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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
[ ] 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
of Incorporation or Organization) Identification No.)
220 Division Street, Kingston, Pennsylvania 18704
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (570) 287-9915
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Securities registered pursuant to Section 12(b) of
the Act:
NONE
Securities registered pursuant to Section 12(g) of
the Act:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark 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 ]
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There is no public market for the registrant's stock. Diamond 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 30, 2001.
Documents Incorporated by Reference:
None.
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, 2000, Diamond operated a network
of 232 automotive glass service centers, approximately 1,069 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, 2000 were $184.0 million and $18.4 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 markets 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 2000 sales to individual
consumers, commercial and insurance customers represented approximately 26.9%,
40.0% and 33.1% 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 markets.
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 $38,000. In 2000, 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 2000, Diamond's 140 mature service centers (service centers open for four
years or longer) averaged approximately $956,000 in sales and approximately
$201,000 of branch operating profit per location. For the year ended December
31, 2000, approximately 94% of Diamond's mature service centers 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.
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 232 locations at the end of
2000.
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, Green Equity Investors II, L.P. acquired 77.0% of the Common
Stock and 80.0% of the Preferred Stock. This transaction was consummated on
March 31, 1998. Concurrently therewith, Diamond issued $100 million in the
aggregate principal amount of 9 1/4% Senior Notes (the "Notes") and entered into
a credit facility, under which Diamond borrowed $12.5 million.
Industry Overview
The market for the installation of automotive glass is highly
fragmented. Many industry participants 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.
Demand for automotive glass is influenced by several factors.
Replacement volume increases as the total vehicle population and the number of
miles driven increases. Severe weather and road conditions can also increase
demand for automotive glass repair and replacement. However, consumers may defer
fixing minor damage to a windshield 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 in the automotive glass replacement and repair industry
has been attributable primarily to an increase in the aggregate number of
vehicles on the road and to an increase in the aggregate number of miles driven
per vehicle per year. Growth in industry sales has also been driven by the use
of larger, more complex and more expensive automotive glass in new vehicles.
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. Although NAGS has not materially
modified its published list prices since January 1, 1999, NAGS has made periodic
modifications to its published list prices subsequent to that date.
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
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 markets, 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 2000 sales to individual consumers, commercial and
insurance customers represented approximately
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26.9%, 40.0% and 33.1% of total sales, respectively. In 2000, Diamond's top ten
customer accounts comprised approximately 21.5% of total sales and no single
customer account exceeded 5.7% 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
market 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 market 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. Substantial portions 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 market customers include commercial fleet leasing
companies, rental car companies, car dealerships, body shops, utilities and
government agencies. Diamond's customers in the commercial market include Avis
Rent-A-Car, Inc., Enterprise Rent-A-Car and Bell Atlantic Corporation (Verizon).
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 that participate in these networks have required that more than one
service provider provide automotive glass replacement and repair services in
order to ensure competitive pricing and high quality service. Diamond is an
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 1,069 mobile installation vehicles.
In 2000, 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 December 31, 2000, Diamond operated a network of 232 automotive
glass service centers, approximately 1,069 mobile installation vehicles and four
distribution 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. Due to the weak industry conditions
experienced in 1999, Diamond was more deliberate with its service center
expansion in 2000. Diamond opened seven new service centers in 2000, as compared
to an average of 32 new service centers in the four years prior to 2000. Diamond
will continue to be
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deliberate in its service center expansion policy as compared to the average
number of service centers opened in the four years prior to 2000.
The following chart provides information concerning Diamond's service
center openings from 1990 to 2000:
Service Centers % Increase
Year Openings Consolidations At Year End Over Prior Year
---- -------- -------------- ----------- ---------------
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%
2000.... 7 1 232 2.7%
Service centers 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
seven 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 regular 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 a
significant portion of its sales with internally distributed product, with the
remainder being purchased from the spot market. Diamond's highly efficient
distribution system, 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.
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 2000, no single supplier represented more than 20%
of Diamond's automotive glass purchases. Due to the competitive nature of the
automotive glass manufacturing industry, Diamond does not anticipate any
substantial difficulty in sourcing its automotive glass requirements in the
foreseeable future.
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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, 2000, Diamond employed 1,697 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 substantially leveraged and has significant debt service
obligations, which could impair its ability to pay the amounts due under its 9
1/4% Senior Notes. As of December 31, 2000, Diamond's aggregate consolidated
indebtedness was approximately $100.5 million (of which approximately $0.5
million represented aggregate outstanding indebtedness under Diamond's credit
facility), and Diamond had $48.4 million (liquidation preference) of outstanding
Preferred Stock and a stockholders' deficit of $81.3 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 credit facility and the indenture governing the Notes
contain certain restrictive financial and operating
covenants;
o Diamond's indebtedness under the credit facility is at
variable rates of interest, which makes Diamond vulnerable
to increases in interest rates;
o Diamond's indebtedness outstanding under the 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 credit facility and
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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 credit facility) with respect to the
assets securing such indebtedness. The 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 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 credit facility is secured by a first priority lien on
substantially all of Diamond's assets. In addition, the indenture governing the
Notes restricts the amount of indebtedness that subsidiaries are permitted to
incur.
