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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, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 333-33572
DIAMOND TRIUMPH AUTO GLASS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 23-2758853
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
220 DIVISION STREET, KINGSTON, 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 ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [ ] No [X]
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There is no public market for the registrant's stock. Diamond had
1,011,366 shares of Common Stock (the "Common Stock"), par value $0.01 per
share, and 35,000 shares of Series A 12% Senior Redeemable Cumulative Preferred
Stock (the "Preferred Stock"), par value $0.01 per share, outstanding as of
March 31, 2003.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains certain "forward-looking
statements" (as defined in Section 21E of the Securities and Exchange Act of
1934) that reflect Diamond's expectations regarding its future growth, results
of operations, performance and business prospects and opportunities. Words such
as "anticipates," "believes," "expects," "intends," "estimates," "will" and
similar expressions have been used to identify these forward-looking statements,
but are not the exclusive means of identifying these statements. These
statements reflect Diamond's current beliefs and expectations and are based on
information currently available to Diamond. Accordingly, these statements are
subject to known and unknown risks, uncertainties and other factors that could
cause Diamond's actual growth, results of operations, performance and business
prospects and opportunities to differ from those expressed in, or implied by,
these statements. As a result, no assurance can be given that Diamond's future
growth, results of operations, performance and business prospects and
opportunities covered by such forward-looking statements will be achieved. Such
factors include, among others: (1) Diamond's expansion is dependent on business
conditions and access to capital; (2) Diamond's substantial indebtedness; (3)
Diamond's business is affected by seasonality and weather, (4) Diamond's
business is affected by general economic conditions; (5) Diamond's competitive
business environment, which may reduce demand for automotive glass replacement
and repair services; and (6) Diamond's ability to attract and retain key
employees. For purposes of this annual report on Form 10-K, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Diamond is not obligated and has no intention to
update or revise these forward-looking statements to reflect new events,
information or circumstances.
ITEM 1. BUSINESS
OVERVIEW
Diamond is a leading provider of automotive glass replacement and
repair services in the United States. At December 31, 2002, Diamond operated a
network of 278 automotive glass service centers, approximately 1,100 mobile
installation vehicles and six distribution centers in 46 states. Diamond serves
all of its customers' automotive glass replacement and repair needs, offering
windshields, tempered glass and other related products. Sales and net loss for
the year ended December 31, 2002, was $201.6 million and ($0.1) 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 companies, rental car companies, car dealerships, body shops, utilities
and government agencies; and (3) insurance customers, including referrals from
local agents, claims offices and centralized call centers. Diamond's 2002 sales
to individual consumers, commercial customers and insurance customers
represented approximately 27.1%, 37.0% and 35.9% of total sales, respectively.
While the two largest participants in the industry primarily focus on servicing
automotive glass insurance claims (including providing related insurance claims
processing services) and also manufacture automotive glass, Diamond has
strategically positioned itself solely as a provider of automotive glass
replacement and repair services to a balanced mix of individual, commercial and
insurance customers.
Diamond's sole focus on automotive glass replacement and repair,
combined with its aggressive cost controls, strong purchasing power and
efficient internal distribution system, have positioned Diamond as one of the
lowest cost providers of automotive glass replacement and repair services. These
competitive attributes, together with localized marketing efforts, have enabled
Diamond's new service centers to quickly establish a base of local consumer and
commercial installation business from which Diamond services 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 $41,900. In 2002, 87% 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 2002, Diamond's 201 mature service centers (service centers open for four
years or longer) averaged approximately $845,000 in sales and approximately
$131,000 of branch operating profit per location. For the year ended December
31, 2002, approximately 84% of Diamond's mature service centers achieved
positive branch operating profitability.
Management believes that the high volume of its automotive glass
purchases position 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. 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 278 locations at the end of 2002.
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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 aggregate
principal amount of 9 1/4% Senior Notes (the "Notes") and entered into a credit
facility, under which Diamond borrowed $12.5 million. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Significant Accounting Policies - Income Tax" for a discussion of the Internal
Revenue Service's proposed adjustments with respect to Diamond's tax treatment
of the recapitalization.
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 in part on list
prices developed by the National Auto Glass Specification ("NAGS"), an
independent third party. Prices charged by participants in the automotive glass
replacement industry are independently determined using varying percentage
discounts from the NAGS price list. The impact of NAGS price changes on
Diamond's financial results depends on the level of discounts Diamond grants to
its customers and the level of discounts that Diamond can obtain from its glass
suppliers. Effective January 1, 1999, NAGS significantly modified its published
list prices in order to bring actual prices more in line with published list
prices. Although NAGS has not materially modified its published list prices
since January 1, 1999, NAGS has made periodic modifications to its published
list prices subsequent to that date, which includes a series of price changes
effective January 2003 that has resulted in a 4% to 5% decrease in overall list
prices.
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,
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whose participants generally establish multiple providers for their automotive
glass replacement requirements. In 2002, Diamond's top ten customer accounts
comprised approximately 22.1% of total sales and no single customer account
exceeded 6.7% of total sales.
Diamond's marketing is conducted through a combination of prominent
Yellow Pages advertising and by a direct sales force of 183 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, USF Holland 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, 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. At December 31, 2002, Diamond operated a network of 278 automotive
glass service centers, approximately 1,100 mobile installation vehicles and six
distribution centers in 46 states. In 2002, 87% 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.
Diamond's automotive glass 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,
Southwest and Western. Any expansion into new states will be under the Triumph
Auto Glass registered service mark. The company opened 23 new service centers in
2002.
The following chart provides information concerning Diamond's service
center openings from 1990 to 2002:
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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%
2001......... 24 -- 256 10.3%
2002......... 23 1 278 8.6%
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 six distribution centers which operate seven
days a week and are located in Kingston, Pennsylvania; Columbus, Ohio; Atlanta,
Georgia; Rock Island, Illinois; Dallas, Texas and Denver, Colorado. Diamond's
efficient distribution system enables Diamond to make regular deliveries to
substantially 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
Management believes that the high volume of its automotive replacement
glass ("ARG") purchases position 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 ARG 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 foreign suppliers, and is continuing
to expand its supplier network by utilizing additional foreign suppliers in
order to guard against product shortages and to reduce the overall cost of ARG.
In 2002, no single supplier represented more than 16% of Diamond's ARG
purchases. Due to the competitive nature of the automotive glass manufacturing
industry, Diamond does not anticipate any substantial difficulty in sourcing its
ARG requirements in the foreseeable future.
On February 28, 2001, several U.S. glass manufacturers petitioned the
Federal Trade Commission requesting the imposition of antidumping duties on
imports of ARG windshields from the People's Republic of China. A duty
determination was issued on February 4, 2002 by the Department of Commerce, the
governing body that sets preliminary duty rates, ranging from 3.70% to 9.67% for
certain suppliers of Diamond located in the People's Republic of China.
Management believes that Diamond has significantly minimized any adverse impact
of
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these duty rates to its purchasing costs by shifting a substantial amount of its
ARG purchases from suppliers in the People's Republic of China to suppliers in
the People's Republic of China at the lower end of the duty range and to
suppliers located outside of the People's Republic of China.
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 three of whom are
Safelite Glass Corporation, LYNX Services from PPG, L.L.C. and Harmon AutoGlass,
a division of Apogee Enterprises, Inc.
EMPLOYEES
As of December 31, 2002, Diamond employed 1,855 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 the
Notes. As of December 31, 2002, Diamond's aggregate consolidated indebtedness
was approximately $93.0 million, and Diamond had $61.4 million (liquidation
preference) of outstanding Preferred Stock and a stockholders' deficit of $89.5
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:
- Diamond's ability to obtain additional financing for working
capital, capital expenditures or general corporate purposes
may be impaired;
- 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;
- the credit facility and the indenture governing the Notes
contain certain restrictive financial and operating covenants;
- Diamond's indebtedness under the credit facility is at
variable rates of interest, which makes Diamond vulnerable to
increases in interest rates;
- 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;
- 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.
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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 the indenture governing the Notes restrict
Diamond's ability to sell assets and/or use the proceeds therefrom. Diamond
cannot give the assurance that any refinancing or asset sales would be possible
under its debt instruments existing at that time and 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:
- 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.
- 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.
- 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's subsidiary currently has no such 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:
- make investments;
- incur additional indebtedness;
- grant liens;
- merge or consolidate with other companies;
- change the nature of its business;
- dispose of assets;
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- make loans;
- pay dividends or redeem capital stock;
- guarantee the debts of other persons;
- make capital expenditures; and
- 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:
- 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;
- Diamond was insolvent or was rendered insolvent by reason of
issuing the Notes;
- Diamond was engaged in a business or transaction with
unreasonably small capital; or
- 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
- 7 -
could be avoided as a preferential transfer and the recipient of that payment
could be required to return that payment.
Diamond does not know what standard a court would use to determine
whether Diamond was insolvent at the time the Notes were issued, nor can Diamond
assure you that a court would not find Diamond to be insolvent on that date or
that, regardless of Diamond's solvency, that the issuances of the Notes
constituted fraudulent conveyances on another of the grounds summarized above.
DIAMOND MAY NOT BE ABLE TO COMPLY WITH ITS OBLIGATIONS UNDER THE INDENTURE
GOVERNING THE NOTES TO PURCHASE ALL OF THE NOTES UPON A CHANGE OF CONTROL.
Upon the occurrence of a change of control, the indenture governing the
Notes requires Diamond to make an offer to repurchase all outstanding Notes at a
price equal to 101% of the aggregate principal amount thereof, together with
accrued and unpaid interest thereon to the date of repurchase. However, the
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. The company opened
23 new service centers in 2002. 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:
- it will possess sufficient funds to finance the expenditures
related to its expansion;
- new service centers can be opened on a timely basis;
- new service centers can be operated on a profitable basis; or
that
- 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 and net income, with
severe weather generating increased sales and net income and mild weather
resulting in lower sales and net income. In addition, Diamond's business is
somewhat seasonal, with the fourth quarter traditionally its slowest period of
activity. Diamond believes these seasonal trends will continue for the
foreseeable future.
