotive glass purchases
positions Diamond as an important customer of the primary automotive glass
manufacturers, thereby reducing Diamond's exposure to product shortages and
maximizing its ability to purchase automotive glass at the lowest available
cost. Diamond's purchasing program utilizes the major domestic original
equipment manufacturers for truckload and spot purchases, and importation of
containers from the larger manufacturers throughout the world. Management
believes that the scope
and flexibility of Diamond's purchasing program and its efficient distribution
system have enabled Diamond to achieve higher service levels and a lower cost of
goods than most of its competitors.
Recent Developments
On March 31, 1998, Diamond entered into a bank facility with a
syndicate of financial institutions, which provided for borrowings of up to $35
million. On March 27, 2000, Diamond entered into a new revolving credit facility
with The CIT Group/Business Credit, Inc., as lender, which provides for
revolving advances ("Revolving Loans") of up to the lesser of:
o $25,000,000; or
o the sum of 85% of Diamond's Eligible Accounts Receivable (as defined in the
new credit facility) plus 85% of Diamond's Eligible Inventory (as defined
in the new credit facility), less certain reserves; or
o an amount equal to 1.5 times Diamond's EBITDA for the prior twelve months.
For purposes of the new credit facility, EBITDA is defined as earnings
before interest, taxes, depreciation and amortization, plus any accrued and
unpaid management fees payable to Leonard Green & Partners, L.P. ("LGP")
during the period.
At the same time Diamond entered into the new credit facility, it
repaid outstanding borrowings under the old bank facility.
History
Diamond was founded in 1923 by the grandfather of Kenneth Levine and
Richard Rutta, Diamond's Co-Chairmen of the Board and Co-Chief Executive
Officers. Diamond continues to operate a service center at the location of its
original store in Scranton, Pennsylvania. Messrs. Levine and Rutta joined
Diamond in 1979, when Diamond operated only one service center, and acquired
Diamond in 1987, when Diamond operated ten service centers in Pennsylvania and
New York. Under the management of Messrs. Levine and Rutta, Diamond has expanded
its service center and distribution network to serve 226 locations at the end of
1999.
Recapitalization
On January 15, 1998, Diamond, Kenneth Levine, Richard Rutta, Green
Equity Investors II, L.P. and certain affiliated entities of Diamond entered
into a Second Amended and Restated Stock Purchase Agreement, pursuant to which,
among other things:
o Diamond declared and paid a dividend of 3,500 shares of Series
A 12% Senior Redeemable Cumulative Preferred Stock (equal to
10.0% of the Series A 12% Senior Redeemable Cumulative
Preferred Stock outstanding after the Recapitalization, as
defined below) to each of Kenneth Levine and Richard Rutta;
o Kenneth Levine and Richard Rutta transferred all of the issued
and outstanding shares of each of the affiliated entities to
Diamond in consideration for which Diamond issued 6,950,000
shares of Common Stock to Kenneth Levine and Richard Rutta;
o each of the affiliated entities merged with and into Diamond;
o Green Equity Investors II, L.P. purchased:
(1) 770,000 shares of Common Stock, equal to 77.0% of the
Common Stock outstanding after the Recapitalization,
for aggregate consideration equal to $15.4 million,
and
-2-
(2) 28,000 shares of Series A 12% Senior Redeemable
Cumulative Preferred Stock, equal to 80.0% of the
Preferred Stock outstanding following the
Recapitalization, for an aggregate consideration of
$28.0 million;
o Norman Harris and Michael A. Sumsky purchased an aggregate of
30,000 shares of Common Stock, equal to 3.0% of the Common
Stock outstanding after the Recapitalization, for aggregate
consideration of $600,000; and
o Diamond redeemed from Kenneth Levine and Richard Rutta all of
the Common Stock owned by them (other than 100,000 shares
owned by each of them) for approximately $150.7 million in
cash, which resulted in each of Kenneth Levine and Richard
Rutta owning 10.0% of the Common Stock outstanding after the
Recapitalization.
The above transactions were consummated on March 31, 1998, and together
constitute the "Recapitalization." Concurrently with the Recapitalization,
Diamond issued the Notes and entered into the old bank facility, under which
Diamond borrowed $12.5 million in connection with the Recapitalization.
Industry Overview
The automotive glass replacement and repair industry is an
approximately $3.0 billion market. The market for the installation of automotive
glass is highly fragmented, with approximately 20,000 providers of automotive
glass replacement and repair services in the United States. Many participants in
the industry are small "mom and pop" installers who compete less effectively
against large, geographically diversified providers of automotive glass
installation services, such as Diamond. Consequently, the industry has been
consolidating.
Over the past 10 years, management estimates that total industry sales
have grown at approximately 4.0% per year. Replacement volume is influenced by
several factors, including the total vehicle population and the number of miles
driven. Severe weather and road conditions can also increase demand for
automotive glass repair and replacement. Fixing minor damage to a windshield may
be deferred by consumers until a vehicle trade-in, sale or inspection for new
license tags. Therefore, new automobile sales, turnover of used vehicles and
state automobile inspection laws influence automotive glass demand.
Sales growth has been attributable primarily to an increase in the
aggregate number of vehicles on the road, from approximately 181 million
vehicles in 1988 to approximately 212 million vehicles in 1998, and to an
increase in the aggregate number of miles driven per vehicle per year, from
approximately 11,188 miles in 1988 to approximately 12,183 miles in 1998. Growth
in industry sales has also been driven by the use of larger, more complex and
more expensive automotive glass in new vehicles. In 1999, management estimates
that industry replacement units decreased approximately 3%, primarily due to
weak demand. This weaker demand had a negative impact on pricing and resulted in
a decrease in average revenue per installation unit.
Pricing
The price of replacement automotive glass is based on list prices
developed by the National Auto Glass Specification ("NAGS"), an independent
third party. NAGS prices are generally changed following wholesale price
increases announced by original equipment manufacturers. 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 increases 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.
-3-
Products
Diamond's primary installation products are automotive windshields
which are made of laminated safety glass. Safety glass consists of two layers of
glass bound together with a thin layer of vinyl which adds strength to the glass
and makes it very difficult for an object to penetrate a windshield upon impact.
As part of Diamond's commitment to serve all of its customers' automotive glass
replacement needs, Diamond also offers tempered automotive glass. Tempered glass
is generally used for side and rear automobile and truck windows and is
significantly stronger than regular glass due to specialized processing which
also causes tempered glass to shatter into dull-edged pebbles, reducing glass
related injuries. In addition, Diamond offers automotive glass repair services.
Customers and Marketing
Diamond provides automotive glass replacement services to each of the
industry's customer segments, which include individual consumers, commercial
customers and insurance customers. Management believes that in addition to
capturing additional consumer sales, broadening Diamond's service center network
and geographic coverage will facilitate Diamond's efforts to obtain an increased
share of the national insurance and fleet markets, whose participants generally
establish multiple providers for their automotive glass replacement
requirements. Diamond's 1999 sales to individual consumers, commercial customers
and insurance customers represented 28.6%, 41.5% and 29.9% of total sales,
respectively. In 1999, Diamond's top ten customer accounts comprised
approximately 18.9% of total sales and no single customer account exceeded 6.0%
of total sales.
Diamond's marketing is conducted through a combination of prominent
Yellow Pages advertising and by a direct sales force of 143 representatives.
Yellow Pages advertising is supported by customer service representatives and
extended hour call centers that answer telephone inquiries, schedule service
appointments and arrange emergency service. Sales representatives market
Diamond's services to insurance claim centers, local agents, fleet operators,
automobile dealers and body shops and have established relationships at all
levels of the major insurance, fleet and rental car company organizations.
Individual Consumers. The marketing focus to the individual consumer
segment is low price and speed of service. Diamond's consumer customers consist
of individuals who are not associated with a related automobile insurance claim.
Customers in this segment typically do not have automobile glass insurance
coverage, have a high insurance deductible or do not want to file a claim with
their insurance carrier. These customers are primarily concerned with price,
quality, convenience and speed of service. A substantial portion of the
industry's consumer sales are generated as a result of localized marketing
efforts, such as Yellow Pages advertising. In order to attract consumer
customers, Diamond's Yellow Pages advertisements are designed to appear in the
first group of display advertisements and promote Diamond's competitive pricing
and fast mobile service. When a customer calls, Diamond's service
representatives are trained to emphasize Diamond's low price guarantee and
prompt service capabilities. The majority of Diamond's services can be provided
by its mobile installation technicians at a customer's home or workplace.
Commercial Customers. Diamond markets to commercial customers through
its direct sales force, which emphasizes high quality service at a low cost.
Diamond's commercial segment customers include commercial fleet leasing
companies, rental car companies, car dealerships, body shops, utilities and
government agencies. Diamond's customers in the commercial segment include Avis
Rent-A-Car, Inc., Enterprise Rent-A-Car and Bell Atlantic Corporation.
Management believes that Diamond's expanding geographic coverage will enable
Diamond to obtain an increased share of the national fleet automotive glass
replacement business.
Insurance Customers. Diamond markets its services to all levels of the
insurance industry, including local agents, claims offices and centralized call
centers. In addition to marketing directly to insurance companies through its
direct sales force, Diamond participates as an approved service provider within
glass replacement networks administered by third parties, including certain of
Diamond's competitors. These third party networks act as outsourced claims
administrators under contract to an insurance company. Historically, insurance
companies which participate in these networks have required that automotive
glass replacement and repair services be provided by more than one service
provider in order to ensure competitive pricing and high quality service.
Diamond is an
-4-
approved service provider for many national insurance carriers, including State
Farm Insurance Company, Nationwide Insurance Company, Allstate Insurance Company
and Travelers Property Casualty Corporation.
Service Centers
Diamond's repair and installation service is performed either on-site
at a service center location or at a customer's home or workplace by a mobile
technician. Diamond operates approximately 1,041 mobile installation vehicles.
In 1999, over 75% of Diamond's installations and repairs were performed by
mobile technicians at a customer's home or workplace. Due to the high percentage
of mobile installations and repairs which Diamond performs, service centers are
typically located in commercial or industrial areas, where rents are generally
available at low cost.
At the end of 1999, Diamond's network comprised 226 service centers in
39 states in the Northeast, Mid-Atlantic, Midwest, Southeast and Southwest
regions of the United States. These service centers are operated under the
following service marks: Triumph Auto Glass and Diamond Auto Glass in the
Northeast and Mid-Atlantic; and Triumph Auto Glass in the Midwest, Southeast and
Southwest. Any expansion into new states will be under the Triumph Auto Glass
registered service mark. Generally, Diamond's service center locations are
approximately 2,600 square feet in size. Due to weak industry conditions,
Diamond opened 24 new service centers in 1999, as compared to an average of 35
new service centers in the three years prior to 1999. Diamond currently plans to
open approximately 4 new service centers in 2000 absent an improvement in
industry conditions.
The following chart provides information concerning Diamond's service
center openings from 1990 to 1999:
Service % Increase
Year Openings Consolidations Centers Over Prior Year
At Year End
1990..... 6 -- 24 33.3%
1991..... 7 -- 31 29.2%
1992..... 12 -- 43 38.7%
1993..... 17 -- 60 39.5%
1994..... 31 -- 91 51.7%
1995..... 17 3 105 15.4%
1996..... 39 2 142 35.2%
1997..... 33 1 174 22.5%
1998..... 33 1 206 18.4%
1999..... 24 4 226 9.7%
Service centers are typically staffed with approximately four persons
and are open for business from 8:00 a.m. to 5:00 p.m. on Monday through Friday
and 8:00 a.m. to 12:00 p.m. on Saturday. Service center employees perform
installation services and process customer inquiries during regular business
hours. After-hours customer inquiries are handled by Diamond's emergency and
extended hour call center. Operators at this call center answer customer
inquiries, schedule mobile installation services and arrange emergency service
from service centers throughout Diamond's network.
Distribution System
Diamond currently operates four distribution centers which operate 7
days a week and are located in Kingston, Pennsylvania; Columbus, Ohio; Atlanta,
Georgia; and Rock Island, Illinois. Diamond's efficient distribution system
enables Diamond to make nightly or weekly deliveries to all of its service
centers both to replenish stock and to provide automotive glass that is not
carried in service center inventories. Through its distribution centers, Diamond
supports over 75% of its sales with internally distributed product, with the
remainder being purchased from the spot market. Diamond's highly efficient
distribution center network, combined with a successful inventory management
program at its service centers, enables Diamond to meet immediate service
demands at a lower cost than if larger quantities of automotive glass were
required to be purchased in the spot market.
-5-
Suppliers
Diamond believes that the high volume of its automotive glass purchases
positions Diamond as an important customer of the primary automotive glass
manufacturers, thereby reducing Diamond's exposure to product shortages and
maximizing its ability to purchase automotive glass at the lowest available
cost. Diamond's purchasing program utilizes the major domestic original
equipment manufacturers for truckload and spot purchases, and importation of
containers from the larger manufacturers throughout the world. Management
believes that the scope and flexibility of Diamond's purchasing program and its
efficient distribution system have enabled Diamond to achieve higher service
levels and a lower cost of goods than those of most of its competitors.
