ITEM 1. BUSINESS
Overview
Diamond is a leading provider of automotive glass replacement and repair services in the United States. At December 31, 2001, Diamond operated a network of 256 automotive glass service centers, approximately 1,153 mobile installation vehicles and six distribution centers in 43 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 (income before income taxes and extraordinary item, interest expense, depreciation and amortization) for the year ended December 31, 2001, were $201.4 million, $5.0 million and $21.5 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 2001 sales to individual consumers, commercial customers and insurance customers represented approximately 25.8%, 37.0% and 37.2% of total sales, respectively. While the two largest participants in the industry primarily focus on servicing automotive glass insurance claims (including providing related insurance claims processing services) and also manufacture automotive glass, Diamond has strategically positioned itself solely as a provider of automotive glass replacement and repair services to a balanced mix of individual, commercial and insurance customers.
Diamond's sole focus on automotive glass replacement and repair, combined with its aggressive cost controls, strong purchasing power and efficient internal distribution system, have positioned Diamond as one of the lowest cost providers of automotive glass replacement and repair services. These competitive attributes, together with localized marketing efforts, have enabled Diamond's new service centers to quickly establish a base of local consumer and commercial installation business from which Diamond services all three of its customer markets.
Diamond's financial performance reflects attractive service center-level economics. The cash required to open a new service center, including inventory net of trade payables, averages $39,900. In 2001, over 80% of Diamond's installations and repairs were performed by mobile technicians at a customer's home or workplace. Due to the high percentage of mobile installations and repairs which Diamond performs, service centers are typically located in commercial or industrial areas, where rents are generally available at low cost. In 2001, Diamond's 169 mature service centers (service centers open for four years or longer) averaged approximately $949,000 in sales and approximately $192,000 of branch operating profit per location. For the year ended December 31, 2001, approximately 92% of Diamond's mature service centers achieved positive branch operating profitability. Management believes that, with enhanced emphasis on marketing, personnel evaluation, effective cost controls and inventory management, Diamond will increase this percentage of branch operating profitability in mature service centers.
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 256 locations at the end of 2001.
Recapitalization
On January 15, 1998, Diamond, Kenneth Levine, Richard Rutta, Green Equity Investors II, L.P. and certain affiliated entities of Diamond entered into a Second Amended and Restated Stock Purchase Agreement, pursuant to which, among other things, Green Equity Investors II, L.P. acquired 77.0% of the Common Stock and 80.0% of the Preferred Stock. This transaction was consummated on March 31, 1998. Concurrently therewith, Diamond issued $100 million in aggregate principal amount of 9 1/4% Senior Notes (the "Notes") and entered into a credit facility, under which Diamond borrowed $12.5 million. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Significant Accouting Policies -- Income Tax" for a discussion of the Internal Revenue Service's proposed adjustments with respect to Diamond's tax treatment of the recapitalization.
Industry Overview
The market for the installation of automotive glass is highly fragmented. Many industry participants are small "mom and pop" installers who compete less effectively against large, geographically diversified providers of automotive glass installation services, such as Diamond. Consequently, the industry has been consolidating.
Demand for automotive glass is influenced by several factors. Replacement volume increases as the total vehicle population and the number of miles driven increases. Severe weather and road conditions can also increase demand for automotive glass repair and replacement. However, consumers may defer fixing minor damage to a windshield until a vehicle trade-in, sale or inspection for new license tags. Therefore, new automobile sales, turnover of used vehicles and state automobile inspection laws influence automotive glass demand.
Sales growth in the automotive glass replacement and repair industry has been attributable primarily to an increase in the aggregate number of vehicles on the road and to an increase in the aggregate number of miles driven per vehicle per year. Growth in industry sales has also been driven by the use of larger, more complex and more expensive automotive glass in new vehicles.
Pricing
The price of replacement automotive glass is based on list prices developed by the National Auto Glass Specification ("NAGS"), an independent third party. NAGS prices are generally changed following wholesale price increases announced by original equipment manufacturers. Prices charged by participants in the automotive glass replacement industry are independently determined using varying percentage discounts from the NAGS price list. The impact of NAGS price increases on Diamond's financial results depends on the level of discounts Diamond grants to its customers and the level of discounts that Diamond can obtain from its glass suppliers. Effective January 1, 1999, NAGS significantly modified its published list prices in order to bring actual prices more in line with published list prices. Although NAGS has not materially modified its published list prices since January 1, 1999, NAGS has made periodic modifications to its published list prices subsequent to that date.
Products
Diamond's primary installation products are automotive windshields which are made of laminated safety glass. Safety glass consists of two layers of glass bound together with a thin layer of vinyl which adds strength to the glass and makes it very difficult for an object to penetrate a windshield upon impact. As part of Diamond's commitment to serve all of its customers' automotive glass replacement needs, Diamond also offers tempered automotive glass. Tempered glass is generally used for side and rear automobile and truck windows and is significantly stronger than regular glass due to specialized processing which causes tempered glass to shatter into dull-edged pebbles, reducing glass related injuries. In addition, Diamond offers automotive glass repair services.
Customers and Marketing
Diamond provides automotive glass replacement services to each of the industry's customer markets, which include individual consumers, commercial customers and insurance customers. Management believes that, in addition to capturing additional consumer sales, broadening Diamond's service center network and geographic coverage will facilitate Diamond's efforts to obtain an increased share of the national insurance and fleet markets, whose participants generally establish multiple providers for their automotive glass replacement requirements. In 2001, Diamond's top ten customer accounts comprised approximately 22.1% of total sales and no single customer account exceeded 5.9% of total sales.
Diamond's marketing is conducted through a combination of prominent Yellow Pages advertising and by a direct sales force of 163 representatives. Yellow Pages advertising is supported by customer service representatives and extended hour call centers that answer telephone inquiries, schedule service appointments and arrange emergency service. Sales representatives market Diamond's services to insurance claim centers, local agents, fleet operators, automobile dealers and body shops and have established relationships at all levels of the major insurance, fleet and rental car company organizations.
Individual Consumers. The marketing focus to the individual consumer market is low price and speed of service. Diamond's consumer customers consist of individuals who are not associated with a related automobile insurance claim. Customers in this market typically do not have automobile glass insurance coverage, have a high insurance deductible or do not want to file a claim with their insurance carrier. These customers are primarily concerned with price, quality, convenience and speed of service. Substantial portions of the industry's consumer sales are generated as a result of localized marketing efforts, such as Yellow Pages advertising. In order to attract consumer customers, Diamond's Yellow Pages advertisements are designed to appear in the first group of display advertisements and promote Diamond's competitive pricing and fast mobile service. When a customer calls, Diamond's service representatives are trained to emphasize Diamond's low price guarantee and prompt service capabilities. The majority of Diamond's services can be provided by its mobile installation technicians at a customer's home or workplace.
Commercial Customers. Diamond markets to commercial customers through its direct sales force, which emphasizes high quality service at a low cost. Diamond's commercial market customers include commercial fleet leasing companies, rental car companies, car dealerships, body shops, utilities and government agencies. Diamond's customers in the commercial market include Avis Rent-A-Car, Inc., Enterprise Rent-A-Car, USF Holland and Bell Atlantic Corporation (Verizon). Management believes that Diamond's expanding geographic coverage will enable Diamond to obtain an increased share of the national fleet automotive glass replacement business.
Insurance Customers. Diamond markets its services to all levels of the insurance industry, including local agents, claims offices and centralized call centers. In addition to marketing directly to insurance companies through its direct sales force, Diamond participates as an approved service provider within glass replacement networks administered by third parties, including certain of Diamond's competitors. These third party networks act as outsourced claims administrators under contract to an insurance company. Historically, insurance companies that participate in these networks have required that more than one service provider provide automotive glass replacement and repair services in order to ensure competitive pricing and high quality service. Diamond is an approved service provider for many national insurance carriers, including State Farm Insurance Company, Allstate Insurance Company and Travelers Property Casualty Corporation.
Service Centers
Diamond's repair and installation service is performed either on-site at a service center location or at a customer's home or workplace by a mobile technician. At December 31, 2001, Diamond operated a network of 256 automotive glass service centers, approximately 1,153 mobile installation vehicles and six distribution centers in 43 states. In 2001, over 80% of Diamond's installations and repairs were performed by mobile technicians at a customer's home or workplace. Due to the high percentage of mobile installations and repairs which Diamond performs, service centers are typically located in commercial or industrial areas, where rents are generally available at low cost.
Diamond's automotive glass service centers are operated under the following service marks: Triumph Auto Glass and Diamond Auto Glass in the Northeast and Mid-Atlantic; and Triumph Auto Glass in the Midwest, Southeast, Southwest and Western. Any expansion into new states will be under the Triumph Auto Glass registered service mark. The company opened 24 new service centers and two distribution centers in 2001, and plans to continue in its current service center expansion mode.
The following chart provides information concerning Diamond's service center openings from 1990 to 2001:
Service % Increase Centers Over Prior Year Openings Consolidation At Year End 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%
Service centers are open for business from 8:00 a.m. to 5:00 p.m. on Monday through Friday and 8:00 a.m. to 12:00 p.m. on Saturday. Service center employees perform installation services and process customer inquiries during regular business hours. After-hours customer inquiries are handled by Diamond's emergency and extended hour call center. Operators at this call center answer customer inquiries, schedule mobile installation services and arrange emergency service from service centers throughout Diamond's network.
