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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, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 333-33572
DIAMOND TRIUMPH AUTO GLASS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 23-2758853
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
220 DIVISION STREET, KINGSTON, PENNSYLVANIA 18704
(Address of Principal Executive Office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (570) 287-9915
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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 30, 2004.
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 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, 2003, Diamond operated a
network of 277 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 income for
the year ended December 31, 2003, were $218.7 million and $0.8 million,
respectively.
Diamond believes that, due to its sole focus on automotive glass
replacement and repair, it has one of the lowest cost structures in the
automotive glass replacement and repair industry. Diamond's low cost structure
enables it to serve all 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 2003 sales
to individual consumers, commercial customers and insurance customers
represented approximately 27.7%, 38.9% and 33.4% of total sales, respectively.
While the largest participant in the industry primarily focuses on servicing
automotive glass insurance claims (including providing related insurance claims
processing services) and also manufactures automotive glass, Diamond has
strategically positioned itself solely as a provider of automotive glass
replacement and repair services to a balanced mix of individual, commercial and
insurance customers.
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 $44,000. In 2003, 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
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commercial or industrial areas, where rents are generally available at low cost.
In 2003, Diamond's 224 mature service centers (service centers open for four
years or longer) averaged approximately $870,246 in sales and approximately
$119,906 of branch operating profit per location.
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 277 locations at the end of 2003.
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 also 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. Price changes in January 2004 yielded very moderate overall price
decreases.
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PRODUCTS
Diamond's primary installation products are automotive windshields
which are made of laminated safety glass. Safety glass consists of two layers of
glass bound together with a thin layer of vinyl which adds strength to the glass
and makes it very difficult for an object to penetrate a windshield upon impact.
As part of Diamond's commitment to serve all of its customers' automotive glass
replacement needs, Diamond also offers tempered automotive glass. Tempered glass
is generally used for side and rear automobile and truck windows and is
significantly stronger than regular glass due to specialized processing which
causes tempered glass to shatter into dull-edged pebbles, reducing glass related
injuries. In addition, Diamond offers automotive glass repair services.
CUSTOMERS AND MARKETING
Diamond provides automotive glass replacement services to each of the
industry's customer markets, which include individual consumers, commercial
customers and insurance customers. Management believes that, in addition to
capturing additional consumer sales, broadening Diamond's service center network
and geographic coverage will facilitate Diamond's efforts to obtain an increased
share of the national insurance and fleet markets, whose participants generally
establish multiple providers for their automotive glass replacement
requirements. In 2003, Diamond's top ten customer accounts comprised
approximately 22.8% of total sales and no single customer account exceeded 7.0%
of total sales.
Diamond's marketing is conducted through a combination of prominent
Yellow Pages advertising and by a direct sales force of 180 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, U-Haul, and Federal Express. Management
believes that Diamond's national geographic coverage will position 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.
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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, 2003, Diamond operated a network of 277 automotive
glass service centers, approximately 1,100 mobile installation vehicles and six
distribution centers in 46 states. In 2003, 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. Diamond was very deliberate with new service center
openings during 2003, as Diamond continued to focus on improving the performance
of recently opened service centers, and utilizing its new Management and
Information Systems infrastructure to leverage costs throughout the organization
while exploring opportunities to broaden its revenue base. Diamond opened 1 new
service center in 2003, and underwent 2 consolidations. Diamond will continue to
be deliberate with new service center openings during 2004.
The following chart provides information concerning Diamond's service
center openings from 1990 to 2003:
SERVICE
CENTERS % CHANGE
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%
2003..... 1 2 277 -0.4%
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.
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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 2003, no single supplier represented more than 20% 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 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 Glass Doctor, a subsidiary of
the Dwyer Group. Harmon Auto Glass, a former division of Apogee Enterprises, was
acquired by the Glass Doctor, a chain of auto glass repair and replacement
franchises.
EMPLOYEES
As of December 31, 2003, Diamond employed 1,918 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 9
1/4 % Senior Notes (the "Notes"). As of December 31, 2003, Diamond's aggregate
consolidated indebtedness was approximately $82.3 million, and Diamond had $69.1
million (liquidation preference) of outstanding Preferred Stock and a
stockholders' deficit of $96.3 million.
The degree to which Diamond is leveraged may impair Diamond's ability
to pay the amounts due under the Notes. Possible adverse consequences of
Diamond's degree of leverage include the following:
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- 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.
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
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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;
- 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. Furthermore, at
any time that the average excess availability (as defined in the credit
facility) for any month is less than $4.0 million, Diamond is required to
maintain an EBITDA for the trailing three-month period of at least $2.0 million.
Diamond's ability to comply with the minimum EBITDA requirements 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:
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- 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 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. Diamond was very
deliberate with new
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service center openings during 2003, as Diamond continued to focus on improving
the performance of recently opened service centers, and utilizing its new
Management and Information Systems infrastructure to leverage costs throughout
the organization while exploring opportunities to broaden its revenue base.
Diamond opened 1 new service center in 2003, and underwent 2 consolidations.
Diamond will continue to be deliberate with new service center openings during
2004. 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 future 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.
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 Glass Doctor, a
subsidiary of the Dwyer Group. Harmon Auto Glass, a former division of Apogee
Enterprises, was acquired by the Glass Doctor, a chain of auto glass repair and
replacement franchises. 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.
- 9 -
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.
ITEM 2. PROPERTIES
The following chart provides information concerning Diamond's
headquarters, distribution facilities and emergency call centers, all of which
are leased:
AREA IN SQUARE
FACILITY FUNCTION FEET
-------- -------- ----
Kingston, PA............. Headquarters 206,080
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
- 10 -
The following chart provides information concerning the number and
location of Diamond's service centers, all of which are leased:
NUMBER OF
SERVICE NUMBER OF
STATE CENTERS STATE SERVICE CENTERS
----- ------- ----- ---------------
Alabama........... 6 Nebraska.......... 2
Arkansas.......... 1 Nevada............ 2
Arizona........... 2 New Hampshire..... 6
California........ 11 New Jersey........ 11
Colorado.......... 7 New Mexico........ 1
Connecticut....... 6 New York.......... 28
Delaware.......... 2 North Carolina.... 9
Florida........... 11 Ohio.............. 11
Georgia........... 9 Oklahoma.......... 2
Idaho............. 2 Oregon............ 3
Illinois.......... 7 Pennsylvania...... 28
Indiana........... 7 Rhode Island...... 1
Iowa.............. 3 South Carolina.... 4
Kansas............ 3 South Dakota...... 1
Kentucky.......... 3 Tennessee......... 5
Louisiana......... 5 Texas............. 11
Maine............. 3 Utah.............. 2
Maryland.......... 8 Vermont........... 3
Massachusetts..... 10 Virginia.......... 12
Michigan.......... 8 West Virginia..... 5
Minnesota......... 3 Washington........ 3
Mississippi....... 1 Wisconsin......... 5
Missouri.......... 3 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 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
- 11 -
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.
- 12 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public market for Diamond's Common Stock or
Preferred Stock.
At March 30, 2004, there were four holders of record of Diamond's
Common Stock and three holders of record of Diamond's Preferred Stock.
- 13 -
ITEM 6. SELECTED FINANCIAL DATA
The selected condensed financial data as of December 31, 1999, 2000,
2001, 2002 and 2003 and for each of the years then ended has been derived from
Diamond's audited financial statements.