DIAMOND COMPETES AGAINST OTHER LARGE COMPANIES THAT MAY BE BETTER EQUIPPED TO
PROVIDE CUSTOMERS WITH AUTOMOTIVE GLASS REPLACEMENT AND REPAIR SERVICES.
- 8 -
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 three of whom are
Safelite Glass Corporation, LYNX Services from PPG, L.L.C. 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 approximately 76.1% of the
outstanding shares of Diamond's Common Stock and 80.0% of the outstanding shares
of Diamond's 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, including insurance for its mobile
installation units and technicians. 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.
- 9 -
ITEM 2. PROPERTIES
The following chart provides information concerning Diamond's
headquarters, distribution facilities and emergency call centers, all of which
are leased:
FACILITY FUNCTION AREA IN SQUARE FEET
-------- -------- -------------------
Kingston, PA............ Headquarters 121,000
Distribution Center
Call Center
Columbus, OH............ Distribution Center 26,000
Call Center
Atlanta, GA............. Distribution Center 20,000
Rock Island, IL......... Distribution Center 16,000
Dallas, TX.............. Distribution Center 12,000
Denver, CO.............. Distribution Center 9,400
Scranton, PA............ Call Center 5,000
The following chart provides information concerning the number and
location of Diamond's service centers, all of which are leased:
NUMBER OF
SERVICE
STATE CENTERS
- ----- ---------
Alabama................. 6
Arkansas................ 1
Arizona................. 2
California.............. 11
Colorado................ 7
Connecticut............. 6
Delaware................ 2
Florida................. 11
Georgia................. 9
Idaho................... 2
Illinois................ 7
Indiana................. 7
Iowa.................... 3
Kansas.................. 3
Kentucky................ 3
Louisiana............... 5
Maine................... 4
Maryland................ 8
Massachusetts........... 10
Michigan................ 8
Minnesota............... 3
Mississippi............. 1
Missouri................ 4
Nebraska................ 2
Nevada.................. 2
New Hampshire........... 6
New Jersey.............. 11
New Mexico.............. 1
New York................ 28
North Carolina.......... 8
Ohio.................... 11
Oklahoma................ 2
Oregon.................. 3
Pennsylvania............ 28
Rhode Island............ 1
South Carolina.......... 4
South Dakota............ 1
Tennessee............... 5
Texas................... 11
Utah.................... 2
Vermont................. 3
Virginia................ 12
West Virginia........... 5
Washington.............. 3
Wisconsin............... 5
Wyoming................. 1
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
On May 2, 2002, Diamond filed an amended Complaint with the United
States District Court, Middle District of Pennsylvania against Safelite Glass
Corporation (the "Defendant"). Diamond alleges, among other things, that the
Defendant's conduct as (i) an operator of national telephone call centers which
takes first notice of
- 10 -
loss calls from insurers of several of the largest automobile insurers in the
United States (the "Insurers"); (ii) a provider of various claims processing
services to the Insurers as a third-party administrator and; (iii) an operator
of a network of retail repair and replacement facilities who perform work for
the Insurers as Safelite affiliates, violated certain federal and state laws and
give rise to other legal and equitable claims against the Defendant. Diamond
alleges that the Defendant engaged in various practices designed to divert
customers away from Diamond to the Defendant, and that Diamond has suffered
damages as a result of this conduct in an amount to be determined at trial.
On November 1, 2002, the Defendant filed a counter claim against
Diamond, alleging, among other things, that Diamond has engaged and continues to
engage in publishing certain false and defamatory statements about the Defendant
to automobile insurance companies that are the Defendant's clients. Defendant
alleges that this alleged conduct has injured the Defendant's goodwill and
business reputation with its insurance clients and in the autoglass repair and
replacement industry. Among other things, the Defendant is seeking damages in an
amount to be determined at trial.
On February 3, 2003, Delbert Rice and Kenneth E. Springfield, Jr., on
behalf of themselves and all others similarly situated (the "Plaintiffs"), filed
a class action Complaint in the Court of Common Pleas of Luzerne County against
Diamond. Plaintiffs allege, among other things, Diamond violated certain
sections of the Pennsylvania Unfair Trade Practices and Consumer Protection Law
and common law. Plaintiffs allege that this alleged conduct has caused monetary
damages to Plaintiffs. Among other things, Plaintiffs are seeking damages in an
amount to be determined at trial. Diamond believes Plaintiffs' allegations are
without merit and plans to vigorously contest this complaint.
Diamond is involved in 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, including insurance for its mobile
installation units and technicians.
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
Preferred Stock.
At March 13, 2003, there were four holders of record of Diamond's
Common Stock and three holders of record of Diamond's 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, 1998, 1999, 2000, 2001 and 2002 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, 2000, 2001 and 2002, 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,
------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATING DATA:
Sales ................................................. $ 149,609 $ 164,520 $ 184,015 $ 201,366 $ 201,623
Cost of sales ......................................... 43,851 51,456 56,585 58,049 59,525
--------- --------- --------- --------- ---------
Gross profit .......................................... 105,758 113,064 127,430 143,317 142,098
Operating expenses .................................... 89,764 101,894 111,814 124,501 133,321
--------- --------- --------- --------- ---------
Income from operations ................................ 15,994 11,170 15,616 18,816 8,777
Interest income ....................................... (120) (31) (57) (191) (221)
Interest expense ...................................... 8,162 11,054 11,514 10,305 8,826
--------- --------- --------- --------- ---------
Net income before provision for income taxes .......... 7,952 147 4,159 8,702 172
Provision for income taxes ............................ (37) 138 1,799 3,733 261
Net income ............................................ 7,989 9 2,360 4,969 (89)
Preferred stock dividends ............................. 3,246 4,800 5,403 6,081 6,843
--------- --------- --------- --------- ---------
Net income (loss) applicable to common stockholders ... $ 4,743 $ (4,791) $ (3,043) $ (1,112) $ (6,932)
========= ========= ========= ========= =========
PRO FORMA (1):
Historical income before provision for income taxes ... $ 7,952
Pro forma provision for income taxes .................. 3,181
---------
Pro forma net income .................................. $ 4,771
=========
OTHER DATA:
EBITDA(2) ............................................. $ 18,524 $ 13,796 $ 18,447 $ 21,462 $ 12,012
EBITDA margin ......................................... 12.4% 8.4% 10.0% 10.7% 6.0%
Non-vehicle capital expenditures ...................... $ 1,856 $ 1,892 $ 1,076 $ 2,915 $ 2,560
Vehicle capital expenditures .......................... 673 479 182 1,300 711
--------- --------- --------- --------- ---------
Total capital expenditures ............................ 2,529 2,371 1,258 4,215 3,271
Service centers operated at period end ................ 206 226 232 256 278
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents ............................. $ 301 $ 94 $ 25 $ 6,592 $ 2,094
Total assets .......................................... 90,692 87,519 87,995 91,846 83,822
Total debt ............................................ 108,500 107,500 100,500 100,000 93,000
Redeemable cumulative preferred stock ................. 38,246 43,046 48,449 54,530 61,373
Stockholders' equity (deficit) ........................ (73,441) (78,232) (81,275) (82,387) (89,452)
(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
- 13 -
"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 is defined as earnings before interest expense, taxes, depreciation
and amortization, which for the Company is income from continuing
operations plus depreciation and amortization and interest income. EBITDA
is not a measurement of financial performance under accounting principles
generally accepted in the United States of America, or GAAP, and should not
be considered in isolation or as an alternative to income from operations,
net income (loss), cash flows from operating activities or any other
measure of performance or liquidity derived in accordance with GAAP. EBITDA
is presented because Diamond believes it is an indicative measure of its
operating performance and its ability to meet its debt service requirements
and is used by investors and analysts to evaluate companies in its industry
as a supplement to GAAP measures
Not all companies calculate EBITDA using the same methods; therefore, the
EBITDA figures set forth herein may not be comparable to EBITDA reported by
other companies. A substantial portion of Diamond's EBITDA must be
dedicated to the payment of interest on its outstanding indebtedness and to
service other commitments, thereby reducing the funds available to the
Company for other purposes. Accordingly, EBITDA does not represent an
amount of funds that is available for management's discretionary use. See
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(IN THOUSANDS)
Income from continuing operations.... $ 15,994 $ 11,170 $ 15,616 $ 18,816 $ 8,777
Depreciation and amortization........ 2,410 2,595 2,774 2,455 3,014
Interest Income 120 31 57 191 221
-------- -------- -------- -------- --------
EBITDA.......................... $ 18,524 $ 13,796 $ 18,447 $ 21,462 $ 12,012
======== ======== ======== ======== ========
QUARTERLY FINANCIAL DATA
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter Total
- --------------------------------------------------- ------- ------- ------- ------- --------
Net Sales $48,157 $54,404 $52,970 $46,092 $201,623
Gross Profit 34,520 39,354 37,112 31,112 142,098
Net income (loss) 166 2,038 29 (2,322) (89)
Net income (loss) applicable to common stockholders (1,469) 353 (1,706) (4,110) (6,932)
2001
- ---------------------------------------------------
Net sales $50,057 $55,849 $52,304 $43,156 $201,366
Gross profit 35,726 40,338 37,088 30,165 143,317
Net income (loss) 1,983 3,613 1,494 (2,121) 4,969
Net income (loss) applicable to common stockholders 530 2,116 (48) (3,710) (1,112)
2000
- ---------------------------------------------------
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) 693 1,970 1,305 (1,608) 2,360
Net (loss) income applicable to common stockholders (599) 641 (65) (3,020) (3,043)
- 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 United States. At December 31, 2002, Diamond operated a
network of 278 automotive glass service centers, approximately 1,100 mobile
installation vehicles and six distribution centers in 46 states. Diamond serves
all of its customers' automotive glass replacement and repair needs, offering
windshields, tempered glass and other related products. Sales, net loss and
EBITDA for the year ended December 31, 2002 was $201.6 million, ($0.1) million
and $12.0 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 companies, rental car companies, car dealerships, body shops, utilities
and government agencies; and (3) insurance customers, including referrals from
local agents, claims offices and centralized call centers. Diamond's 2002 sales
to individual consumers, commercial customers and insurance customers
represented approximately 27.1%, 37.0% and 35.9% of total sales, respectively.