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 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;
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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 credit facility requires Diamond to maintain minimum EBITDA (as
defined in the 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 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 credit facility, in which case the lender would, among other things,
be entitled to elect to declare all amounts owing under the 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 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;
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.
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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
credit facility prohibits Diamond from repurchasing any Notes, unless and until
Diamond has paid the indebtedness under the credit facility in full. Diamond's
failure to repurchase the Notes would result in a default under the indenture
governing the Notes and the credit facility. Diamond's inability to pay the
indebtedness under the 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 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 experienced in 1999, resulting from reduced demand for auto
glass services and lower average revenue per installation unit, Diamond was more
deliberate with its service center expansion in 2000. Diamond opened seven new
service centers in 2000, as compared to an average of 32 new service centers in
the four years prior to 2000. Diamond will continue to be deliberate in its
service center expansion policy as compared to the average number of service
centers opened in the four years prior to 2000. 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 credit facility, should enable it to finance the
expenditures related to its expansion. However, Diamond cannot assure you that:
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 credit facility are insufficient to
finance the expenditures related to Diamond's expansion, Diamond might 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, 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 these seasonal trends will
continue for the foreseeable future. Although Diamond's installation units
increased by only 0.7% in fiscal 2000, revenue per installation unit increased
an average of 10.7% in 2000. The increase in Diamond's average revenue per
installation unit is attributable
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to the stabilization of price compression and to its sales mix.
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's 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.
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
Leonard Green and Partners, L.P. ("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 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. 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's financial condition, operating results or
liquidity. In addition, management believes that Diamond has appropriate
insurance coverage to operate its business.
-9-
However, 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.
-10-
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........... 6 Nebraska.......... 1
Arkansas.......... 1 New Hampshire..... 5
Colorado.......... 5 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.......... 2
Indiana........... 7 Pennsylvania...... 26
Iowa.............. 3 Rhode Island...... 1
Kansas............ 3 South Carolina.... 4
Kentucky.......... 3 South Dakota...... 1
Louisiana......... 3 Tennessee......... 5
Maine............. 3 Texas............. 6
Maryland.......... 8 Utah.............. 2
Massachusetts..... 9 Vermont........... 3
Michigan.......... 8 Virginia.......... 11
Minnesota......... 3 West Virginia..... 4
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's financial condition, operating results or
liquidity. In addition, management believes that Diamond has appropriate
insurance coverage to operate its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
-11-
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 30, 2001, 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 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.
-12-
ITEM 6. SELECTED FINANCIAL DATA
The selected historical and unaudited pro forma condensed financial
data as of December 31, 1996, 1997, 1998, 1999 and 2000 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, 1999 and 2000, and for each of the years in the three year
period ended December 31, 2000, 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,
------------------------
1996 1997 1998 1999 2000
---- ---- ---- ----- ----
(dollars in thousands)
Statement of Operating Data:
Sales.................................................. $101,355 $122,005 $149,609 $164,520 $184,015
Cost of sales.......................................... 31,423 36,702 43,851 51,456 56,585
Gross profit........................................... 69,932 85,303 105,758 113,064 127,430
Operating expenses..................................... 56,883 74,696 89,764 101,894 111,814
Income from operations................................. 13,049 10,607 15,994 11,170 15,616
Interest income........................................ (109) (184) (120) (31) (57)
Interest expense....................................... -- -- 8,162 11,054 10,674
Net income before provision for income taxes and.......
extraordinary item................................ 13,158 10,791 7,952 147 4,999
Provision for income taxes............................. -- -- (37) 138 2,135
Extraordinary loss on extinguishment of debt,
net of income taxes of $336....................... -- -- -- -- 504
------- -------- -------- -------- -------
Net income............................................. 13,158 10,791 7,989 9 2,360
Preferred stock dividends.............................. -- -- 3,246 4,800 5,403
------- -------- -------- -------- -------
Net income (loss) applicable to common stockholders.... $13,158 $10,791 $ 4,743 $ (4,791) $ (3,043)
======= ======= ======= ========= =========
Pro forma (1):
Historical income before provision for income taxes.... $13,158 $10,791 $7,952
Pro forma provision for income taxes................... 5,263 4,316 3,181
------- -------- --------
Pro forma net income................................... $ 7,895 $ 6,475 $ 4,771
======= ======= =======
Other Data:
EBITDA(2).............................................. $14,948 $18,029 $18,524 $13,796 $18,447
EBITDA margin.......................................... 14.8% 14.8% 12.4% 8.4% 10.0%
Non-vehicle capital expenditures....................... $ 1,616 $ 1,514 $ 1,856 $ 1,892 $ 1,076
Vehicle capital expenditures........................... 3,730 859 673 479 182
------- -------- -------- -------- -------
Total capital expenditures............................. 5,346 2,373 2,529 2,371 1,258
Ratio of earnings to fixed charges (excluding
preferred stock dividends) (3)......................... 1.97x 1.01x 1.47x
Service centers operated at period end................. 142 174 206 226 232
Balance Sheet Data (at period end):
Cash and cash equivalents.............................. $ 5,393 $ 6,255 $ 301 $ 94 $ 25
Total assets........................................... 31,494 36,687 90,692 87,519 87,995
Total debt............................................. -- -- 108,500 107,500 100,500
Redeemable cumulative preferred stock.................. -- -- 38,246 43,046 48,449
Stockholders' equity (deficit) ........................ 24,294 23,285 (73,441) (78,232) (81,275)
-13-
(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 "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation"), Diamond eliminated its S corporation
status and, accordingly, is subject to federal and state income taxes.