Distribution System
Diamond currently operates six distribution centers which operate seven days a week and are located in Kingston, Pennsylvania; Columbus, Ohio; Atlanta, Georgia; Rock Island, Illinois; Dallas, Texas and Denver, Colorado. Diamond's efficient distribution system enables Diamond to make regular deliveries to substantially all of its service centers both to replenish stock and to provide automotive glass that is not carried in service center inventories. Through its distribution centers, Diamond supports a significant portion of its sales with internally distributed product, with the remainder being purchased from the spot market. Diamond's highly efficient distribution system, combined with a successful inventory management program at its service centers, enables Diamond to meet immediate service demands at a lower cost than if larger quantities of automotive glass were required to be purchased in the spot market.
Suppliers
Management believes that the high volume of its automotive replacement glass ("ARG") purchases position Diamond as an important customer of the primary automotive glass manufacturers, thereby reducing Diamond's exposure to product shortages and maximizing its ability to purchase ARG at the lowest available cost. Diamond's purchasing program utilizes the major domestic original equipment manufacturers for truckload and spot purchases, and importation of containers from the larger manufacturers throughout the world. Management believes that the scope and flexibility of Diamond's purchasing program and its efficient distribution system have enabled Diamond to achieve higher service levels and a lower cost of goods than those of most of its competitors.
Diamond has numerous domestic and foreign suppliers, and is continuing to expand its supplier network by utilizing additional foreign suppliers in order to guard against product shortages and to reduce the overall cost of ARG. In 2001, no single supplier represented more than 17% 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 which are Safelite Glass Corporation, LYNX Services from PPG, L.L.C. and Harmon AutoGlass, a division of Apogee Enterprises, Inc.
Employees
As of December 31, 2001, Diamond employed 1,868 persons. None of Diamond's employees are covered by a collective bargaining agreement, and Diamond believes that its relationships with its employees are good.
FACTORS AFFECTING FUTURE PERFORMANCE
Diamond is substantially leveraged and has significant debt service obligations which could impair its ability to pay the amounts due under the Notes.
Diamond is substantially leveraged and has significant debt service obligations, which could impair its ability to pay the amounts due under the Notes. As of December 31, 2001, Diamond's aggregate consolidated indebtedness was approximately $100.0 million, and Diamond had $54.5 million (liquidation preference) of outstanding Preferred Stock and a stockholders' deficit of $82.4 million.
The degree to which Diamond is leveraged may impair Diamond's ability to pay the amounts due under the Notes. Possible adverse consequences of Diamond's degree of leverage include the following:
o Diamond's ability to obtain additional financing for working capital, capital expenditures or general corporate purposes may be impaired;
o a substantial portion of Diamond's cash flow from operations goes to the payment of interest and principal on its outstanding debt, thereby reducing the funds available to Diamond for other purposes;
o the credit facility and the indenture governing the Notes contain certain restrictive financial and operating covenants;
o Diamond's indebtedness under the credit facility is at variable rates of interest, which makes Diamond vulnerable to increases in interest rates;
o Diamond's indebtedness outstanding under the credit facility is secured by a first priority lien on substantially all of its assets and will become due prior to the time the principal on the Notes will become due;
o Diamond's substantial degree of leverage will limit its ability to adjust rapidly to changing market conditions, reduce its ability to withstand competitive pressures, and make it more vulnerable in the event of a downturn in general economic conditions, repeated years of mild weather conditions or other adverse events in its business.
If Diamond is unable to generate sufficient cash flows from operations in the future to service its indebtedness, it may be required to refinance all or a portion of its indebtedness, including the Notes, or to obtain additional financing or to dispose of material assets or discontinue certain of its operations. The credit facility and 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:
o senior, unsecured obligations of Diamond and will rank senior in right and priority of payment to any indebtedness of Diamond that by its terms is expressly subordinated to the Notes.
o subordinated to secured indebtedness of Diamond (including indebtedness under the credit facility) with respect to the assets securing such indebtedness. The credit facility is secured by a first priority lien on substantially all of Diamond's assets.
o subordinated to claims of creditors of Diamond's subsidiaries, except to the extent that holders of the Notes may be creditors of such subsidiaries pursuant to the Guarantees. Diamond currently has no subsidiaries, and, accordingly, there are currently no Guarantees.
Diamond's obligations with respect to the Notes will be guaranteed, jointly and severally, on a senior, unsecured basis by certain of its future subsidiaries. Any obligations of Diamond's subsidiaries will be senior to the claims of the holders of the Notes with respect to the assets of any of these subsidiaries, except to the extent that the holders of the Notes may be creditors of a subsidiary pursuant to a Guarantee. Any claim by the holders of the Notes with respect to the assets of any subsidiary will be subordinated to secured indebtedness (including indebtedness under the credit facility) of that subsidiary with respect to the assets securing such indebtedness. The rights of Diamond and its creditors, including holders of the Notes, to realize upon the assets of any subsidiary upon that subsidiary's liquidation or reorganization (and the consequent rights of holders of the Notes to participate in those assets) will be subject to the prior claims of that subsidiary's creditors, except to the extent that Diamond may itself be a creditor with recognized claims against that subsidiary or to the extent that the holders of the Notes may be creditors with recognized claims against that subsidiary pursuant to the terms of a Guarantee (subject, however, to the prior claims of creditors holding secured indebtedness of any subsidiary with respect to the assets securing that indebtedness). The credit facility is secured by a first priority lien on substantially all of Diamond's assets. In addition, the indenture governing the Notes restricts the amount of indebtedness that subsidiaries are permitted to incur.
Diamond may not be able to comply with certain provisions in the agreements governing its outstanding debt that restrict Diamond's actions and require Diamond to maintain financial ratios.
The credit facility and the indenture governing the Notes include certain covenants that, among other things, restrict Diamond's ability to:
o make investments;
o incur additional indebtedness;
o grant liens;
o merge or consolidate with other companies;
o change the nature of its business;
o dispose of assets;
o make loans;
o pay dividends or redeem capital stock;
o guarantee the debts of other persons;
o make capital expenditures; and
o engage in transactions with affiliates.
The credit facility requires Diamond to maintain minimum EBITDA (as defined in the credit facility), calculated monthly, for each 12-month period, ending as of the end of each month, of at least $10.5 million.
Diamond's ability to comply with the minimum EBITDA requirement and the other provisions of its credit facility may be affected by events beyond its control. Diamond's breach of any of these covenants could result in a default under the credit facility, in which case the lender would, among other things, be entitled to elect to declare all amounts owing under the credit facility, together with accrued interest, to be due and payable. If Diamond were unable to repay these borrowings, the lender could proceed against its collateral. If the indebtedness under the credit facility were accelerated, Diamond cannot assure you that its assets would be sufficient to repay in full that indebtedness and Diamond's other indebtedness, including the Notes.
The Notes are subject to fraudulent conveyance laws.
Diamond's obligations under the Notes may be subject to review under relevant federal and state fraudulent conveyance laws in the event that a bankruptcy, reorganization or rehabilitation case by or on behalf of unpaid creditors of Diamond were to occur. Under these laws, Diamond's obligation to repay the Notes could be voided, or the Notes could be subordinated to all other creditors of Diamond, if, at the time Diamond issued the Notes, any of the following were true:
o Diamond intended to hinder, delay or defraud any existing or future creditor or contemplated insolvency in order to prefer one or more creditors to the exclusion in the whole or in part of others;
o Diamond was insolvent or was rendered insolvent by reason of issuing the Notes;
o Diamond was engaged in a business or transaction with unreasonably small capital; or
o Diamond intended to incur, or believed that it would incur, debts beyond its ability to pay those debts as they matured.
In the event that in the future the Notes are guaranteed by subsidiary guarantors, the Guarantees may also be subject to review under federal and state fraudulent transfer laws. If a court were to determine that, at the time a subsidiary guarantor became liable under its Guarantee, it satisfied certain of the conditions stated above, the court could void the Guarantee and direct the repayment of amounts paid thereunder.
The measure of insolvency under fraudulent conveyance statutes varies depending upon the laws of the jurisdiction being applied. Generally, however, Diamond would be considered insolvent if, at the time it issued the Notes, either (1) the sum of its debts was greater than all of its property at a fair valuation; or (2) if the present fair salable value of its assets is less than the amount that it would be required to pay on its existing debts as they become absolute and matured. The obligations of each subsidiary guarantor under its Guarantee, however, will be limited in a manner intended to avoid it being deemed a fraudulent conveyance under applicable law.
Additionally, under federal bankruptcy or applicable state insolvency law, if a bankruptcy or insolvency proceeding were initiated by or against Diamond within 90 days after it made any payment with respect to the Notes, or if Diamond anticipated becoming insolvent at the time of that payment, all or a portion of the payment could be avoided as a preferential transfer and the recipient of that payment could be required to return that payment.
Diamond does not know what standard a court would use to determine whether Diamond was insolvent at the time the Notes were issued, nor can Diamond assure you that a court would not find Diamond to be insolvent on that date or that, regardless of Diamond's solvency, that the issuances of the Notes constituted fraudulent conveyances on another of the grounds summarized above.
Diamond may not be able to comply with its obligations under the indenture governing the Notes to purchase all of the Notes upon a change of control.