Diamond has numerous domestic and international suppliers, and is
continuing to expand its supplier network by utilizing additional foreign
suppliers in order to hedge against product shortages and to reduce the overall
cost of automotive glass. In 1999, no single supplier represented more than 30%
of Diamond's automotive glass purchases. Due to the competitive nature of the
automotive glass manufacturing industry, Diamond does not anticipate any
difficulty in sourcing its automotive glass requirements in the foreseeable
future.
Competition
The automotive glass replacement and repair industry is highly
competitive, with customer decisions based on price, customer service, technical
capabilities, quality, advertising and geographic coverage. The competition in
the industry could result in additional pricing pressures, which would
negatively affect Diamond's results of operations. In addition, certain of
Diamond's competitors provide insurance companies with claims management
services, including computerized referral management, policyholder call
management, electronic auditing and billing services and management reporting.
While the market is generally highly fragmented, Diamond competes against
several other large competitors in this market, the largest two of which are
Safelite Glass Corporation and Harmon AutoGlass, a division of Apogee
Enterprises, Inc.
Employees
As of December 31, 1999, Diamond employed 1,610 persons. None of
Diamond's employees are covered by a collective bargaining agreement, and
Diamond believes that its relationships with its employees are good.
FACTORS AFFECTING FUTURE PERFORMANCE
Diamond is substantially leveraged and has significant debt service obligations
which could impair its ability to pay the amounts due under the Notes.
Diamond is highly leveraged and has significant debt service
obligations. As of December 31, 1999, Diamond's aggregate consolidated
indebtedness was approximately $107.5 million (of which approximately $7.5
million represented aggregate outstanding indebtedness under Diamond's old bank
facility), and Diamond had $43.0 million (liquidation preference) of outstanding
Preferred Stock and a stockholders' deficit of $78.2 million.
The degree to which Diamond is leveraged may impair Diamond's ability
to pay the amounts due under the Notes. Possible adverse consequences of
Diamond's degree of leverage include the following:
o Diamond's ability to obtain additional financing for working
capital, capital expenditures or general corporate purposes
may be impaired;
o a substantial portion of Diamond's cash flow from operations
goes to the payment of interest and principal on its
outstanding debt, thereby reducing the funds available to
Diamond for other purposes;
o the new credit facility and the indenture governing the Notes
contain certain restrictive financial and operating covenants;
-6-
o Diamond's indebtedness under the new credit facility is at
variable rates of interest, which makes Diamond vulnerable to
increases in interest rates;
o Diamond's indebtedness outstanding under the new credit
facility is secured by a first priority lien on substantially
all of its assets and will become due prior to the time the
principal on the Notes will become due;
o Diamond's substantial degree of leverage will limit its
ability to adjust rapidly to changing market conditions,
reduce its ability to withstand competitive pressures, and
make it more vulnerable in the event of a downturn in general
economic conditions, repeated years of mild weather conditions
or other adverse events in its business.
If Diamond is unable to generate sufficient cash flows from operations
in the future to service its indebtedness, it may be required to refinance all
or a portion of its indebtedness, including the Notes, or to obtain additional
financing or to dispose of material assets or discontinue certain of its
operations. The new credit facility and the indenture governing the Notes
restrict Diamond's ability to sell assets and/or use the proceeds therefrom.
Diamond cannot assure you that any refinancing or asset sales would be possible
under its debt instruments existing at that time, that the proceeds which
Diamond could realize from such refinancing or asset sales would be sufficient
to meet its obligations then due or that Diamond could obtain any additional
financing.
The Notes are subordinated to Diamond's secured indebtedness.
The Notes are:
o senior, unsecured obligations of Diamond and will rank senior
in right and priority of payment to any indebtedness of
Diamond that by its terms is expressly subordinated to the
Notes.
o subordinated to secured indebtedness of Diamond (including
indebtedness under the new credit facility) with respect to
the assets securing such indebtedness. The new credit facility
is secured by a first priority lien on substantially all of
Diamond's assets.
o subordinated to claims of creditors of Diamond's subsidiaries,
except to the extent that holders of the Notes may be
creditors of such subsidiaries pursuant to the Guarantees.
Diamond currently has no subsidiaries, and, accordingly, there
are currently no Guarantees.
Diamond's obligations with respect to the Notes will be guaranteed,
jointly and severally, on a senior, unsecured basis by certain of its future
subsidiaries. Any obligations of Diamond's subsidiaries will be senior to the
claims of the holders of the Notes with respect to the assets of any of these
subsidiaries, except to the extent that the holders of the Notes may be
creditors of a subsidiary pursuant to a Guarantee. Any claim by the holders of
the Notes with respect to the assets of any subsidiary will be subordinated to
secured indebtedness (including indebtedness under the new credit facility) of
that subsidiary with respect to the assets securing such indebtedness. The
rights of Diamond and its creditors, including holders of the Notes, to realize
upon the assets of any subsidiary upon that subsidiary's liquidation or
reorganization (and the consequent rights of holders of the Notes to participate
in those assets) will be subject to the prior claims of that subsidiary's
creditors, except to the extent that Diamond may itself be a creditor with
recognized claims against that subsidiary or to the extent that the holders of
the Notes may be creditors with recognized claims against that subsidiary
pursuant to the terms of a Guarantee (subject, however, to the prior claims of
creditors holding secured indebtedness of any subsidiary with respect to the
assets securing that indebtedness). The new credit facility is secured by a
first priority lien on substantially all of Diamond's assets. In addition, the
indenture governing the Notes will restrict the amount of indebtedness that
subsidiaries are permitted to incur.
-7-
Diamond may not be able to comply with certain provisions in the agreements
governing its outstanding debt that restrict Diamond's actions and require
Diamond to maintain financial ratios.
The new credit facility and the indenture governing the Notes include
certain covenants that, among other things, restrict Diamond's ability to:
o make investments;
o incur additional indebtedness;
o grant liens;
o merge or consolidate with other companies;
o change the nature of its business;
o dispose of assets;
o make loans;
o pay dividends or redeem capital stock;
o guarantee the debts of other persons;
o make capital expenditures; and
o engage in transactions with affiliates.
The old bank facility required Diamond to maintain certain financial
ratios, including interest coverage and leverage ratios. In August 1999, the
lenders of the old bank facility amended the old bank facility to increase the
permitted maximum leverage ratio and decrease the minimum interest coverage
ratio. At December 31, 1999, Diamond did not comply with the revised ratios set
forth in the old bank facility, as amended. Diamond received a waiver from the
lenders under the old bank facility with respect to this non-compliance. The new
credit facility requires Diamond to maintain minimum EBITDA (as defined in the
new credit facility), calculated monthly, for each 12-month period, ending as of
the end of each month, of at least $10.5 million.
Diamond's ability to comply with the minimum EBITDA requirement and the
other provisions of its new credit facility may be affected by events beyond its
control. Diamond's breach of any of these covenants could result in a default
under the new credit facility, in which case the lender would, among other
things, be entitled to elect to declare all amounts owing under the new credit
facility, together with accrued interest, to be due and payable. If Diamond were
unable to repay these borrowings, the lender could proceed against its
collateral. If the indebtedness under the new credit facility were accelerated,
Diamond cannot assure you that its assets would be sufficient to repay in full
that indebtedness and Diamond's other indebtedness, including the Notes.
The Notes are subject to fraudulent conveyance laws.
Diamond's obligations under the Notes may be subject to review under
relevant federal and state fraudulent conveyance laws in the event that a
bankruptcy, reorganization or rehabilitation case by or on behalf of unpaid
creditors of Diamond were to occur. Under these laws, Diamond's obligation to
repay the Notes could be voided, or the Notes could be subordinated to all other
creditors of Diamond, if, at the time Diamond issued the Notes, any of the
following were true:
o Diamond intended to hinder, delay or defraud any existing or
future creditor or contemplated insolvency in order to prefer
one or more creditors to the exclusion in the whole or in part
of others;
-8-
o Diamond was insolvent or was rendered insolvent by reason of
issuing the Notes;
o Diamond was engaged in a business or transaction with
unreasonably small capital; or
o Diamond intended to incur, or believed that it would incur,
debts beyond its ability to pay those debts as they matured.
In the event that in the future the Notes are guaranteed by subsidiary
guarantors, the Guarantees may also be subject to review under federal and state
fraudulent transfer laws. If a court were to determine that, at the time a
subsidiary guarantor became liable under its Guarantee, it satisfied certain of
the conditions stated above, the court could void the Guarantee and direct the
repayment of amounts paid thereunder.
The measure of insolvency under fraudulent conveyance statutes varies
depending upon the laws of the jurisdiction being applied. Generally, however,
Diamond would be considered insolvent if, at the time it issued the Notes,
either (1) the sum of its debts was greater than all of its property at a fair
valuation; or (2) if the present fair salable value of its assets is less than
the amount that it would be required to pay on its existing debts as they become
absolute and matured. The obligations of each Subsidiary Guarantor under its
Guarantee, however, will be limited in a manner intended to avoid it being
deemed a fraudulent conveyance under applicable law.
Additionally, under federal bankruptcy or applicable state insolvency
law, if a bankruptcy or insolvency proceeding were initiated by or against
Diamond within 90 days after it made any payment with respect to the Notes, or
if Diamond anticipated becoming insolvent at the time of that payment, all or a
portion of the payment could be avoided as a preferential transfer and the
recipient of that payment could be required to return that payment.
Diamond does not know what standard a court would use to determine
whether Diamond was insolvent at the time the Notes were issued, nor can Diamond
assure you that a court would not find Diamond to be insolvent on that date or
that, regardless of Diamond's solvency, that the issuances of the Notes
constituted fraudulent conveyances on another of the grounds summarized above.
Diamond may not be able to comply with its obligations under the indenture
governing the Notes to purchase all of the Notes upon a change of control.
Upon the occurrence of a change of control, the indenture governing the
Notes requires Diamond to make an offer to repurchase all outstanding Notes at a
price equal to 101% of the aggregate principal amount thereof, together with
accrued and unpaid interest thereon to the date of repurchase. However, the new
credit facility prohibits Diamond from repurchasing any Notes, unless and until
Diamond has paid the indebtedness under the new credit facility in full.
Diamond's failure to repurchase the Notes would result in a default under the
indenture governing the Notes and the new credit facility. Diamond's inability
to pay the indebtedness under the new credit facility, if accelerated, would
also constitute a default under the indenture governing the Notes, which could
have adverse consequences to Diamond and to the holders of the Notes. In the
event of a change of control, Diamond cannot assure you that it would have
sufficient assets to satisfy all of its obligations under the new credit
facility and the Notes.
Diamond's future expansion may be hindered by its lack of sufficient capital or
other factors, which would adversely affect Diamond's continued growth.
Diamond's continued growth depends to a significant degree on its
ability to open new service centers in existing and new markets and to operate
these service centers on a profitable basis. In addition, Diamond will require
additional distribution centers as it implements its program to expand its
service centers to achieve a nationwide presence. Diamond's ability to expand
will depend, in part, on business conditions and the availability of qualified
managers and service representatives, and sufficient capital. Due to weak
industry conditions resulting from reduced demand for auto glass services and
lower average revenue per installation unit, Diamond opened 24 new service
centers in 1999, as compared to an average of 35 new service centers in the
three years prior to 1999. Diamond currently plans to open approximately 4 new
service centers in 2000 absent an improvement in industry conditions. A decline
in Diamond's overall financial performance may adversely impact its ability to
expand in the future. Diamond expects that the net cash generated from
operations, together with borrowings under the new credit facility, should
enable it to finance the expenditures related to its expansion. However, Diamond
cannot assure you that:
-9-
o it will possess sufficient funds to finance the expenditures
related to its expansion;
o new service centers can be opened on a timely basis;
o new service centers can be operated on a profitable basis; or
that
o Diamond will be able to hire, train and integrate employees.
In the event net cash generated from operations together with working
capital reserves and borrowings under the new credit facility are insufficient
to finance the expenditures related to Diamond's expansion, Diamond may be
required to reduce its expansion in the future.
Diamond's operating results are affected by seasonality and weather.
Weather has historically affected Diamond's sales, net income and
EBITDA, with severe weather generating increased sales and income and mild
weather resulting in lower sales, net income and EBITDA. In addition, Diamond's
business is somewhat seasonal, with the fourth quarter traditionally its slowest
period of activity. Diamond believes these seasonal trends will continue for the
foreseeable future. Although Diamond's installation units increased 18.4% in
fiscal 1999, primarily reflecting the continued maturation of Diamond's service
centers and increased installation productivity, revenue per installation unit
decreased an average of 6% in 1999. The decrease in Diamond's average revenue
per installation unit is primarily attributable to weaker industry demand for
glass replacement services, due primarily to milder weather conditions, which
resulted in price compression throughout the industry.
Diamond competes against other large companies that may be better equipped to
provide customers with automotive glass replacement and repair services.
The automotive glass replacement and repair industry is highly
competitive, with customer decisions based on price, customer service, technical
capabilities, quality, advertising and geographic coverage. The competition in
the industry could result in additional pricing pressures, which could
negatively affect Diamond's results of operations. In addition, certain of
Diamond's competitors provide insurance companies with claims management
services, including computerized referral management, policyholder call
management, electronic auditing and billing services and management reporting.
While the market is generally highly fragmented, Diamond also competes against
several other large competitors in this market, the largest two of which are
Safelite Glass Corporation and Harmon AutoGlass, a division of Apogee
Enterprises, Inc. Many of Diamond's competitors have substantially less leverage
than Diamond, which may allow them greater flexibility in managing their
operations. Diamond cannot assure you that it will be able to continue to
compete effectively with these or other competitors. See
"Business--Competition."