(2) EBITDA represents income before income taxes and extraordinary item,
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.
-14-
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, 2000, Diamond operated a network
of 232 automotive glass service centers, approximately 1,069 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, 2000 were $184.0 million and $18.4 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 markets 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 2000 sales to individual
consumers, commercial customers and insurance customers represented
approximately 26.9%, 40.0% and 33.1% 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 a credit 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, 1998, 1999 and 2000.
-15-
Years Ended December 31,
--------------------------------------------------
1998 1999 2000
---------------- ------------- --------------
$ % $ % $ %
------ ------ ----- ----- ----- -----
(dollars in millions)
Sales....................................... 149.6 100.0 164.5 100.0 184.0 100.0
Cost of Sales............................... 43.8 29.3 51.4 31.2 56.6 30.8
------- ------- ------ ----- ----- -----
Gross Profit................................ 105.8 70.7 113.1 68.8 127.4 69.2
Operating Expenses.......................... 89.8 60.0 101.9 61.9 111.8 60.8
------- ------- ------ ----- ----- -----
Income from Operations...................... 16.0 10.7 11.2 6.8 15.6 8.4
Interest Income............................. (0.1) 0.1 0.0 0.0 (0.1) 0.1
Interest Expense............................ 8.1 5.4 11.0 6.7 10.7 5.8
------- ------- ------ ----- ----- -----
8.0 5.3 11.0 6.7 10.6 5.7
------- ------- ------ ----- ----- -----
Income before Provision for Income Taxes....
and Extraordinary Item................. 8.0 5.3 0.2 0.1 5.0 2.7
Provision for Income Taxes.................. 0.0 0.0 0.2 0.1 2.1 1.1
Extraordinary Loss on Debt Extinguishment,
Net of Income Taxes of $0.3............ 0.0 0.0 0.0 0.0 0.5 0.3
------- ------- ------ ----- ----- -----
Net Income.................................. 8.0 5.3 0.0 0.0 2.4 1.3
======= ======= ====== ===== ===== =====
EBITDA (1).................................. 18.5 12.4 13.8 8.4 18.4 10.0
(1) EBITDA represents income before taxes and extraordinary item, interest
expense, depreciation and amortization. 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, 2000 Compared to Year Ended December 31, 1999
Sales. Sales for 2000 increased by $19.5 million, or 11.9%, to $184.0
million from $164.5 million for 1999. This increase was primarily due to an
increase in sales at service centers opened in 1998 and 1999. Although
installation units increased only 0.7%, revenue per installation unit increased
an average of 10.7%. The increase in Diamond's average revenue per installation
unit is attributable to stabilization of price compression and to its sales mix.
Gross Profit. Gross profit for 2000 increased by $14.3 million, or
12.6%, to $127.4 million from $113.1 million for 1999. Gross margin increased as
a percentage of sales to 69.2% for 2000 from 68.8% for 1999. The increase in
gross margin was primarily due to the increased level of sales and average
revenue per installation unit in 2000.
Operating Expenses. Operating expenses for 2000 increased by $9.9
million, or 9.7%, to $111.8 million from $101.9 million for 1999. Operating
expenses decreased as a percentage of sales to 60.8% for 2000 from 61.9% for
1999. The increase in operating expenses during 2000 was primarily due to an
increase in wage expense caused by certain wage rate pressures, including
increased medical insurance and workers compensation insurance costs, primarily
at the service center level. The increase in aggregate operating expenses was
also due to an increase in vehicle related expenses versus the prior year,
resulting mainly from higher fuel costs due to rising gas prices. The decrease
in operating expenses as a percentage of sales is attributable to an increase in
average revenue per installation unit.
Depreciation and amortization expense for 2000 increased by $0.2
million, or 7.7%, to $2.8 million from $2.6 million for 1999. This increase is
primarily attributable to a $0.3 million increase in amortization and
depreciation expense related to certain sales, billing and financial systems
software and computer hardware.
-16-
This increase in expense was partially offset by a $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 2000 increased by
$4.4 million, or 39.3%, to $15.6 million from $11.2 million for 1999. This
increase was primarily due to the increase in average revenue per installation
unit and was partially offset by an increase in operating expenses as discussed
above.
Interest Expense. Interest expense for 2000 decreased by $0.3 million,
or 2.7%, to $10.7 million from $11.0 million for 1999. The decrease was due to a
reduction in outstanding borrowings under the credit facility during 2000.