Upon the occurrence of a change of control, the indenture governing the Notes requires Diamond to make an offer to repurchase all outstanding Notes at a price equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest thereon to the date of repurchase. However, the credit facility prohibits Diamond from repurchasing any Notes, unless and until Diamond has paid the indebtedness under the credit facility in full. Diamond's failure to repurchase the Notes would result in a default under the indenture governing the Notes and the credit facility. Diamond's inability to pay the indebtedness under the credit facility, if accelerated, would also constitute a default under the indenture governing the Notes, which could have adverse consequences to Diamond and to the holders of the Notes. In the event of a change of control, Diamond cannot assure you that it would have sufficient assets to satisfy all of its obligations under the credit facility and the Notes.
Diamond's future expansion may be hindered by its lack of sufficient capital or other factors, which would adversely affect Diamond's continued growth.
Diamond's continued growth depends to a significant degree on its ability to open new service centers in existing and new markets and to operate these service centers on a profitable basis. In addition, Diamond will require additional distribution centers as it implements its program to expand its service centers to achieve a nationwide presence. Diamond's ability to expand will depend, in part, on business conditions and the availability of qualified managers and service representatives, and sufficient capital. The company opened 24 new service centers and two distribution centers in 2001, and plans to continue in its current service center expansion mode. A decline in Diamond's overall financial performance may adversely impact its ability to expand in the future. Diamond expects that the net cash generated from operations, together with borrowings under the credit facility, should enable it to finance the expenditures related to its expansion. However, Diamond cannot assure you that:
o it will possess sufficient funds to finance the expenditures related to its expansion;
o new service centers can be opened on a timely basis;
o new service centers can be operated on a profitable basis; or that
o Diamond will be able to hire, train and integrate employees.
In the event net cash generated from operations together with working capital reserves and borrowings under the credit facility are insufficient to finance the expenditures related to Diamond's expansion, Diamond might be required to reduce its expansion in the future.
Diamond's operating results are affected by seasonality and weather.
Weather has historically affected Diamond's sales 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. Although Diamond's installation units increased by only 2.7% in fiscal 2001, revenue per installation unit increased an average of 7.2% in 2001. The increase in Diamond's average revenue per installation unit is attributable to the stabilization of price compression and to its sales mix.
Diamond competes against other large companies that may be better equipped to provide customers with automotive glass replacement and repair services.
The automotive glass replacement and repair industry is highly competitive, with customer decisions based on price, customer service, technical capabilities, quality, advertising and geographic coverage. The competition in the industry could result in additional pricing pressures, which could negatively affect Diamond's results of operations. In addition, certain of Diamond's competitors provide insurance companies with claims management services, including computerized referral management, policyholder call management, electronic auditing and billing services and management reporting. While the market is generally highly fragmented, Diamond also competes against several other large competitors in this market, the largest three of which are Safelite Glass Corporation, LYNX Services from PPG, L.L.C. and Harmon AutoGlass, a division of Apogee Enterprises, Inc. Many of Diamond's competitors have substantially less leverage than Diamond, which may allow them greater flexibility in managing their operations. Diamond cannot assure you that it will be able to continue to compete effectively with these or other competitors. See "Business--Competition."
Diamond is dependent on its key personnel and the loss of key personnel could adversely affect its results of operations.
Diamond's success is largely dependent upon the abilities and experience of its senior management team, including Kenneth Levine, Richard Rutta, Norman Harris and Michael A. Sumsky. The loss of services of one or more of these senior executives could adversely affect Diamond's results of operations.
Ownership of Diamond is concentrated in Green Equity Investors II, L.P., whose interests may conflict with those of the holders of Notes.
Green Equity Investors II, L.P., an investment partnership managed by Leonard Green and Partners, L.P. ("LGP"), owns 77.0% 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.
ITEM 2. PROPERTIES
The following chart provides information concerning Diamond's headquarters, distribution facilities and emergency call centers, all of which are leased:
Facility Function Area in Square Feet -------- -------- -------------------
Kingston, PA.......... Headquarters 121,000 Distribution Center Call Center Columbus, OH.......... Distribution Center 26,000 Call Center Atlanta, GA........... Distribution Center 20,000 Rock Island, IL....... Distribution Center 16,000 Dallas, TX............ Distribution Center 12,000 Denver, CO............ Distribution Center 9,400 Scranton, PA.......... Call Center 5,000
The following chart provides information concerning the number and location of Diamond's service centers, all of which are leased:
Number of Number of Service Service State Centers State Centers ----- ------- ----- -------
Alabama...... 6 Nevada....... 1 Arkansas..... 1 New Hampshire 5 California... 2 New Jersey... 11 Colorado..... 6 New Mexico... 1 Connecticut. 6 New York..... 28 Delaware..... 2 North Carolina..... 8 Florida...... 11 Ohio......... 11 Georgia...... 9 Oklahoma..... 2 Illinois..... 6 Oregon....... 3 Indiana...... 7 Pennsylvania. 27 Iowa......... 3 Rhode Island. 1 Kansas....... 4 South Carolina..... 4 Kentucky..... 3 South Dakota. 1 Louisiana.... 4 Tennessee.... 5 Maine........ 3 Texas........ 9 Maryland..... 8 Utah......... 2 Massachusetts... 10 Vermont...... 4 Michigan..... 8 Virginia..... 12 Minnesota.... 3 West Virginia 5 Mississippi. 1 Washington... 2 Missouri..... 4 Wisconsin.... 5 Nebraska..... 2
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.
ITEM 3. LEGAL PROCEEDINGS AND INSURANCE
Diamond is involved in legal proceedings in the ordinary course of its business. Management believes that the amounts which may be awarded or assessed against Diamond in connection with these matters, if any, will not have a material adverse effect on Diamond's financial condition, operating results or liquidity. In addition,
management believes that Diamond has appropriate insurance coverage to operate its business, including insurance for its mobile installation units and technicians.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public market for Diamond's Common Stock or Preferred Stock.
At March 13, 2002, there were five holders of record of Diamond's Common Stock and three holders of record of Diamond's Preferred Stock.
Diamond's ability to pay dividends is limited by the credit facility and the Notes. Diamond does not currently intend to pay dividends on its capital stock. Any future determination to pay dividends will be at the discretion of Diamond's Board of Directors and will be dependent upon Diamond's results of operations, capital requirements, financial condition, contractual restrictions and other factors deemed relevant at the time by Diamond's Board of Directors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical and unaudited pro forma condensed financial data as of December 31, 1997, 1998, 1999, 2000 and 2001 and for each of the years then ended has been derived from Diamond's audited financial statements. The report of KPMG LLP, independent auditors, on Diamond's Financial Statements as of December 31, 2000 and 2001, and for each of the years in the three year period ended December 31, 2001, is included elsewhere herein.
This summary historical and unaudited pro forma condensed financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Diamond's Financial Statements and the related notes thereto appearing elsewhere in this Annual Report.
(1) Prior to March 31, 1998, Diamond consisted of S corporations and, accordingly, federal and state income taxes were generally paid at the stockholder level only. Upon consummation of the Recapitalization (as defined under "Item 7.
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, 2001, Diamond operated a network of 256 automotive glass service centers, approximately 1,153 mobile installation vehicles and six distribution centers in 43 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, 2001 were $201.4 million, $5.0 million and $21.5 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 2001 sales to individual consumers, commercial customers and insurance customers represented approximately 25.8%, 37.0% and 37.2% of total sales, respectively. While the two largest participants in the industry primarily focus on servicing automotive glass insurance claims (including providing related insurance claims processing services) and also manufacture automotive glass, Diamond has strategically positioned itself solely as a provider of automotive glass replacement and repair services to a balanced mix of individual, commercial and insurance customers.
Recapitalization
On January 15, 1998, Diamond, Kenneth Levine, Richard Rutta, Green Equity Investors II, L.P. and certain affiliated entities of Diamond entered into a Second Amended and Restated Stock Purchase Agreement, pursuant to which, among other things: (1) Diamond declared and paid a dividend of 3,500 shares of Preferred Stock (equal to 10.0% of the Preferred Stock outstanding after the Recapitalization, as defined below) to each of Kenneth Levine and Richard Rutta; (2) Kenneth Levine and Richard Rutta transferred all of the issued and outstanding shares of each of the affiliated entities to Diamond in consideration for which Diamond issued 6,950,000 shares of Common Stock to Kenneth Levine and Richard Rutta; (3) each of the affiliated entities merged with and into Diamond; (4) Green Equity Investors II, L.P. purchased: (A) 770,000 shares of Common Stock, equal to 77.0% of the Common Stock outstanding after the Recapitalization, for aggregate consideration equal to $15.4 million, and (B) 28,000 shares of Preferred Stock, equal to 80.0% of the Preferred Stock outstanding following the Recapitalization, for an aggregate consideration of $28.0 million; (5) Norman Harris and Michael A. Sumsky purchased an aggregate of 30,000 shares of Common Stock, equal to 3.0% of the Common Stock outstanding after the Recapitalization, for aggregate consideration of $600,000; and (6) Diamond redeemed from Kenneth Levine and Richard Rutta all of the Common Stock owned by them (other than 100,000 shares owned by each of them) for approximately $150.7 million in cash, which resulted in each of Kenneth Levine and Richard Rutta owning 10.0% of the Common Stock outstanding after the Recapitalization. These transactions were consummated on March 31, 1998, and together constitute the "Recapitalization." Concurrently with the Recapitalization, Diamond issued the Notes and entered into a credit facility with a syndicate of financial institutions, under which Diamond borrowed $12.5 million in connection with the Recapitalization. See "-- Significant Accouting Policies -- Income Tax" for a discussion of the Internal Revenue Service's proposed adjustments with respect to Diamond's tax treatment of the Recapitalization.