This summary 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,
------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATING DATA:
Sales ................................................. $ 218,703 $ 201,623 $ 201,366 $ 184,015 $ 164,520
Cost of sales ......................................... 65,966 59,525 58,049 56,585 51,456
---------- ---------- ---------- ---------- ----------
Gross profit .......................................... 152,737 142,098 143,317 127,430 113,064
Operating expenses .................................... 143,504 133,321 124,501 111,814 101,894
---------- ---------- ---------- ---------- ----------
Income from operations ................................ 9,233 8,777 18,816 15,616 11,170
Interest income ....................................... (22) (221) (191) (57) (31)
Interest expense ...................................... 7,706 8,826 10,305 11,514 11,054
---------- ---------- ---------- ---------- ----------
Net income before provision for income taxes .......... 1,549 172 8,702 4,159 147
Provision for income taxes ............................ 795 261 3,733 1,799 138
---------- ---------- ---------- ---------- ----------
Net income (loss) ..................................... 754 (89) 4,969 2,360 9
Preferred stock dividends ............................. 7,703 6,843 6,081 5,403 4,800
---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to common stockholders ... $ (6,949) $ (6,932) $ (1,112) $ (3,043) $ (4,791)
========== ========== ========== ========== ==========
OTHER DATA:
EBITDA(1) ............................................. $ 12,039 $ 12,012 $ 21,462 $ 18,447 $ 13,796
EBITDA margin ......................................... 5.5% 6.0% 10.7% 10.0% 8.4%
Non-vehicle capital expenditures ...................... $ 837 $ 2,560 $ 2,915 $ 1,076 $ 1,892
Vehicle capital expenditures .......................... 548 711 1,300 182 479
---------- ---------- ---------- ---------- ----------
Total capital expenditures ............................ 1,385 3,271 4,215 1,258 2,371
Service centers operated at period end (unaudited) .... 277 278 256 232 226
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents ............................. $ 35 $ 2,094 $ 6,592 $ 25 $ 94
Total assets .......................................... 75,332 83,822 91,846 87,995 87,519
Total debt ............................................ 82,258 93,000 100,000 100,500 107,500
Redeemable cumulative preferred stock ................. 69,076 61,373 54,530 48,449 43,046
Stockholders' equity (deficit) ........................ (96,296) (89,452) (82,387) (81,275) (78,232)
(1) EBITDA represents net income before interest, taxes, depreciation and
amortization. Diamond presents EBITDA because it considers it an
important supplemental measure of its performance and believes it is
frequently used by securities analysts, investors and other interested
parties in the evaluation of companies in its industry, many of which
present EBITDA when reporting their results.
Diamond believes issuers of "high yield" securities also present EBITDA
because investors, analysts and rating agencies consider it useful in
measuring the ability of those issuers to meet debt service
obligations. Diamond believes EBITDA is an appropriate supplemental
measure of debt service capacity, because cash expenditures on interest
are, by definition, available to pay interest, and tax expense is
inversely correlated to interest expense because tax expense goes down
as deductible interest expense goes up; depreciation and amortization
are non-cash charges.
- 14 -
Diamond also uses EBITDA for the following purposes: (i) its
executives' compensation plans base incentive compensation payments on
its EBITDA performance measured against budgets; and (ii) its credit
agreement and its indenture for its Notes use EBITDA to measure
Diamond's compliance with covenants such as interest coverage and debt
incurrence.
EBITDA has limitations as an analytical tool, and you should not
consider it in isolation, or as a substitute for analysis of Diamond's
results as reported under GAAP. Some of these limitations are:
- EBITDA does not reflect our cash expenditures, or future
requirements, for capital expenditures or contractual
commitments;
- EBITDA does not reflect changes in, or cash requirements for,
our working capital needs;
- EBITDA does not reflect the significant interest expense, or
the cash requirements necessary to service interest or
principal payments, on our debts;
- Although depreciation and amortization are non-cash charges,
the assets being depreciated and amortized will often have to
be replaced in the future, and EBITDA does not reflect any
cash requirements for such replacements; and
- Other companies in Diamond's industry may calculate EBITDA
differently than Diamond does, limiting its usefulness as a
comparative measure.
Because of these limitations, EBITDA should not be considered as a
measure of discretionary cash available to Diamond to invest in the
growth of its business. Diamond compensates for these limitations by
relying primarily on its GAAP results and using EBITDA only
supplementally. See the Statements of Cash Flow included in our
financial statements.
Reconciliation of EBITDA to net income follows for the periods
indicated:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Net Income (Loss) ................. $ 754 $ (89) $ 4,969 $ 2,360 $ 9
Interest expense .................. 7,706 8,826 10,305 11,514 11,054
Depreciation and amortization ..... 2,784 3,014 2,455 2,774 2,595
Provision for income taxes ........ 795 261 3,733 1,799 138
---------- ---------- ---------- ---------- ----------
EBITDA ....................... $ 12,039 $ 12,012 $ 21,462 $ 18,447 $ 13,796
========== ========== ========== ========== ==========
- 15 -
QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
2003
Net Sales $ 54,133 $ 59,790 $ 57,090 $ 47,690 $218,703
Gross Profit 37,896 41,254 39,581 34,006 $152,737
Net income (loss) 682 2,189 260 (2,377) $ 754
Net income (loss) applicable to common stockholders (1,158) 292 (1,694) (4,389) ($ 6,949)
2002
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)
- 16 -
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, 2003, Diamond operated a
network of 277 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 income and
EBITDA for the year ended December 31, 2003 was $218.7 million, $0.8 million and
$12.0 million, respectively.
Weather has historically affected Diamond's sales and net income, with
severe weather generating increased sales and net income and mild weather
resulting in lower sales and net income. In addition, Diamond's business is
somewhat seasonal, with the fourth quarter traditionally its slowest period of
activity. Diamond believes these seasonal trends will continue for the
foreseeable future.
The price of replacement automotive glass is based in part on list
prices developed by the National Auto Glass Specification ("NAGS"), an
independent third party. Prices charged by participants in the automotive glass
replacement industry are independently determined using varying percentage
discounts from the NAGS price list. The impact of NAGS price changes on
Diamond's financial results depends on the level of discounts Diamond grants to
its customers and the level of discounts that Diamond can obtain from its glass
suppliers. Effective January 1, 1999, NAGS significantly modified its published
list prices in order to bring actual prices more in line with published list
prices. Although NAGS has not materially modified its published list prices
since January 1, 1999, NAGS has made periodic modifications to its published
list prices subsequent to that date, which includes a series of price changes
effective January 2003 that has resulted in a 4% to 5% decrease in overall list
prices. Price changes in January 2004 yielded very moderate overall price
decreases.
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 2003 sales
to individual consumers, commercial customers and insurance customers
represented approximately 27.7%, 38.9% and 33.4% of total sales, respectively.
While the largest participant in the industry primarily focuses on servicing
automotive glass insurance claims (including providing related insurance claims
processing services) and also manufactures automotive glass, Diamond has
strategically positioned itself solely as a provider of automotive glass
replacement and repair services to a balanced mix of individual, commercial and
insurance customers.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with "Selected Financial Data" and the audited Financial Statements of Diamond
and the notes thereto included elsewhere in this Annual Report.
The following table summarizes Diamond's historical results of
operations and historical results of operations as a percentage of sales for the
years ended December 31, 2001, 2002 and 2003.