While the two largest participants in the industry primarily focus on servicing
automotive glass insurance claims (including providing related insurance claims
processing services) and also manufacture automotive glass, Diamond has
strategically positioned itself solely as a provider of automotive glass
replacement and repair services to a balanced mix of individual, commercial and
insurance customers.
RECAPITALIZATION
On January 15, 1998, Diamond, Kenneth Levine, Richard Rutta, Green
Equity Investors II, L.P. and certain affiliated entities of Diamond entered
into a Second Amended and Restated Stock Purchase Agreement, pursuant to which,
among other things: (1) Diamond declared and paid a dividend of 3,500 shares of
Preferred Stock (equal to 10.0% of the 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 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. See "--Significant Accounting
Policies - Income Tax" for a discussion of the Internal Revenue Service's
proposed adjustments with respect to Diamond's tax treatment of 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.
- 15 -
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, 2000, 2001 and 2002.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
2000 2001 2002
--------------- --------------- ---------------
$ % $ % $ %
----- ----- ----- ----- ----- -----
(DOLLARS IN MILLIONS)
Sales ............................................. 184.0 100.0 201.4 100.0 201.6 100.0
Cost of Sales...................................... 56.6 30.8 58.1 28.8 59.5 29.5
----- ----- ----- ----- ----- -----
Gross Profit....................................... 127.4 69.2 143.3 71.2 142.1 70.5
Operating Expenses................................. 111.8 60.8 124.5 61.8 133.3 66.1
----- ----- ----- ----- ----- -----
Income from Operations............................. 15.6 8.4 18.8 9.4 8.8 4.4
Interest Income.................................... (0.1) 0.1 (0.2) 0.1 (0.2) 0.1
Interest Expense................................... 11.5 6.3 10.3 5.1 8.8 4.4
----- ----- ----- ----- ----- -----
11.4 6.2 10.1 5.0 8.6 4.3
----- ----- ----- ----- ----- -----
Income before Provision for Income Taxes........... 4.2 2.3 8.7 4.3 0.2 0.1
Provision for Income Taxes......................... 1.8 1.0 3.7 1.8 0.3 0.1
Net Income (loss).................................. 2.4 1.3 5.0 2.5 (0.1) (0.0)
===== ===== ===== ===== ===== =====
Net Loss Applicable to Common Stockholders (3.0) (1.6) (1.1) (0.5) (6.9) (3.4)
===== ===== ===== ===== ===== =====
Net Income (loss).................................. 2.4 1.3 5.0 2.5 (0.1) (0.0)
Interest Expense 11.5 6.3 10.3 5.1 8.8 4.4
Income Tax 1.8 1.0 3.7 1.8 0.3 0.1
Depreciation and Amortization 2.7 1.5 2.5 1.3 3.0 1.5
EBITDA (1)......................................... 18.4 10.0 21.5 10.7 12.0 6.0
===== ===== ===== ===== ===== =====
(1) EBITDA represents income before taxes, 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, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Sales. Sales for 2002 increased by $0.2 million, or 0.1%, to $201.6
million from $201.4 million for 2001. The increase in sales was attributable to
an increase in revenue per installation unit. Although installation units
decreased 1.4%, due primarily to weaker demand resulting from historically mild
winter weather conditions experienced throughout a large portion of the United
States during the early months of 2002 and the recessionary economic climate,
revenue per installation unit increased an average of 1.5%. The increase in
Diamond's average revenue per installation unit is attributable to general price
increases and to its sales mix.
Gross Profit. Gross profit for 2002 decreased by $1.2 million, or 0.8%,
to $142.1 million from $143.3 million for 2001. Gross margin decreased as a
percentage of sales to 70.5% for 2002 from 71.2% for 2001. The decrease in gross
margin percentage was primarily due to increased product costs in 2002.
Operating Expenses. Operating expenses for 2002 increased by $8.8
million, or 7.1%, to $133.3 million from $124.5 million for 2001. Operating
expenses increased as a percentage of sales to 66.1% for 2002 from 61.8% for
2001. Approximately $5.9 million of increased operating expense is directly
related to expansion in service centers,
- 16 -
primarily for wages and wage related expenses, advertisement and promotional
expenses and occupancy costs. The increase in operating expenses was also due to
a general increase in wages and wage related expenses experienced primarily at
service centers combined with an increase in insurance expense due to rising
insurance premiums, an increase in advertisement and promotional expenses and an
increase in depreciation expense due to continued investment in our back office
systems.
Depreciation and amortization expense for 2002 increased by $0.5
million, or 20.0%, to $3.0 million from $2.5 million for 2001. This increase was
primarily due to the amortization and depreciation expense related to certain
sales, billing and financial systems software and computer hardware implemented
in the latter half of 2001 and first half of 2002. This increase was partially
offset by a decrease in expense due to the increased use of a master fleet
leasing program for the lease of mobile installation and distribution service
vehicles.
Income from Operations. Income from operations for 2002 decreased by
$10.0 million, or 53.2%, to $8.8 million from $18.8 million for 2001. This
decrease was primarily due to the decrease in gross profit and increase in
operating expenses as discussed above.
Interest Expense. Interest expense for 2002 decreased by $1.5 million,
or 14.6%, to $8.8 million from $10.3 million for 2001. The decrease was due
primarily to a net gain of $1.4 million from the repurchase of $7.0 million of
senior notes in December 2002.
Net Income. Diamond recorded $(0.1) million of net loss in 2002
compared to $5.0 million net income in 2001. Net income (loss) as a percentage
of sales decreased to (0.0%) for 2002 from 2.5% for 2001. The decrease in net
income and net income margin during 2002 compared to 2001 was primarily due to
the impact of the decrease in gross profit and increased operating expenses.
Net Loss Applicable to Common Stockholders. Net loss applicable to
common stockholders for 2002 increased $5.8 million to $(6.9) million from
$(1.1) million for 2001. The increase was primarily due to the decrease in net
income as discussed above and to the increase in preferred stock dividends.
EBITDA. EBITDA for 2002 decreased by $9.5 million, or 44.2%, to $12.0
million from $21.5 million for 2001. EBITDA as a percentage of sales decreased
to 6.0% for 2002 from 10.7% for 2001. The decrease in EBITDA and EBITDA margin
during 2002 was primarily due to the decrease in gross profit and increase in
operating expenses as discussed above.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Sales. Sales for 2001 increased by $17.4 million, or 9.5%, to $201.4
million from $184.0 million for 2000. The increase in sales was attributable to
an increase in installation units and revenue per installation unit. Although
installation units increased only 2.7%, due primarily to weaker demand, revenue
per installation unit increased an average of 7.2%. 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 2001 increased by $15.9 million, or
12.5%, to $143.3 million from $127.4 million for 2000. Gross margin increased as
a percentage of sales to 71.2% for 2001 from 69.2% for 2000. The increase in
gross margin was primarily due to the increased level of sales and average
revenue per installation unit in 2001.
Operating Expenses. Operating expenses for 2001 increased by $12.7
million, or 11.4%, to $124.5 million from $111.8 million for 2000. Operating
expenses increased as a percentage of sales to 61.8% for 2001 from 60.8% for
2000. The increase in operating expenses during 2001 was primarily due to higher
wage expense, primarily at the service center level caused by wage rate
pressures including increased medical insurance and workers compensation
insurance costs; costs related to service center and distribution center
expansion; an increase in vehicle related expenses including auto insurance and
increased promotional expense and occupancy costs. The increase in operating
expenses as a percentage of sales is primarily attributable to the increase in
operating expenses related to service center and distribution center expansion.
- 17 -
Depreciation and amortization expense for 2001 decreased by $0.3
million, or 10.7%, to $2.5 million from $2.8 million for 2000. This decrease is
primarily attributable to 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. This decrease in expense
was partially offset by a $0.1 million increase in amortization and depreciation
expense related to certain sales, billing and financial systems software and
computer hardware.
Income from Operations. Income from operations for 2001 increased by
$3.2 million, or 20.5%, to $18.8 million from $15.6 million for 2000. 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 2001 decreased by $1.2 million,
or 10.4%, to $10.3 million from $11.5 million for 2000. The decrease was due to
a net loss realized on extinguishment of debt of $0.8 million in 2000, and to a
reduction in outstanding borrowings under the credit facility during 2001.
Net Income. Diamond recorded $5.0 million of net income in 2001
compared to $2.4 million in 2000. Net income as a percentage of sales increased
to 2.5% for 2001 from 1.3% for 2000. The increase in net income and net income
margin during 2001 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.
Net Loss Applicable to Common Stockholders. Net loss applicable to
common stockholders for 2001 decreased $1.9 million to $(1.1) million from
$(3.0) million for 2000. The decrease was primarily due to the increase in net
income as discussed above.
EBITDA. EBITDA for 2001 increased by $3.1 million, or 16.8%, to $21.5
million from $18.4 million for 2000. EBITDA as a percentage of sales increased
to 10.7% for 2001 from 10.0% for 2000. The increase in EBITDA and EBITDA margin
during 2001 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.