Net Income. Diamond recorded $2.4 million of net income in 2000
compared to a minimal amount of net income in 1999. Net income as a percentage
of sales increased to 1.3% for 2000 from 0.0% for 1999. The increase in net
income and net income margin during 2000 was primarily due to the impact of
higher average revenue per installation unit that was partially offset by an
increase in operating expenses and in the provision for income taxes.
EBITDA. EBITDA for 2000 increased by $4.6 million, or 33.3%, to $18.4
million from $13.8 million for 1999. EBITDA as a percentage of sales increased
to 10.0% for 2000 from 8.4% for 1999. The increase in EBITDA and EBITDA margin
during 2000 was primarily due to the impact of higher average revenue per
installation unit that was partially offset by an increase in operating expenses
as discussed above.
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 was 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 certain 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.
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.
-17-
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 certain
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 certain 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 certain
service center, corporate and administrative expenses.
Liquidity and Capital Resources
Diamond's need for liquidity will arise primarily from interest payable
on the Notes, the credit facility and the funding of Diamond's capital
expenditures and working capital requirements. There are no mandatory principal
payments on the Notes prior to their maturity on April 1, 2008 and, except to
the extent that the amount outstanding under the credit facility exceeds the
borrowing base, no required payments of principal on the credit facility prior
to its expiration on March 27, 2004.
Net Cash Provided by Operating Activities. Net cash provided by
operating activities for 2000 increased $5.2 million to $8.5 million from $3.3
million for 1999. The increase in cash provided by operating activities for 2000
was due to an increase in Diamond's net earnings and a $4.0 million increase in
accounts payable which was partially offset by a $3.4 million increase in
accounts receivable and a $2.0 million increase in inventory. 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.
Net Cash Provided by/Used in Investing Activities. Net cash used in
investing activities for 2000 decreased $1.1 million to $1.2 million used from
$2.3 million used in investing activities for 1999. 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. The primary reason for these
variances was a decrease in capital expenditures in 2000 and 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 2000 increased $6.1 million to $7.3 million from $1.2 million for
1999. The reason for this variance was the increase in credit facility payments
over proceeds from $1.0 million in 1999 to $7.0 million in 2000. The net cash
used in financing activities for 1999 decreased $10.4 million to $1.2 million
from $11.6 million for 1998. The reason for this variance was the
Recapitalization, in which $97.0 million was received from the issuance of the
Notes, $12.5 million from a credit facility with a syndicate of financial
institutions, $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 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 borrowed under this credit facility during 1998 in connection with
the Recapitalization.
-18-
Capital Expenditures. Net capital expenditures were $1.3 million for
2000 as compared to $2.4 million for 1999 and $2.5 million for 1998. Excluding
vehicle capital expenditures, capital expenditures were $1.1 million for 2000 as
compared to $1.9 million for 1999 and $1.8 million for 1998. Capital
expenditures in 2000 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 the
continuation of Diamond's expansion program. It is anticipated that Diamond will
annually incur approximately $3.0 to $3.5 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 for the foreseeable future. Diamond's capital
resources and liquidity are expected to be provided by Diamond's net cash
provided by operating activities and borrowings under the credit facility.
Inflation
Diamond believes that inflation has not had a material impact on its
results of operations for 1998, 1999 or 2000.
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."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Diamond is subject to potential market risk exposure derived from its
practice of purchasing automotive replacement glass ("ARG") windshields from the
People's Republic of China. On February 28, 2001, several U.S. glass
manufacturers petitioned the Federal Trade Commission (the "FTC") requesting the
imposition of Antidumping Duties on imports of ARG windshields from the People's
Republic of China. Diamond's purchasing process utilizes a broad vendor base.
The majority of the Diamond's annual windshield purchases are from sources not
located in the People's Republic of China, with which already-established
flexible purchasing terms exist. Management believes that it is premature to
assess the potential impact of the FTC's ongoing investigation on Diamond.
Diamond has no other material exposure to market risk.
-19-
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, 2000 and 1999.............................. F-3
Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998........................................ F-5
Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 2000, 1999 and 1998............................ F-6
Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998........................................ F-7
Notes to Financial Statements........................................... F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-20-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning Diamond's
directors and executive officers:
Name Age Position
---- --- --------
Kenneth Levine ...................... 47 Co-Chairman of the Board,
Co-Chief Executive Officer and
Director
Richard Rutta ...................... 44 Co-Chairman of the Board,
Co-Chief Executive Officer and
Director
Norman Harris ...................... 46 President
Michael A. Sumsky.................... 42 Executive Vice President, Chief
Financial Officer and General
Counsel
Gregory J. Annick.................... 37 Director
John G. Danhakl .................... 45 Director
Jonathan D. Sokoloff................. 43 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.
Except for Messrs. Levine and Rutta, who are first cousins, no family
relationship exists between any of Diamond's officers or directors.