- 17 -
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
$ % $ % $ %
----- ----- ----- ----- ----- -----
(DOLLARS IN MILLIONS)
Sales ......................................... 218.7 100.0 201.6 100.0 201.4 100.0
Cost of Sales ................................. 66.0 30.2 59.5 29.5 58.1 28.8
----- ----- ----- ----- ----- -----
Gross Profit .................................. 152.7 69.8 142.1 70.5 143.3 71.2
Operating Expenses ............................ 143.5 65.6 133.3 66.1 124.5 61.8
----- ----- ----- ----- ----- -----
Income from Operations ........................ 9.2 4.2 8.8 4.4 18.8 9.4
Interest Income ............................... 0.0 0.0 (0.2) (0.1) (0.2) (0.1)
Interest Expense .............................. 7.7 3.5 8.8 4.4 10.3 5.1
----- ----- ----- ----- ----- -----
7.7 3.5 8.6 4.3 10.1 5.0
----- ----- ----- ----- ----- -----
Income before Provision for Income Taxes ...... 1.5 0.7 0.2 0.1 8.7 4.3
Provision for Income Taxes .................... 0.8 0.4 0.3 0.1 3.7 1.8
----- ----- ----- ----- ----- -----
Net Income (loss) ............................. 0.8 0.3 (0.1) (0.0) 5.0 2.5
===== ===== ===== ===== ===== =====
Net Loss Applicable to Common Stockholders .... (6.9) (3.2) (6.9) (3.4) (1.1) (0.5)
===== ===== ===== ===== ===== =====
Net Income (loss) ............................. .8 0.3 (0.1) (0.0) 5.0 2.5
Interest Expense .............................. 7.7 3.5 8.8 4.4 10.3 5.1
Provision for Income Taxes .................... 0.8 0.4 0.3 0.1 3.7 1.8
Depreciation and Amortization ................. 2.8 1.3 3.0 1.5 2.5 1.3
----- ----- ----- ----- ----- -----
EBITDA (1) .................................... 12.0 5.5 12.0 6.0 21.5 10.7
===== ===== ===== ===== ===== =====
(1) EBITDA and the related ratios presented in this table are measures of
Diamond's performance that are not required by, or presented in accordance with,
GAAP. EBITDA is not measurements of Diamond's financial performance under GAAP
and should not be considered as alternatives to net income, operating income or
any other performance measures derived in accordance with GAAP or as an
alternative to cash flow from operating activities as a measure of our
liquidity.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Sales. Sales for 2003 increased by $17.1 million, or 8.5%, to $218.7
million from $201.6 million for 2002. Installation units sold increased 13.6%
compared to 2002. Revenue per installation unit for 2003 decreased 4.7% compared
to 2002. The increase in sales and installation units sold was primarily due to
increased demand due to the harsh winter weather conditions and to increased
volume in our maturing service centers. The decrease in revenue per installation
unit is primarily due to a series of price changes made to the list prices
developed by 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. These price changes, effective January 2003, have resulted
in a 4% to 5% decrease in overall list prices. The decrease in revenue per
installation unit is also due to pricing pressures experienced within our
insurance customer sector.
Gross Profit. Gross profit for 2003 increased by $10.6 million, or
7.5%, to $152.7 million from $142.1 million for 2002. Gross margin decreased as
a percentage of sales to 69.8% for 2003 from 70.5% for 2002. The decrease in
gross profit percentage is due to a decrease in average revenue per installation
unit.
Operating Expenses. Operating expenses for 2003 increased by $10.2
million, or 7.6%, to $143.5 million from $133.3 million for 2002. Operating
expenses decreased as a percentage of sales to 65.6% for 2003 from 66.1% for
2002. Approximately $2.7 million of increased operating expense is a direct
result of the incremental costs absorbed during 2003 for new service centers
opened during 2002, primarily for wages and wage related expenses,
- 18 -
advertisement and promotional expenses and occupancy costs. The incremental
costs are due to the fact that these new service centers were opened at various
times during 2002 and did not incur a full year of operating expenses during
2002. The increase in operating expenses was also due to an increase in wages
and wage related expense, primarily at the service centers, due to an increase
in unit demand and to general wage increases, an increase in insurance expense
due to rising insurance premiums, an increase in advertisement and promotional
expenses and an increase in vehicle fuel costs due to rising prices and
increased consumption. Diamond also experienced an increase in vehicle lease
expense due to an increase in fleet size to support expansion and continued
replacement of owned vehicles with leased vehicles.
Depreciation and amortization expense for 2003 decreased by $0.2
million, or 6.7%, to $2.8 million from $3.0 million for 2002. The decrease is
primarily due to increased use of a master fleet leasing program for the lease
of mobile installation and distribution service vehicles in favor of owned
vehicles which was partially offset by increases in depreciation and
amortization expense related to certain sales, billing, and financial system
software and computer hardware that started being depreciated during 2002.
Income from Operations. Income from operations for 2003 increased by
$.4 million, or 4.5%, to $9.2 million from $8.8 million for 2002. This increase
was primarily due to the increase in gross profit which was partially offset by
the increase in operating expenses discussed above.
Interest Expense. Interest expense for 2003 decreased by $1.1 million,
or 12.5%, to $7.7 million from $8.8 million for 2002. The decrease was due to
reduced interest expense realized by the repurchase of $20.2 million in
aggregate principal amount of senior notes since December 2002, which was
partially offset by increased interest on credit facility borrowings throughout
the year.
Net Income (Loss). Diamond recorded $0.8 million of net income in 2003
compared to $(.1) million net loss in 2002. Net income (loss) as a percentage of
sales increased by 0.3% for 2003 as compared to 2002. The increase in net income
(loss) and net income (loss) margin during 2003 compared to 2002 was primarily
due to the reduced interest expense realized from the repurchase of senior notes
during 2003 and 2002, which was partially offset by the impact of decreased
gross profit percentage and increased operating costs discussed above.
Net Loss Applicable to Common Stockholders. Net loss applicable to
common stockholders for 2003 remained steady at $(6.9) million compared to 2002.
The increase in net income as discussed above was offset by an increase in
preferred stock dividends.
EBITDA. EBITDA for 2003 of $12.0 million remained flat compared to
2002. EBITDA as a percentage of sales decreased to 5.5% for 2003 from 6.0% for
2002. The decrease in EBITDA margin for 2003 was primarily due to the decrease
in gross profit percentage and increased operating costs discussed above.
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%
- 19 -
for 2001. Approximately $5.9 million of increased operating expense is directly
related to expansion in service centers, 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 (Loss). 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.
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, 2007. Diamond may from time to time repurchase
Notes in the open market.
Net Cash Provided by Operating Activities. Net cash provided by
operating activities for 2003 increased $4.0 million to $8.3 million from $4.3
million for 2002. The increase in cash provided by operating activities for 2003
was primarily due to an increase in Diamond's net earnings, a decrease in
inventory resulting from enhanced inventory management capabilities as a result
of the implementation of new systems software, and an increase in accounts
payable and accrued expenses. 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 Used in Investing Activities. Net cash used in investing
activities for 2003 decreased $1.9 million to $1.3 million used from $3.2
million used in investing activities for 2002. 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 2001. The primary reason for these
variances was a decrease in capital expenditures.
- 20 -
Net Cash Used in Financing Activities. Net cash used in financing
activities for 2003 increased $3.5 million to $9.1 million from $5.6 million for
2002 primarily due to cash used to purchase $13.2 million face value of senior
notes for a purchase price of $11.6 million which was partially offset by net
borrowings under the credit facility in the amount of $2.5 million. 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 used to purchase $7.0
million face value of senior notes and a $0.3 million repurchase of common
stock.