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 2002 decreased $6.9 million to $4.3 million from $11.2
million for 2001. The decrease in cash provided by operating activities for 2002
was primarily due to a decrease in Diamond's net earnings. Net cash provided by
operating activities for 2001 increased $2.7 million to $11.2 million from $8.5
million for 2000. The increase in cash provided by operating activities for 2001
was due to an increase in Diamond's net earnings and a $3.7 million decrease in
deferred income taxes, which was partially offset by a $2.2 million increase in
inventory.
Net Cash Used in Investing Activities. Net cash used in investing
activities for 2002 decreased $0.8 million to $3.2 million used from $4.0
million used in investing activities for 2002. Net cash used in investing
activities for 2001 increased $2.8 million to $4.0 million used from $1.2
million used in investing activities for 2000. The primary reason for these
variances was a change in capital expenditures.
Net Cash Used in Financing Activities. Net cash used in financing
activities for 2002 increased $5.0 million to $5.6 million from $0.6 million for
2001 due to a $5.3 million cash outlay for redemption of $7.0 million in senior
notes and a $0.3 million repurchase of common stock. Net cash used in financing
activities for 2001 decreased $6.7 million to $0.6 million from $7.3 million for
2000 due to less borrowings under the credit facility in 2001.
- 18 -
Capital Expenditures. Capital expenditures were $3.3 million for 2002
as compared to $4.2 million for 2001 and $1.3 million for 2000. Excluding
vehicle capital expenditures, capital expenditures were $2.6 million for 2002 as
compared to $2.9 million for 2001 and $1.1 million for 2000. Capital
expenditures in 2002 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.
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. See
"--Critical Accounting Policies - Income Tax" for a discussion of the Internal
Revenue Service's proposed adjustments with respect to Diamond's tax treatment
of the Recapitalization.
CRITICAL ACCOUNTING POLICIES
Certain accounting estimates and assumptions are particularly sensitive
because of their significance to the financial statements and the possibility
that future events affecting them may differ markedly. The accounting policies
of Diamond with the more critical estimates and judgments are described below.
Allowance for Doubtful Accounts. Diamond makes assumptions related to
the uncollectability of trade accounts receivable. An accrual is recorded for
all specific accounts receivable that have been determined to be uncollectible
and an estimate for all other uncollectible amounts. Assumptions used are based
on aging of receivables, type of customer and historical company experience.
Accrued Healthcare and Worker's Compensation Costs. Diamond makes
assumptions in order to estimate its healthcare and worker's compensation cost
accruals for claims that have been incurred but not yet paid for by the company.
Assumptions used in the estimate are based on continued analysis of claim
activity and time lag in processing claims.
Income Tax. 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. 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. The timing of the
reversal of deferred tax liabilities and the projection of future taxable income
require the Company to make a number of estimates.
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. and other investors acquired
80.0% of the Common Stock and 80.0% of the Preferred Stock (the "Transaction").
The Transaction was consummated on March 31, 1998. For tax purposes, the parties
made a joint election under Internal Revenue Code Sec. 338(h)(10), under which
the assets and liabilities of the affiliates were recorded at their fair market
values for tax purposes resulting in $118.5 million of tax deductible goodwill.
A financial statement deferred tax asset was also established on March 31, 1998
in the amount of approximately $44.8 million with a credit to additional paid-in
capital as the Transaction was recorded for financial statement purposes as a
recapitalization for which purchase accounting was not applied.
The Internal Revenue Service has concluded its audit of the tax periods
ended December 31, 1998, 1999, and 2000. As a result of this audit, the Internal
Revenue Service issued a notice of proposed adjustments on February 20, 2002,
which included a disallowance of the tax-deductible goodwill resulting from the
aforementioned Transaction. The Internal Revenue Service has asserted that the
Transaction did not qualify as a stock purchase, and accordingly, that the
election under Internal Revenue Code Section 338(h)(10) was not valid. As a
result, if the IRS position is sustained, tax-deductible goodwill would not be
recognizable by Diamond.
- 19 -
The proposed adjustments by the Internal Revenue Service would result
in $7.3 million of federal tax deficiencies owed by Diamond for the period
December 31, 1998 through December 31, 2002, plus possible interest and
penalties and any resultant increases in current state tax expense for this
period. Additionally, the deferred tax asset established in 1998 would be
eliminated, as well as net operating loss carryforwards from previous deductions
of the tax goodwill. The carrying amount of these assets at December 31, 2002 is
approximately $36.5 million.
Diamond strongly believes that the Transaction was properly accounted
for, and has appealed the Internal Revenue Service's proposed adjustment. If
such appeal is ultimately unsuccessful, the Internal Revenue Service's proposed
adjustment would have a material adverse affect on Diamond's liquidity, cash
flows, balance sheet and results of operations.
NEW ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." In April 2002, the FASB issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections." In June 2002, the FASB issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." In
November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an Interpretation of FASB Statements No. 5, 57 and 107
and a Rescission of FASB Interpretation No. 34." In December 2002, the FASB
issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an Amendment of FASB Statement No. 123." In January 2003, the FASB
issued Interpretation No. 46, "Consolidation of Variable Interest Entities". See
Note 2 to the consolidated financial statements for information concerning the
company's implementation and impact of these new standards.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes Diamond's contractual cash obligations and
other commercial commitments as of December 31, 2002.
PAYMENTS DUE BY PERIOD (DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------
CONTRACTUAL CASH OBLIGATIONS 2003 2004 2005 2006 2007 THEREAFTER TOTAL
--------------------------------------------------------------------------
Long Term Debt ---- ---- ---- ---- ---- $ 93,000 $ 93,000
Real Estate Leases $4,846 $2,601 $1,165 $ 241 $ 84 31 8,968
Vehicle Operating Leases 829 ---- ---- ---- ---- ---- 829
--------------------------------------------------------------------------
Total Contractual Cash Obligations $5,675 $2,601 $1,165 $ 241 $ 84 $ 93,031 $102,797
==========================================================================
AMOUNT OF COMMITMENT
EXPIRATION PER PERIOD
(DOLLARS IN THOUSANDS)
----------------------------------
OTHER COMMERCIAL COMMITMENTS 2003 THEREAFTER TOTAL
----------------------------------
Standby Letters of Credit $ 4,546 ---- $ 4,546
Operating Lease - Contingent Guaranteed Residual Value 9,370 ---- 9,370
----------------------------------
Total Commercial Commitments 13,916 ---- 13,916
==================================
- 20 -
INFLATION
Diamond believes that inflation has not had a material impact on its
results of operations for 2000, 2001 or 2002.
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."
- 21 -
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Diamond has no material exposure to market risk.
- 22 -
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-20
hereof as set forth below:
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report......................................................................... F-2
Consolidated Balance Sheets, December 31, 2002 and 2001.............................................. F-3
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000........... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2002, 2001 F-6
and 2000.............................................................................................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000........... F-7
Notes to Consolidated Financial Statements........................................................... F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
- 23 -
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 .......... 49 Co-Chairman of the Board and Director
Richard Rutta ........... 46 Co-Chairman of the Board and Director
Norman Harris ........... 48 Chief Executive Officer
Michael A. Sumsky ....... 44 President, Chief Financial Officer and General Counsel
Jonathan A. Seiffer ..... 31 Director
John G. Danhakl ......... 47 Director
Jonathan D. Sokoloff .... 45 Director
KENNETH LEVINE has been Diamond's Co-Chairman of the Board since March
1998 and a Director of Diamond since March 1987. Mr. Levine served as Co-Chief
Executive Officer from March 1998 until January 2002. Mr. Levine joined Diamond
in 1979 and served as Diamond's effective Co-President from 1987 to March 1998.
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 since March
1998 and a Director of Diamond since March 1987. Mr. Rutta served as Co-Chief
Executive Officer from March 1998 until January 2002. Mr. Rutta joined Diamond
in 1979 and served as Diamond's effective Co-President from 1987 to March 1998.
In 1987, Mr. Rutta, together with Kenneth Levine, purchased all of Diamond's
outstanding stock.
NORMAN HARRIS was appointed Diamond's Chief Executive Officer in
January 2002. Mr. Harris served as Diamond's Executive Vice President from 1995
until March 1998 and as President from March 1998 until January 2002. 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 was appointed Diamond's President in January 2002.
Mr. Sumsky continues to serve as Chief Financial Officer and General Counsel as
he has since joining Diamond in 1995. Before his appointment as Diamond's
President, Mr. Sumsky served as Executive Vice President since 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.
JONATHAN A. SEIFFER has been a Director of Diamond since November 2001.
Mr. Seiffer has been a partner of Leonard Green & Partners, L.P. "LGP", since
January 1999. From December 1997 through January 1999, Mr. Seiffer was a Vice
President of LGP. From October 1994 through December 1997, Mr. Seiffer was an
associate at LGP. Prior to October 1994, Mr. Seiffer was a member of the
corporate finance department of Donaldson, Lufkin & Jenrette Securities
Corporation "DLJ". Mr. Seiffer is also a director of Gart Sports Company, Dollar
Financial Group, Inc. and Liberty Group Publishing, Inc.
JOHN G. DANHAKL has been a Director of Diamond since March 1998. Mr.
Danhakl has been a partner of LGP since 1995. Mr. Danhakl had previously been a
Managing Director at 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., Petco Animal Supplies, Inc., Leslie's Poolmart, Inc., Big 5
Corporation, Communications and Power Industries, Inc., Liberty Group
Publishing, Inc., VCA Antech, Inc. and several private companies.
JONATHAN D. SOKOLOFF has been a Director of Diamond since March 1998.