-21-
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,
1998, 1999 and 2000. 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 2000 $300,000 - - - $3,168 (2)
Co-Chairman of the Board 1999 $300,000 - - - $3,168 (2)
and Co-Chief Executive Officer 1998 $249,331 $85,386 (1) - - $3,168 (2)
- --------------------------------------------------------------------------------------------------------------------------
Richard Rutta 2000 $300,000 - - - $3,168 (2)
Co-Chairman of the Board 1999 $300,000 - - - $3,168 (2)
and Co-Chief Executive Officer 1998 $249,331 $85,386 (1) - - $3,168 (2)
- --------------------------------------------------------------------------------------------------------------------------
Norman Harris 2000 $275,000 $100,000 (1) - - $3,168 (2)
President 1999 $275,000 - - - $3,168 (2)
1998 $256,962 $70,016 (1) - 450 $3,168 (2)
- --------------------------------------------------------------------------------------------------------------------------
Michael A. Sumsky 2000 $250,000 $100,000 (1) - - $2,711 (2)
Executive Vice President, 1999 $250,000 - - - $2,711 (2)
Chief Financial Officer and 1998 $221,893 $70,016 (1) - 450 $2,324 (2)
General Counsel
- --------------------------------------------------------------------------------------------------------------------------
- ------------------
(1) This bonus was earned in the year indicated, but paid in the
immediately subsequent year.
(2) Represents Diamond's net contribution on behalf of the Named
Executive Officer to Diamond's 401(k) Profit Sharing Plan.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values. The following table provides information regarding the exercise
price of stock options during the fiscal year ended December 31, 2000 for each
of Diamond's Named Executive Officers and the year-end value of unexercised
options held by the Named Executive Officers.
-22-
- ----------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options/SARs at
Options/SARs at Fiscal Year-End ($)
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, 2000, the Board of Directors
had granted options to purchase a total of 28,425 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.
-23-
(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
-24-
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.
The employment agreements with Messrs. Harris and Sumsky as discussed
above will cease on March 31, 2001. From that date onward employment between the
Company and Messrs. Harris and Sumsky becomes at-will for both parties.
-25-
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, 2001, 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
12% Senior Redeemable Cumulative 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 RECAPITALIZATION
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.
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 $510,000, $530,000 and $551,000 in
1998, 1999 and 2000, 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) Financial Statements
(1) All financial statements of Diamond for the year ended December 31,
2000 are filed herewith. See Item 8 of this Annual 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.
-28-
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.
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.
- ---------------------------
(1) Incorporated by reference to Diamond's Registration Statement on Form
S-4 filed with the SEC on March 30, 2000.
-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
Dated: March 30, 2001
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, March 30, 2001
- ------------------------------- Co-Chief
Kenneth Levine Executive Officer and
Director
/s/ Richard Rutta Co-Chairman of the Board, March 30, 2001
- ------------------------------- Co-Chief
Richard Rutta Executive Officer and
Director
/s/ Michael A. Sumsky Executive Vice President, March 30, 2001
- ------------------------------- Chief Financial Officer
Michael A. Sumsky and General Counsel
/s/ Norman Harris
- ------------------------------- President March 30, 2001
Norman Harris
/s/ Gregory J. Annick Director March 30, 2001
- -------------------------------
Gregory J. Annick
/s/ John G. Danhakl Director March 30, 2001
- -------------------------------
John G. Danhakl
/s/ Jonathan D. Sokoloff Director March 30, 2001
- -------------------------------
Jonathan D. Sokoloff
-30-
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT
The registrant has not sent an annual report or proxy material to its
security holders.
-31-
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................. F-2
Balance Sheets, December 31, 2000 and 1999............................... F-3
Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998......................................... F-5
Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 2000, 1999 and 1998............................. F-6
Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998......................................... 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, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results of its operations
and its cash flows for each of the years in the three year period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
Allentown, Pennsylvania
February 22, 2001
F-2
DIAMOND TRIUMPH AUTO GLASS, INC.
Balance Sheets
December 31, 2000 and 1999
(Dollars in Thousands except per share amounts)
Assets 2000 1999
---------- ---------
Current assets:
Cash and cash equivalents $ 25 94
Accounts receivable, less allowance for doubtful accounts
of $462 and $956 for 2000 and 1999 respectively 13,977 10,895
Other receivables 373 189
Inventories 14,581 12,620
Prepaid expenses 1,084 962
Deferred income taxes 3,285 3,081
-------- --------
Total current assets 33,325 27,841
-------- --------
Equipment and leasehold improvements:
Vehicles 9,632 10,289
Computers and office equipment 3,274 3,173
Computer software 4,277 3,901
Other equipment 563 524
Leasehold improvements 319 140
-------- --------
18,065 18,027
Accumulated depreciation and amortization (11,911) (10,334)
-------- --------
Net equipment and leasehold improvements 6,154 7,693
Unamortized deferred loan costs and senior notes discount, net 6,073 7,502
Deferred income taxes 42,039 44,082
Other assets 404 401
-------- --------
Total assets $ 87,995 87,519
======== ========
F-3
DIAMOND TRIUMPH AUTO GLASS, INC.