Results of Operations
The following discussion and analysis should be read in conjunction with "Selected Financial Data" and the audited Financial Statements of Diamond and the notes thereto included elsewhere in this Annual Report.
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, 1999, 2000 and 2001.
(1) EBITDA represents income before taxes and extraordinary item, interest expense, depreciation and amortization. While EBITDA is not intended to represent cash flow from operations as defined by GAAP and should not be considered as an indicator of operating performance or an alternative to cash flow (as measured by GAAP) as a measure of liquidity, it is included herein to provide additional information with respect to Diamond's ability to meet its future debt service, capital expenditure and working capital requirements.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Sales. Sales for 2001 increased by $17.4 million, or 9.5%, to $201.4 million from $184.0 million for 2000. The increase in sales was attributable to an increase in installation units and revenue per installation unit. Although installation units increased only 2.7%, due primarily to weaker demand, revenue per installation unit increased an average of 7.2%. The increase in Diamond's average revenue per installation unit is attributable to stabilization of price compression and to its sales mix.
Gross Profit. Gross profit for 2001 increased by $15.9 million, or 12.5%, to $143.3 million from $127.4 million for 2000. Gross margin increased as a percentage of sales to 71.2% for 2001 from 69.2% for 2000. The increase in gross margin was primarily due to the increased level of sales and average revenue per installation unit in 2001.
Operating Expenses. Operating expenses for 2001 increased by $12.7 million, or 11.4%, to $124.5 million from $111.8 million for 2000. Operating expenses increased as a percentage of sales to 61.8% for 2001 from 60.8% for 2000. The increase in operating expenses during 2001 was primarily due to higher wage expense, primarily at the service center level caused by wage rate pressures including increased medical insurance and workers compensation insurance costs; costs related to service center and distribution center expansion; an increase in vehicle related expenses including auto insurance and increased promotional expense and occupancy costs. The increase in operating expenses as a percentage of sales is primarily attributable to the increase in operating expenses related to service center and distribution center expansion.
Depreciation and amortization expense for 2001 decreased by $0.3 million, or 10.7%, to $2.5 million from $2.8 million for 2000. This decrease is primarily attributable to a $0.5 million decrease in depreciation expense due to the inception of a master fleet leasing program during 1997 for the lease of mobile installation and distribution service vehicles. This decrease in expense was partially offset by a $0.1 million increase in amortization and depreciation expense related to certain sales, billing and financial systems software and computer hardware.
Income from Operations. Income from operations for 2001 increased by $3.2 million, or 20.5%, to $18.8 million from $15.6 million for 2000. This increase was primarily due to the increase in average revenue per installation unit and was partially offset by an increase in operating expenses as discussed above.
Interest Expense. Interest expense for 2001 decreased by $0.4 million, or 3.7%, to $10.3 million from $10.7 million for 2000. The decrease was due to a reduction in outstanding borrowings under the credit facility during 2001.
Net Income. Diamond recorded $5.0 million of net income in 2001 compared to $2.4 million in 2000. Net income as a percentage of sales increased to 2.5% for 2001 from 1.3% for 2000. The increase in net income and net income margin during 2001 was primarily due to the impact of higher average revenue per installation unit that was partially offset by an increase in operating expenses and in the provision for income taxes.
Net Loss Applicable to Common Stockholders. Net loss applicable to common stockholders for 2001 decreased $1.9 million to $(1.1) million from $(3.0) million for 2000. The decrease was primarily due to the increase in net income as discussed above.
EBITDA. EBITDA for 2001 increased by $3.1 million, or 16.8%, to $21.5 million from $18.4 million for 2000. EBITDA as a percentage of sales increased to 10.7% for 2001 from 10.0% for 2000. The increase in EBITDA and EBITDA margin during 2001 was primarily due to the impact of higher average revenue per installation unit that was partially offset by an increase in operating expenses as discussed above.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Sales. Sales for 2000 increased by $19.5 million, or 11.9%, to $184.0 million from $164.5 million for 1999. This increase was primarily due to an increase in sales at service centers opened in 1998 and 1999. Although installation units increased only 0.7%, revenue per installation unit increased an average of 10.7%. The increase in Diamond's average revenue per installation unit is attributable to stabilization of price compression and to its sales mix.
Gross Profit. Gross profit for 2000 increased by $14.3 million, or 12.6%, to $127.4 million from $113.1 million for 1999. Gross margin increased as a percentage of sales to 69.2% for 2000 from 68.8% for 1999. The increase in gross margin was primarily due to the increased level of sales and average revenue per installation unit in 2000.
Operating Expenses. Operating expenses for 2000 increased by $9.9 million, or 9.7%, to $111.8 million from $101.9 million for 1999. Operating expenses decreased as a percentage of sales to 60.8% for 2000 from 61.9% for 1999. The increase in operating expenses during 2000 was primarily due to an increase in wage expense caused
by certain wage rate pressures, including increased medical insurance and workers compensation insurance costs, primarily at the service center level. The increase in aggregate operating expenses was also due to an increase in vehicle related expenses versus the prior year, resulting mainly from higher fuel costs due to rising gas prices. The decrease in operating expenses as a percentage of sales is attributable to an increase in average revenue per installation unit.
Depreciation and amortization expense for 2000 increased by $0.2 million, or 7.7%, to $2.8 million from $2.6 million for 1999. This increase is primarily attributable to a $0.3 million increase in amortization and depreciation expense related to certain sales, billing and financial systems software and computer hardware. This increase in expense was partially offset by a $0.1 million decrease in depreciation expense due to the inception of a master fleet leasing program during 1997 for the lease of mobile installation and distribution service vehicles.
Income from Operations. Income from operations for 2000 increased by $4.4 million, or 39.3%, to $15.6 million from $11.2 million for 1999. This increase was primarily due to the increase in average revenue per installation unit and was partially offset by an increase in operating expenses as discussed above.
Interest Expense. Interest expense for 2000 decreased by $0.3 million, or 2.7%, to $10.7 million from $11.0 million for 1999. The decrease was due to a reduction in outstanding borrowings under the credit facility during 2000.
Net Income. Diamond recorded $2.4 million of net income in 2000 compared to a minimal amount of net income in 1999. Net income as a percentage of sales increased to 1.3% for 2000 from 0.0% for 1999. The increase in net income and net income margin during 2000 was primarily due to the impact of higher average revenue per installation unit that was partially offset by an increase in operating expenses and in the provision for income taxes.
Net Loss Applicable to Common Stockholders. Net loss applicable to common stockholders for 2000 decreased $1.8 million to $(3.0) million from $(4.8) million for 1999. The decrease was primarily due to the increase in net income as discussed above.
EBITDA. EBITDA for 2000 increased by $4.6 million, or 33.3%, to $18.4 million from $13.8 million for 1999. EBITDA as a percentage of sales increased to 10.0% for 2000 from 8.4% for 1999. The increase in EBITDA and EBITDA margin during 2000 was primarily due to the impact of higher average revenue per installation unit that was partially offset by an increase in operating expenses as discussed above.
Liquidity and Capital Resources
Diamond's need for liquidity will arise primarily from interest payable on the Notes, the credit facility and the funding of Diamond's capital expenditures and working capital requirements. There are no mandatory principal payments on the Notes prior to their maturity on April 1, 2008 and, except to the extent that the amount outstanding under the credit facility exceeds the borrowing base, no required payments of principal on the credit facility prior to its expiration on March 27, 2004.
Net Cash Provided by Operating Activities. Net cash provided by operating activities for 2001 increased $2.7 million to $11.2 million from $8.5 million for 2000. The increase in cash provided by operating activities for 2001 was due to an increase in Diamond's net earnings and a $3.7 million decrease in deferred income taxes which was partially offset by a $2.2 million increase in inventory. Net cash provided by operating activities for 2000 increased $5.2 million to $8.5 million from $3.3 million for 1999. The increase in cash provided by operating activities for 2000 was due to an increase in Diamond's net earnings and a $4.0 million increase in accounts payable which was partially offset by a $3.4 million increase in accounts receivable and a $2.0 million increase in inventory.
Net Cash Used in Investing Activities. Net cash used in investing activities for 2001 increased $2.8 million to $4.0 million used from $1.2 million used in investing activities for 2000. Net cash used in investing activities for 2000 decreased $1.1 million to $1.2 million used from $2.3 million used in investing activities for 1999. The primary reason for these variances was a change in capital expenditures.
Net Cash Used in Financing Activities. Net cash used in financing activities for 2001 decreased $6.7 million to $0.6 million from $7.3 million for 2000 due to less borrowings under the credit facility in 2001. Net cash used in financing activities for 2000 increased $6.1 million to $7.3 million from $1.2 million for 1999 due to increased credit facility payments over borrowings in 2000.
Capital Expenditures. Capital expenditures were $4.2 million for 2001 as compared to $1.3 million for 2000 and $2.4 million for 1999. Excluding vehicle capital expenditures, capital expenditures were $2.9 million for 2001 as compared to $1.1 million for 2000 and $1.9 million for 1999. Capital expenditures in 2001 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 "-- Significant Accouting Policies -- Income Tax" for a discussion of the Internal Revenue Service's proposed adjustments with respect to Diamond's tax treatment of the Recapitalization.
Significant Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period.
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 significant estimates and judgements are described below.
Allowance for Doubtful Accounts. Diamond makes assumptions related to the uncollectability of trade accounts receivable. Assumptions used are based on aging of receivables, customer classification and historical company experience.