Diamond is dependent on its key personnel and the loss of key personnel could
adversely affect its results of operations.
Diamond success is largely dependent upon the abilities and experience
of its senior management team, including Kenneth Levine, Richard Rutta, Norman
Harris and Michael A. Sumsky. The loss of services of one or more of these
senior executives could adversely affect Diamond's results of operations.
-10-
Ownership of Diamond is concentrated in Green Equity Investors II, L.P., whose
interests may conflict with those of the holders of Notes.
Green Equity Investors II, L.P., an investment partnership managed by
LGP, owns 77.0% of the outstanding shares of Diamond's Common Stock and 80.0% of
the outstanding shares of Diamond's Series A 12% Senior Redeemable Cumulative
Preferred Stock. As a result, Green Equity Investors II, L.P. has the power to
elect all of the members of Diamond's board of directors, to approve all
amendments to Diamond's certificate of incorporation and bylaws and to effect
fundamental corporate transactions such as mergers, asset sales and public
offerings. Diamond cannot assure you that the interests of Green Equity
Investors II, L.P. will not conflict with the interests of the holders of the
Notes. See "Security Ownership of Certain Beneficial Owners and Management."
Diamond's results of operations may be adversely affected by a downturn in
general economic conditions or an increase in fuel prices.
Diamond's revenues are dependent on the annual number of windshields
replaced, which in turn is influenced by the aggregate number of vehicles on the
road and the number of miles driven per vehicle per year. As a result, a general
economic downturn or higher fuel prices could have a material adverse effect on
Diamond's results of operations.
Diamond's EBITDA has declined due to industry conditions.
In 1999, Diamond's EBITDA declined 25.4%. The decrease in EBITDA was
primarily due to lower average revenue per installation unit that was partially
offset by a decrease in glass product costs, increases in installation
productivity and the leveraging of service center, corporate and administrative
expenses. If Diamond continues to experience further declines in revenue per
installation unit, Diamond would experience further declines in EBITDA which
could limit its ability to meet its ongoing debt service obligations. The new
credit facility requires Diamond to maintain minimum EBITDA (as defined in the
new credit facility), calculated monthly, for each 12-month period, ending as of
the end of each month, of at least $10.5 million.
Diamond's business involves the potential for product liability claims against
Diamond, which may adversely affect Diamond's business, financial condition and
results of operations if the cost of those claims exceeds Diamond's insurance
coverage.
The replacement of windshields entails risk of product liability
claims, particularly if the windshields Diamond uses in its business are
defective. To date, no material product liability claims have been made against
Diamond relating to its replacement of windshields. However, Diamond cannot
assure you that these claims will not be made in the future. A successful
product liability claim (or series of claims) against Diamond in excess of its
insurance coverage could have a material adverse affect on Diamond's business,
financial condition and results of operations.
There is no established market for the Notes and no assurance that a liquid
trading market will develop in the future.
There is no existing market for the Notes, Diamond cannot assure you as
to the liquidity of any markets that may develop for the Notes, the ability of
holders of the Notes to sell their Notes or the price at which holders would be
able to sell their Notes. Future trading prices of the Notes will depend on many
factors, including, among other things, prevailing interest rates, Diamond's
operating results and the market for similar securities.
The Notes are subject to restrictions on transfer.
The Notes are subject to the restrictions on transfer. These
restrictions are described in the legend to the Notes. In general, the Notes may
not be offered or sold unless: (1) they are registered under the Securities Act,
or (2) an exemption from the registration requirements of the Securities Act and
applicable state securities laws is available. Diamond does not currently
anticipate that it will register the outstanding Notes under the Securities Act.
-11-
ITEM 2. PROPERTIES
The following chart provides information concerning Diamond's
headquarters, distribution facilities and emergency call centers, all of which
are leased:
Area in Square
Facility Function Feet
-------- -------- ----
Kingston, PA............. Headquarters 121,000
Distribution Center
Call Center
Columbus, OH............. Distribution Center 26,000
Atlanta, GA.............. Distribution Center 20,000
Rock Island, IL.......... Distribution Center 16,000
Scranton, PA............. Call Center 2,500
The following chart provides information concerning the number and
location of Diamond's service centers, all of which are leased:
Number of
Service Number of
State Centers State Service Centers
- ----- ------- ----- ---------------
Alabama........... 5 Nebraska.......... 1
Arkansas.......... 1 New Hampshire..... 5
Colorado.......... 4 New Jersey........ 10
Connecticut....... 6 New Mexico........ 1
Delaware.......... 2 New York.......... 27
Florida........... 10 North Carolina.... 8
Georgia........... 9 Ohio.............. 11
Illinois.......... 6 Oklahoma.......... 1
Indiana........... 7 Pennsylvania...... 26
Iowa.............. 3 Rhode Island...... 1
Kansas............ 2 South Carolina.... 4
Kentucky.......... 3 South Dakota...... 1
Louisiana......... 3 Tennessee......... 5
Maine............. 3 Texas............. 5
Maryland.......... 8 Utah.............. 1
Massachusetts..... 9 Vermont........... 3
Michigan.......... 8 Virginia.......... 11
Minnesota......... 4 West Virginia..... 3
Mississippi....... 1 Wisconsin......... 5
Missouri.......... 3
Diamond believes that its facilities are adequate for its current needs
and that suitable additional distribution centers and service locations will be
available to satisfy Diamond's expansion needs.
ITEM 3. LEGAL PROCEEDINGS AND INSURANCE
Diamond is involved in legal proceedings in the ordinary course of its
business. Management believes that the amounts which may be awarded or assessed
against Diamond in connection with these matters, if any, will not have a
material adverse effect on Diamond. In addition, management believes that
Diamond has appropriate insurance coverage to operate its business, including
insurance for its mobile installation units and technicians.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
-12-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public market for Diamond's Common Stock or
Series A 12% Senior Redeemable Cumulative Preferred Stock.
At March 27, 2000, there were five holders of record of Diamond's
Common Stock and three holders of record of Diamond's Series A 12% Senior
Redeemable Cumulative Preferred Stock.
Diamond's ability to pay dividends is limited by the new credit
facility and the Notes. Diamond does not currently intend to pay dividends on
its capital stock. Any future determination to pay dividends will be at the
discretion of Diamond's Board of Directors and will be dependent upon Diamond's
results of operations, capital requirements, financial condition, contractual
restrictions and other factors deemed relevant at the time by Diamond's Board of
Directors.
-13-
ITEM 6. SELECTED FINANCIAL DATA
The selected historical and unaudited pro forma condensed financial
data as of December 31, 1995, 1996, 1997, 1998 and 1999 and for each of the
years then ended has been derived from Diamond's audited financial statements.
The report of KPMG LLP, independent auditors, on Diamond's Financial Statements
as of December 31, 1998 and 1999, and for each of the years in the three year
period ended December 31, 1999, is included elsewhere herein.
This summary historical and unaudited pro forma condensed financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Diamond's Financial
Statements and the related notes thereto appearing elsewhere in this Annual
Report.
Years Ended December 31,
------------------------
1995 1996 1997 1998 1999
---- ---- ---- ----- ----
(dollars in thousands)
Statement of Operating Data:
Sales ............................................... $ 68,102 $ 101,355 $ 122,005 $ 149,609 $ 164,520
Cost of sales ....................................... 20,697 31,423 36,702 43,851 51,456
--------- --------- --------- --------- ---------
Gross profit ........................................ 47,405 69,932 85,303 105,758 113,064
Operating expenses .................................. 40,470 56,883 74,696 89,764 101,894
--------- --------- --------- --------- ---------
Income from operations .............................. 6,935 13,049 10,607 15,994 11,170
Interest income ..................................... (54) (109) (184) (120) (31)
Interest expense .................................... -- -- -- 8,162 11,054
Pre-tax income ...................................... 6,989 13,158 10,791 7,952 147
Provision for income taxes .......................... -- -- -- (37) 138
--------- --------- --------- --------- ---------
Net income .......................................... $ 6,989 $ 13,158 $ 10,791 $ 7,989 $ 9
========= ========= ========= ========= =========
Pro forma (1):
Historical income before provision for income taxes . $ 6,989 13,158 $ 10,791 $ 7,952
Pro forma provision for income taxes ................ 2,796 5,263 4,316 3,181
--------- --------- --------- ---------
Pro forma net income ................................ $ 4,193 $ 7,895 $ 6,475 $ 4,771
========= ========= ========= =========
Other Data:
EBITDA(2) ........................................... $ 8,284 $ 14,948 $ 18,029 $ 18,524 $ 13,796
EBITDA margin ....................................... 12.2% 14.8% 14.8% 12.4% 8.4%
Non-vehicle capital expenditures .................... $ 356 $ 1,616 $ 1,514 $ 1,856 $ 1,892
Vehicle capital expenditures ........................ 1,425 3,730 859 673 479
--------- --------- --------- --------- ---------
Total capital expenditures .......................... 1,781 5,346 2,373 2,529 2,371
Ratio of earnings to fixed charges (excluding
preferred stock dividends) (3) ...................... 1.97x 1.01x
Service centers operated at period end .............. 105 142 174 206 226
Balance Sheet Data (at period end):
Cash and cash equivalents ........................... $ 4,100 $ 5,393 $ 6,255 $ 301 $ 94
Total assets ........................................ 21,069 31,494 36,687 90,692 87,519
Total debt .......................................... -- -- -- 108,500 107,500
Stockholders' equity (deficit) ...................... 15,728 24,294 23,285 (73,441) (78,232)
(1) Prior to March 31, 1998, Diamond consisted of S corporations and,
accordingly, federal and state income taxes were generally paid at the
stockholder level only. Upon consummation of the Recapitalization (as
defined under "Business--Recapitalization"), Diamond eliminated its S
corporation status and, accordingly, is subject to federal and state income
taxes.
-14-
(2) EBITDA represents income before income taxes, interest expense,
depreciation and amortization expense and non-recurring executive
compensation expense in 1997 of $5 million. While EBITDA is not intended to
represent cash flow from operations as defined by GAAP and should not be
considered as an indicator of operating performance or an alternative to
cash flow (as measured by GAAP) as a measure of liquidity, it is included
herein to provide additional information with respect to Diamond's ability
to meet its future debt service, capital expenditure and working capital
requirements.
(3) Ratio of earnings to fixed charges equals pre-tax income plus interest
expense divided by interest expense.
-15-
ITEM 7. 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 Northeast, Mid-Atlantic, Midwest, Southeast and Southwest
regions of the United States. At December 31, 1999, Diamond operated a network
of 226 automotive glass service centers, approximately 1,041 mobile installation
vehicles and four distribution centers in 39 states. Diamond serves all of its
customers' automotive glass replacement and repair needs, offering windshields,
tempered glass and other related products. Sales and EBITDA for the year ended
December 31, 1999 were $164.5 million and $13.8 million, respectively.
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 segments of the industry, which is comprised of: (1)
individual consumers; (2) commercial customers, including commercial fleet
leasing and rental car companies, car dealers, body shops and government
agencies; and (3) insurance customers, including referrals from local agents,
claims offices and centralized call centers. Diamond's 1999 sales to individual
consumers, commercial customers and insurance customers represented 28.6%, 41.5%
and 29.9% of total sales, respectively. While the two largest participants in
the industry primarily focus on servicing automotive glass insurance claims
(including providing related insurance claims processing services) and also
manufacture 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.
Recapitalization
On January 15, 1998, Diamond, Kenneth Levine, Richard Rutta, Green
Equity Investors II, L.P. and certain affiliated entities of Diamond entered
into a Second Amended and Restated Stock Purchase Agreement, pursuant to which,
among other things: (1) Diamond declared and paid a dividend of 3,500 shares of
Series A 12% Senior Redeemable Cumulative Preferred Stock (equal to 10.0% of the
Series A 12% Senior Redeemable Cumulative Preferred Stock outstanding after the
Recapitalization, as defined below) to each of Kenneth Levine and Richard Rutta;
(2) Kenneth Levine and Richard Rutta transferred all of the issued and
outstanding shares of each of the affiliated entities to Diamond in
consideration for which Diamond issued 6,950,000 shares of Common Stock to
Kenneth Levine and Richard Rutta; (3) each of the affiliated entities merged
with and into Diamond; (4) Green Equity Investors II, L.P. purchased: (A)
770,000 shares of Common Stock, equal to 77.0% of the Common Stock outstanding
after the Recapitalization, for aggregate consideration equal to $15.4 million,
and (B) 28,000 shares of Series A 12% Senior Redeemable Cumulative Preferred
Stock, equal to 80.0% of the Preferred Stock outstanding following the
Recapitalization, for an aggregate consideration of $28.0 million; (5) Norman
Harris and Michael A. Sumsky purchased an aggregate of 30,000 shares of Common
Stock, equal to 3.0% of the Common Stock outstanding after the Recapitalization,
for aggregate consideration of $600,000; and (6) Diamond redeemed from Kenneth
Levine and Richard Rutta all of the Common Stock owned by them (other than
100,000 shares owned by each of them) for approximately $150.7 million in cash,
which resulted in each of Kenneth Levine and Richard Rutta owning 10.0% of the
Common Stock outstanding after the Recapitalization. These transactions were
consummated on March 31, 1998, and together constitute the "Recapitalization."