Balance Sheets
December 31, 2000 and 1999
(Dollars in Thousands except per share amounts)
Liabilities and Stockholders' Equity (Deficit) 2000 1999
---------- ---------
Current liabilities:
Accounts payable $ 11,952 7,950
Accrued expenses
Payroll and related items 4,246 3,314
Accrued interest 2,329 2,363
Accrued income taxes 1,322 1,216
Other 492 362
--------- ---------
Total accrued expenses 8,169 7,255
--------- ---------
Total current liabilities 20,321 15,205
--------- ---------
Long-term debt:
Credit facility 500 7,500
Senior notes 100,000 100,000
--------- ---------
Total long-term debt 100,500 107,500
--------- ---------
Total liabilities 120,821 122,705
--------- ---------
Series A 12% senior redeemable cumulative preferred stock - par value $0.01
per share; authorized 100,000 shares; issued and outstanding 35,000
in 2000 and 1999, at liquidation preference value 48,449 43,046
--------- ---------
Stockholders' equity (deficit):
Common stock, 2000 and 1999- par value $0.01
per share; authorized 1,100,000 shares; issued
and outstanding 1,000,000 shares 10 10
Additional paid-in capital 47,344 52,747
Retained earnings (accumulated deficit) (128,629) (130,989)
--------- ---------
Total stockholders' equity (deficit) (81,275) (78,232)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 87,995 87,519
========= =========
See accompanying notes to financial statements.
F-4
DIAMOND TRIUMPH AUTO GLASS, INC.
Statements of Operations
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands except per share amounts)
2000 1999 1998
------------------- ------------------ ------------------
Net sales $ 184,015 164,520 149,609
Cost of sales 56,585 51,456 43,851
------------------- ------------------ ------------------
Gross profit 127,430 113,064 105,758
------------------- ------------------ ------------------
Operating expenses:
Payroll 67,786 61,434 54,377
Advertising and promotional 11,027 10,349 9,499
Other operating expenses 30,227 27,516 23,478
Depreciation and amortization 2,774 2,595 2,410
------------------- ------------------ ------------------
111,814 101,894 89,764
------------------- ------------------ ------------------
Income from operations 15,616 11,170 15,994
Other (income) expense:
Interest income (57) (31) (120)
Interest expense 10,674 11,054 8,162
------------------- ------------------ ------------------
10,617 11,023 8,042
------------------- ------------------ ------------------
Income before provision for income taxes and
extraordinary item 4,999 147 7,952
Provision for income taxes 2,135 138 (37)
------------------- ------------------ ------------------
Net income before extraordinary item 2,864 9 7,989
Extraordinary loss on extinguishment of debt,
net of income taxes of $336 504 -- --
------------------- ------------------ ------------------
Net Income 2,360 9 7,989
------------------- ------------------ ------------------
Preferred stock dividends 5,403 4,800 3,246
------------------- ------------------ ------------------
Net (loss) income applicable to common stockholders $ (3,043) (4,791) 4,743
=================== ================== ==================
Historical income before provision for income taxes $ 7,952
Pro forma provision for taxes 3,181
------------------
Pro forma net income 4,771
Preferred stock dividends 3,246
------------------
Pro forma net income applicable to common stockholders $ 1,525
==================
See accompanying notes to financial statements.
F-5
DIAMOND TRIUMPH AUTO GLASS, INC.
Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands except per share amounts)
Retained
Common stock Additional earnings
paid-in (accumulated
Shares Amount capital deficit) Total
------------------ ------------ -------------- ----------------- --------------
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)
Net income -- -- -- 2,360 2,360
Preferred stock dividends -- -- (5,403) -- (5,403)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2000 1,000,000 $ 10 47,344 (128,629) (81,275)
========== ========== ========== ========== ==========
See accompanying notes to financial statements.
F-6
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands except per share amounts)
2000 1999 1998
-------- -------- -------
Cash flows from operating activities:
Net income $ 2,360 9 7,989
-------- -------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and other amortization 2,774 2,595 2,410
Amortization of deferred loan costs and senior notes discount 920 882 661
Extraordinary loss on extinguishment of debt, excluding income taxes 840 -- --
Provision for doubtful accounts 101 1,341 1,063
(Gain) on sale of fixed assets (32) (32) (40)
Changes in assets and liabilities:
(Increase) decrease in accounts and other receivables (3,367) 1,912 (5,586)
(Increase) in inventories (1,961) (1,356) (3,027)
(Increase) decrease in prepaid expenses (122) (121) 363
Increase (decrease) in accounts payable 4,002 (1,635) 3,655
Increase (decrease) in accrued expenses 1,114 (546) (2,339)
Increase in deferred income taxes 1,839 282 25
-------- -------- --------
Total adjustments 6,108 3,322 (2,815)
-------- -------- --------
Net cash provided by operating activities 8,468 3,331 5,174
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (1,258) (2,371) (2,529)
Proceeds from sale of equipment 55 92 186
(Increase) decrease in other assets (3) (27) (69)
Due from (to) related company -- -- 2,866
-------- -------- --------
Net cash (used in) provided by investing activities (1,206) (2,306) 454
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of senior notes -- -- 97,000
Net proceeds from credit facility 12,750 26,000 18,500
Proceeds from issuance of preferred stock -- -- 28,000
Distributions to stockholders, net -- -- (4,597)
Payments on bank facility (19,750) (27,000) (10,000)
Issuance of common stock -- -- 16,000
Deferred loan costs (331) (232) (5,813)
Repurchase of common stock -- -- (150,672)
-------- -------- --------
Net cash used in financing activities (7,331) (1,232) (11,582)
Net (decrease) in cash and cash equivalents (69) (207) (5,954)
Cash and cash equivalents, beginning of year 94 301 6,255
-------- -------- --------
Cash and cash equivalents, end of year $ 25 94 301
======== ======== ========
See accompanying notes to financial statements.