Mr. Sokoloff has been a partner 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
- 24 -
director of Twinlab Corporation, Gart Sports Company, Rite Aid Corporation,
Dollar Financial Group, Inc. 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.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table provides information
about the compensation paid by Diamond to its Co-Chairman of the Board and its
two other executive officers during the fiscal years ended December 31, 2000,
2001 and 2002. The Co-Chairman of the Board 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 SALARY COMPENSATION OPTIONS/ COMPENSATION
POSITION YEAR ($) BONUS ($) ($) SARs (#) ($)
- ----------------------------------------------------------------------------------------------------------------------
Kenneth Levine 2002 $300,000 - - - $ 3,667(2)
----------------------------------------------------------------------------------
Co-Chairman of the 2001 $300,000 - - - $ 3,400(2)
----------------------------------------------------------------------------------
Board and Director 2000 $300,000 - - - $ 3,168(2)
- -------------------------------------------------------------------------------------------------------------------
Richard Rutta 2002 $300,000 - - - $ 3,667(2)
----------------------------------------------------------------------------------
Co-Chairman of the 2001 $300,000 - - - $ 3,400
----------------------------------------------------------------------------------
Board and Director 2000 $300,000 - - - $ 3,168(2)
- -------------------------------------------------------------------------------------------------------------------
Norman Harris 2002 $367,902 - $ 166,899(3) - $ 3,667(2)
----------------------------------------------------------------------------------
Chief Executive Officer 2001 $311,539 $ 149,356(1) - - $ 3,400(2)
----------------------------------------------------------------------------------
2000 $275,000 $ 100,000(1) - - $ 3,168(2)
- -------------------------------------------------------------------------------------------------------------------
Michael A. Sumsky 2002 $321,460 - - - $ 3,667(2)
----------------------------------------------------------------------------------
President, Chief 2001 $286,539 $ 149,356(1) - - $ 3,400(2)
----------------------------------------------------------------------------------
Financial Officer and 2000 $250,000 $ 100,000(1) - - $ 2,711(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.
(3) Income earned in accordance with Restrictive Stock Agreement.
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, 2002 for each
of Diamond's Named Executive Officers and the year-end value of unexercised
options held by the Named Executive Officers.
- 25 -
- ---------------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-THE-
UNEXERCISED MONEY
OPTIONS/SARs AT OPTIONS/SARs AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)
SHARES ACQUIRED ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) VALUE REALIZED ($) 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. Danhakl, Sokoloff and Seiffer,
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, 2002, the Board of Directors
had granted options to purchase a total of 28,225 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.
- 26 -
(4) In the event the executive is terminated due to death or
disability (as defined in the employment agreement), the
executive will receive:
- his base salary for a period of 12 months (but in no
event beyond March 31, 2003); and
- 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:
- his base salary through the date of termination;
- the amount of any bonus payable through the date of
termination; and
- 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.
The employment agreement with Messrs. Levine and Rutta discussed above
terminate on March 31, 2003. From that date onward, employment between Diamond
and Messrs. Levine and Rutta is at-will.
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 provided for the following:
(1) An initial term of three years, which began on March 31, 1998
and ended on March 31, 2001.
(2) In addition to his base salary, for each calendar year
beginning on January 1, 1998, each executive was 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 was terminated by Diamond for cause
(as defined in the employment agreement) or in the event the
executive resigned, Diamond would pay the executive the
executive's base salary through the date of termination.
(4) In the event the executive was terminated due to death or
disability (as defined in the employment agreement), the
executive would receive:
- his base salary for a period of 12 months (but in no
event beyond March 31, 2001); and
- the amount of any bonus payable through the date of
termination.
(5) In the event the executive was terminated by Diamond for any
other reason than as provided in clauses (3) and (4) above,
the executive would receive:
- his base salary through the date of termination;
- 27 -
- the amount of any bonus payable through the date of
termination; and
- 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 the executive's employment period under
the employment agreement and (2) such time as the executive
would have obtained 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 agreement with Messrs. Harris and Sumsky discussed above
terminated on March 31, 2001. From that date onward, employment between Diamond
and Mr. Sumsky is at-will. Also from that date through May 31, 2002, employment
between Diamond and Mr. Harris was at-will.
On June 1, 2002, Diamond entered into an employment agreement with
Norman Harris pursuant to which Mr. Harris agreed to serve as the Chief
Executive Officer of Diamond at an annual salary of $400,000, subject to annual
review based on Diamond's and the executive's performance. The agreement with
Mr. Harris also provides for the following:
(1) An initial term of four years, which began on June 1, 2002,
and ends on June 1, 2006.
(2) 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.
(3) In the event the executive is terminated due to death or
disability (as defined in the employment agreement), the
executive will receive:
- his base salary for a period of 12 months (but in no
event beyond June 1, 2006); and
- the amount of any bonus payable through the date of
termination.
(4) 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:
- his base salary through the date of termination;
- the amount of any bonus payable through the date of
termination; and
- 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 the
executive's employment period under the employment
agreement and (2) such time as the executive would
have obtained other permanent employment for
compensation in an amount reasonably comparable to
his base salary with Diamond.
(5) Customary non-competition, non-solicitation provisions,
non-disclosure and assignment of inventions provisions.
On June 1, 2002, Diamond entered into a Restricted Stock Agreement with
Mr. Harris (the "Agreement") pursuant to which the executive purchased from
Diamond 26,366 shares (the "Restricted Shares") of Diamond's common stock, par
value $0.01 per share, for nominal consideration. The Agreement generally
restricts the sale or transferability of shares of Common Stock held by the
executive before the Restrictions (as defined in the Agreement) have lapsed. The
executive has all rights and privileges of a stockholder with respect to the
Restricted Shares, including voting rights and the right to receive dividends
paid with respect to the Restricted Shares.
- 28 -
Generally, the Restricted Shares vest and the Restrictions lapse: (i) with
respect to 20% of the Restricted Shares on the Grant Date; and (ii) with respect
to 20% of the Restricted Shares on each subsequent anniversary of the Grant Date
until the Restricted Shares are fully vested. Compensation expense, unearned
restricted stock compensation, and proceeds from common stock issued have been
recognized based on the vesting periods and an estimated fair market value of
$20 per share.
- 29 -
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 Preferred Stock, as of March 13, 2003,
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 Preferred Stock indicated.
- ------------------------------------------------------------------------------------------------------------------
COMMON STOCK 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 76.1% 28,000 80.0%
- --------------------------------------------------------------------------------------------------------------
Jonathan A. Seiffer (1)(2) 770,000 76.1% 28,000 80.0%
- --------------------------------------------------------------------------------------------------------------
John G. Danhakl (1)(2) 770,000 76.1% 28,000 80.0%
- --------------------------------------------------------------------------------------------------------------
Jonathan D. Sokoloff (1)(2) 770,000 76.1% 28,000 80.0%
- --------------------------------------------------------------------------------------------------------------
Kenneth Levine (1) 100,000 9.9% 3,500 10.0%
- --------------------------------------------------------------------------------------------------------------
Richard Rutta (1) 100,000 9.9% 3,500 10.0%
- --------------------------------------------------------------------------------------------------------------
Norman Harris (1) 41,366 4.1% -
- --------------------------------------------------------------------------------------------------------------
All directors and executive officers 1,011,366 100.0% 35,000 100.00%
as a group
(6 persons)(3)
- --------------------------------------------------------------------------------------------------------------
(1) The address of Green Equity Investors II, L.P. and Messrs. Seiffer,
Danhakl and Sokoloff is 11111 Santa Monica Boulevard, Suite 2000, Los
Angeles, California 90025. The address of Messrs. Levine, Rutta and
Harris is 220 Division Street, Kingston, Pennsylvania.
(2) The shares shown as beneficially owned by Messrs. Seiffer, Danhakl and
Sokoloff represent the 770,000 shares of Common Stock and the 28,000
shares of 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, Jonathan A. Seiffer and John
M. Baumer 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.
Seiffer, 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.
- 30 -
Set-out below is a table containing information as of the end of the
last fiscal year of executive compensation plan split between plans (including
individual compensation arrangements) approved by security holders and plans
that have not been approved by security holders:
- -------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES
NUMBER OF WEIGHTED- REMAINING
SECURITIES TO AVERAGE AVAILABLE FOR
BE ISSUED EXERCISE PRICE FUTURE ISSUANCE
UPON OF UNDER EQUITY
EXERCISE OF OUTSTANDING COMPENSATION
OUTSTANDING OPTIONS, PLANS
OPTIONS, WARRANTS AND (EXCLUDING
WARRANTS AND RIGHTS SECURITIES
RIGHTS REFLECTED IN
(a) (b) COLUMN (a))
- -------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS 28,225 $ 20 1,775
APPROVED BY SECURITY HOLDERS
- -------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS NOT ---- ---- ----
APPROVED BY SECURITY HOLDERS
- -------------------------------------------------------------------------------------------
TOTAL 28,225 $ 20 1,775
- -------------------------------------------------------------------------------------------
- 31 -
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED RECAPITALIZATION
MANAGEMENT SERVICES AGREEMENT
In connection with the Recapitalization, on March 31, 1998, 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, 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 $551,000, $573,000 and $611,000 in
2000, 2001 and 2002, 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.
On November 1, 2002 Mr. Sumsky terminated his Management Share
Agreement with Diamond. On November 1, 2002, Diamond made an aggregate
investment of $300,000 as a capital contribution to DT Subsidiary Corp. (the
"Subsidiary"), a corporation wholly owned by Diamond. Also, on November 1, 2002,
the Subsidiary entered into a Stock Sale Agreement with Mr. Sumsky, pursuant to
which Mr. Sumsky sold to the Subsidiary 15,000 shares of Diamond's common stock,
par value $0.01 per share, for consideration of $20 per share.
- 32 -
ITEM 15. CONTROLS AND PROCEDURES
Diamond maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in Diamond's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to Diamond's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
Diamond carried out an evaluation within 90 days prior to the date of
this report, under the supervision and with the participation of Diamond's
management, including Diamond's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of Diamond's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 under
the Securities Exchange Act of 1934. Based upon that evaluation, Diamond's Chief
Executive Officer and Chief Financial Officer concluded that Diamond's
disclosure controls and procedures (1) are effective in timely alerting them to
material information relating to Diamond (including its consolidated
subsidiaries) required to be included in Diamond's periodic SEC filings and (2)
are adequate to ensure that information required to be disclosed by Diamond in
the reports filed or submitted by Diamond under the Securities Exchange Act of
1934 is recorded, processed and summarized and reported within the time periods
specified in the SEC's rules and forms.