Capital Expenditures. Capital expenditures were $1.4 million for 2003
as compared to $3.3 million for 2002 and $4.2 million for 2001. The decrease in
capital expenditures in 2003 is primarily due to the completion of implementing
certain sales, billing and financial systems software and computer hardware in
the latter half of 2001 and first half of 2002. Excluding vehicle capital
expenditures, capital expenditures were $.8 million for 2003 as compared to $2.6
million for 2002 and $2.9 million for 2001. Capital expenditures in 2003 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 allowance for doubtful
accounts is recorded to reserve against specific accounts receivable that are
deemed uncollectable, as well as to establish a general reserve based on aging
of receivables and historical company experience related to the amount and
aging of specific write-offs.
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. In addition, Diamond also utilizes
third party reports in the development of loss development factors to further
substantiate accounting reserves.
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.
- 21 -
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 $7.6 million of federal tax deficiencies owed by Diamond for the period
December 31, 1998 through December 31, 2003, plus possible interest and
penalties and any resultant increases in current state tax expense for this
period. Additionally, the deferred tax asset established in 1998 would be
eliminated, as well as net operating loss carryforwards from previous deductions
of the tax goodwill. The carrying amount of these assets at December 31, 2003 is
approximately $37 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 November 2002, the FASB issued Interpretation No. 45, " Guarantor's
Accounting And Disclosure Requirements For Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The disclosure requirements, and the
recognition and initial measurement provisions were adopted January 1, 2003. The
adoption of this Interpretation had no impact on Diamond's financial statements.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation
of Variable Interest Entities." In December 2003, a modification to FIN 46 was
issued (FIN 46R) which delayed the effective date until no later than fiscal
periods ending after March 15, 2004 and provided additional technical
clarifications to implementation issues. We currently do not have any variable
interest entities as defined in FIN 46R. Diamond does not expect that the
adoption of this Interpretation will have a material impact on our consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This Statement is effective, except for certain provisions, for
contracts entered into or modified after June 30, 2003. The adoption of this
Statement did not have any impact on our consolidated financial statements.
Effective July 1, 2003, Diamond adopted SFAS No. 150 "Accounting for
Certain Financial Instruments With Characteristics of Both Liabilities and
Equity," which addresses accounting for certain financial instruments with
characteristics of both liabilities and equity. The adoption of this Statement
did not have any impact on our consolidated financial statements.
- 22 -
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes Diamond's contractual cash obligations and
other commercial commitments as of December 31, 2003.
PAYMENTS DUE BY PERIOD (DOLLARS IN THOUSANDS)
-----------------------------------------------------------------
CONTRACTUAL CASH OBLIGATIONS 2004 2005 2006 2007 2008 THEREAFTER TOTAL
------ ------ ------ ------ ------- ---------- -------
Long Term Debt ----- ----- ----- $2,500 $79,758 ----- $82,258
Real Estate Leases $4,466 $2,032 $ 675 $ 218 $99 $ 26 7,516
Vehicle Operating Leases 1,126 ---- ---- ---- ---- ---- 1,126
------ ------ ------ ------ ------- ---------- -------
Total Contractual Cash Obligations $5,592 $2,032 $ 675 $2,718 $79,857 $ 26 $90,900
====== ====== ====== ====== ======= ========== =======
AMOUNT OF COMMITMENT
EXPIRATION PER PERIOD
(DOLLARS IN THOUSANDS)
-------- ---------- -------
OTHER COMMERCIAL COMMITMENTS 2004 THEREAFTER TOTAL
-------- ---------- -------
Standby Letters of Credit $ ------ $ 6,391 $ 6,391
Operating Lease - Contingent Guaranteed Residual Value 10,440 ---- 10,440
-------- ---------- -------
Total Commercial Commitments $ 10,440 $ 6,391 $16,831
======== ========== =======
INFLATION
Diamond believes that inflation has not had a material impact on its
results of operations for 2001, 2002 or 2003.
EFFECT OF WEATHER CONDITIONS AND SEASONALITY
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 such seasonal trends will continue for the
foreseeable future. See "--Sales."
- 23 -
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Diamond has a revolving Credit Facility that provides for
revolving advances of up to $25.0 million, and matures in
March 2007. Borrowings under the Credit Facility bear
interest, at Diamond's discretion, at either the Chase
Manhattan Bank Rate (as defined in the Credit Facility) or
LIBOR, plus a margin of 0.50% for the Chase Manhattan Rate and
2.25% for the LIBOR Rate. In addition, a commitment fee of
0.25% is charged against any unused balance of the Credit
Facility. Interest rates are subject to increases or
reductions based upon Diamond meeting certain EBITDA levels.
At December 31, 2003, Diamond had $2.5 million of outstanding
borrowings under the Credit Facility.
- 24 -
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, 2003 and 2002.................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001................. F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2003, 2002 and
2001....................................................................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001................. F-7
Notes to Consolidated Financial Statements................................................................. F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Diamond maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in Diamond's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms and that
such information is accumulated and communicated to Diamond's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), Diamond carried out an evaluation,
under the supervision and with the participation of Diamond's management,
including the Chief Executive Officer and the Company's Chief Financial Officer,
of the effectiveness of the design and operation of Diamond's disclosure
controls and procedures as of the end of the period covered by this report.
Based on the foregoing, Diamond's Chief Executive Officer and Chief Financial
Officer concluded that Diamond's disclosure controls and procedures were
effective at the reasonable assurance level.
There has been no change in Diamond's internal controls over financial
reporting during its fourth fiscal quarter covered by this report that has
materially affected, or is reasonably likely to materially affect, Diamond's
internal controls over financial reporting.
- 25 -
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors does not have a separate audit committee and
does not have an "audit committee financial expert" as that term is defined in
the Securities and Exchange Commission rules and regulations. However, the Board
of Directors believes that each of its members has demonstrated that he is
capable of analyzing and evaluating Diamond's financial statements and
understanding internal controls and procedures for financial reporting. As the
Board of Directors believes that its current members are qualified to carry out
all of their duties and responsibilities, the Board of Directors does not
believe that it is necessary at this time to actively search for an outside
person to serve on the Board of Directors who would qualify as an audit
committee financial expert.
Diamond has adopted a Code of Ethics that applies to all of its
directors, officers and employees, including its principal executive officer,
principal financial officer, principal accounting officer or controller, and
persons performing similar functions. The Code of Ethics is filed herewith (see
Exhibit 14). Diamond intends to post amendments to or waivers from its Code of
Ethics, of the type referred to in Item 10 of Form 8-K, to the extent applicable
to its principal executive officer, principal financial officer, principal
accounting officer or controller, and persons performing similar functions, on
our website.
The following table sets forth certain information concerning Diamond's
directors and executive officers:
NAME AGE POSITION
---- --- --------
Kenneth Levine ...................... 50 Co-Chairman of the Board and Director
Richard Rutta ...................... 47 Co-Chairman of the Board and Director
Norman Harris ...................... 49 Chief Executive Officer
Michael A. Sumsky.................... 45 President, Chief Financial Officer and General Counsel
Jonathan A. Seiffer.................. 32 Director
John G. Danhakl .................... 48 Director
Jonathan D. Sokoloff................. 46 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. Mr. Seiffer joined LGP as an Associate in October 1994. Prior to
October 1994, Mr. Seiffer was a member of the corporate finance department of
Donaldson, Lufkin
- 27 -
& Jenrette Securities Corporation "DLJ". Mr. Seiffer is also a director of
Dollar Financial Group, Inc., Liberty Group Publishing, Inc. and several private
companies.