F-7
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands except per share amounts)
(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 (as
defined in Note 5), 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").
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, 2000, the Company operated a network of 232
automotive glass service centers, approximately 1,069 mobile
installation vehicles and four distribution centers in 39 states.
F-8
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands except per share amounts)
(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 2000, 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 2000, 1999 and 1998, the
Company commenced amortizing the software costs over the estimated
useful life of five years. Unamortized computer software costs
were $2,818, $3,218 and $2,503 at December 31, 2000, 1999 and
1998, respectively. Amortization expense in 2000, 1999 and 1998
for capitalized computer software costs was $844, $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, 2000, 1999 and 1998
(Dollars in Thousands except per share amounts)
(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.
(f) Revenue Recognition
Revenue from auto glass installation and related services is
recognized when the installation is complete or the service is
performed. The Company provides for an allowance for accounts
receivable. The provision for doubtful accounts was $101, $1,341
and $1,063 and write offs against the allowance were $595, $1,185
and $837 in 2000, 1999 and 1998 respectively.
(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
$8,287, $8,150 and $7,444 in 2000, 1999 and 1998, 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.
(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 Credit
Facility approximates fair value based on borrowing rates available to
the Company for loans with similar terms. 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 $77,000, $70,000 and $100,000 at December 31, 2000, 1999 and
1998, respectively. The fair value of the Company's Series A 12% Senior
Redeemable Cumulative Preferred Stock approximates the liquidation
preference.
F-10
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands except per share amounts)
(4) Long -Term Debt
Long-term debt consists of the following:
2000 1999 1998
------------------------------------------------
Bank facility $ -- 7,500 8,500
Credit facility 500 -- --
Senior notes 100,000 100,000 100,000
------------------------------------------------
Total $ 100,500 107,500 108,500
================================================
On March 27, 2000, the Company entered into the credit facility. The
Credit Facility defined in Note 1 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 Credit Facility) plus 85% of the Company's Eligible Inventory (as
defined in the Credit Facility), less certain reserves; or (3) an amount
equal to 1.5 times the Company's EBITDA (as defined in the Credit
Facility) for the prior twelve months. A portion of the Credit Facility,
not to exceed $3,000, is available for the issuance of letters of credit,
which generally have an initial term of one year or less. The Company had
$2,598 in outstanding letters of credit at December 31, 2000. Borrowings
under the Credit Facility bear interest, at the Company's discretion, at
either the Chase Manhattan Bank Rate (as defined in the credit facility)
or LIBOR, plus a margin of 0.50% for the Chase Manhattan Rate and 2.25%
for the LIBOR Rate. In addition, a commitment fee of 0.25% is charged
against any unused balance of the credit facility. The effective interest
rate on borrowings under the Credit Facility was 10.0% at December 31,
2000. Interest rates are subjected to increases or reductions based upon
the Company meeting certain EBITDA levels. The proceeds of the Credit
Facility are available for working capital requirements and for general
corporate purposes. The Credit Facility is secured by first priority
security interests in all of the tangible and intangible assets of the
Company. In addition, the Credit Facility contains certain restrictive
covenants including, among other things, the maintenance of a minimum
EBITDA level for the prior twelve months, as well as restrictions on
additional indebtedness, dividends and certain other significant
transactions. The Company was in compliance with these covenants at
December 31, 2000.
The Old Bank Facility was scheduled to expire on April 1, 2003 and
provided for borrowings of up to $35,000. As previously described, the
Company replaced the Old Bank Facility with the Credit Facility on March
27, 2000. In connection with the early retirement of the Old Bank
Facility, the Company incurred an extraordinary loss of $840, offset by a
tax benefit of $336, on the extinguishments of debt, primarily consisting
of the write-off of deferred loan costs.
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, 2000.
F-11-
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands except per share amounts)
Maturities of long-term debt are as follows:
2001 $ --
2002 --
2003 --
2004 500
2005 --
Thereafter 100,000
---------
$ 100,500
=========
Deferred loan costs and accumulated amortization are summarized as follows:
Accumulated
December 31, 2000 Amount Amortization Balance
----------------- ------ ------------ -------
Deferred loan costs $5,330 1,432 3,898
Discount on senior notes 3,000 825 2,175
------ ------ ------
$8,330 2,257 6,073
====== ====== ======
December 31, 1999
Deferred loan costs $6,044 1,017 5,027
Discount on senior notes 3,000 525 2,475
------ ------ -----
$9,044 1,542 7,502
====== ====== =====
(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 credit facility or the terms of the Note
Indenture.
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
F-12
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands except per share amounts)
Company and any amendments to the Company's Certificate of Incorporation
that adversely affect the rights of the Preferred Stock.