Concurrently with the Recapitalization, Diamond issued the Notes and entered
into the old bank facility with a syndicate of financial institutions, under
which Diamond borrowed $12.5 million in connection with the Recapitalization.
Results of Operations
The following discussion and analysis should be read in conjunction
with "Selected Financial Data" and the audited Financial Statements of Diamond
and the notes thereto included elsewhere in this Annual Report.
The following table summarizes Diamond's historical results of
operations and historical results of operations as a percentage of sales for the
years ended December 31, 1997, 1998 and 1999.
-16-
` Years Ended December 31,
------------------------
1997 1998 1999
---- ---- ----
$ % $ % $ %
-----------------------------------------------------
(dollars in millions)
Sales....................................... 122.0 100.0 149.6 100.0 164.5 100.0
Cost of Sales............................... 36.7 30.1 43.8 29.3 51.4 31.2
------ ----- ----- ----- ----- -----
Gross Profit................................ 85.3 69.9 105.8 70.7 113.1 68.8
Operating Expenses.......................... 74.7 61.2 89.8 60.0 101.9 61.9
------ ----- ----- ----- ----- -----
Income from Operations...................... 10.6 8.7 16.0 10.7 11.2 6.8
Interest Income............................. (0.2) 0.2 (0.1) 0.1 0.0 0.0
Interest Expense............................ 0.0 0.0 8.1 5.4 11.0 6.7
------ ----- ----- ----- ----- -----
(0.2) 0.2 8.0 5.3 11.0 6.7
------ ----- ----- ----- ----- -----
Income before provision for income taxes.... 10.8 8.9 8.0 5.3 0.2 0.1
Provision for income taxes.................. 0.0 0.0 0.0 0.0 0.2 0.1
----- ------ ----- ----- ---- ---
Net income.................................. 10.8 8.9 8.0 5.3 0.0 0.0
===== ====== ===== ===== ==== ====
EBITDA (1).................................. 18.0 14.8 18.5 12.4 13.8 8.4
(1) EBITDA represents income before taxes, interest expense, depreciation and
amortization expense and non-recurring executive compensation expense in
1997 of $5 million. While EBITDA is not intended to represent cash flow
from operations as defined by GAAP and should not be considered as an
indicator of operating performance or an alternative to cash flow (as
measured by GAAP) as a measure of liquidity, it is included herein to
provide additional information with respect to Diamond's ability to meet
its future debt service, capital expenditure and working capital
requirements.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Sales. Sales for 1999 increased by $14.9 million, or 10.0%, to $164.5
million from $149.6 million for 1998. This increase was primarily due to an
increase in sales at service centers opened in 1998 and 1999. Although
installation units increased 18.4%, primarily reflecting the continued
maturation of Diamond's service centers and increased installation productivity,
revenue per installation unit decreased an average of 6%. The decrease in
Diamond's average revenue per installation unit is primarily attributable to
weaker industry demand for glass replacement services, due primarily to milder
weather conditions, which resulted in price compression throughout the industry.
Gross Profit. Gross profit for 1999 increased by $7.3 million, or 6.9%,
to $113.1 million from $105.8 million for 1998. Gross margin decreased as a
percentage of sales to 68.8% for 1999 from 70.7% for 1998. The decrease in gross
margin was primarily due to price compression throughout the industry, which
adversely affected average revenue per installation unit. The adverse impact of
price compression was partially offset by a decrease in glass product costs.
Operating Expenses. Operating expenses for 1999 increased by $12.1
million, or 13.5%, to $101.9 million from $89.8 million for 1998. Operating
expenses increased as a percentage of sales to 61.9% for 1999 from 60.0% for
1998. The increase in operating expenses during 1999 was primarily due to an
increase in expenses related to the continued expansion of Diamond's service and
distribution center network which resulted in an increase in service and
distribution center payroll and other operating expenses, such as vehicle
operating leases and rent. The increase in operating expenses as a percentage of
sales is attributable to a decrease in average revenue per installation unit
which was partially offset by an average decrease of 4% in operating expense per
installation unit due to the leveraging of service center, corporate and
administrative expenses. In addition, operating expenses in 1999 included a full
year of costs related to senior management salaries and the management fees paid
to LGP compared to the inclusion of nine months of these costs in 1998 following
the consummation of the Recapitalization.
-17-
Depreciation and amortization expense for 1999 increased by $0.2
million, or 8.3%, to $2.6 million from $2.4 million for 1998. This increase is
attributable to a $0.5 million increase in amortization expense related to the
implementation of certain sales, billing and financial systems software in
February 1999. The increase in amortization expense was offset by a $0.5 million
decrease in depreciation expense due to the inception of a master fleet leasing
program during 1997 for the lease of mobile installation and distribution
service vehicles.
Income from Operations. Income from operations for 1999 decreased by
$4.8 million, or 30.0%, to $11.2 million from $16.0 million for 1998. This
decrease was primarily due to the decline in average revenue per installation
unit discussed above that was partially offset by a decrease in glass product
costs, an increase in installation productivity and the leveraging of service
center, corporate and administrative expenses.
Interest Expense. Interest expense for 1999 increased by $2.9 million,
or 35.8%, to $11.0 million from $8.1 million for 1998. In 1999, Diamond incurred
a full year of interest expense compared to the inclusion of nine months of
interest expense in 1998 following the consummation of the Recapitalization.
Net Income. Diamond recorded a minimal amount of net income in 1999
compared to $8.0 million of net income in 1998. Net income as a percentage of
sales decreased to 0.0% for 1999 from 5.3% for 1998. The decrease in net income
and net income margin during 1999 was primarily due to the adverse impact of
lower average revenue per installation unit that was partially offset by a
decrease in glass product costs, an increase in installation productivity and
the leveraging of service center, corporate and administrative expenses.
EBITDA. EBITDA for 1999 decreased by $4.7 million, or 25.4%, to $13.8
million from $18.5 million for 1998. EBITDA as a percentage of sales decreased
to 8.4% for 1999 from 12.4% for 1998. The decrease in EBITDA and EBITDA margin
during 1999 was primarily due to the adverse impact of lower average revenue per
installation unit that was partially offset by a decrease in glass product
costs, an increase in installation productivity and the leveraging of service
center, corporate and administrative expenses.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Sales. Sales for 1998 increased by $27.6 million, or 22.6%, to $149.6
million from $122.0 million for 1997. This increase was primarily due to an
increase in sales at service centers opened in 1996, 1997 and 1998.
Gross Profit. Gross profit for 1998 increased by $20.5 million, or
24.0%, to $105.8 million from $85.3 million for 1997. Gross profit increased as
a percentage of sales to 70.7% for 1998 from 69.9% for 1997. The increase in
gross profit and gross margin during 1998 was primarily due to an increase in
Diamond's sales and an increase in average revenue per installation unit.
Operating Expenses. Operating expenses for 1998 increased by $15.1
million, or 20.2%, to $89.8 million from $74.7 million for 1997. Operating
expenses decreased as a percentage of sales to 60.0% for 1998 from 61.2% for
1997. The decrease in operating expenses as a percentage of sales during 1998
was primarily due to a non-recurring executive compensation expense of $5.0
million accrued for in 1997. Excluding the non-recurring executive compensation
expense in 1997, operating expenses increased as a percentage of sales to 60.0%
for 1998 from 57.1% for 1997. The increase in operating expenses during 1998 was
primarily due to an increase in expenses related to the continued expansion of
Diamond's service and distribution center network. During 1998, Diamond added 32
net new service centers; opened distribution centers in Rock Island, Illinois
and Atlanta, Georgia and consolidated its Raleigh, North Carolina and its
Orlando, Florida distribution centers into Diamond's Atlanta, Georgia
distribution center. The increase in operating expenses as a percentage of sales
is primarily attributable to an increase in service and distribution center
network payroll and other operating expenses combined with weaker demand for
auto glass installation services. In addition, since April 1998 Diamond has
incurred additional costs related to increases in senior management salaries, an
accrual for an incentive based bonus program for senior management and
management fees paid to LGP.
Depreciation and amortization expense for 1998 increased by $0.2
million, or 9.1%, to $2.4 million from $2.2 million for 1997. In 1998, Diamond
commenced amortization of certain software related to the implementation of a
new point of sale system for the service center network. The increase in
amortization expense was offset by a
-18-
$0.1 million decrease in depreciation expense due to the inception of a master
fleet leasing program during 1997 for the lease of mobile installation and
distribution service vehicles.
Income from Operations. Income from operations for 1998 increased by
$5.4 million, or 50.9%, to $16.0 million from $10.6 million for 1997. Excluding
the impact of the non-recurring executive compensation expense of $5.0 million
in 1997, income from operations for 1998 increased by $0.4 million, or 2.6%, to
$16.0 million from $15.6 million for 1997.
Interest Expense. Interest expense for 1998 was $8.1 million due to the
consummation of the Recapitalization compared to no interest expense for 1997.
Net Income. Net income for 1998 decreased $2.8 million, or 25.9%, to
$8.0 million from $10.8 million for 1997. The primary reason for this decrease
was attributable to interest expense of $8.1 million. This was offset with a
$5.4 million increase in income from operations.
EBITDA. EBITDA for 1998 increased by $0.5 million, or 2.8%, to $18.5
million from $18.0 million for 1997. EBITDA as a percentage of sales decreased
to 12.4% for 1998 from 14.8% for 1997. The increase in EBITDA during 1998 was
primarily due to the increase in sales and gross profit, which was offset by an
increase in operating expenses. The decrease in EBITDA margin during 1998 is
primarily attributable to an increase in the service and distribution center
network payroll and other operating expenses combined with weaker demand for
auto glass installation services. During 1998, Diamond incurred additional costs
related to increases in senior management salaries, an accrual for an incentive
based bonus program for senior management and management fees paid to LGP. The
decrease in EBITDA margin for 1998 related primarily to an increase in operating
expenses which was partially offset by an increase in gross margin.
Liquidity and Capital Resources
Diamond's need for liquidity will arise primarily from interest payable
on the Notes, the new 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 borrowing base under the new credit facility exceeds the
amount outstanding thereunder, no required payments of principal on the new
credit facility prior to its expiration on March 27, 2004.
Net Cash Provided by Operating Activities. Net cash provided by
operating activities for 1999 decreased $1.9 million to $3.3 million from $5.2
million for 1998. The decrease in cash provided by operating activities for 1999
was due to a decrease in Diamond's net earnings, a $1.4 million increase in
inventory and a $1.6 million decrease in accounts payable which was offset by a
$1.9 million decrease in accounts receivable due to newly implemented accounts
receivable and billing systems which improved the accuracy and timeliness of
customer billings and improved post-billing collection efforts. Net cash
provided by operating activities for 1998 decreased $10.5 million to $5.2
million from $15.7 million for 1997. The decrease in cash provided by operating
activities for 1998 was primarily due to a decrease in Diamond's net earnings
and an increase in working capital requirements.
Net Cash Provided by/Used in Investing Activities. Net cash used in
investing activities for 1999 decreased $2.8 million to $2.3 million used from
$0.5 million provided by investing activities for 1998. Net cash provided by
investing activities for 1998 increased $3.6 million to $0.5 million from $3.1
million used in investing activities for 1997. The primary reason for these
variances was the elimination in 1998 of a due from related company of $2.9
million in connection with the Recapitalization.
Net Cash Used in Financing Activities. Net cash used in financing
activities for 1999 decreased $10.4 million to $1.2 million from $11.6 million
for 1998, while net cash used in financing activities for 1998 decreased $0.2
million to $11.6 million from $11.8 million for 1997. The reason for these
variances was the Recapitalization, in which $97.0 million was received from the
issuance of the Notes, $12.5 million from the old bank facility, $28.0 million
from the sale of preferred stock to Green Equity Investors II, L.P. and $16.0
million from the sale of common stock to Green Equity Investors II, L.P., Norman
Harris and Michael A. Sumsky. This was offset by distributions to stockholders
of $4.6 million, the repurchase of common stock for $150.7 million and deferred
loan
-19-
costs of $5.8 million principally resulting from the issuance of the Notes. In
addition, Diamond repaid $4.0 million of the $12.5 million received from the old
bank facility during 1998 in connection with the Recapitalization.
Capital Expenditures. Net capital expenditures were $2.4 million for
1999 as compared to $2.5 million for 1998 and $2.4 million for 1997. Excluding
vehicle capital expenditures, capital expenditures were $1.9 million for 1999 as
compared to $1.8 million for 1998 and $1.5 million for 1997. Capital
expenditures in 1999 were made primarily to fund the continued upgrade of
Diamond's management information systems. The most significant capital
expenditures contemplated over the next five years will be for the continued
enhancement and maintenance of Diamond's management information systems and
development of Diamond's nationwide expansion program. It is anticipated that
Diamond will annually incur approximately $2.5 to $3.0 million in capital
expenditures primarily to expand its management information systems with the
remaining portion used to expand its service and distribution center network.
Liquidity. Management believes that Diamond will have adequate capital
resources and liquidity to satisfy its debt service obligations, working capital
needs and capital expenditure requirements, including those related to the
opening of new service centers. Diamond's capital resources and liquidity are
expected to be provided by Diamond's net cash provided by operating activities
and borrowings under the new credit facility.