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 The Arden Group, Inc., Petco
Animal Supplies, Inc., Rite Aid Corporation, MEMC Electronic Materials, Leslie's
Poolmart, Inc., Big 5 Corporation, 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 director of The Sports Authority, 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, 2003,
2002 and 2001. 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 2003 $308,077 - - - $ 4,000(2)
Co-Chairman of the 2002 $300,000 - - - $ 3,667(2)
Board and Director 2001 $300,000 - - - $ 3,400(2)
Richard Rutta 2003 $285,000 - - - $ 4,000(2)
Co-Chairman of the 2002 $300,000 - - - $ 3,667(2)
Board and Director 2001 $300,000 - - - $ 3,400(2)
Norman Harris 2003 $407,692 - $ 105,408(3) - $ 4,000(2)
Chief Executive Officer 2002 $367,902 - $ 166,899(3) - $ 3,667(2)
2001 $311,539 $ 149,356(1) - - $ 3,400(2)
Michael A. Sumsky 2003 $346,346 - - - $ 4,000(2)
President, Chief 2002 $321,460 - - - $ 3,667(2)
Financial Officer and 2001 $286,539 $ 149,356(1) - - $ 3,400(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.
- 28 -
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, 2003 for each
of Diamond's Named Executive Officers and the year-end value of unexercised
options held by the Named Executive Officers.
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-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, 2003, the Board of Directors
had granted options to purchase a total of 22,175 shares of Common Stock under
the 1998 Plan. These options vest in five equal annual installments, commencing
on the first anniversary of the date of grant. Vested options may not be
exercised until the earlier of: (1) 90 days after Diamond's Common Stock has
become publicly traded and (2) 91 days prior to the tenth anniversary of the
date of grant. The 1998 Plan expires in September 2008.
EMPLOYMENT AGREEMENTS
On 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.
- 29 -
(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. Generally, the Restricted Shares
vest and the Restrictions lapse: (i) with respect to 20% of the Restricted
Shares on the Grant Date; and (ii) with respect to 20% of the Restricted Shares
on each subsequent anniversary of the Grant Date until the Restricted Shares are
fully vested. Compensation expense, unearned restricted stock compensation, and
proceeds from common stock issued have been recognized based on the vesting
periods and an estimated fair market value of $20 per share.
On July 1, 2003, Diamond entered into an employment agreement with
Michael A. Sumsky pursuant to which Mr. Sumsky agreed to serve as the President,
Chief Financial Officer, Secretary and General Counsel of Diamond at an annual
salary of $350,000, subject to annual review based on Diamond's and the
executive's performance. The agreement with Mr. Sumsky also provides for the
following:
(1) An initial term of eighteen months, beginning on July 1, 2003
and ending on December 31, 2004.
(2) In addition to his base salary, for each calendar year
beginning on January 1, 2003, the executive is entitled to
receive an annual bonus equal to a percentage of Diamond's
EBITDA in excess of specified thresholds, not to exceed
$180,000.
(3) In the event the executive is terminated by Diamond for cause
(as defined in the employment agreement) or in the event the
executive resigns, Diamond will pay the executive the
executive's base salary through the date of termination.
(4) In the event the executive is terminated due to death or
disability (as defined in the employment agreement), the
executive will receive:
- 30 -
- his base salary for a period of 12 months (but in no
event beyond December 31, 2004); 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 the
executive's employment period under the employment
agreement and (2) such time as the executive obtains
other permanent employment for compensation in an
amount reasonably comparable to his base salary with
Diamond.
(6) Customary non-competition, non-solicitation provisions,
non-disclosure and assignment of inventions provisions.
On November 17, 2003, 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 of Diamond. Each of the agreements with
Messrs. Levine and Rutta provide for the following:
(1) An initial term of one year beginning on November 17, 2003 and
ending on November 16, 2004.
(2) An annual base salary of $320,000, subject to annual review
based on Diamond's and the executive's performance. In
addition, each executive is entitled to receive an annual
bonus equal to a percentage of Diamond's EBITDA in excess of
specified thresholds.
(3) In the event the executive is terminated by Diamond for cause
(as defined in the employment agreement) or in the event the
executive resigns, Diamond will pay the executive the
executive's base salary through the date of termination.
(4) In the event the executive is terminated due to death or
disability (as defined in the employment agreement), the
executive will receive:
- his base salary for a period of 12 months (but in no
event beyond November 16, 2004); 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.
- 31 -
(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.
Effective March 15, 2004, the employment agreements with Messrs. Levine
and Rutta were amended to reduce their annual base salary to $52,000. All other
aspects of their employment agreements remained unchanged.
- 32 -
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 30, 2004,
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 Jonathan D. Sokoloff, John G.
Danhakl, Peter J. Nolan, Jonathan A. Seiffer, John M. Baumer and James
D. Halper 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.
- 33 -
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 REMAINING
SECURITIES TO WEIGHTED- AVAILABLE FOR
BE ISSUED AVERAGE FUTURE ISSUANCE
UPON EXERCISE PRICE UNDER EQUITY
EXERCISE OF OF COMPENSATION
OUTSTANDING OUTSTANDING PLANS
OPTIONS, OPTIONS, (EXCLUDING
WARRANTS AND WARRANTS AND SECURITIES
RIGHTS RIGHTS REFLECTED IN
(a) (b) COLUMN (a))
------------- -------------- ---------------
EQUITY COMPENSATION PLANS APPROVED 22,175 $ 20 7,825
BY SECURITY HOLDERS
EQUITY COMPENSATION PLANS NOT ---- ---- ----
APPROVED BY SECURITY HOLDERS
TOTAL 22,175 $ 20 7,825
- 34 -
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.
EMPLOYMENT AGREEMENTS
On July 1, 2003, Diamond entered into an employment agreement with
Michael A. Sumsky, pursuant to which Mr. Sumsky agreed to serve as the
President, Chief Financial Officer, Secretary and General Counsel of Diamond at
an annual salary of $350,000, subject to annual review based on Diamond's and
Mr. Sumsky's performance. The employment agreement provides for a term
commencing on July 1, 2003 and ending on December 31, 2004. In addition to his
annual salary, Mr. Sumsky is eligible to receive a bonus based upon the
achievement of certain criteria. The employment agreement also contains various
severance, non-competition, non-solicitation provisions, non-disclosure and
assignment of inventions provisions.
On November 17, 2003, Diamond entered into an employment agreement with
each of Kenneth Levine and Richard Rutta, pursuant to which Messrs. Levine and
Rutta agreed to serve as the Co-Chairmen of Diamond at an annual salary of
$320,000, subject to annual review based on Diamond's and Messrs. Levine and
Rutta's performance. The employment agreements provides for a term commencing on
November 17, 2003 and ending on November 16, 2004. On March 15, 2004, the
employment agreements were amended to reduce the annual salary for Messrs.
Levine and Rutta to $52,000. In addition to their annual salary, Messrs. Levine
and Rutta are eligible to receive a bonus based upon the achievement of certain
criteria. The employment agreements also contain various severance,
non-competition, non-solicitation provisions, non-disclosure and assignment of
inventions provisions. (See Executive Compensation--Employment Agreements.)
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 $675,000, $611,000, and $573,000
in 2003, 2002 and 2001, respectively.
On November 1, 2003, Diamond entered into an amendment to that certain
lease agreement dated July 1, 2000 between Richard Rutta & Kenneth Levine Real
Estate Partnership, a partnership wholly owned by Richard Rutta and Kenneth
Levine, and Diamond for certain leased premises located at 220 Division Street,
Kingston, PA 18704. The amendment increased the square footage being leased to
Diamond from 102,075 square feet to 206,080 square feet and increased the total
annual rent from $235,787 to $465,740. The annual rent shall be increased by
four percent on January 1, 2004 and each January 1st thereafter.