At December 31, 2000, 1999 and 1998 the liquidation value of the
Preferred Stock recorded on the Company's Balance Sheet was $48,449,
$43,046 and $38,246, respectively, which includes dividends of $13,449,
$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 2000, 1999 and 1998
aggregated $4,605, $4,419 and $3,931, respectively, of which $551, $530
and $510, 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 $2,994,
$2,587 and $1,808 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Total lease commitments, including vehicles, are as follows:
Third Related
parties parties Total
-------------- --------------- -----------
2001 $ 5,113 572 5,685
2002 3,239 595 3,834
2003 1,417 619 2,036
2004 487 644 1,131
2005 124 335 459
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, $685 and $514 in
2000, 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.
(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. As of
December 31, 2000, the Board of Directors had granted 28,425 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. 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.
F-13
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands except per share amounts)
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,
2000 1999 1998
-------- ---------- ---------
As reported $ 2,360 9 7,987
Pro forma 2,344 (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
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 20.00 27,125
Granted -- --
Exercised -- --
Cancelled -- (3,000)
----------------
Outstanding at December 31, 1999 20.00 24,125
Granted 20.00 5,500
Exercised -- --
Cancelled 20.00 (1,200)
----------------
Outstanding at December 31, 2000 20.00 28,425
================
Exercisable $ -- --
F-14
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands except per share amounts)
(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 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.
Income tax expense consists of:
Applicable To
----------------------------------------------------------------------
Extraordinary
Continuing Operation Items
---------------------------------------------------- ----------------
Current Deferred Total Deferred
---------------- ---------------- ---------------- ----------------
Year ended December 31, 2000:
Federal $ -- 1,630 1,630 (260)
State (40) 545 505 (76)
-------------- -------------- ---------------- ----------------
$ (40) 2,175 2,135 (336)
============== ============== ================ ================
Current Deferred Total
------------ ----------- -----------
Year ended December 31, 1999:
Federal $ -- 107 107
State (144) 175 31
---------- ----------- -----------
$ (144) 282 138
========== =========== ===========
Year ended December 31, 1998:
Federal $ 161 (302) (141)
State 446 (342) 104
---------- ----------- -----------
$ 607 (644) (37)
========== =========== ===========
Income tax expense applicable to continuing operations 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:
F-15
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands except per share amounts)
2000 1999 1998
------------- ------------ -------------
Computed "expected" tax expense $ 1,700 50 2,704
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal income tax benefit 333 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 73 67 173
Other, net 29 -- 233
------------- ------------ -------------
$ 2,135 138 (37)
============= ============ =============
The tax effects of temporary differences that give rise to significant
portions of the deferred assets and deferred tax liabilities at December
31, 2000 and 1999 are presented below.
Deferred tax assets: 2000 1999
-------- --------
Accounts receivable, principally due to
allowance for doubtful accounts $ 185 382
Inventories, principally due to additional
costs inventoried for tax 801 651
Intangibles 38,723 41,885
Prepaid advertising expenses not yet
deducted for tax purposes 1,708 1,650
Net operating loss and alternative minimum
tax credit carryforward 4,193 3,130
Liabilities and accruals for financial reporting purposes 635 420
------- -------
Total gross deferred tax assets 46,245 48,118
------- -------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and capitalized interest 921 955
------- --------
Total gross deferred tax liabilities 921 955
------- --------
Net deferred tax assets $45,324 47,163
======= ========
There was no valuation allowance for deferred tax assets as of December
31, 2000 or 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
$110,000 prior to expiration of the 15-year amortization period for the
intangible assets in 2012 and the subsequent net operating loss
F-16
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands except per share amounts)
carryforward period of 20 years. Taxable income (loss) for the years
ended December 31, 2000, 1999 and 1998 was $(2,800), $(8,000) and $4,500
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.
(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 $286, $292 and $250 for 2000, 1999 and 1998, respectively.
(10) Supplemental Cash Flow Information
2000 1999 1998
------------ --------- -----------
Interest paid $ 9,759 10,090 5,175
Income taxes paid -- -- 202
=========== ========= ===========
Non cash investing and financing
activiies:
Preferred stock dividends $ 5,403 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, results of operations or liquidity.
(12) Quarterly Financial Data (Unaudited)
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter Total
- ---------------------------------------------------- ------------ ------------ ----------- ----------- ------------
Net sales $44,665 $49,153 $48,628 $41,569 $184,015
Gross profit 30,801 33,746 33,822 29,061 127,430
Net income (loss) before extraordinary item 1,197 1,970 1,305 (1,608) 2,864
Net income (loss) 693 1,970 1,305 (1,608) 2,360
Net (loss) income applicable to common stockholders (599) 641 (65) (3,020) (3,043)
1999
- ----------------------------------------------------
Net sales $41,412 $43,361 $43,848 $35,899 $164,520
Gross profit 28,570 30,133 30,210 24,151 113,064
Net income (loss) 1,259 1,164 438 (2,852) 9
Net income (loss) applicable to common stockholders 112 (18) (779) (4,106) (4,791)
F-17