Inflation
Diamond believes that inflation has not had a material impact on its
results of operations for 1997, 1998 or 1999.
Effect of Weather Conditions and Seasonality
Weather has historically affected Diamond's sales, net income and
EBITDA, with severe weather generating increased sales, net income and EBITDA
and mild weather resulting in lower sales, net income and EBITDA. In addition,
Diamond's business is somewhat seasonal, with the fourth quarter traditionally
its slowest period of activity. Diamond believes such seasonal trends will
continue for the foreseeable future. See "--Sales."
-20-
ITEM 8. FINANCIAL STATEMENTS
The following financial statements of Diamond, together with the report
of the independent auditors thereon, are presented on pages F-1 through F-19
hereof as set forth below:
Index to Financial Statements
Page
----
Independent Auditors' Report............................................. F-2
Balance Sheets, December 31, 1999 and 1998............................... F-3
Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997...................................... F-5
Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1999, 1998 and 1997...................................... F-6
Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997..................................... F-7
Notes to Financial Statements.......................................... F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-21-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of
Diamond's directors and executive officers:
Name Age Position
---- --- --------
Kenneth Levine ...................... 46 Co-Chairman of the Board,
Co-Chief Executive Officer
and Director
Richard Rutta........................ 43 Co-Chairman of the Board,
Co-Chief Executive Officer
and Director
Norman Harris........................ 45 President
Michael A. Sumsky.................... 41 Executive Vice President,
Chief Financial Officer and
General Counsel
Gregory J. Annick.................... 36 Director
John G. Danhakl .................... 44 Director
Jonathan D. Sokoloff................. 42 Director
Kenneth Levine has been Diamond's Co-Chairman of the Board and Co-Chief
Executive Officer since March 1998 and a Director of Diamond since March 1987.
Mr. Levine joined Diamond in 1979 and has served as Diamond's effective
Co-President since 1987. In 1987, Mr. Levine, together with Richard Rutta,
purchased all of Diamond's outstanding stock.
Richard Rutta has been Diamond's Co-Chairman of the Board and Co-Chief
Executive Officer since March 1998 and a Director of Diamond since March 1987.
Mr. Rutta joined Diamond in 1979 and has served as Diamond's effective
Co-President since 1987. In 1987, Mr. Rutta, together with Kenneth Levine,
purchased all of Diamond's outstanding stock.
Norman Harris has been Diamond's President since March 1998. Mr. Harris
has served as Diamond's Executive Vice President from 1995 until March 1998. Mr.
Harris joined Diamond in 1993. From 1991 through 1993, Mr. Harris served as
President of Inveauto C.A. of Maracay, Venezuela, a fabricator of automotive
glass and parts. From 1977 until 1991, Mr. Harris was employed by Safelite Glass
Corporation.
Michael A. Sumsky has been Diamond's Executive Vice President, Chief
Financial Officer and General Counsel since joining Diamond in 1995. Prior to
joining Diamond, Mr. Sumsky was the co-founder of a distributorship of seasonal
gift electronics and other consumer products since 1991. Mr. Sumsky was employed
by Emerson Radio Corporation in various financial and legal capacities from 1986
to 1989 and from 1990 to 1991. From 1989 to 1990, Mr. Sumsky was an associate at
Parker, Duryee, Rosoff & Haft, a New York City law firm.
Gregory J. Annick has been a Director of Diamond since March 1998. Mr.
Annick has been an executive officer of LGP, a merchant banking firm that
manages Green Equity Investors II, L.P., since the formation of LGP and Green
Equity Investors II, L.P. in 1994. Mr. Annick joined a merchant-banking firm
affiliated with LGP as an associate in 1989, became a principal in 1993, and
through a corporation became a partner in 1994. From 1988 to 1989, Mr. Annick
was an associate with the merchant banking firm of Gibbons, Green, van
Amerongen. Prior thereto, Mr. Annick was a financial analyst in mergers and
acquisitions with Goldman, Sachs & Co. Mr. Annick is also a director of several
private companies.
John G. Danhakl has been a Director of Diamond since March 1998. Mr.
Danhakl has been an executive officer of LGP since 1995. Mr. Danhakl had
previously been a Managing Director at Donaldson, Lufkin & Jenrette Securities
Corporation ( "DLJ ") and had been with DLJ since 1990. Prior to joining DLJ,
Mr. Danhakl was a Vice President at Drexel Burnham Lambert Incorporated
("Drexel"). Mr. Danhakl is also a director of Twinlab Corporation, The Arden
Group, Inc. and several private companies.
Jonathan D. Sokoloff has been a Director of Diamond since March 1998.
Mr. Sokoloff has been an executive officer of LGP since its formation in 1994.
Since 1990, Mr. Sokoloff had been a partner at a merchant-banking firm
affiliated with LGP. Mr. Sokoloff had previously been a Managing Director at
Drexel. Mr. Sokoloff is also a director of Twinlab Corporation, Gart Sports
Company, Rite Aid Corporation and several private companies.
-22-
Except for Messrs. Levine and Rutta, who are first cousins, no family
relationship exists between any of Diamond's officers or directors.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
Summary Compensation Table. The following table provides information
about the compensation paid by Diamond to its Co-Chief Executive Officers and
its two other executive officers during the fiscal years ended December 31,
1997, 1998 and 1999. The Co-Chief Executive Officers and the two other executive
officers of Diamond are collectively referred to as the "Named Executive
Officers."
- ------------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation Awards
-------------------------------------------------------------------------------
Other Securities All
Annual Underlying Other
Name and Principal Position Salary ($) Compensation Options/ Compensation
Year Bonus ($) ($) SARs (#) ($)
- -----------------------------------------------------------------------------------------------------------------------
Kenneth Levine 1999 $300,000 - - - $3,168 (3)
Co-Chairman of the Board 1998 $249,331 $85,386 (1) - - $3,168 (3)
and Co-Chief Executive Officer 1997 $106,000 - (2) - $3,168 (3)
- -----------------------------------------------------------------------------------------------------------------------
Richard Rutta 1999 $300,000 - - - $3,168 (3)
Co-Chairman of the Board 1998 $249,331 $85,386 (1) - - $3,168 (3)
and Co-Chief Executive Officer 1997 $106,000 - (2) - $3,168 (3)
- -----------------------------------------------------------------------------------------------------------------------
Norman Harris 1999 $275,000 - - - $3,168 (3)
President 1998 $256,962 $70,016 (1) - 450 $3,168 (3)
1997 $212,000 - (2) - $2,721 (3)
- -----------------------------------------------------------------------------------------------------------------------
Michael A. Sumsky 1999 $250,000 - - - $2,711 (3)
Executive Vice President, 1998 $221,893 $70,016 (1) - 450 $2,324 (3)
Chief Financial Officer and 1997 $148,400 - (2) - $2,182 (3)
General Counsel
- -----------------------------------------------------------------------------------------------------------------------
- ------------------------
(1) This bonus was earned in the year indicated, but paid in the
immediately subsequent year.
(2) During 1997, Diamond accrued an aggregate of $5.0 million in
non-recurring executive compensation for the Named Executive
Officers, which was paid in 1998.
(3) Represents Diamond's net contribution on behalf of the Named
Executive Officer to Diamond's 401(k) Profit Sharing Plan.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values. The following table provides information regarding the exercise
price of stock options during the fiscal year ended December 31, 1999 for each
of Diamond's Named Executive Officers and the year-end value of unexercised
options held by the Named Executive Officers.
-23-
- --------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options/SARs at
Options/SARs at Fiscal Year-End ($)
Shares Acquired on Fiscal Year-End (#) Exercisable/
Name Exercise (#) Value Realized ($) Exercisable/ Unexercisable
Unexercisable
- --------------------------------------------------------------------------------------------------------------------
Kenneth Levine N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------
Richard Rutta N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------
Norman Harris - - 0/450 0/0
- --------------------------------------------------------------------------------------------------------------------
Michael A. Sumsky - - 0/450 0/0
- --------------------------------------------------------------------------------------------------------------------
Committees of the Board of Directors
There are no committees of the Board of Directors.
Compensation of Directors
Diamond's officers, as well as Messrs. Annick, Danhakl and Sokoloff, do
not receive any compensation directly for their service on Diamond's Board of
Directors. Diamond has agreed, however, to pay LGP certain fees for various
management, consulting and financial planning services, including assistance in
strategic planning, providing market and financial analyses, negotiating and
structuring financing and exploring expansion opportunities. See "Certain
Relationships and Related Transactions."
Stock Option Plan
In September 1998, Diamond's Board of Directors and stockholders
approved and adopted the Diamond Triumph Auto Glass, Inc. 1998 Management Stock
Option Plan (the "1998 Plan"). The purpose of the 1998 Plan is to provide key
employees of Diamond and its subsidiaries with an incentive to remain in the
service of Diamond or its subsidiaries, to enhance Diamond's long-term
performance and to afford key employees the opportunity to acquire a proprietary
interest in Diamond. Currently, the 1998 Plan is administered by Diamond's Board
of Directors. An aggregate of 30,000 shares of Common Stock are authorized for
issuance under the 1998 Plan. As of December 31, 1999, the Board of Directors
had granted options to purchase a total of 27,175 shares of Common Stock under
the 1998 Plan. These options vest in five equal annual installments, commencing
on the first anniversary of the date of grant. Vested options may not be
exercised until the earlier of: (1) 90 days after Diamond's Common Stock has
become publicly traded and (2) 91 days prior to the tenth anniversary of the
date of grant. The 1998 Plan expires in September 2008.
Employment Agreements
On March 31, 1998, Diamond entered into employment agreements with each
of Kenneth Levine and Richard Rutta pursuant to which they each agreed to serve
as the Co-Chairmen of the Board and Co-Chief Executive Officers of Diamond. Each
of the agreements with Messrs. Levine and Rutta provide for the following:
(1) An initial term of five years beginning on March 31, 1998 and
ending on March 31, 2003.
(2) An annual base salary of $300,000, subject to annual review
based on Diamond's and the executive's performance. In
addition, for each calendar year beginning on January 1, 1998,
each executive is entitled to receive an annual bonus equal to
a percentage of Diamond's EBITDA in excess of specified
thresholds, not to exceed $450,000.
(3) In the event the executive is terminated by Diamond for cause
(as defined in the employment agreement) or in the event the
executive resigns, Diamond will pay the executive the
executive's base salary through the date of termination.
-24-
(4) In the event the executive is terminated due to death or
disability (as defined in the employment agreement), the
executive will receive:
o his base salary for a period of 12 months (but in no
event beyond March 31, 2003); and
o the amount of any bonus payable through the date of
termination.
(5) In the event the executive is terminated by Diamond for any
other reason than as provided in clauses (3) and (4) above,
the executive will receive:
o his base salary through the date of termination;
o the amount of any bonus payable through the date of
termination; and
o in lieu of any further compensation, severance pay equal
to the base salary that the executive would have
otherwise received during the period beginning on the
date of termination and ending on the earlier of (1) the
scheduled termination date of executive's employment
period under the employment agreement and (2) such time
as the executive obtains other permanent employment.
(6) Customary non-competition and non-solicitation provisions,
which provisions survive for one year after the termination of
the executive's employment, and customary non-disclosure and
assignment of inventions provisions.
On March 31, 1998, Diamond entered into an employment agreement with
Norman Harris pursuant to which Mr. Harris agreed to serve as the President of
Diamond at an annual salary of $275,000, subject to annual review based on
Diamond's and the executive's performance. On March 31, 1998, Diamond also
entered into an employment agreement with Michael A. Sumsky pursuant to which
Mr. Sumsky agreed to serve as the Executive Vice President, Chief Financial
Officer and General Counsel of Diamond at an annual salary of $250,000, subject
to annual review based on Diamond's and the executive's performance. Each of the
agreements with Messrs. Harris and Sumsky also provide for the following:
(1) An initial term of three years beginning on March 31, 1998 and
ending on March 31, 2001.
(2) In addition to his base salary, for each calendar year
beginning on January 1, 1998, each executive is entitled to
receive an annual bonus equal to a percentage of Diamond's
EBITDA in excess of specified thresholds, not to exceed
$375,000.
(3) In the event the executive is terminated by Diamond for cause
(as defined in the employment agreement) or in the event the
executive resigns, Diamond will pay the executive the
executive's base salary through the date of termination.
(4) In the event the executive is terminated due to death or
disability (as defined in the employment agreement), the
executive will receive:
o his base salary for a period of 12 months (but in no
event beyond March 31, 2001); and
o the amount of any bonus payable through the date of
termination.
(5) In the event the executive is terminated by Diamond for any
other reason than as provided in clauses (3) and (4) above,
the executive will receive:
o his base salary through the date of termination;
o the amount of any bonus payable through the date of
termination; and
-25-
o in lieu of any further compensation, severance pay equal
to the base salary that the executive would have
otherwise received during the period beginning on the
date of termination and ending on the earlier of (1) the
scheduled termination date of executive's employment
period under the employment agreement and (2) such time
as the executive obtains other permanent employment for
compensation in an amount reasonably comparable to his
base salary with Diamond.