- 35 -
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.
ITEM 14. ACCOUNTANT'S FEES AND SERVICES
The Board of Directors has reviewed the audit and non-audit fees that Diamond
has paid to its independent public accountants for purposes of considering
whether such fees are compatible with maintaining the auditor's independence.
Audit Fees. Fees for services rendered by KPMG LLP for the reviews of periodic
reports and for the audits of the financial statements of Diamond were $95,350
for 2002 and $122,200 for 2003.
Tax Fees. Aggregate fees billed for tax services rendered by KPMG LLP to Diamond
consisted of $56,660 in 2002 and $26,000 in 2003.
- 36 -
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,
2003 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.
Form 8-K filed on April 2, 2003, reporting that Diamond Triumph Auto
Glass, Inc. issued a press release announcing its operating and
financial results for the year ended December 31, 2002.
Form 8-K filed on April 9, 2003, reporting that Diamond Triumph Auto
Glass, Inc. held a teleconference following the announcement of its
operating and financial results for the year ended December 31, 2002.
Form 8-K filed on May 15, 2003, reporting that Diamond Triumph Auto
Glass, Inc. issued a press release announcing its operating and
financial results for the quarter ended March 31, 2003.
Form 8-K filed on August 14, 2003, reporting that Diamond Triumph Auto
Glass, Inc. issued a press release announcing its operating and
financial results for the quarter ended June 30, 2003.
Form 8-K filed on November 14, 2003, reporting that Diamond Triumph
Auto Glass, Inc. issued a press release announcing its operating and
financial results for the quarter ended September 30, 2003.
(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.
- 37 -
4.2(1) Registration Rights Agreement, dated as of March 31, 1998, among
Diamond Triumph Auto Glass, Inc., First Union Capital Markets, a
division of Wheat First Securities, Inc., BT Alex. Brown
Incorporated and Donaldson, Lufkin & Jenrette Securities
Corporation.
4.3(1) Note Purchase Agreement, dated March 26, 1998, among Diamond
Triumph Auto Glass, Inc., First Union Capital Markets, a division
of Wheat First Securities, Inc., BT Alex. Brown Incorporated and
Donaldson, Lufkin & Jenrette Securities Corporation.
10.1(1) Management Subscription and Stockholders Agreement, dated as of
March 31, 1998, among Diamond Triumph Auto Glass, Inc., Green
Equity Investors II, L.P. and Norman Harris.
10.2(1) Management Subscription and Stockholders Agreement, dated as of
March 31, 1998, among Diamond Triumph Auto Glass, Inc., Green
Equity Investors II, L.P. and Michael Sumsky.
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(3) Employment Agreement, dated June 1, 2002, between Diamond Triumph
Auto Glass, Inc. and Norman Harris
10.14(3) Restricted Stock Agreement, dated June 1, 2002, between Diamond
Triumph Auto Glass, Inc and Norman Harris
10.15(3) 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(3) 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(3) Stock Sale Agreement, dated October 30, 2002, between DT
Subsidiary Corp. and Michael A. Sumsky.
- 38 -
10.18(4) Employment Agreement, dated July 1, 2003, between Diamond Triumph
Auto Glass, Inc. and Michael A. Sumsky
10.19(5) Amended Lease Agreement, dated November 1, 2003, between Diamond
Triumph Auto Glass, Inc. and Richard Rutta & Kenneth Levine Real
Estate Partnership.
10.20 Employment Agreement, dated November 17, 2003, between Diamond
Triumph Auto Glass, Inc. and Kenneth Levine
10.21 Amendment of March 15, 2004 to the Employment Agreement by and
between Diamond Triumph Auto Glass, Inc. and Kenneth Levine dated
Novemeber 17, 2003.
10.22 Employment Agreement, dated November 17, 2003, between Diamond
Triumph Auto Glass, Inc. and Richard Rutta.
10.23 Amendment of March 15, 2004 to the Employment Agreement by and
between Diamond Triumph Auto Glass, Inc. and Richard Rutta dated
Novemeber 17, 2003.
14.0 Code of Ethics.
31.1 Sarbanes-Oxley Section 302(a) Certification of the Chief Executive
Officer.
31.2 Sarbanes-Oxley Section 302(a) Certification of the Chief Financial
Officer.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the
Chief Executive Officer.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the
Chief Financial Officer.
- ------------------------
(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.
(3) Incorporated by reference to Diamond's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002.
(4) Incorporated by reference to Diamond's Quarterly Report on Form 10-Q for the
period ended June 30, 2003.
(5) Incorporated by reference to Diamond's Quarterly Report on Form 10-Q for the
period ended September 30, 2003.
- 39 -
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 30, 2004
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 30, 2004
- -------------------------------------- Director
Kenneth Levine
/s/ Richard Rutta Co-Chairman of the Board and March 30, 2004
- -------------------------------------- Director
Richard Rutta
/s/ Norman Harris Chief Executive Officer March 30, 2004
- --------------------------------------
Norman Harris
/s/ Michael A. Sumsky Chief Financial Officer March 30, 2004
- --------------------------------------
Michael A. Sumsky
/s/ Jonathan Seiffer Director March 30, 2004
- --------------------------------------
Jonathan Seiffer
/s/ John G. Danhakl Director March 30, 2004
- --------------------------------------
John G. Danhakl
/s/ Jonathan D. Sokoloff Director March 30, 2004
- --------------------------------------
Jonathan D. Sokoloff
- 40 -
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.
- 41 -
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets, December 31, 2003 and 2002.................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001................. F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2003, 2002 and F-6
2001.......................................................................................................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001................. 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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and
the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Philadelphia,
Pennsylvania
March 15, 2004
F-2
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2003 and 2002
(Dollars in Thousands except per share amounts)
2003 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 35 2,094
Accounts receivable, less allowance for doubtful accounts
of $413 for 2003 and 2002 10,353 11,403
Other receivables 402 349
Inventories 13,493 15,712
Prepaid expenses 1,783 1,562
Deferred income taxes 3,038 4,277
-------- --------
Total current assets 29,104 35,397
-------- --------
Equipment and leasehold improvements:
Vehicles 5,459 6,441
Computers and office equipment 3,431 4,157
Computer software 7,869 7,384
Other equipment 663 649
Leasehold improvements 644 593
-------- --------
18,066 19,224
Accumulated depreciation and amortization (11,519) (11,218)
-------- --------
Net equipment and leasehold improvements 6,547 8,006
Unamortized deferred loan costs and senior notes discount, net 2,706 4,001
Deferred income taxes 36,473 35,932
Other assets 502 486
-------- --------
Total assets $ 75,332 83,822
======== ========
See accompanying notes to consolidated financial statements.