There have been no significant changes in Diamond's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date Diamond completed its evaluation.
- 33 -
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) Financial Statements
(1) All financial statements of Diamond for the year ended
December 31, 2002 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.
- 34 -
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.
10.13 Employment Agreement, dated June 1, 2002, between Diamond Triumph Auto Glass, Inc.
and Norman Harris
10.14 Restricted Stock Agreement, dated June 1, 2002, between Diamond Triumph Auto Glass, Inc
and Norman Harris
10.15 Letter Agreement, dated June 1, 2002, between Diamond Triumph Auto Glass, Inc., Green Equity
Investors II, L.P., Kenneth Levine, Richard Rutta and Norman Harris.
10.16 Amendment Agreement, dated October 30, 2002, between Diamond Triumph Auto Glass, Inc.,
Green Equity Investors II, L.P., Kenneth Levine, Richard Rutta and Michael A. Sumsky.
10.17 Stock Sale Agreement, dated October 30, 2002, between DT Subsidiary Corp. and Michael A.
Sumsky.
- -------------------------------------------
(1) Incorporated by reference to Diamond's Registration Statement on Form
S-4 filed with the SEC on March 30, 2000.
(2) Incorporated by reference to Diamond's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.
- 35 -
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-Chairman of the Board
Dated: March 31, 2003
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 DATES INDICATED.
Signature Title(s) Date
--------- -------- ----
/s/ Kenneth Levine
- --------------------------------------------- Co-Chairman of the Board and March 31, 2003
Kenneth Levine Director
/s/ Richard Rutta
- --------------------------------------------- Co-Chairman of the Board and March 31, 2003
Richard Rutta Director
/s/ Norman Harris
- --------------------------------------------- Chief Executive Officer March 31, 2003
Norman Harris
/s/ Michael A. Sumsky
- --------------------------------------------- Chief Executive Officer March 31, 2003
Michael A. Sumsky
/s/ Jonathan Seiffer
- --------------------------------------------- Director March 31, 2003
Jonathan Seiffer
/s/ John G. Danhaki
- --------------------------------------------- Director March 31, 2003
John G. Danhakl
/s/ Jonathan D. Sokoloff
- --------------------------------------------- Director March 31, 2003
Jonathan D. Sokoloff
- 36 -
I, Norman Harris, certify that:
1. I have reviewed this annual report on Form 10-K of Diamond
Triumph Auto Glass, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of material fact or omit to state a material
fact necessary in order to make the statement made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which the annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 31, 2003 By: /s/ Norman Harris
-----------------------
Chief Executive Officer
- 37 -
I, Michael A. Sumsky, certify that:
1. I have reviewed this annual report on Form 10-K of Diamond
Triumph Auto Glass, Inc;
2. Based on my knowledge, this annual report does not contain any
untrue statement of material fact or omit to state a material
fact necessary in order to make the statement made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which the annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 31, 2003 By: /s/ Michael A. Sumsky
-----------------------
Chief Financial Officer
- 38 -
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.
- 39 -
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets, December 31, 2002 and 2001.................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000................. F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2002, 2001 and F-6
2000.......................................................................................................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000................. F-7
Notes to Consolidated Financial Statements................................................................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Diamond Triumph Auto Glass, Inc.:
We have audited the accompanying consolidated balance sheets of Diamond
Triumph Auto Glass, Inc. and subsidiary as of December 31, 2002 and 2001, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Diamond
Triumph Auto Glass, Inc. and subsidiary as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements,
Diamond Triumph Auto Glass, Inc. and subsidiary changed its method of
accounting for extinguishment of debt in 2002.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 26, 2003
F-2
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2002 and 2001
(Dollars in Thousands except per share amounts)
ASSETS 2002 2001
---------- ---------
Current assets:
Cash and cash equivalents $ 2,094 6,592
Accounts receivable, less allowance for doubtful accounts
of $413 for 2002 and $213 for 2001 11,403 11,596
Other receivables 349 387
Inventories 15,712 16,757
Prepaid expenses 1,562 1,383
Deferred income taxes 4,277 3,540
--------- --------
Total current assets 35,397 40,255
--------- --------
Equipment and leasehold improvements:
Vehicles 6,441 8,027
Computers and office equipment 4,157 3,898
Computer software 7,384 5,968
Other equipment 649 636
Leasehold improvements 593 481
--------- --------
19,224 19,010
Accumulated depreciation and amortization (11,218) (11,211)
--------- --------
Net equipment and leasehold improvements 8,006 7,799
Unamortized deferred loan costs and senior notes discount, net 4,001 5,183
Deferred income taxes 35,932 38,111
Other assets 486 498
--------- --------
Total assets $ 83,822 91,846
========= ========
See accompanying notes to consolidated financial statements
F-3
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2002 and 2001
(Dollars in Thousands except per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 2002 2001
---------- ---------
Current liabilities:
Accounts payable $ 9,856 10,640
Accrued expenses
Payroll and related items 5,729 4,678
Accrued interest 2,155 2,317
Accrued income taxes 451 1,679
Other 710 389
--------- --------
Total accrued expenses 9,045 9,063
--------- --------
Total current liabilities 18,901 19,703
--------- --------
Long-term debt:
Senior notes 93,000 100,000
--------- --------
Total long-term debt 93,000 100,000
--------- --------
Total liabilities 111,901 119,703
--------- --------
Series A 12% senior redeemable cumulative preferred stock - par
value $0.01 per share; authorized 100,000 shares; issued and outstanding
35,000 shares in 2002 and 2001, at liquidation preference value 61,373 54,530
--------- --------
Stockholders' equity (deficit):
Common stock, 2002 and 2001 par value $0.01 per share; authorized
1,100,000 shares; issued and outstanding 1,026,366 shares
in 2002, issued and outstanding 1,000,000 shares in 2001 10 10
Additional paid-in capital 34,947 41,263
Deferred compensation (360) --
Retained earnings (accumulated deficit) (123,749) (123,660)
Common stock in treasury, at cost, 15,000 shares in 2002 and 0 shares in 2001 (300) --
--------- --------
Total stockholders' equity (deficit) (89,452) (82,387)
--------- --------
Total liabilities and stockholders' equity (deficit) $ 83,822 91,846
========= ========
See accompanying notes to consolidated financial statements.
F-4
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands)
2002 2001 2000
---------- ---------- ----------
Net sales $ 201,623 201,366 184,015
Cost of sales 59,525 58,049 56,585
--------- --------- ---------
Gross profit 142,098 143,317 127,430
--------- --------- ---------
Operating expenses:
Payroll 80,730 75,232 67,786
Advertising and promotional 12,800 11,783 11,027
Other operating expenses 36,777 35,031 30,227
Depreciation and amortization 3,014 2,455 2,774
--------- --------- ---------
133,321 124,501 111,814
--------- --------- ---------
Income from operations 8,777 18,816 15,616
Other (income) expense:
Interest income (221) (191) (57)
Interest expense 8,826 10,305 11,514
--------- --------- ---------
8,605 10,114 11,457
--------- --------- ---------
Income before provision for income taxes 172 8,702 4,159
Provision for income taxes 261 3,733 1,799
--------- --------- ---------
Net (loss) income (89) 4,969 2,360
Preferred stock dividends 6,843 6,081 5,403
--------- --------- ---------
Net loss applicable to common stockholders $ (6,932) (1,112) (3,043)
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands except per share amounts)
COMMON STOCK RETAINED
------------------- ADDITIONAL EARNINGS
PAID-IN DEFERRED (ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT) STOCK TOTAL
--------- ------ ---------- ------------ ------------ -------- --------
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)
Net income -- -- -- -- 4,969 -- 4,969
Preferred stock dividends -- -- (6,081) -- -- -- (6,081)
--------- ---- -------- ------ --------- ----- -------
Balance, December 31, 2001 1,000,000 10 41,263 -- (123,660) -- (82,387)
Issuance of common stock 26,366 -- 527 (527) -- -- --
Amortization of deferred -- -- -- 167 -- -- 167
compensation
Purchase of treasury stock -- -- -- -- -- (300) (300)
Net loss -- -- -- -- (89) -- (89)
Preferred stock dividends -- -- (6,843) -- (6,843)
--------- ---- -------- ------ --------- ----- -------
Balance, December 31, 2002 1,026,366 $10 $34,947 $(360) $(123,749) $(300) $(89,452)
========= ==== ======== ====== ========= ===== =======
See accompanying notes to consolidated financial statements.
F-6
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands except per share amounts)
2002 2001 2000
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $ (89) 4,969 2,360
--------- -------- -------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and other amortization 3,014 2,455 2,774
Deferred income taxes 1,442 3,673 1,839
Amortization of deferred loan costs and senior notes discount 939 945 920
(Gain) loss on extinguishment of debt (1,430) -- 840
Provision for doubtful accounts 832 860 101
(Gain) on sale of fixed assets (36) (148) (32)
Amortization of deferred compensation 167 -- --
Changes in assets and liabilities:
Accounts and other receivables (600) 1,507 (3,367)
Inventories 1,045 (2,176) (1,961)
Prepaid expenses (179) (299) (122)
Accounts payable (784) (1,312) 4,002
Accrued expenses (18) 694 1,114
--------- -------- -------
Net cash provided by operating activities 4,303 11,168 8,468
--------- -------- -------
Cash flows from investing activities:
Capital expenditures (3,271) (4,215) (1,258)
Proceeds from sale of equipment 85 263 55
(Increase) decrease in other assets 12 (94) (3)
--------- -------- -------
Net cash used in investing activities (3,174) (4,046) (1,206)
--------- -------- -------
Cash flows from financing activities:
Payment for redemption of senior notes (5,276) -- --
Net proceeds from bank facility -- 2,500 12,750
Payments on bank facility -- (3,000) (19,750)
Deferred debt costs (51) (55) (331)
Repurchase of common stock (300) -- --
--------- -------- -------
Net cash used in financing activities (5,627) (555) (7,331)
--------- -------- -------
Net (decrease) increase in cash and cash equivalents (4,498) 6,567 (69)
Cash and cash equivalents, beginning of year 6,592 25 94
--------- -------- -------
Cash and cash equivalents, end of year $ 2,094 6,592 25
========= ======== =======
See accompanying notes to consolidated financial statements.