(6) Customary non-competition, non-solicitation provisions,
non-disclosure and assignment of inventions provisions.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information regarding the beneficial
ownership of Diamond's Common Stock and Series A 12% Senior Redeemable
Cumulative Preferred Stock (referred to in the table as the "Series A Preferred
Stock"), as of March 30, 2000, by (1) each person known by Diamond to be the
beneficial owner of more than 5% of the Common Stock, (2) each director, (3)
Diamond's Named Executive Officers, and (4) all of Diamond's executive officers
and directors as a group. Except as indicated in the footnotes to this table,
Diamond believes that the persons named in this table have sole voting and
investment power with respect to all of the shares of Common Stock and Series A
Preferred Stock indicated.
- ----------------------------------------------------------------------------------------------------------------------
Common Stock Series A Preferred Stock
Beneficially Owned Beneficially Owned
Number of Percentage of Number of Percentage of
Name Shares Class Shares Class
- ----------------------------------------------------------------------------------------------------------------------
Green Equity Investors II, L.P. (1) 770,000 77.0% 28,000 80.0%
- ----------------------------------------------------------------------------------------------------------------------
Gregory J. Annick (1)(2) 770,000 77.0% 28,000 80.0%
- ----------------------------------------------------------------------------------------------------------------------
John G. Danhakl (1)(2) 770,000 77.0% 28,000 80.0%
- ----------------------------------------------------------------------------------------------------------------------
Jonathan D. Sokoloff (1)(2) 770,000 77.0% 28,000 80.0%
- ----------------------------------------------------------------------------------------------------------------------
Kenneth Levine 100,000 10.0% 3,500 10.0%
- ----------------------------------------------------------------------------------------------------------------------
Richard Rutta 100,000 10.0% 3,500 10.0%
- ----------------------------------------------------------------------------------------------------------------------
Norman Harris 15,000 1.5% - -
- ----------------------------------------------------------------------------------------------------------------------
Michael Sumsky 15,000 1.5% - -
- ----------------------------------------------------------------------------------------------------------------------
All directors and executive officers 1,000,000 100.0% 35,000 100.00%
as a group
(7 persons)(3)
- ----------------------------------------------------------------------------------------------------------------------
(1) The address of Green Equity Investors II, L.P. and Messrs. Annick,
Danhakl and Sokoloff is 11111 Santa Monica Boulevard, Suite 2000, Los
Angeles, California 90025.
(2) The shares shown as beneficially owned by Messrs. Annick, Danhakl and
Sokoloff represent the 770,000 shares of Common Stock and the 28,000
shares of Series A Preferred Stock owned of record by Green Equity
Investors II, L.P. Green Equity Investors II, L.P. is a Delaware
limited partnership managed by LGP, which is an affiliate of the
general partner of Green Equity Investors II, L.P. Each of Leonard I.
Green, Jonathan D. Sokoloff, John G. Danhakl, Peter J. Nolan and
Gregory J. Annick, either directly (whether through ownership interest
or position) or through one or more intermediaries, may be deemed to
control LGP and such general partner. LGP and such general partner may
be deemed to control the voting and disposition of the shares of Common
Stock owned by Green Equity Investors II, L.P. As such, Messrs. Annick,
Danhakl and Sokoloff may be deemed to have shared voting and investment
power with respect to all shares held by Green Equity Investors II,
L.P. However, such individuals disclaim beneficial ownership of the
securities held by Green Equity Investors II, L.P., except to the
extent of their respective pecuniary interests therein.
(3) Includes the shares referred to in Note 2 above.
-26-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Services Agreement
In connection with the Recapitalization, Diamond entered into a
Management Services Agreement with LGP pursuant to which LGP receives an annual
management fee of $685,000. This fee is subordinated in right of payment to the
Notes. The Management Services Agreement also provides that LGP may receive
reasonable and customary fees and reasonable expenses from time to time for
providing financing, advisory and investment banking services to Diamond in
connection with major financial transactions. See "Business - Recapitalization".
Lease
Kenneth Levine and Richard Rutta are the sole partners of a partnership
which leases to Diamond, on an arm's length basis, Diamond's headquarters and
distribution facility in Kingston, Pennsylvania and 18 service center locations.
Following the Recapitalization, at Diamond's request, Kenneth Levine and Richard
Rutta caused the partnership to renew or extend the leases on the facilities
through December 31, 2010, on terms substantially similar to those applicable to
those facilities on January 15, 1998, provided that the monthly rental amounts
increase 4.0% each calendar year beginning January 1, 1999. Rental payments to
the partnership for the facilities aggregated $513,000, $535,000 and $556,000 in
1997, 1998 and 1999, respectively.
Stockholders Agreement
On March 31, 1998, Green Equity Investors II, L.P., Kenneth Levine,
Richard Rutta and Diamond entered into a Stockholders Agreement. The
Stockholders Agreement generally restricts the transferability of shares of
Common Stock held by Kenneth Levine and Richard Rutta. The Stockholders
Agreement also establishes a right of first refusal in favor of Green Equity
Investors II, L.P. or Diamond in the event Kenneth Levine or Richard Rutta seek
to transfer any of their shares of Common Stock to a third party pursuant to a
bona fide offer. In addition, Green Equity Investors II, L.P. has certain
"drag-along" rights and certain sales of Common Stock by Green Equity Investors
II, L.P. are subject to "tag-along" rights of Kenneth Levine and Richard Rutta
to participate in those sales. The Stockholders Agreement also grants demand
registration rights to Green Equity Investors II, L.P. and piggyback
registration rights to Green Equity Investors II, L.P., Kenneth Levine and
Richard Rutta
Pursuant to the Stockholders Agreement, Green Equity Investors II,
L.P., Kenneth Levine and Richard Rutta have agreed to vote their shares of
Common Stock in favor of the election of each of Kenneth Levine and Richard
Rutta as a director of Diamond so long as they are executive officers of
Diamond.
Subject to early termination of the provisions described above (other
than those relating to registration rights) at the time, if any, as the Common
Stock is publicly held, the Stockholders Agreement terminates on the tenth
anniversary of the date thereof.
Management Share Agreements
On March 31, 1998, Diamond and Green Equity Investors II, L.P. entered
into Management Subscription and Stockholders Agreements with each of Norman
Harris and Michael A. Sumsky, which are collectively referred to as the
"Management Share Agreements." Pursuant to the Management Share Agreements, the
shares of Common Stock purchased by Messrs. Harris and Sumsky in the
transactions related to the Recapitalization are subject to various transfer
restrictions and purchase rights. The Management Share Agreements also contain
certain "piggyback," registration rights, "tag-along" sale rights, "drag-along"
sale obligations and a right of first refusal in favor of Green Equity Investors
II, L.P. or Diamond in the event Messrs. Harris or Sumsky seek to transfer their
shares of Common Stock to a third party pursuant to a bona fide offer.
-27-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) (1) All financial statements of Diamond for the year ended
December 31, 1999 are filed herewith. See Item 8 of this
Report for a list of such financial statements.
(2) All financial statement schedules have been omitted as the
required information is inapplicable or has been included in
the financial statements and notes thereto.
(3) Exhibits - See response to paragraph (c) below.
(b) Reports on Form 8-K.
Not applicable.
(c) Exhibits.
Exhibit
Number Description
------ -----------
2.1 (1) Second Amended and Restated Stock Purchase and Sale Agreement,
dated as of January 15, 1998, by and among, VGMC Corp., Green
Equity Investors II, L.P., Diamond Triumph Auto Glass, Inc.,
Triumph Auto Glass, Inc., Diamond Auto Glass Works, Inc., A
Above Average Glass Company by Diamond, inc., A-AA Triumph Auto
Glass, Inc., Scranton Holdings, Inc., Diamond/Triumph Auto
Export Sales Co. Inc., A-Auto Glass by Triumph, Inc., A-Auto
Glass Company by Diamond, Inc. and Kenneth Levine and Richard
Rutta.
3.1 (1) Amended and Restated Certification of Incorporation of Diamond
Triumph Auto Glass, Inc.
3.2 (1) Certificate of Designations of Series A 12% Senior Redeemable
Cumulative Preferred Stock of Diamond Triumph Auto Glass, Inc.
3.3 (1) Certificate of Amendment of Certificate of Incorporation of
Diamond Triumph Auto Glass, Inc., dated April 28, 1998.
3.4 (1) Certificate of Amendment of Certificate of Incorporation of
Diamond Triumph Auto Glass, Inc., dated September 15, 1998.
3.5 (1) By-laws of Diamond Triumph Auto Glass, Inc.
4.1 (1) Indenture, dated as of March 31, 1998, between Diamond Triumph
Auto Glass, Inc., as Issuer, and State Street Bank and Trust
Company, as Trustee, regarding the 91/4% Senior Notes Due 2008.
4.2 (1) Registration Rights Agreement, dated as of March 31, 1998,
among Diamond Triumph Auto Glass, Inc., First Union Capital
Markets, a division of Wheat First Securities, Inc., BT Alex.
Brown Incorporated and Donaldson, Lufkin & Jenrette Securities
Corporation.
4.3 (1) Note Purchase Agreement, dated March 26, 1998, among Diamond
Triumph Auto Glass, Inc., First Union Capital Markets, a
division of Wheat First Securities, Inc., BT Alex. Brown
Incorporated and Donaldson, Lufkin & Jenrette Securities
Corporation.
10.1 (1) Management Subscription and Stockholders Agreement, dated as of
March 31, 1998, among Diamond Triumph Auto Glass, Inc., Green
Equity Investors II, L.P. and Norman Harris.
10.2 (1) Management Subscription and Stockholders Agreement, dated as of
March 31, 1998, among Diamond Triumph Auto Glass, Inc., Green
Equity Investors II, L.P. and Michael Sumsky.
-28-
Exhibit
Number Description
------ -----------
10.3 (1) Stockholders Agreement, dated as of March 31, 1998, among Green
Equity Investors II, L.P., Kenneth Levine, Richard Rutta and
Diamond Triumph Auto Glass, Inc.
10.4 (1) Employment Agreement, dated as of March 31, 1998, between
Diamond Triumph Auto Glass, Inc. and Kenneth Levine.
10.5 (1) Employment Agreement, dated as of March 31, 1998, between
Diamond Triumph Auto Glass, Inc. and Richard Rutta.
10.6 (1) Employment Agreement, dated as of March 31, 1998, between
Diamond Triumph Auto Glass, Inc. and Norman Harris.
10.7 (1) Employment Agreement, dated as of March 31, 1998, between
Diamond Triumph Auto Glass, Inc. and Michael Sumsky.
10.8 (1) Non-Competition Agreement, dated March 31, 1998, between
Kenneth Levine and Diamond Triumph Auto Glass, Inc.
10.9 (1) Non-Competition Agreement, dated March 31, 1998, between
Richard Rutta and Diamond Triumph Auto Glass, Inc.
10.10 (1) Management Services Agreement, dated as of March 31, 1998,
between Diamond Triumph Auto Glass, Inc. and Leonard Green &
Partners, L.P.
10.11 (2) Finance Agreement, dated March 27, 2000, between The CIT
Business Group/Business Credit, Inc. and Diamond Triumph Auto
Glass, Inc.
10.12 (1) Diamond Triumph Auto Glass, Inc. 1998 Management Stock Option
Plan.
27 (2) Financial Data Schedule.
(1) Incorporated by reference to Diamond's Registration Statement on Form
S-4 filed with the SEC on March 30, 2000.
(2) Filed herewith.
-29-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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.
By: /s/ Kenneth Levine
---------------------------------
Name: Kenneth Levine
Title: Co-Chief Executive Officer
Date: April 11, 2000
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title(s) Date
--------- -------- ----
/s/ Kenneth Levine Co-Chairman of the Board, April 11, 2000
- ------------------------------- Co-Chief Executive
Kenneth Levine Officer and Director
/s/ Richard Rutta Co-Chairman of the Board, April 11, 2000
- ------------------------------- Co-Chief Executive
Richard Rutta Officer and Director
/s/ Michael A. Sumsky Executive Vice President, April 11, 2000
- ------------------------------- Chief Financial Officer
Michael A. Sumsky and General Counsel
/s/ Norman Harris President April 11, 2000
- -------------------------------
Norman Harris
/s/ Gregory J. Annick Director April 11, 2000
- -------------------------------
Gregory J. Annick
/s/ John G. Danhakl Director April 11, 2000
- -------------------------------
John G. Danhakl
/s/ Jonathan D. Sokoloff Director April 11, 2000
- -------------------------------
Jonathan D. Sokoloff
-30-
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report........................................... F-2
Balance Sheets, December 31, 1999 and 1998............................. F-3
Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997.................................. F-5
Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1999, 1998 and 1997...................... F-6
Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.................................. F-7
Notes to Financial Statements.......................................... F-8
F-1
Independent Auditors' Report
The Board of Directors
Diamond Triumph Auto Glass, Inc.:
We have audited the accompanying balance sheets of Diamond Triumph Auto Glass,
Inc. as of December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the three
year period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Diamond Triumph Auto Glass,
Inc. as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the years in the three year period ended December 31,
1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Allentown, Pennsylvania
February 22, 2000, except for Note 12 which is as of March 27, 2000
F-2
DIAMOND TRIUMPH AUTO GLASS, INC.