F-3
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2003 and 2002
(Dollars in Thousands except per share amounts)
2003 2002
---------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 12,492 9,856
Accrued expenses
Payroll and related items 4,341 5,729
Accrued interest 1,859 2,155
Accrued income taxes 461 451
Other 1,141 710
---------- --------
Total accrued expenses 7,802 9,045
---------- --------
Total current liabilities 20,294 18,901
---------- --------
Long-term debt:
Senior notes 79,758 93,000
Credit Facility 2,500 -
---------- --------
Total long-term debt 82,258 93,000
---------- --------
Total liabilities 102,552 111,901
---------- --------
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 2003 and 2002, at liquidation preference value 69,076 61,373
---------- --------
Stockholders' equity (deficit):
Common stock, 2003 and 2002 par value $0.01 per share; authorized
1,100,000 shares; issued and outstanding 1,026,366 shares in 2003
and 2002 10 10
Additional paid-in capital 27,244 34,947
Deferred compensation (255) (360)
Retained earnings (accumulated deficit) (122,995) (123,749)
Common stock in treasury, at cost, 15,000 shares in 2003 and 2002 (300) (300)
---------- --------
Total stockholders' equity (deficit) (96,296) (89,452)
---------- --------
Total liabilities and stockholders' equity (deficit) $ 75,332 83,822
========== ========
See accompanying notes to consolidated financial statements.
F-4
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands)
2003 2002 2001
---------- ------- -------
Net sales $ 218,703 201,623 201,366
Cost of sales 65,966 59,525 58,049
---------- ------- -------
Gross profit 152,737 142,098 143,317
---------- ------- -------
Operating expenses:
Payroll 86,119 80,730 75,232
Advertising and promotional 13,976 12,800 11,783
Other operating expenses 40,625 36,777 35,031
Depreciation and amortization 2,784 3,014 2,455
---------- ------- -------
143,504 133,321 124,501
---------- ------- -------
Income from operations 9,233 8,777 18,816
Other (income) expense:
Interest income (22) (221) (191)
Interest expense 7,706 8,826 10,305
---------- ------- -------
7,684 8,605 10,114
---------- ------- -------
Income before provision for income taxes 1,549 172 8,702
Provision for income taxes 795 261 3,733
---------- ------- -------
Net income (loss) 754 (89) 4,969
Preferred stock dividends 7,703 6,843 6,081
---------- ------- -------
Net loss applicable to common stockholders $ (6,949) (6,932) (1,112)
========== ======= =======
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, 2003, 2002 and 2001
(Dollars in Thousands except per share amounts)
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
-------------------- PAID-IN DEFERRED (ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT) STOCK TOTAL
--------- ------ ---------- ------------ ------------ -------- -------
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)
--------- ------ ---------- ------------ ------------ -------- -------
-- -- --
Amortization of deferred
compensation 105 105
Net Income -- -- -- -- 754 -- 754
Preferred stock dividends -- -- (7,703) -- (7,703)
--------- ------ ---------- ------------ ------------ -------- -------
Balance, December 31, 2003 1,026,366 10 27,244 (255) (122,995) (300) (96,296)
--------- ------ ---------- ------------ ------------ -------- -------
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, 2003, 2002 and 2001
(Dollars in Thousands except per share amounts)
2003 2002 2001
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $ 754 (89) 4,969
---------- ---------- ----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and other amortization 2,784 3,014 2,455
Deferred income taxes 698 1,442 3,673
Amortization of deferred loan costs and senior notes discount 783 939 945
Gain on extinguishment of debt (1,140) (1,430) 0
Provision for doubtful accounts 482 832 860
(Gain) on sale of fixed assets (30) (36) (148)
Amortization of deferred compensation 105 167 0
Changes in assets and liabilities:
Accounts and other receivables 516 (600) 1,507
Inventories 2,219 1,045 (2,176)
Prepaid expenses (221) (179) (299)
Accounts payable 2,636 (784) (1,312)
Accrued expenses (1,243) (18) 694
---------- ---------- ----------
Net cash provided by operating activities 8,343 4,303 11,168
Cash flows from investing activities:
Capital expenditures (1,385) (3,271) (4,215)
Proceeds from sale of equipment 89 85 263
(Increase) decrease in other assets (16) 12 (94)
---------- ---------- ----------
Net cash used in investing activities (1,312) (3,174) (4,046)
---------- ---------- ----------
Cash flows from financing activities:
Payment for redemption of senior notes (11,590) (5,276) 0
Net proceeds from bank facility 6,500 0 2,500
Payments on bank facility (4,000) 0 (3,000)
Deferred debt costs 0 (51) (55)
Repurchase of common stock 0 (300) 0
---------- ---------- ----------
Net cash used in financing activities (9,090) (5,627) (555)
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (2,059) (4,498) 6,567
Cash and cash equivalents, beginning of year 2,094 6,592 25
---------- ---------- ----------
Cash and cash equivalents, end of year $ 35 2,094 6,592
========== ========== ==========
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, 2003, 2002 and 2001
(Dollars in Thousands except per share amounts)
(1) DESCRIPTION OF ENTITY
Diamond Triumph Auto Glass, Inc. (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,
2003, the Company operated a network of 277 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, 2003, 2002 and 2001
(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 4 years
Computers and office equipment 5-7 years
Computer software 3-5 years
Other equipment 5-7 years
Leasehold improvements Lesser of lease life or 10 years
Costs in 2003, 2002 and 2001 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
2003, 2002 and 2001, the Company commenced amortizing the
software costs over the estimated useful life of five years.
Unamortized computer software costs were $2,940, $3,871 and
$3,490 at December 31, 2003, 2002 and 2001, respectively.
Amortization expense in 2003, 2002 and 2001 for capitalized
computer software costs was $1,416, $1,034 and $952,
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, 2003, 2002 and 2001
(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 Company provides for an
allowance for doubtful accounts. The allowance for doubtful
accounts was $413 at December 31, 2003 and 2002. Writed offs
against the allowance were $482, $632 and $1,109 in 2003, 2002
and 2001 respectively. 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 charged 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.
(h) ADVERTISING
The Company expenses all advertising costs as incurred. The
most significant advertising costs relate to yellow pages
advertisements. The costs of yellow pages advertising are
expensed at the time the yellow pages phone book is published.
Total advertising expense was $9,213, $9,039, and $8,364 in
2003, 2002 and 2001, 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 adopted in 2002. The
Company recorded a reduction to interest expense of $1,140 and
$1,430 in 2003 and 2002 respectively related to gain on
extinguishment of debt (See Note 4 - Long-Term Debt).
(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
F-10
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands except per share amounts)
1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123
established a fair value based method of accounting for
stock-based compensation plans. SFAS No. 123 requires that a
company's financial statements include certain disclosures
about stock-based employee compensation arrangements
regardless of the method used to account for the plan.
As allowed by SFAS 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 compensation cost for the
Company's common stock options been determined based upon the
fair value of the options at the date of the grant, as
prescribed under SFAS No. 123, as amended by SFAS No. 148,
Accounting for stock-based compensation, the Company's net
income (loss) and earnings per share would have been reduced
to the following pro forma amounts:
2003 2002 2001
-------- ---- -----
Net income (loss) $ 754 (89) 4,969
As reported
Add stock-based employee compensation expense 64 167 ----
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 (73) (177) (6)
-------- ---- -----
Proforma net income (loss) 745 (99) 4,963
======== ==== =====
The fair value of the options granted in 2001 was $2.84 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%. The fair value of the
options granted in 2003 was $2.63 using the following
assumptions: Risk-free interest rate of 2.82%, 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.
(m) RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45, "
Guarantor's Accounting And Disclosure Requirements For
Guarantees, Including Indirect Guarantees of Indebtedness of
Others." The disclosure requirements, and the recognition and
initial measurement provisions were adopted January 1, 2003.
The adoption of this Interpretation had no impact on Diamond's
financial statements.