F-7
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands except per share amounts)
(1) DESCRIPTION OF ENTITY, BASIS OF PRESENTATION AND RECAPITALIZATION
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 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, Southeast and Western regions of the
United States. At December 31, 2002, the Company operated a network of
278 automotive glass service centers, approximately 1,100 mobile
installation vehicles and six distribution centers in 46 states.
F-8
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(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 weighted average method.
(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 Lesser of lease life or 10 years
Costs in 2002, 2001 and 2000 related to the development of
software for a new back office sales audit and financial
accounting system and point of sale system were capitalized in
accordance with AICPA Statement of Position 98-1 "Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use". Upon completion of each of the projects in
2002, 2001 and 2000, the Company commenced amortizing the
software costs over the estimated useful life of five years.
Unamortized computer software costs were $3,871, $3,490 and
$2,818 at December 31, 2002, 2001 and 2000, respectively.
Amortization expense in 2002, 2001 and 2000 for capitalized
computer software costs was $1,034, $952 and $844,
respectively.
(d) INCOME TAXES
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. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(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) ACCOUNTS RECEIVABLE
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. The allowance for doubtful accounts
is the Company's best estimate of the amount of probable
credit losses in the Company's existing accounts receivable.
The Company determines the allowance based on historical
write-off experience and current economic and customer
specific data. Past due balances over 180 days and a specified
amount are reviewed individually for collectibility. All other
balances are reviewed on a pooled basis by customer type.
Account balances are charge-off against the allowance after
all means of collection have been exhausted and the potential
for recovery is considered remote. The Company does not have
any off-balance sheet credit exposure related to its
customers.
(g) 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 $832, $860
and $101 and write offs against the allowance were $632,
$1,109 and $595 in 2002, 2001 and 2000 respectively.
(h) 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 $9,039, $8,364 and $8,287 in 2002, 2001 and 2000,
respectively.
(i) IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with
the provisions of SFAS No. 144, "Accounting For the Impairment
or Disposition of Long-lived Assets. 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.
(j) EXTINGUISHMENT OF DEBT
The company accounts for the extinguishment of debt in
accordance with the provision of SFAS No. 145, "Rescission of
FASB Statement No. 4, 44 and 64, Amendment of FASB Statement
13, and Technical Corrections", which was early adopted in
2002. The company recorded a reduction to interest expense of
$1,430 in 2002 related to gain on extinguishment of debt (See
Note 4 - Long-Term Debt) and reclassified prior year debt
extinguishments so that the presentation is in conformance
with SFAS No. 145.
(k) STOCK OPTION PLAN
The Company accounts for its stock option plan (Note - 7)
under Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized for options issued to
employees at fair market value on the date of grant. In 1995,
the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based
F-10
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands except per share amounts)
Compensation." SFAS No. 123 established a fair value based
method of accounting for stock-based compensation plans. SFAS
No. 123 requires that a company's financial statements include
certain disclosures about stock-based employee compensation
arrangement regardless of the method used to account for the
plan.
As allowed by SFAS 123, the Company has elected to continue to
account for its employee stock-based compensation plans under
APB Opinion No. 25, and adopted only the disclosure
requirements of SFAS No. 123. Had the Company recognized
compensation cost for its stock based compensation plans
consistent with the provisions of SFAS 123, the Company's net
loss and net loss per share would have been increased to the
following pro forma amounts:
YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- ------- -------
Net (loss) income $ (89) 4,969 2,360
As reported
Add stock-based employee compensation expense ---- ---- ----
included in reported net income, net of tax
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (16) (6) (16)
----- ------ ------
Pro forma (105) 4,963 2,344
----- ------ ------
The fair value of the options of $2.84 granted is estimated
using the Black-Scholes option-pricing model with the
following assumptions: risk-free interest rate of 4.65%,
volatility of 0% and expected dividend yield of 0%.
(l) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-11
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands except per share amounts)
(m) RECENT ACCOUNTING PRONOUNCEMENTS
In 2002, Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment of Disposition of
Long-Lived Assets" was issued. This standard establishes one
accounting model to be used for measuring impairment of
long-lived assets. In accordance with SFAS No. 144, long-lived
assets, such as property, plant and equipment are reviewed for
impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. As of December
31, 2002, management of the Company believes that no
write-down for such impairment was required..
During June 2002, the Financial Accounting Standards Board
("FASB") issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." Such Standard requires
costs associated with exit or disposal activities (including
restructurings), to be recognized when costs are incurred,
rather than at a date of commitment to an exit or disposal
plan. SFAS No. 146 nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring)." Under SFAS No. 146, a liability related to an
exit or disposal activity is not recognized until such
liability has actually been incurred whereas under EITF Issue
No. 94-3 a liability was recognized at the time of a
commitment to an exit or disposal plan. The provisions of this
standard are effective for disposal activities initiated after
December 31, 2002. Diamond does not expect adoption of SFAS
No. 146 to have a material impact on its financial statements.
In November 2002, the FASB issued Interpretation No. 45, which
elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under guarantees issued. The Interpretation also clarifies
that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions
of the Interpretation are applicable to guarantees issued or
modified after December 31, 2002. The disclosure requirements
are effective for financial statements in interim or annual
periods ending after December 15, 2002. Diamond has not yet
determined the impact this statement will have on its
financial statements.
In December 2002, the FASB issued SFAS No. 148, which amends
SFAS No. 123, to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are
required for fiscal years ending after December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46, which
addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation.
The Interpretation applies immediately to variable interest in
variable interest entities created after January 31, 2003, and
to variable interests in variable interest entities obtained
after January 31, 2003. The application of this Interpretation
is not expected to have a material effect on the Company's
financial statements.
(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,
F-12
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands except per share amounts)
accounts and other receivables and current liabilities. In making this
determination, the Company considered the short-term maturity of those
assets and liabilities. 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 $65,000 at December 31, 2002. The fair value of the Company's
Preferred Stock approximates the liquidation preference.
(4) LONG -TERM DEBT
Long-term debt consists of the following:
2002 2001
-------- -------
Senior notes 93,000 100,000
-------- -------
Total $ 93,000 100,000
======== =======
On March 27, 2000, the Company entered into a Credit Facility, which
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 $10,000, is available for the issuance of letters of credit,
which generally have an initial term of one year or less. The Company
had $4,546 in outstanding letters of credit at December 31, 2002.
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 0.75% for the Chase
Manhattan Rate and 2.50% for the LIBOR Rate. In addition, a commitment
fee of 0.25% is charged against any unused balance of the Credit
Facility. Interest rates are 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, 2002. No amounts were outstanding under
the Credit Facility at December 31, 2002.
In connection with the early retirement of an earlier credit facility,
the Company incurred a loss of $840 on the extinguishment of debt in
2000. In connection with the adoption of SFAS No. 145, this loss was
reclassified to interest expense in the 2000 Statement of Operations.
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 in the
Note Indenture, 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, 2002.
F-13
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands except per share amounts)
On December 16, 2002, the Company repurchased $7,000 face amount of
senior notes for a repurchase price of $5,276. This repurchase resulted
in a gain of $1,430, which was the difference between the carrying
value of the senior notes, including unamortized debt issuance costs,
at the time of their repurchase and the amount paid to repurchase the
senior notes. This gain is included within interest expense.
Maturities of long-term debt are as follows:
2003 $ --
2004 --
2005 --
2006 --
2007 --
Thereafter 93,000
--------
$ 93,000
========
Deferred loan costs and accumulated amortization are summarized as
follows:
ACCUMULATED
DECEMBER 31, 2002 AMOUNT AMORTIZATION BALANCE
- ----------------- -------- ------------ -------
Deferred loan costs $ 4,987 2,451 2,536
Discount on senior notes 2,790 1,325 1,465
-------- ------ ------
$ 7,777 3,776 4,001
======== ====== ======
DECEMBER 31, 2001
Deferred loan costs $ 5,385 2,076 3,309
Discount on senior notes 3,000 1,126 1,874
-------- ------ ------
$ 8,385 3,202 5,183
======== ====== ======
(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.
F-14
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands except per share amounts)
The Preferred Stock bears cumulative quarterly dividends at a rate per
annum equal to 12.0% of the liquidation value. Dividends may, at the
option of the Company, be paid in cash or by adding to the then
liquidation value of the Preferred Stock an amount equal to the
dividends then accrued and payable. The terms of the Preferred Stock
contain restrictions on distributions and on purchases of junior
securities. The Preferred Stock has no voting rights with respect to
general corporate matters except as provided by law or for certain
class voting rights in connection with the issuance of senior or parity
equity securities of the Company and any amendments to the Company's
Certificate of Incorporation that adversely affect the rights of the
Preferred Stock.
At December 31, 2002, 2001 and 2000 the liquidation value of the
Preferred Stock recorded on the Company's balance sheet was $61,373,
$54,530 and $48,449, respectively, which includes dividends of $26,373,
$19,530 and $13,449, 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 2002,
2001 and 2000 aggregated $5,739, $5,058 and $4,605, respectively, of
which $611, $573 and $551, 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 monthly renewal options
over periods of up to eight years. Total rent expense for such leases
amounted to $4,009, $3,513 and $2,994 for the years ended December 31,
2002, 2001 and 2000, respectively.