Accrued Healthcare and Worker's Compensation Costs. Diamond makes assumptions related to healthcare and worker's compensation cost accruals. Assumptions are based on continued analysis of claim activity, time lag in processing claims and employee census growth.
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.
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 recently 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, tax deductible goodwill would not be recognizable by Diamond.
The proposed adjustments by the Internal Revenue Service would result in $3.8 million of federal tax deficiencies owed by Diamond for the period December 31, 1998 through December 31, 2000, 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, 2001 is approximately $39.1 million. In addition, Diamond would be responsible to fund a current federal tax liability for 2001 of approximately $2.8 million, plus possible interest and penalties, and any resultant increases in current state tax expense for 2001.
Diamond strongly believes that the Transaction was properly accounted for, and plans to appeal the Internal Revenue Service's proposed adjustment. If such appeal were 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.
Contractual Obligations and Commercial Commitments
The following summarizes Diamond's contractural cash obligations and other commercial commitments as of December 31, 2001.
Payments Due By Period (dollars in thousands) ---------------------------------------------
Contractural Cash Obligations Total Less than 1 year After 5 years -------- ---------------- ------------- Long Term Debt $100,000 -- 100,000 Operating Leases 738 738 -- -------------------------------------- Total Contractual Cash Obligations $100,738 738 100,000 ======== === =======
Amount of Commitment Expiration Per Period (dollars in thousands) --------------------------- Other Commercial Commitments Total Amts Committed 1-3 years --------- --------- Standby Letters of Credit $2,924 2,924 Operating Lease - Contingent Guaranteed Residual Value 7,583 7,583 ------------------------ Total Commercial Commitments $10,507 10,507 ======= ======
Inflation
Diamond believes that inflation has not had a material impact on its results of operations for 1999, 2000 or 2001.
Effect of Weather Conditions and Seasonality
Weather has historically affected Diamond's sales, net income and EBITDA, with severe weather generating increased sales, net income and EBITDA and mild weather resulting in lower sales, net income and EBITDA. In addition, Diamond's business is somewhat seasonal, with the fourth quarter traditionally its slowest period of activity. Diamond believes such seasonal trends will continue for the foreseeable future. See "--Sales."
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 which are Safelite Glass Corporation, LYNX Services from PPG, L.L.C. and Harmon AutoGlass, a division of Apogee Enterprises, Inc. Many of Diamond's competitors have substantially less leverage than Diamond, which may allow them greater flexibility in managing their operations. Diamond cannot assure you that it will be able to continue to compete effectively with these or other competitors. See "Business--Competition."
Diamond'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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Diamond has no material exporure to market risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
The following financial statements of Diamond, together with the report of the independent auditors thereon, are presented on pages through hereof as set forth below:
Page ----
Independent Auditors' Report.............................................
Balance Sheets, December 31, 2001 and 2000...............................
Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999..........................................................
Statements of Stockholders' Equity (Deficit) for the Years Ended December31, 2001, 2000 and 1999..................................
Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999.......................................
Notes to Financial Statements............................................
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10.....DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning Diamond's directors and executive officers:
Name Age Position ---- --- --------
Kenneth Levine........... 48 Co-Chairman of the Board and Director Richard Rutta............ 45 Co-Chairman of the Board and Director Norman Harris............ 47 Chief Executive Officer Michael A. Sumsky........ 43 President, Chief Financial Officer and General Counsel Jonathan A. Seiffer...... 30 Director John G. Danhakl.......... 46 Director Jonathan D. Sokoloff..... 44 Director
Kenneth Levine has been Diamond's Co-Chairman of the Board since March 1998 and a Director of Diamond since March 1987. Mr. Levine served as Co-Chief Executive Officer from March 1998 until January 2002. Mr. Levine joined Diamond in 1979 and served as Diamond's effective Co-President from 1987 to March 1998. In 1987, Mr. Levine, together with Richard Rutta, purchased all of Diamond's outstanding stock.
Richard Rutta has been Diamond's Co-Chairman of the Board since March 1998 and a Director of Diamond since March 1987. Mr. Rutta served as Co-Chief Executive Officer from March 1998 until January 2002. Mr. Rutta joined Diamond in 1979 and served as Diamond's effective Co-President from 1987 to March 1998. In 1987, Mr. Rutta, together with Kenneth Levine, purchased all of Diamond's outstanding stock.
Norman Harris was appointed Diamond's Chief Executive Officer in January 2002. Mr. Harris served as Diamond's Executive Vice President from 1995 until March 1998 and as President from March 1998 until January 2002. Mr. Harris joined Diamond in 1993. From 1991 through 1993, Mr. Harris served as President of Inveauto C.A. of Maracay, Venezuela, a fabricator of automotive glass and parts. From 1977 until 1991, Mr. Harris was employed by Safelite Glass Corporation.
Michael A. Sumsky was appointed Diamond's President in January 2002. Mr. Sumsky continues to serve as Chief Financial Officer and General Counsel as he has since joining Diamond in 1995. Before his appointment as Diamond's President, Mr. Sumsky served as Executive Vice President since 1995. Prior to joining Diamond, Mr. Sumsky was the co-founder of a distributorship of seasonal gift electronics and other consumer products since 1991. Mr. Sumsky was employed by Emerson Radio Corporation in various financial and legal capacities from 1986 to 1989 and from 1990 to 1991. From 1989 to 1990, Mr. Sumsky was an associate at Parker, Duryee, Rosoff & Haft, a New York City law firm.
Jonathan A. Seiffer has been a Director of Diamond since November 2001. Mr. Seiffer has been a partner of Leonard Green & Partners, L.P. ("LGP"), since January 1999. From December 1997 through January 1999, Mr. Seiffer was a Vice President of LGP. From October 1994 through December 1997, Mr. Seiffer was an associate at LGP. Prior to October 1994, Mr. Seiffer was a member of the corporate finance department of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). Mr. Seiffer is also a director of Gart Sports Company, Dollar Financial Group, Inc. and Liberty Group Publishing, Inc.
John G. Danhakl has been a Director of Diamond since March 1998. Mr. Danhakl has been a partner of LGP since 1995. Mr. Danhakl had previously been a Managing Director at DLJ and had been with DLJ since 1990. Prior to joining DLJ, Mr. Danhakl was a Vice President at Drexel Burnham Lambert Incorporated ("Drexel"). Mr. Danhakl is also a director of Twinlab Corporation, The Arden Group, Inc., Pet-Co Animal Supplies, Inc., Leslie's Poolmart, Inc., Big 5 Corporation, Communications and Power Industries, Inc., Liberty Group Publishing, Inc., VCA Antech, Inc. and several private companies.
Jonathan D. Sokoloff has been a Director of Diamond since March 1998. Mr. Sokoloff has been a partner of LGP since its formation in 1994. Since 1990, Mr. Sokoloff had been a partner at a merchant-banking firm affiliated with LGP. Mr. Sokoloff had previously been a Managing Director at Drexel. Mr. Sokoloff is also a
director of Twinlab Corporation, Gart Sports Company, Rite Aid Corporation, Dollar Financial Group, Inc. and several private companies.
Except for Messrs. Levine and Rutta, who are first cousins, no family relationship exists between any of Diamond's officers or directors.
ITEM 11.
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, 1999, 2000 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."
- -----------------
(1) This bonus was earned in the year indicated, but paid in the immediately subsequent year.
(2) Represents Diamond's net contribution on behalf of the Named Executive Officer to Diamond's 401(k) Profit Sharing Plan.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values. The following table provides information regarding the exercise price of stock options during the fiscal year ended December 31, 2001 for each of Diamond's Named Executive Officers and the year-end value of unexercised options held by the Named Executive Officers.
- -------------------------------------------------------------------------------- Number of Value of Securities Unexercised Underlying In-the-Money Unexercised Options/SARs Shares Options/SARs at Fiscal Name Acquired on Value Realized at Fiscal Year-End ($) Exercise (#) ($) Year-End (#) Exercisable/ Exercisable/ Unexercisable Unexercisable - -------------------------------------------------------------------------------- Kenneth Levine N/A N/A N/A N/A - -------------------------------------------------------------------------------- Richard Rutta N/A N/A N/A N/A - -------------------------------------------------------------------------------- Norman Harris - - 0/450 0/0 - -------------------------------------------------------------------------------- Michael A. - - 0/450 0/0 Sumsky - --------------------------------------------------------------------------------
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, 2001, the Board of Directors had granted options to purchase a total of 29,575 shares of Common Stock under the 1998 Plan. These options vest in five equal annual installments, commencing on the first anniversary of the date of grant. Vested options may not be exercised until the earlier of: (1) 90 days after Diamond's Common Stock has become publicly traded and (2) 91 days prior to the tenth anniversary of the date of grant. The 1998 Plan expires in September 2008.
Employment Agreements
On March 31, 1998, Diamond entered into employment agreements with each of Kenneth Levine and Richard Rutta pursuant to which they each agreed to serve as the Co-Chairmen of the Board and Co-Chief Executive Officers of Diamond. Each of the agreements with Messrs. Levine and Rutta provide for the following:
(1) An initial term of five years beginning on March 31, 1998 and ending on March 31, 2003.
(2) An annual base salary of $300,000, subject to annual review based on Diamond's and the executive's performance. In addition, for each calendar year beginning on January 1, 1998, each executive is entitled to receive an annual bonus equal to a percentage of Diamond's EBITDA in excess of specified thresholds, not to exceed $450,000.