Balance Sheets
December 31, 1999 and 1998
(Dollars in Thousands)
Assets 1999 1998
-------- --------
Current assets:
Cash and cash equivalents $ 94 301
Accounts receivable, less allowance for doubtful accounts
of $956 and $800 for 1999 and 1998 respectively 10,895 12,727
Other receivables 189 1,610
Inventories 12,620 11,264
Prepaid expenses 962 841
Deferred income taxes 3,081 2,826
-------- --------
Total current assets 27,841 29,569
-------- --------
Equipment and leasehold improvements:
Vehicles 10,289 11,040
Computers and office equipment 3,173 2,667
Computer software 3,901 2,566
Other equipment 524 488
Leasehold improvements 140 123
-------- --------
18,027 16,884
Accumulated depreciation and amortization (10,334) (8,906)
-------- --------
Net equipment and leasehold improvements 7,693 7,978
Deferred loan costs and senior notes discount, net 7,502 8,152
Deferred income taxes 44,082 44,619
Other assets 401 374
-------- --------
Total assets $ 87,519 90,692
======== ========
F-3
DIAMOND TRIUMPH AUTO GLASS, INC.
Balance Sheets
December 31, 1999 and 1998
(Dollars in Thousands)
Liabilities and Stockholders' Equity (Deficit) 1999 1998
--------- ---------
Current liabilities:
Accounts payable $ 7,950 9,586
Accrued expenses
Payroll and related items 3,314 3,166
Accrued interest 2,363 2,326
Accrued income taxes 1,216 1,955
Other 362 354
--------- ---------
Total accrued expenses 7,255 7,801
--------- ---------
Total current liabilities 15,205 17,387
--------- ---------
Long-term debt:
Bank facility 7,500 8,500
Senior notes 100,000 100,000
--------- ---------
Total long-term debt 107,500 108,500
--------- ---------
Total liabilities 122,705 125,887
--------- ---------
Series A 12% senior redeemable cumulative preferred stock - par
value $0.01 per share; authorized 100,000 shares; issued and
outstanding 35,000 in 1999 and 1998, at liquidation preference value 43,046 38,246
--------- ---------
Stockholders' equity (deficit):
Common stock, 1999 and 1998- par value $0.01 per share; authorized
1,100,000 shares; issued and outstanding 1,000,000 shares 10 10
Additional paid-in capital 52,747 57,547
Retained earnings (accumulated deficit) (130,989) (130,998)
--------- ---------
Total stockholders' equity (deficit) (78,232) (73,441)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 87,519 90,692
========= =========
See accompanying notes to financial statements.
F-4
DIAMOND TRIUMPH AUTO GLASS, INC.
Statements of Operations
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
1999 1998 1997
--------- --------- ---------
Net sales $ 164,520 149,609 122,005
Cost of sales 51,456 43,851 36,702
--------- --------- ---------
Gross profit 113,064 105,758 85,303
--------- --------- ---------
Operating expenses:
Payroll 61,434 54,377 47,653
Advertising and promotional 10,349 9,499 7,360
Other operating expenses 27,516 23,478 17,445
Depreciation and amortization 2,595 2,410 2,238
--------- --------- ---------
101,894 89,764 74,696
--------- --------- ---------
Income from operations 11,170 15,994 10,607
Other (income) expense:
Interest income (31) (120) (184)
Interest expense 11,054 8,162 --
--------- --------- ---------
11,023 8,042 (184)
--------- --------- ---------
Income before provision for income taxes 147 7,952 10,791
Provision for income taxes 138 (37) --
--------- --------- ---------
Net income 9 7,989 10,791
Preferred stock dividends 4,800 3,246 --
--------- --------- ---------
Net (loss) income applicable to common stockholders $ (4,791) 4,743 10,791
========= ========= =========
Historical income before provision for income taxes $ 7,952 10,791
Pro forma provision for taxes 3,181 4,316
--------- ---------
Pro forma net income 4,771 6,475
Preferred stock dividends 3,246 --
--------- ---------
Pro forma net income applicable to common stockholders $ 1,525 6,475
========= =========
See accompanying notes to financial statements.
F-5
DIAMOND TRIUMPH AUTO GLASS, INC.
Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
Retained
Common stock Additional earnings
------------------------ paid-in (accumulated
Shares Amount capital deficit) Total
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 2,300 4 -- 24,290 24,294
Issuance of common stock -- -- -- -- --
Net income -- -- -- 10,791 10,791
Distributions to stockholders -- -- -- (11,800) (11,800)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 2,300 4 -- 23,281 23,285
Net income -- -- -- 7,989 7,989
Distributions to stockholders -- -- -- (11,597) (11,597)
Reclassification of common stock 698,500 6 -- (6) --
Common stock issued as stock
purchase shares 6,950,000 69 -- (69) --
Sale of common stock 800,000 8 15,992 -- 16,000
Redemption of stockholders'
common stock and
recapitalization followed by
cancellation of treasury stock
including income tax effects (7,450,800) (77) 44,801 (150,596) (105,872)
Preferred stock dividends -- -- (3,246) -- (3,246)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 1,000,000 10 57,547 (130,998) (73,441)
Net income -- -- -- 9 9
Preferred stock dividends -- -- (4,800) -- (4,800)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 1,000,000 $ 10 52,747 (130,989) (78,232)
========== ========== ========== ========== ==========
See accompanying notes to financial statements.
F-6
DIAMOND TRIUMPH AUTO GLASS, INC.
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net income $ 9 7,989 10,791
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and other amortization 2,595 2,410 2,238
Amortization of deferred loan costs and senior notes discount 882 661 --
Provision for doubtful accounts 1,341 1,063 662
(Gain) on sale of fixed assets (32) (40) (2)
Changes in assets and liabilities:
Decrease (increase) in accounts and other receivables 1,912 (5,586) (4,824)
(Increase) decrease in inventories (1,356) (3,027) 886
(Increase) decrease in prepaid expenses (121) 363 (207)
(Decrease) increase in accounts payable (1,635) 3,655 911
(Decrease) increase in accrued expenses (546) (2,339) 5,290
Increase in deferred income taxes 282 25 --
-------- -------- --------
Total adjustments 3,322 (2,815) 4,954
-------- -------- --------
Net cash provided by operating activities 3,331 5,174 15,745
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (2,371) (2,529) (2,373)
Proceeds from sale of equipment 92 186 105
(Increase) decrease in other assets (27) (69) 83
Due from (to) related company -- 2,866 (898)
-------- -------- --------
Net cash (used in) provided by investing activities (2,306) 454 (3,083)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of senior notes -- 97,000 --
Net proceeds from bank facility 26,000 18,500 --
Proceeds from issuance of preferred stock -- 28,000 --
Distributions to stockholders, net -- (4,597) (11,800)
Payments on bank facility (27,000) (10,000) --
Issuance of common stock -- 16,000 --
Deferred loan costs (232) (5,813) --
Repurchase of common stock -- (150,672) --
-------- -------- --------
Net cash used in financing activities (1,232) (11,582) (11,800)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (207) (5,954) 862
Cash and cash equivalents, beginning of year 301 6,255 5,393
-------- -------- --------
Cash and cash equivalents, end of year $ 94 301 6,255
======== ======== ========
See accompanying notes to financial statements.
F-7
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
(1) Description of Entity, Basis of Presentation and Recapitalization
Prior to March 31, 1998, Diamond Triumph Auto Glass, Inc. (formerly Diamond
Auto Glass Works, Inc. and affiliates) included Diamond Auto Glass Works,
Inc., Triumph Auto Glass, Inc., Triumph Auto Glass of Ohio, Inc., A Above
Average Auto Glass Company by Diamond, Inc., A-AA Triumph Auto Glass, Inc.,
and Scranton Holding Co., all of which were owned equally by two
stockholders. All significant intercompany balances and transactions were
eliminated in combination prior to March 31, 1998.
The Company, Kenneth Levine and Richard Rutta (together, the "Company
Principals"), Green Equity Investors II, L.P. ("GEI"), and certain
affiliated entities of the Company (the "Affiliated Companies") entered
into a Second Amended and Restated Stock Purchase and Sale Agreement, dated
as of January 15, 1998 and which was consummated on March 31, 1998,
pursuant to which, among other things, (a) the Company declared and paid a
dividend of 3,500 shares ($3,500) of Preferred Stock, to each of the
Company Principals, equal to 10.0% of the Preferred Stock to be outstanding
following the Recapitalization (as hereinafter defined); (b) the Company
Principals transferred all of the issued and outstanding shares of each of
the Affiliated Companies to Diamond and as consideration for such transfers
Diamond issued 6,950,000 shares of Common Stock (the "Stock Purchase
Shares") to the Company Principals; (c) certain Affiliated Companies merged
with and into the Company (the "Merger"); (d) GEI purchased (i)
approximately 770,000 shares of Common Stock, equal to 77.0% of the Common
Stock outstanding following the Recapitalization, for aggregate
consideration of $15,400, and (ii) 28,000 shares of Preferred Stock, equal
to 80.0% of the Preferred Stock outstanding following the Recapitalization,
for aggregate consideration of $28,000; (e) certain members of the
Company's management purchased 30,000 shares of Common Stock, equal to 3.0%
of the Common Stock outstanding following the Recapitalization, for
aggregate consideration of $600; and (f) the Company redeemed from the
Company Principals all of the Stock Purchase Shares and other shares of
Common Stock owned by them (other than 100,000 shares owned by each of
them) for cash, resulting in each of the Company Principals owning 10.0% of
the Common Stock to be outstanding following the Recapitalization.
Concurrently, with the consummation of the transactions set forth in
clauses (a) through (f) above (the "Recapitalization"), the Company issued
$100,000 in aggregate principal amount of senior notes in a private
placement (the "Note Offering") and entered into a five year $35,000
revolving credit facility (the "Old Bank Facility") with a syndicate of
financial institutions, of which $12,500 was borrowed in connection with
the Recapitalization.
On March 27, 2000, the Company replaced the Old Bank Facility with a new
revolving credit facility (the "Credit Facility") (See Note 12 - Subsequent
Event).
The Company, headquartered in Kingston, Pennsylvania, is a provider of
automotive glass replacement and repair services in the Northeast,
Mid-Atlantic, Midwest, Southwest and Southeast regions of the United
States. At December 31, 1999, the Company operated a network of 226 service
centers and four distribution centers in 39 states.
F-8
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Investments with original maturities of three months or less are
considered cash equivalents.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the rolling average method with costs incurred on a
first-in, first-out basis.
(c) Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost.
Depreciation and amortization is calculated using the straight-line
method over the following useful lives:
Vehicles 5 years
Computers and office equipment 5-7 years
Computer software 3-5 years
Other equipment 5 years
Leasehold improvements 39 years
Costs in 1999 and 1998 related to the development of software for a
new back office sales audit and financial accounting system and point
of sale system were capitalized. Upon completion of each of the
projects in 1999 and 1998, the Company commenced amortizing the
software costs over the estimated useful life of five years.
Unamortized computer software costs were $3,218 and $2,503 at December
31, 1999 and 1998, respectively. Amortization expense in 1999 and 1998
for capitalized computer software costs was $620 and $61,
respectively.
(d) Income Taxes
Effective March 31, 1998, the date of conversion from S Corporation
status to C Corporation status, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes, and has reported the effect of recognizing deferred tax assets
and liabilities in income tax expense in the 1998 statement of
operations.
Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date of any change.
F-9
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
(e) Deferred Loan Costs and Senior Notes Discount
Deferred loan costs and senior notes discount are amortized over
the life of the related debt and included in interest expense. Costs
and accumulated amortization are summarized as follows:
Accumulated
December 31, 1999 Amount Amortization Balance
----------------- ------ ------------ -------
Deferred loan costs $ 6,013 1,017 4,996
Discount on senior notes 3,000 525 2,475
-------- -------- --------
$ 9,013 1,542 7,471
======== ======== ========
December 31, 1998
-----------------
Deferred loan costs $ 5,813 436 5,377
Discount on senior notes 3,000 225 2,775
-------- -------- --------
$ 8,813 661 8,152
======== ======== ========
(f) Revenue Recognition
Revenue from auto glass installation and related services is
recognized when the installation is complete or the service is
performed.
(g) Advertising
The Company expenses all advertising costs as incurred. The costs of
yellow pages advertising are expensed at the time the yellow pages
phone book is published. Total advertising expense was $8,150, $7,444
and $5,902 in 1999, 1998 and 1997, respectively.
(h) Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting For the Impairment of
Long-lived Assets and For Long-lived Assets to Be Disposed Of". Under
the provisions of this statement, the Company has evaluated its
long-lived assets for financial impairment, and will continue to
evaluate them as events or changes in circumstances indicate that the
carrying amount of such assets may not be fully recoverable.
(i) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-10
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
(3) Fair Value of Financial Instruments
For purposes of estimating the fair value of financial instruments, the
Company has determined that the carrying amounts recorded on the balance
sheet approximate the fair value for cash and cash equivalents, accounts
and other receivables and current liabilities. In making this
determination, the Company considered the short-term maturity of those
assets and liabilities. The carrying amount of the Company's Old Bank
Facility approximates fair value based on borrowing rates available to the
Company for loans with similar terms. On March 27, 2000, the Company
replaced the Old Bank Facility with the new Credit Facility (See Note 12 -
Subsequent Event). The fair value of the Company's Senior Notes is
estimated based on quoted market prices for those or similar investments.
The estimated fair value of the Corporation's Senior Notes is $70,000 and
$100,000 at December 31, 1999 and 1998, respectively. The fair value of the
Company's Series A 12% Senior Redeemable Cumulative Preferred Stock
approximates the liquidation preference.