Total lease commitments, including vehicles, are as follows:
REAL ESTATE
------------------
THIRD RELATED
VEHICLES PARTIES PARTIES TOTAL
-------- ------- ------- -----
2003 $ 829 4,227 619 5,675
2004 ---- 1,957 644 2,601
2005 ---- 830 335 1,165
2006 ---- 241 ---- 241
2007 ---- 84 ---- 84
Thereafter ---- 31 ---- 31
The vehicle lease agreement also provides for terminal lease payment
for guaranteed residual values reduced by actual proceeds from the
vehicle sale in the event the lease is not renewed over periods ranging
from four to eight years. The contingent guaranteed residual value
payment commitment was $9,370 at December 31, 2002.
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 annually in 2002,
2001 and 2000.
F-15
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands except per share amounts)
The Company's stockholders have entered into a Stockholders Agreement
and a Management Share Agreement, which restricts the transferability
of certain shares, establishes rights of first refusal, and establishes
rights among the parties to the agreements.
On June 1, 2002, Diamond entered into a Restricted Stock Agreement with
Mr. Harris (the "Agreement") pursuant to which the executive purchased
from Diamond 26,366 shares (the "Restricted Shares") of Diamond's
common stock, par value $0.01 per share, for nominal consideration. The
Agreement generally restricts the sale or transferability of shares of
Common Stock held by the executive before the Restrictions (as defined
in the Agreement) have lapsed. The executive has all rights and
privileges of a stockholder with respect to the Restricted Shares,
including voting rights and the right to receive dividends paid with
respect to the Restricted Shares. Generally, the Restricted Shares vest
and the Restrictions lapse: (i) with respect to 20% of the Restricted
Shares on the Grant Date; and (ii) with respect to 20% of the
Restricted Shares on each subsequent anniversary of the Grant Date
until the Restricted Shares are fully vested. Compensation expense,
deferred stock compensation, and proceeds from common stock issued have
been recognized based on the vesting periods and the fair market value
of $20 per share.
On November 1, 2002 Mr. Sumsky terminated his Management Share
Agreement with Diamond. On November 1, 2002, Diamond made an aggregate
investment of $300 as a capital contribution in DT Subsidiary Corp.
(the "Subsidiary"), a corporation wholly owned by Diamond. Also, on
November 1, 2002, the Subsidiary entered into a Stock Sale Agreement
with Mr. Sumsky, pursuant to which Mr. Sumsky sold to the Subsidiary
15,000 shares of Diamond's common stock, par value $0.01 per share, for
consideration of $20 per share.
(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, 2002, the Board of Directors had granted 28,225 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-16
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands except per share amounts)
Summarized stock option data is as follows:
EXERCISE SHARES
PRICE UNDER OPTION
-------- ------------
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
Granted 20.00 2,000
Exercised -- --
Cancelled 20.00 (850)
------
Outstanding at December 31, 2001 29,575
Granted -- --
Exercised -- --
Cancelled 20.00 (1,350)
------
Outstanding at December 31, 2002 28,225
======
Exercisable $ -- --
(8) INCOME TAXES
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.
and other investors acquired 80.0% of the Common Stock and 80.0% of the
Preferred Stock (the "Transaction"). The Transaction was consummated on
March 31, 1998. For tax purposes, the parties made a joint election
under Internal Revenue Code Sec. 338(h)(10), under which the assets and
liabilities of the affiliates were recorded at their fair market values
for tax purposes resulting in $118.5 million of tax deductible
goodwill. A financial statement deferred tax asset was also established
on March 31, 1998 in the amount of approximately $44.8 million with a
credit to additional paid-in capital as the Transaction was recorded
for financial statement purposes as a recapitalization for which
purchase accounting was not applied.
The Internal Revenue Service has concluded its audit of the tax periods
ended December 31, 1998, 1999, and 2000. As a result of this audit, the
Internal Revenue Service issued a notice of proposed adjustments on
February 20, 2002, which included a disallowance of the tax-deductible
goodwill resulting from the aforementioned Transaction. The Internal
Revenue Service has asserted that the Transaction did not qualify as a
stock purchase, and accordingly, that the election under Internal
Revenue Code Section 338(h)(10) was not valid. As a result, if the IRS
position is sustained, tax-deductible goodwill would not be
recognizable by Diamond.
The proposed adjustments by the Internal Revenue Service would result
in $7.3 million of federal tax deficiencies owed by Diamond for the
period December 31, 1998 through December 31, 2002, plus possible
interest and penalties and any resultant increases in current state tax
expense for this period. Additionally, the deferred tax asset
established in 1998 would be eliminated, as well as net operating loss
carryforwards from
F-17
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands except per share amounts)
previous deductions of the tax goodwill. The carrying amount of these
assets at December 31, 2002 is approximately $36.5 million.
Diamond strongly believes that the Transaction is properly accounted
for, and has appealed the Internal Revenue Service's proposed
adjustment. If such appeal is ultimately unsuccessful, the Internal
Revenue Service's proposed adjustment would have a material adverse
affect on Diamond's liquidity, cash flows, balance sheet and results of
operations.
Income tax expense consists of:
APPLICABLE TO
----------------------------
CURRENT DEFERRED TOTAL
------- -------- -----
Year ended December 31, 2002:
Federal $ (953) 1,164 211
State (228) 278 50
------ ----- ---
$(1,181) 1,442 261
------ ----- ---
APPLICABLE TO
----------------------------
CURRENT DEFERRED TOTAL
------- -------- -----
Year ended December 31, 2001:
Federal $ ---- 2,799 2,799
State 61 874 935
-------- ------ -----
$ 61 3,673 3,734
-------- ------ -----
APPLICABLE TO
----------------------------
CURRENT DEFERRED TOTAL
------- -------- -----
Year ended December 31, 2000:
Federal $ -- 1,370 1,370
State (40) 469 429
------ ------ -----
$ (40) 1,839 1,799
====== ====== =====
F-18
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands except per share amounts)
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:
2002 2001 2000
------ ----- -----
Computed "expected" tax expense $ 59 2,959 1,414
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal income tax benefit 33 617 283
Permanent items 169 129 73
Other, net -- 28 29
------ ----- -----
$ 261 3,733 1,799
------ ----- -----
The tax effects of temporary differences that give rise to significant
portions of the deferred assets and deferred tax liabilities at
December 31, 2002 and 2001 are presented below.
2002 2001
-------- --------
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 161 85
Inventories, principally due to additional
costs inventoried for tax 847 955
Intangibles for tax purposes 31,151 35,562
Advertising expenses not yet
deducted for tax purposes 2,459 1,818
Net operating loss and alternative minimum
tax credit carryforward 5,370 3,505
Liabilities and accruals for financial reporting purposes 898 750
-------- -------
Total gross deferred tax assets 40,886 42,675
-------- -------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and capitalized interest 677 1,024
-------- -------
Total gross deferred tax liabilities 677 1,024
-------- -------
Net deferred tax assets $ 40,209 41,651
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There was no valuation allowance for deferred tax assets as of December
31, 2002 or 2001. 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 (excluding reversal of deferred tax assets) of
approximately $95,000 prior to expiration of the 15-year amortization
period for the intangible assets in 2012 and the subsequent net
operating loss carryforward period of 20 years. 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
F-19
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands except per share amounts)
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 $340, $389 and $286 for 2002, 2001 and 2000, respectively.
(10) SUPPLEMENTAL CASH FLOW INFORMATION
2002 2001 2000
------ ----- -----
Interest paid $9,276 9,327 9,759
Noncash investing and financing activities:
Preferred stock dividends $6,843 6,081 5,403
(11) LEGAL PROCEEDINGS
On May 2, 2002, Diamond filed an amended Complaint with the United
States District Court, Middle District of Pennsylvania against Safelite
Glass Corporation (the "Defendant"). Diamond alleges, among other
things, that the Defendant's conduct as (i) an operator of national
telephone call centers which takes first notice of loss calls from
insurers of several of the largest automobile insurers in the United
States (the "Insurers"); (ii) a provider of various claims processing
services to the Insurers as a third-party administrator and; (iii) an
operator of a network of retail repair and replacement facilities who
perform work for the Insurers as Safelite affiliates, violated certain
federal and state laws and give rise to other legal and equitable
claims against the Defendant. Diamond alleges that the Defendant
engaged in various practices designed to divert customers away from
Diamond to the Defendant, and that Diamond has suffered damages as a
result of this conduct in an amount to be determined at trial.
On November 1, 2002, the Defendant filed a counter claim against
Diamond, alleging, among other things, that Diamond has engaged and
continues to engage in publishing certain false and defamatory
statements about the Defendant to automobile insurance companies that
are the Defendant's clients. Defendant alleges that this alleged
conduct has injured the Defendant's goodwill and business reputation
with its insurance clients and in the autoglass repair and replacement
industry. Among other things, the Defendant is seeking damages in an
amount to be determined at trial.
On February 3, 2003, Delbert Rice and Kenneth E. Springfield, Jr., on
behalf of themselves and all others similarly situated (the
"Plaintiffs"), filed a class action Complaint in the Court of Common
Pleas of Luzerne County against Diamond. Plaintiffs allege, among other
things, Diamond violated certain sections of the Pennsylvania Unfair
Trade Practices and Consumer Protection Law and common law. Plaintiffs
allege that this alleged conduct has caused monetary damages to
Plaintiffs. Among other things, Plaintiffs are seeking damages in an
amount to be determined at trial. Diamond believes Plaintiffs'
allegations are without merit and plans to vigorously contest this
complaint.
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 financials, results of operations or liquidity.
No amounts have been recorded in the consolidated financial statements
for any of these legal actions.
F-20