In January 2003, the FASB issued Interpretation No. 46
"Consolidation of Variable Interest Entities." In December
2003, a modification to FIN 46 was issued (FIN 46R) which
delayed
F-11
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands except per share amounts)
the effective date until no later than fiscal periods ending
after March 15, 2004 and provided additional technical
clarifications to implementation issues. We currently do not
have any variable interest entities as defined in FIN 46R.
Diamond does not expect that the adoption of this
Interpretation will have a material impact on our consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities". This Statement amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement
is effective, except for certain provisions, for contracts
entered into or modified after June 30, 2003. The adoption of
this Statement did not have any impact on our consolidated
financial statements.
Effective July 1, 2003, Diamond adopted SFAS No. 150
"Accounting for Certain Financial Instruments With
Characteristics of Both Liabilities and Equity," which
addresses accounting for certain financial instruments with
characteristics of both liabilities and equity. The adoption
of this Statement did not have any impact on our consolidated
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,
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 Company's senior notes is
$74,973 at December 31, 2003. The fair value of the Company's Preferred
Stock approximates the liquidation preference.
F-12
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands except per share amounts)
(4) LONG -TERM DEBT
Long-term debt consists of the following:
2003 2002
-------- ------
Senior Notes 79,758 93,000
Credit Facility 2,500 --
-------- ------
$ 82,258 93,000
======== ======
On March 27, 2000, the Company entered into a Credit Facility, which
had an initial term of four years and provides for revolving advances
of up to the lesser of: (1) $25,000; (2) the sum of 85% of 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. On November 26, 2003, the Company amended the
Credit Facility, which , among other things, extended the term for an
additional three year period through March 27, 2007. A portion of the
Credit Facility, not to exceed $10,000, is available for the issuance
of letters of credit, which generally have an initial term of one year
or less. The Company had $6,391 in outstanding letters of credit at
December 31, 2003. Borrowings under the Credit Facility bear interest,
at the Company's discretion, at either the JPMorgan Chase Manhattan
Bank Rate (as defined in the Credit Facility) or LIBOR, plus a margin
of 0.50% for the JPMorgan Chase Manhattan Rate and 2.25% for the LIBOR
Rate. The Company shall also pay the Letter of Credit Guaranty Fee (as
defined in the Credit Facility) at an amount equal to 1.45% per annum,
payable monthly, on the face amount of each outstanding Letter of
Credit (as defined in the Credit Facility) less the amount of any and
all amounts previously drawn under such Letters of Credit. 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, 2003. $2.5 million was outstanding
under the Credit Facility at December 31, 2003.
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, 2003.
During 2003 and 2002, the Company repurchased $13,242 and $7,000 face amount of
senior notes respectively, for a repurchase price of $11,590 and $5,276,
respectively. This repurchase resulted in a gain of $1,140 and $1,430 in 2003
and 2002 respectively, 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
was included within interest expense for 2003 and 2002.
F-13
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands except per share amounts)
Maturities of long-term debt are as follows:
2004 $ --
2005 --
2006 --
2007 2,500
2008 79,758
Thereafter --
--------
$ 82,258
========
Deferred loan costs and accumulated amortization are summarized as
follows:
ACCUMULATED
AMOUNT AMORTIZATION BALANCE
------ ------------ -------
DECEMBER 31, 2003
Deferred loan costs $4,339 2,649 1,690
Discount on senior notes 2,393 1,377 1,016
------ ----- -----
$6,732 4,026 2,706
====== ===== =====
DECEMBER 31, 2002
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
stockholders of the Company have, effective July 1, 2003, amended its
Charter with respect to its class of Preferred Stock, which eliminated
the April 1, 2010 mandatory redemption clause. 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 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, 2003, 2002 and 2001
(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, 2003, 2002 and 2001 the liquidation value of the
Preferred Stock recorded on the Company's balance sheet was $69,076,
$61,373 and $54,530, respectively, which includes dividends of $34,076,
$26,373 and $19,530, 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 2003,
2002 and 2001 aggregated $6,099, $5,739, and $5,058, respectively, of
which $675, $611, and $573, 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 $4,934, $4,009, and $3,513 for the years ended December 31,
2003, 2002 and 2001, respectively.
Total lease commitments, including vehicles, are as follows:
THIRD RELATED
VEHICLES PARTIES PARTIES TOTAL
-------- ------- ------- -----
2004 1,126 3,565 901 5,592
2005 ---- 1,563 469 2,032
2006 ---- 675 ---- 675
2007 ---- 218 ---- 218
2008 99 99
Thereafter ---- 26 ---- 26
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 $10,440 at December 31, 2003.
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 2003,
2002 and 2001.
F-15
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002 and 2001
(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, 2003, the Board of Directors had granted 22,175 options
to key employees of the Company with an exercise price of $20.00 per
share, which approximates fair value at the date of grant. 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.
Summarized stock option data is as follows:
F-16
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands except per share amounts)
EXERCISE SHARES
PRICE UNDER OPTION
-------- ------------
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
Granted 20.00 500
Exercised -- --
Cancelled 20.00 (6,550)
------
Outstanding at December 31, 2003 22,175
======
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 $7.6 million of federal tax deficiencies owed by Diamond for the
period December 31, 1998 through December 31, 2003, plus possible
interest and penalties and any resultant increases in current state tax
expense for this period. Additionally, the deferred tax asset
established in 1998 would be eliminated, as well as net operating loss
carryforwards from previous deductions of the tax goodwill. The
carrying amount of these assets at December 31, 2003 is approximately
$37.0 million.
F-17
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands except per share amounts)
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:
CURRENT DEFERRED TOTAL
-------- -------- --------
Year ended December 31, 2003:
Federal $ (24) 665 641
State 121 33 154
-------- -------- --------
$ 97 698 795
======== ======== ========
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 60 874 934
-------- -------- --------
$ 60 3,673 3,733
======== ======== ========
Income tax expense applicable to continuing operations differed from the amounts
computed by applying the U.S. federal income tax rate of 34 percent to pretax
income as a result of the following:
F-18
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands except per share amounts)
2003 2002 2001
-------- -------- --------
Computed "expected "tax expense $ 526 59 2,959
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal income tax benefit 102 33 617
Permanent items 167 169 129
Other, net -- -- 28
-------- -------- --------
$ 795 261 3,733
-------- -------- --------
The tax effects of temporary differences that give rise to significant
portions of the deferred assets and deferred tax liabilities at
December 31, 2003 and 2002 are presented below.
2003 2002
------- -------
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 161 161
Inventories, principally due to additional
costs inventoried for tax 752 847
In tangibles for tax purposes 28,156 31,151
Advertising expenses not yet
deducted for tax purposes 1,685 2,459
Net operating loss and alternative minimum
tax cred it carry forward 8,842 5,370
Liabilities and accruals for financial reporting purposes 553 898
------- -------
Total gross deferred tax assets 40,149 40,886
------- -------
Deferred tax liabilities :
Plant and equipment, principally due to differences
in depreciation and capitalized interest 638 677
------- -------
Total gross deferred tax liabilities 638 677
------- -------
Net deferred tax assets $39,511 40,209
======= =======
There was no valuation allowance for deferred tax assets as of December
31, 2003 or 2002. 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 $97,000 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 differences. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the amortization period are
reduced.
F-19
DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands except per share amounts)
(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 $370, $340, and $389 for 2003, 2002 and 2001, respectively.
(10) SUPPLEMENTAL CASH FLOW INFORMATION
2003 2002 2001
------- ------ ------
Interest paid $ 7,966 9,276 9,327
Noncash investing and financing activities :
Preferred stock dividends $ 7,703 6,843 6,081
(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