(4) Long -Term Debt
Long-term debt consists of the following:
1999 1998
-------- --------
Bank facility $ 7,500 8,500
Senior notes 100,000 100,000
-------- --------
Total $107,500 108,500
======== ========
The Old Bank Facility was scheduled to expire on April 1, 2003 and provided
for borrowings of up to $35,000. Borrowings under the Old Bank Facility
bore interest, at the Company's discretion, at either the Base Rate, as
defined, or at the Eurodollar Rate, plus a margin of 1.50% for the Base
Rate and 2.50% for the Eurodollar Rate from August 13, 1999. Prior to
August 13, 1999, borrowings under the Old Bank Facility bore interest, at
the Company's discretion, at either the Base Rate, as defined, or at the
Eurodollar Rate, plus a margin of 1.00% for the Base Rate and 2.00% for the
Eurodollar Rate. In addition, a commitment fee of 0.375% was charged
against any unused balance of the Old Bank Facility. The effective interest
rate on borrowings under the Old Bank Facility ranged from 9.00% to 10.00%
as of December 31, 1999. Interest rates were subject to increases or
reductions based upon the Company meeting certain financial tests. The
proceeds of the Old Bank Facility were available for working capital
requirements and for general corporate purposes, including permitted
acquisitions. A portion of the Old Bank Facility not to exceed $5,000 was
available for the issuance of letters of credit, which generally have an
initial term of one year or less. The Company had $852 and $673 in
outstanding letters of credit at December 31, 1999 and 1998, respectively.
The Old Bank Facility was secured by first priority security interests in
all of the tangible and intangible assets of the Company. In addition, the
Old Bank Facility contained certain restrictive covenants including, among
other things, the maintenance of certain debt coverage ratios, as well as
restrictions on additional indebtedness, dividends and certain other
significant transactions. At December 31, 1999, the Company was not in
compliance with certain financial covenants of its Old Bank Facility and
received a waiver from its lenders. As previously described, the Company
replaced the Old Bank Facility with the new Credit Facility, which is the
basis for the classification of the debt as long-term debt.
F-11
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
The Senior Notes mature on April 1, 2008 and bear interest at a rate of
9.25% per annum. The Senior Notes and the obligations of the Company under
the indenture governing the Senior Notes (the "Note Indenture") are
unconditionally guaranteed on a senior, unsecured basis by any Subsidiary
Guarantor, of which there are currently none. The Senior Notes are callable
after five years at a premium to par which declines to par after eight
years. Upon a change of control, as defined, the Company is required to
offer to redeem the Senior Notes at 101% of the principal amount plus
accrued and unpaid interest. Restrictive covenants contained in the Note
Indenture include, among other things, limitations on additional
indebtedness, investments, dividends and certain other significant
transactions. The Company was in compliance with all such covenants as of
December 31, 1999.
Maturities of long-term debt are as follows:
2000 $ --
2001 --
2002 --
2003 --
2004 7,500
Thereafter 100,000
-----------
$ 107,500
===========
(5) Preferred Stock
On March 27, 1998, the Company's Board of Directors adopted a Certificate
of Designation creating $35,000 in Series A 12% Senior Redeemable
Cumulative Preferred Stock (the "Preferred Stock"). The Preferred Stock has
a liquidation preference over the Common Stock equal to the initial
liquidation value of the Preferred Stock plus accrued and unpaid dividends
thereon. The Preferred Stock will be subject to mandatory redemption on
April 1, 2010 at 100% of the liquidation value plus accrued and unpaid
dividends. The Company may, at its option, redeem at any time the Preferred
Stock, in whole or in part, at 100% of the liquidation value plus accrued
and unpaid dividends. Upon a Change of Control (as defined), the Company
must offer to repurchase the Preferred Stock at 100% of its liquidation
value plus accrued and unpaid dividends, provided, however, that the
Company shall not be obligated to (and shall not) offer to repurchase the
Preferred Stock if such repurchase would violate the terms of the new
Credit Facility or the terms of the Note Indenture.
F-12
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
The Preferred Stock bears cumulative quarterly dividends at a rate per
annum equal to 12.0% of the liquidation value. Dividends may, at the option
of the Company, be paid in cash or by adding to the then liquidation value
of the Preferred Stock an amount equal to the dividends then accrued and
payable. The terms of the Preferred Stock contain restrictions on
distributions and on purchases of junior securities. The Preferred Stock
has no voting rights with respect to general corporate matters except as
provided by law or for certain class voting rights in connection with the
issuance of senior or parity equity securities of the Company and any
amendments to the Company's Certificate of Incorporation that adversely
affect the rights of the Preferred Stock.
At December 31, 1999 and 1998 the liquidation value of the Preferred Stock
recorded on the Company's Balance Sheet was $43,046 and $38,246,
respectively, which includes dividends of $8,046 and $3,246, respectively,
added to the liquidation value.
(6) Commitments and Related Party Transactions
The Company leases service center and warehouse space and is responsible
for all related occupancy costs. Rental expense in 1999, 1998 and 1997
aggregated $4,419, $3,931 and $3,135, respectively, of which $556, $535 and
$513, respectively, were for realty owned by two stockholders and executive
officers. Certain of the leases with unrelated parties contain various
renewal options, and right of refusal purchase options.
In addition, the Company leases certain vehicles under operating leases
having lease terms of 367 days. The leases have renewal options for up to
eight years. Total rent expense for such leases amounted to $2,587, $1,808
and $539 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Total lease commitments, including vehicles, are as follows:
Third Related
parties parties Total
------------- --------------- --------------
2000 $ 5,764 562 6,326
2001 3,930 539 4,469
2002 2,368 561 2,929
2003 1,102 583 1,685
2004 333 606 939
The Company entered into a Management Services Agreement on March 31, 1998
with a related party pursuant to which the Company pays an annual fee of
$685. Expense under this agreement was $685 and $514 in 1999 and 1998,
respectively.
The Company has employment agreements with certain of its executive
officers (some of whom are also stockholders) which expire on March 31,
2001 and 2003.
F-13
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
(7) Stock Option Plan
In September 1998, the Board of Directors and stockholders of the Company
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 unissued shares of common stock. In 1998, the Board
of Directors granted 27,175 options to key employees of the Company with an
exercise price of $20.00 per share, which approximates fair value at the
date of grant. No options were granted in 1999. The options vest evenly
over five years and may not be exercised until the earlier of (a) 90 days
after the Company'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.
The Company applies APB Opinion No. 25 in accounting for the 1998 Plan and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined its stock options
under SFAS No. 123, the Company's net income would have been changed to the
pro forma amounts indicated below.
Years Ended December 31,
1999 1998
--------- ---------
Net income:
As reported $ 9 7,987
Pro forma (6) 7,985
The per share fair value of stock options granted during fiscal 1998 was
$2.84 on the date of grant and was determined using the Black-Scholes
option-pricing model based upon the following assumptions:
1998
-------
Expected dividend yield 0.00%
Expected volatility 0.00%
Risk-free rate 4.65%
Expected life (in years) 9.75
F-14
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
Summarized stock option data is as follows:
Exercise Shares
Price Under Option
---------- ------------
Outstanding at December 31, 1997 $ -- --
Granted 20.00 27,125
Exercised -- --
Cancelled -- --
--------
Outstanding at December 31, 1998 -- 27,125
Granted -- --
Exercised -- --
Cancelled -- (3,000)
--------
Outstanding at December 31, 1999 20.00 24,125
========
Exercisable $ -- --
(8) Income Taxes
Prior to the consummation of the Merger, all of the Affiliated Companies
were S Corporations and as such federal and state taxes were generally paid
at the stockholder level only. There was no provision for income taxes
through the consummation of the Merger on March 31, 1998.
As discussed in Note 2, the Company adopted SFAS No. 109 as of March 31,
1998. The effect of recognizing deferred tax assets and liabilities from
other than the Merger transaction as of March 31, 1998 was the recording of
net deferred tax assets of $1,643, reflected as a reduction in 1998 income
tax expense.
Upon consummation of the Merger, the Affiliated Companies terminated their
S Corporation status. The Merger of Diamond Auto Glass Works, Inc., Triumph
Auto Glass, Inc., A Above Average Auto Glass Company by Diamond, Inc., A-AA
Triumph Auto Glass, Inc., and Scranton Holding Co. into Diamond Triumph
Auto Glass, Inc. (formerly Triumph Auto Glass of Ohio, Inc.) was treated as
a taxable asset acquisition of the merged Affiliated Companies for Federal
and state income tax purposes and as a recapitalization for financial
accounting purposes. For Federal and state income tax purposes, the
purchase price was allocated among the various merged Affiliated Companies
and their respective assets and liabilities based on the respective fair
values as of the closing of the Merger. This resulted in different book and
tax asset bases for the assets of these companies, which resulted in
deferred tax assets of approximately $44,801 credited to additional paid-in
capital.
F-15
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
Income tax expense consists of:
Current Deferred Total
-------- -------- --------
Year ended December 31, 1999:
Federal $ -- 107 107
State (144) 175 31
-------- -------- --------
$ (144) 282 138
======== ======== ========
Current Deferred Total
-------- -------- --------
Year ended December 31, 1998:
Federal $ 161 (302) (141)
State 446 (342) 104
-------- -------- --------
$ 607 (644) (37)
======== ======== ========
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income as a result of the
following:
1999 1998
------ ------
Computed "expected" tax expense $ 50 2,704
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal income tax benefit 21 68
Recognition of deferred tax due to change in tax status -- (1,643)
Pretax income applicable to portion of year as S Corporation
for which income taxes have not been provided -- (1,572)
Permanent items 67 173
Other, net -- 233
------ ------
$ 138 (37)
====== ======
F-16
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred assets and deferred tax liabilities at December
31, 1999 and 1998 are presented below.
1999 1998
------- -------
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 382 320
Inventories, principally due to additional
costs inventoried for tax 651 741
Intangibles 41,885 45,046
Prepaid Advertising expenses not yet
deducted for tax purposes 1,650 1,501
Net operating loss and alternative minimum
tax credit carryforward 3,130 83
Liabilities and accruals for financial reporting purposes 420 269
------- -------
Total gross deferred tax assets 48,118 47,960
------- -------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and capitalized interest 955 515
------- -------
Total gross deferred tax liabilities 955 515
------- -------
Net deferred tax assets $47,163 47,445
======= =======
There was no valuation allowance for deferred tax assets as of December 31,
1999 or 1998, or March 31, 1999. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during periods in which those temporary
differences become deductible. Management considers the reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. In order to realize the deferred tax
assets, the Company will need to generate future taxable income of
approximately $115,000 prior to expiration of the 15-year amortization
period for the intangible assets in 2012 and the subsequent net operating
loss carryforward period of 20 years. Taxable income (loss) for the years
ended December 31, 1999, 1998 and 1997 was $(8,000), $4,500 and $9,000,
respectively. Based upon the level of historical taxable income and
projections of future taxable income over the period the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences. The
amount of the deferred tax assets considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
amortization period are reduced.
F-17
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
(9) Employee Benefit Plans
The Company has a defined contribution plan covering all employees who meet
the age and service requirements. Contributions to the plan are determined
by the Company and are based upon a percentage of the annual compensation
of all participants. The expense related to the plan amounted to $292,
$250 and $206 for 1999, 1998 and 1997, respectively.
(10) Supplemental Cash Flow Information
1999 1998 1997
------- ------- -------
Interest paid $10,090 5,175 --
Income taxes paid -- 202 --
======= ======= =======
Noncash investing and financing activities:
Preferred stock dividends $ 4,800 3,246 --
Deferred tax assets -- 44,801 --
Distribution of preferred stock -- 7,000 --
======= ======= =======
(11) Legal Proceedings
The Company 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 the
Company's financial position, results of operations or liquidity.
(12) Subsequent Event
On March 27, 2000, the Company entered into the new Credit Facility. The
new Credit Facility has an initial term of four years and provides for
revolving advances of up to the lesser of: (1) $25,000; (2) the sum of 85%
of the Company's Eligible Accounts Receivable (as defined in the new Credit
Facility) plus 85% of the Company's Eligible Inventory (as defined in the
new Credit Facility), less certain reserves; or (3) an amount equal to 1.5
times the Company's EBITDA (as defined in the new Credit Facility) for the
prior twelve months. A portion of the new Credit Facility, not to exceed
$3,000, is available for the issuance of letters of credit. Borrowings
under the new Credit Facility bear interest, at the Company's discretion,
at either the Chase Manhattan Bank Rate (as defined in the new Credit
Facility) or LIBOR, plus a margin of 0.50% for the Chase Manhattan Rate and
2.25% for the LIBOR Rate. In addition, a commitment fee of 0.25% is charged
against any unused balance of the new Credit Facility. Interest rates are
subjected to increases or reductions based upon the Company meeting certain
EBITDA levels. The proceeds of the new Credit Facility are available for
working capital requirements and for general corporate purposes. The new
Credit Facility is secured by first priority security interests in all of
the tangible and intangible assets of the Company. In addition, the new
Credit Facility contains certain restrictive covenants including, among
other things, the
F-18
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
maintenance of a minimum EBITDA level for the prior twelve months, as well
as restrictions on additional indebtedness, dividends and certain other
significant transactions.
F-19