(3) In the event the executive is terminated by Diamond for cause (as defined in the employment agreement) or in the event the executive resigns, Diamond will pay the executive the executive's base salary through the date of termination.
(4) In the event the executive is terminated due to death or disability (as defined in the employment agreement), the executive will receive:
o his base salary for a period of 12 months (but in no event beyond March 31, 2003); and
o the amount of any bonus payable through the date of termination.
(5) In the event the executive is terminated by Diamond for any other reason than as provided in clauses (3) and (4) above, the executive will receive:
o his base salary through the date of termination;
o the amount of any bonus payable through the date of termination; and
o in lieu of any further compensation, severance pay equal to the base salary that the executive would have otherwise received during the period beginning on the date of termination and ending on the earlier of (1) the scheduled termination date of executive's employment period under the employment agreement and (2) such time as the executive obtains other permanent employment.
(6) Customary non-competition and non-solicitation provisions, which provisions survive for one year after the termination of the executive's employment, and customary non-disclosure and assignment of inventions provisions.
On March 31, 1998, Diamond entered into an employment agreement with Norman Harris pursuant to which Mr. Harris agreed to serve as the President of Diamond at an annual salary of $275,000, subject to annual review based on Diamond's and the executive's performance. On March 31, 1998, Diamond also entered into an employment agreement with Michael A. Sumsky pursuant to which Mr. Sumsky agreed to serve as the Executive Vice President, Chief Financial Officer and General Counsel of Diamond at an annual salary of $250,000, subject to annual review based on Diamond's and the executive's performance. Each of the agreements with Messrs. Harris and Sumsky also provided for the following:
(1) An initial term of three years which began on March 31, 1998 and ended on March 31, 2001.
(2) In addition to his base salary, for each calendar year beginning on January 1, 1998, each executive was entitled to receive an annual bonus equal to a percentage of Diamond's EBITDA in excess of specified thresholds, not to exceed $375,000.
(3) In the event the executive was terminated by Diamond for cause (as defined in the employment agreement) or in the event the executive resigned, Diamond would pay the executive the executive's base salary through the date of termination.
(4) In the event the executive was terminated due to death or disability (as defined in the employment agreement), the executive would receive:
o his base salary for a period of 12 months (but in no event beyond March 31, 2001); and
o the amount of any bonus payable through the date of termination.
(5) In the event the executive was terminated by Diamond for any other reason than as provided in clauses (3) and (4) above, the executive would receive:
o his base salary through the date of termination;
o the amount of any bonus payable through the date of termination; and
o in lieu of any further compensation, severance pay equal to the base salary that the executive would have otherwise received during the period beginning on the date of termination and ending on the earlier of (1) the scheduled termination date of the executive's employment period under the employment agreement and (2) such time as the executive would have obtained other permanent employment for compensation in an amount reasonably comparable to his base salary with Diamond.
(6) Customary non-competition, non-solicitation provisions, non-disclosure and assignment of inventions provisions.
The employment agreements with Messrs. Harris and Sumsky discussed above terminated on March 31, 2001. From that date onward, employment between Diamond and each of Messrs. Harris and Sumsky are at-will for both parties.
ITEM 12.
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 14, 2002, 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.
(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.
(2) The shares shown as beneficially owned by Messrs. Seiffer, Danhakl and Sokoloff represent the 770,000 shares of Common Stock and the 28,000 shares of Preferred Stock owned of record by Green Equity Investors II, L.P. Green Equity Investors II, L.P. is a Delaware limited partnership managed by LGP, which is an affiliate of the general partner of Green Equity Investors II, L.P. Each of Leonard I. Green, Jonathan D. Sokoloff, John G. Danhakl, Peter J. Nolan, Jonathan A. Seiffer and John M. Baumer either directly (whether through ownership interest or position) or through one or more intermediaries, may be deemed to control LGP and such general partner. LGP and such general partner may be deemed to control the voting and disposition of the shares of Common Stock owned by Green Equity Investors II, L.P. As such, Messrs. Seiffer, Danhakl and Sokoloff may be deemed to have shared voting and investment power with respect to all shares held by Green Equity Investors II, L.P. However, such individuals disclaim beneficial ownership of the securities held by Green Equity Investors II, L.P., except to the extent of their respective pecuniary interests therein.
(3) Includes the shares referred to in Note 2 above.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED RECAPITALIZATION
Management Services Agreement
In connection with the Recapitalization, on March 31, 1998, Diamond entered into a Management Services Agreement with LGP pursuant to which LGP receives an annual management fee of $685,000. This fee is subordinated in right of payment to the Notes. The Management Services Agreement also provides that LGP may receive reasonable and customary fees and reasonable expenses from time to time for providing financing, advisory and investment banking services to Diamond in connection with major financial transactions.
Lease
Kenneth Levine and Richard Rutta are the sole partners of a partnership which leases to Diamond. Diamond's headquarters and distribution facility in Kingston, Pennsylvania and 18 service center locations. Following the Recapitalization, at Diamond's request, Kenneth Levine and Richard Rutta caused the partnership to renew or extend the leases on the facilities through December 31, 2010, on terms substantially similar to those applicable to those facilities on January 15, 1998, provided that the monthly rental amounts increase 4.0% each calendar year beginning January 1, 1999. Rental payments to the partnership for the facilities aggregated $530,000, $551,000 and $573,000 in 1999, 2000 and 2001, respectively.
Stockholders Agreement
On March 31, 1998, Green Equity Investors II, L.P., Kenneth Levine, Richard Rutta and Diamond entered into a Stockholders Agreement. The Stockholders Agreement generally restricts the transferability of shares of Common Stock held by Kenneth Levine and Richard Rutta. The Stockholders Agreement also establishes a right of first refusal in favor of Green Equity Investors II, L.P. or Diamond in the event Kenneth Levine or Richard Rutta seek to transfer any of their shares of Common Stock to a third party pursuant to a bona fide offer. In addition, Green Equity Investors II, L.P. has certain "drag-along" rights and certain sales of Common Stock by Green Equity Investors II, L.P. are subject to "tag-along" rights of Kenneth Levine and Richard Rutta to participate in those sales. The Stockholders Agreement also grants demand registration rights to Green Equity Investors II, L.P. and piggyback registration rights to Green Equity Investors II, L.P., Kenneth Levine and Richard Rutta.
Pursuant to the Stockholders Agreement, Green Equity Investors II, L.P., Kenneth Levine and Richard Rutta have agreed to vote their shares of Common Stock in favor of the election of each of Kenneth Levine and Richard Rutta as a director of Diamond so long as they are executive officers of Diamond.
Subject to early termination of the provisions described above (other than those relating to registration rights) at the time, if any, as the Common Stock is publicly held, the Stockholders Agreement terminates on the tenth anniversary of the date thereof.
Management Share Agreements
On March 31, 1998, Diamond and Green Equity Investors II, L.P. entered into Management Subscription and Stockholders Agreements with each of Norman Harris and Michael A. Sumsky, which are collectively referred to as the "Management Share Agreements." Pursuant to the Management Share Agreements, the shares of Common Stock purchased by Messrs. Harris and Sumsky in the transactions related to the Recapitalization are subject to various transfer restrictions and purchase rights. The Management Share Agreements also contain certain "piggyback," registration rights, "tag-along" sale rights, "drag-along" sale obligations and a right of first refusal in favor of Green Equity Investors II, L.P. or Diamond in the event Messrs. Harris or Sumsky seek to transfer their shares of Common Stock to a third party pursuant to a bona fide offer.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) Financial Statements
(1) All financial statements of Diamond for the year ended December 31, 2001 are filed herewith. See Item 8 of this Annual Report for a list of such financial statements.
(2) All financial statement schedules have been omitted as the required information is inapplicable or has been included in the financial statements and notes thereto.
(3) Exhibits - See response to paragraph (c) below.
(b) Reports on Form 8-K.
Not applicable.
(c) Exhibits.
Exhibit Number Description ------ -----------
2.1 (1) Second Amended and Restated Stock Purchase and Sale Agreement, dated as of January 15, 1998, by and among, VGMC Corp., Green Equity Investors II, L.P., Diamond Triumph Auto Glass, Inc., Triumph Auto Glass, Inc., Diamond Auto Glass Works, Inc., A Above Average Glass Company by Diamond, inc., A-AA Triumph Auto Glass, Inc., Scranton Holdings, Inc., Diamond/Triumph Auto Export Sales Co. Inc., A-Auto Glass by Triumph, Inc., A-Auto Glass Company by Diamond, Inc. and Kenneth Levine and Richard Rutta.
3.1 (1) Amended and Restated Certification of Incorporation of Diamond Triumph Auto Glass, Inc.
3.2 (1) Certificate of Designations of Series A 12% Senior Redeemable Cumulative Preferred Stock of Diamond Triumph Auto Glass, Inc.
3.3 (1) Certificate of Amendment of Certificate of Incorporation of Diamond Triumph Auto Glass, Inc., dated April 28, 1998.
3.4 (1) Certificate of Amendment of Certificate of Incorporation of Diamond Triumph Auto Glass, Inc., dated September 15, 1998.
3.5 (1) By-laws of Diamond Triumph Auto Glass, Inc.
4.1 (1) Indenture, dated as of March 31, 1998, between Diamond Triumph Auto Glass, Inc., as Issuer, and State Street Bank and Trust Company, as Trustee, regarding the 91/4% Senior Notes Due 2008.
4.2 (1) Registration Rights Agreement, dated as of March 31, 1998, among Diamond Triumph Auto Glass, Inc., First Union Capital Markets, a division of Wheat First Securities, Inc., BT Alex. Brown Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation.
4.3 (1) Note Purchase Agreement, dated March 26, 1998, among Diamond Triumph Auto Glass, Inc., First Union Capital Markets, a division of Wheat First Securities, Inc., BT Alex. Brown Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation.
10.1 (1) Management Subscription and Stockholders Agreement, dated as of March 31, 1998, among Diamond Triumph Auto Glass, Inc., Green Equity Investors II, L.P. and Norman Harris.
10.2 (1) Management Subscription and Stockholders Agreement, dated as of March 31, 1998, among Diamond Triumph Auto Glass, Inc., Green Equity Investors II, L.P. and Michael Sumsky.
10.3 (1) Stockholders Agreement, dated as of March 31, 1998, among Green Equity Investors II, L.P., Kenneth Levine, Richard Rutta and Diamond Triumph Auto Glass, Inc.
10.4 (1) Employment Agreement, dated as of March 31, 1998, between Diamond Triumph Auto Glass, Inc. and Kenneth Levine.
10.5 (1) Employment Agreement, dated as of March 31, 1998, between Diamond Triumph Auto Glass, Inc. and Richard Rutta.
10.6 (1) Employment Agreement, dated as of March 31, 1998, between Diamond Triumph Auto Glass, Inc. and Norman Harris.
10.7 (1) Employment Agreement, dated as of March 31, 1998, between Diamond Triumph Auto Glass, Inc. and Michael Sumsky.
10.8 (1) Non-Competition Agreement, dated March 31, 1998, between Kenneth Levine and Diamond Triumph Auto Glass, Inc.
10.9 (1) Non-Competition Agreement, dated March 31, 1998, between Richard Rutta and Diamond Triumph Auto Glass, Inc.
10.10 (1) Management Services Agreement, dated as of March 31, 1998, between Diamond Triumph Auto Glass, Inc. and Leonard Green & Partners, L.P.
10.11 (2) Finance Agreement, dated March 27, 2000, between The CIT Business Group/Business Credit, Inc. and Diamond Triumph Auto Glass, Inc.
10.12 (1) Diamond Triumph Auto Glass, Inc. 1998 Management Stock Option Plan.
-----------------------
(1) Incorporated by reference to Diamond's Registration Statement on Form S-4 filed with the SEC on March 30, 2000.
(2) Incorporated by reference to Diamond's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
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 13, 2002
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 March 13, 2002 - ------------------------------ and Director Kenneth Levine
/s/ Richard Rutta Co-Chairman of the Board March 13, 2002 - ------------------------------ and Director Richard Rutta
/s/ Norman Harris Chief Executive Officer March 13, 2002 - ------------------------------ Norman Harris
/s/ Michael A. Sumsky President, Chief Financial March 13, 2002 - ------------------------------ Officer and General Counsel Michael A. Sumsky
Director March 13, 2002 /s/ Jonathan Seiffer - ------------------------------ Jonathan Seiffer
/s/ John G. Danhakl Director March 13, 2002 - ------------------------------ John G. Danhakl
/s/ Jonathan D. Sokoloff Director March 13, 2002 - ------------------------------ Jonathan D. Sokoloff
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.
Page ----
Independent Auditors' Report.............................................
Balance Sheets, December 31, 2001 and 2000...............................
Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999..........................................................
Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2001, 2000 and 1999.................................
Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999............................................................
Notes to Financial Statements............................................
Independent Auditors' Report
The Board of Directors Diamond Triumph Auto Glass, Inc.:
We have audited the accompanying balance sheets of Diamond Triumph Auto Glass, Inc. as of December 31, 2001 and 2000, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the three year period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Diamond Triumph Auto Glass, Inc. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
Allentown, Pennsylvania /s/ KPMG LLP February 22, 2002
DIAMOND TRIUMPH AUTO GLASS, INC.
Balance Sheets
December 31, 2001 and 2000
(Dollars in Thousands except per share amounts)
Assets 2001 2000 --------- ---------
Current assets: Cash and cash equivalents $ 6,592 25 Accounts receivable, less allowance for doubtful accounts of $213 and $462 for 2001 and 2000 respectively 11,596 13,977 Other receivables 387 373 Inventories 16,757 14,581 Prepaid expenses 1,383 1,084 Deferred income taxes 3,540 3,285 -------- --------
Total current assets 40,255 33,325 -------- --------
Equipment and leasehold improvements: Vehicles 8,027 9,632 Computers and office equipment 3,898 3,274 Computer software 5,968 4,277 Other equipment 636 563 Leasehold improvements 481 319 -------- --------
19,010 18,065 Accumulated depreciation and amortization (11,211) (11,911) -------- --------
Net equipment and leasehold improvements 7,799 6,154
Unamortized deferred loan costs and senior notes discount, net 5,183 6,073 Deferred income taxes 38,111 42,039 Other assets 498 404 -------- --------
Total assets $ 91,846 87,995 ======== ========
See accompanying notes to financial statements
See accompanying notes to financial statements
See accompanying notes to financial statements.
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollars in Thousands except per share amounts)
(1) Description of Entity, Basis of Presentation and Recapitalization
The Company, Kenneth Levine and Richard Rutta (together, the "Company Principals"), Green Equity Investors II, L.P. ("GEI"), and certain affiliated entities of the Company (the "Affiliated Companies") entered into a Second Amended and Restated Stock Purchase and Sale Agreement, dated as of January 15, 1998 and consummated on March 31, 1998, pursuant to which, among other things, (a) the Company declared and paid a dividend of 3,500 shares ($3,500) of Preferred Stock (as defined in Note 5), to each of the Company Principals, equal to 10.0% of the Preferred Stock to be outstanding following the Recapitalization (as hereinafter defined); (b) the Company Principals transferred all of the issued and outstanding shares of each of the Affiliated Companies to Diamond and as consideration for such transfers Diamond issued 6,950,000 shares of Common Stock (the "Stock Purchase Shares") to the Company Principals; (c) certain Affiliated Companies merged with and into the Company (the "Merger"); (d) GEI purchased (i) approximately 770,000 shares of Common Stock, equal to 77.0% of the Common Stock outstanding following the Recapitalization, for aggregate consideration of $15,400, and (ii) 28,000 shares of Preferred Stock, equal to 80.0% of the Preferred Stock outstanding following the Recapitalization, for aggregate consideration of $28,000; (e) certain members of the Company's management purchased 30,000 shares of Common Stock, equal to 3.0% of the Common Stock outstanding following the Recapitalization, for aggregate consideration of $600; and (f) the Company redeemed from the Company Principals all of the Stock Purchase Shares and other shares of Common Stock owned by them (other than 100,000 shares owned by each of them) for cash, resulting in each of the Company Principals owning 10.0% of the Common Stock to be outstanding following the Recapitalization. Concurrently, with the consummation of the transactions set forth in clauses (a) through (f) above (the "Recapitalization"), the Company issued $100,000 in aggregate principal amount of senior notes in a private placement (the "Note Offering") and entered into a five year $35,000 revolving credit facility (the "Old Bank Facility") with a syndicate of financial institutions, of which $12,500 was borrowed in connection with the Recapitalization.
On March 27, 2000, the Company replaced the Old Bank Facility with a new revolving credit facility (the "Credit Facility").
The Company, headquartered in Kingston, Pennsylvania, is a provider of automotive glass replacement and repair services in the Northeast, Mid-Atlantic, Midwest, Southwest, Southeast and Western regions of the United States. At December 31, 2001, the Company operated a network of 256 automotive glass service centers, approximately 1,153 mobile installation vehicles and six distribution centers in 43 states.
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollars in Thousands except per share amounts)
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Investments with original maturities of three months or less are considered cash equivalents.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the rolling average method with costs incurred on a first-in, first-out basis.
(c) Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation and amortization is calculated using the straight-line method over the following useful lives:
Vehicles 5 years Computers and office equipment 5-7 years Computer software 3-5 years Other equipment 5 years Leasehold improvements 10 years
Costs in 2001, 2000 and 1999 related to the development of software for a new back office sales audit and financial accounting system and point of sale system were capitalized. Upon completion of each of the projects in 2001, 2000 and 1999, the Company commenced amortizing the software costs over the estimated useful life of five years. Unamortized computer software costs were $3,490, $2,818 and $3,218 at December 31, 2001, 2000 and 1999, respectively. Amortization expense in 2001, 2000 and 1999 for capitalized computer software costs was $952, $844 and $620, 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.
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollars in Thousands except per share amounts)
(e) Deferred Loan Costs and Senior Notes Discount
Deferred loan costs and senior notes discount are amortized over the life of the related debt and included in interest expense.
(f) Revenue Recognition
Revenue from auto glass installation and related services is recognized when the installation is complete or the service is performed. The Company provides for an allowance for accounts receivable. The provision for doubtful accounts was $860, $101 and $1,341 and write offs against the allowance were $1,109, $595 and $1,185 in 2001, 2000 and 1999 respectively.
(g) Advertising
The Company expenses all advertising costs as incurred. The costs of yellow pages advertising are expensed at the time the yellow pages phone book is published. Total advertising expense was $8,364, $8,287 and $8,150 in 2001, 2000 and 1999, respectively.
(h) Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 121, "Accounting For the Impairment of Long-lived Assets and For Long-lived Assets to Be Disposed Of". Under the provisions of this statement, the Company has evaluated its long-lived assets for financial impairment, and will continue to evaluate them as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable.
(i) Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(j) Recent Accounting Pronouncements
In 2001, Diamond implemented Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment of Disposition of Long-Lived Assets". This standard establishes one accounting model to be used for measuring impairment of long-lived assets. The company does not expect adoption of SFAS No. 144 to have a material impact on its 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 Corporation's senior notes is $92,000, $77,000 and $70,000 at December 31, 2001, 2000 and 1999, respectively. The fair value of the Company's Preferred Stock approximates the liquidation preference.
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollars in Thousands except per share amounts)
(4) Long -Term Debt
Long-term debt consists of the following:
2001 2000 1999 -----------------------------------
Bank Facility $ -- -- 7,500 Credit Facility -- 500 -- Senior Notes 100,000 100,000 100,000 -----------------------------------
Total $ 100,000 100,500 107,500 ===================================
On March 27, 2000, the Company entered into the Credit Facility, which has an initial term of four years and provides for revolving advances of up to the lesser of: (1) $25,000; (2) the sum of 85% of the Company's Eligible Accounts Receivable (as defined in the Credit Facility) plus 85% of the Company's Eligible Inventory (as defined in the Credit Facility), less certain reserves; or (3) an amount equal to 1.5 times the Company's EBITDA (as defined in the Credit Facility) for the prior twelve months. A portion of the Credit Facility, not to exceed $5,000, is available for the issuance of letters of credit, which generally have an initial term of one year or less. The Company had $2,924 in outstanding letters of credit at December 31, 2001. Borrowings under the Credit Facility bear interest, at the Company's discretion, at either the Chase Manhattan Bank Rate (as defined in the Credit Facility) or LIBOR, plus a margin of 0.25% for the Chase Manhattan Rate and 2.00% for the LIBOR Rate. In addition, a commitment fee of 0.25% is charged against any unused balance of the Credit Facility. The effective interest rate on borrowings available under the Credit Facility was 5.25% at December 31, 2001. 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, 2001.
The Old Bank Facility was scheduled to expire on April 1, 2003 and provided for borrowings of up to $35,000. As previously described, the Company replaced the Old Bank Facility with the Credit Facility on March 27, 2000. In connection with the early retirement of the Old Bank Facility, the Company incurred an extraordinary loss of $840, offset by a tax benefit of $336, on the extinguishments of debt, primarily consisting of the write-off of deferred loan costs.
The senior notes mature on April 1, 2008 and bear interest at a rate of 9.25% per annum. The senior notes and the obligations of the Company under the indenture governing the senior notes (the "Note Indenture") are unconditionally guaranteed on a senior, unsecured basis by any subsidiary guarantor, of which there are currently none. The senior notes are callable after five years at a premium to par which declines to par after eight years. Upon a change of control, as defined 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
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollars in Thousands except per share amounts)
indebtedness, investments, dividends and certain other significant transactions. The Company was in compliance with all such covenants as of December 31, 2001.
Maturities of long-term debt are as follows:
2002 $ -- 2003 -- 2004 -- 2005 -- 2006 -- Thereafter 100,000 --------- $ 100,000 ==========
Deferred loan costs and accumulated amortization are summarized as follows:
Accumulated December 31, 2001 Amount Amortization Balance ----------------- ------ ------------ ------- Deferred loan costs $5,385 2,076 3,309 Discount on senior notes 3,000 1,125 1,875 ------ ----- ------ $8,385 3,201 5,184 ====== ====== ======
December 31, 2000 ----------------- Deferred loan costs $5,330 1,432 3,898 Discount on senior notes 3,000 825 2,175 ------ ------ ------ $8,330 2,257 6,073 ====== ====== ======
(5) Preferred Stock
On March 27, 1998, the Company's Board of Directors adopted a Certificate of Designation creating $35,000 in Series A 12% Senior Redeemable Cumulative Preferred Stock (the "Preferred Stock"). The Preferred Stock has a liquidation preference over the Common Stock equal to the initial liquidation value of the Preferred Stock plus accrued and unpaid dividends thereon. The Preferred Stock will be subject to mandatory redemption on April 1, 2010 at 100% of the liquidation value plus accrued and unpaid dividends. The Company may, at its option, redeem at any time the Preferred Stock, in whole or in part, at 100% of the liquidation value plus accrued and unpaid dividends. Upon a Change of Control (as defined), the Company must offer to repurchase the Preferred Stock at 100% of its liquidation value plus accrued and unpaid dividends, provided, however, that the Company shall not be obligated to (and shall not) offer to repurchase the Preferred Stock if such repurchase would violate the terms of the Credit Facility or the terms of the Note Indenture.
The Preferred Stock bears cumulative quarterly dividends at a rate per annum equal to 12.0% of the liquidation value. Dividends may, at the option of the Company, be paid in cash or by adding to the then
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollars in Thousands except per share amounts)
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, 2001, 2000 and 1999 the liquidation value of the Preferred Stock recorded on the Company's balance sheet was $54,530, $48,449 and $43,046, respectively, which includes dividends of $19,530, $13,449 and $8,046, 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 2001, 2000 and 1999 aggregated $5,058, $4,605 and $4,419, respectively, of which $573, $551 and $530, 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 $3,513, $2,994 and $2,587 for the years ended December 31, 2001, 2000 and 1999, respectively.
Total lease commitments, including vehicles, are as follows:
Real Estate ------------------------------------------- Third Related Vehicles parties parties Total --------- ------- -------- -------
2002 $ 738 3,324 595 4,657 2003 -- 1,348 619 1,967 2004 -- 583 644 1,227 2005 -- 191 335 526 2006 -- 81 -- 81
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 $7,583 at December 31, 2001.
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 2001, 2000 and 1999.
The Company has employment agreements with certain of its executive officers (some of whom are also stockholders) which expire on March 31, 2003.
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.
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollars in Thousands except per share amounts)
(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, 2001, the Board of Directors had granted 29,575 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.
The Company applies APB Opinion No. 25 in accounting for the 1998 Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined its stock options under SFAS No. 123, the Company's net income would have been changed to the pro forma amounts indicated below.
Years Ended December 31, 2001 2000 1999 --------- -------- ------- Net income: As reported $ 4,969 2,360 9 Pro forma 4,963 2,344 (6)
The per share fair value of stock options granted during fiscal 1998 was $2.84 on the date of grant and was determined using the Black-Scholes option-pricing model based upon the following assumptions:
Expected dividend yield 0.00 % Expected volatility 0.00 % Risk-free rate 4.65 % Expected life (in years) 9.75
Summarized stock option data is as follows:
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollars in Thousands except per share amounts)
Exercise Shares Price Under Option ----------- ------------
Outstanding at December 31, 1998 20.00 27,125 Granted -- -- Exercised -- -- Cancelled -- (3,000) --------- Outstanding at December 31, 1999 20.00 24,125 Granted 20.00 5,500 Exercised -- -- Cancelled 20.00 (1,200) ---------- Outstanding at December 31, 2000 20.00 28,425 Granted 20.00 2,000 Exercised -- -- Cancelled 20.00 (850) ---------- Outstanding at December 31, 2001 29,575 ==========
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 recently 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, tax deductible goodwill would not be recognizable by Diamond.
The proposed adjustments by the Internal Revenue Service would result in $3.8 million of federal tax deficiencies owed by Diamond for the period December 31, 1998 through December 31, 2000, 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, 2001 is approximately $39.1 million. In addition, Diamond would be responsible to fund a current federal tax liability for 2001 of approximately $2.8 million, plus possible interest and penalties, and any resultant increases in current state tax expense for 2001.
Diamond strongly believes that the Transaction was properly accounted for, and plans to appeal the Internal Revenue Service's proposed adjustment. If such appeal were 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.
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollars in Thousands except per share amounts)
Income tax expense consists of:
Applicable To ----------------------------------- Current Deferred Total ---------- ----------- -----------
Year ended December 31, 2001: Federal $ -- 2,799 2,799 State 61 874 935 ---------- ----------- ----------- $ 61 3,673 3,734 ========== =========== ===========
Applicable To ------------------------------------------------ Extraordinary Continuing Operation Items ------------------------------------ ----------- Current Deferred Total Deferred ----------- ---------- ----------- -----------
Year ended December 31, 2000: Federal $ -- 1,630 1,630 (260) State (40) 545 505 (76) ----------- ---------- ----------- -----------
$ (40) 2,175 2,135 (336) =========== ========== =========== ===========
Applicable To ----------------------------------- Current Deferred Total ----------- ----------- ---------- Year ended December 31, 1999: Federal $ -- 107 107 State (144) 175 31 ----------- ----------- ----------
$ (144) 282 138 =========== =========== ==========
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:
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(Dollars in Thousands except per share amounts)
2001 2000 1999 ------ ------- ---------
Computed "expected" tax expense $2,959 1,700 50 Increase (reduction) in income taxes resulting from: State income taxes, net of federal income tax benefit 617 333 21
Permanent items 129 73 67
Other, net 28 29 -- ------ ------ ------- $3,733 2,135 138 ====== ====== =======
The tax effects of temporary differences that give rise to significant portions of the deferred assets and deferred tax liabilities at December 31, 2001 and 2000 are presented below.
Deferred tax assets: 2001 2000 --------- -------- Accounts receivable, principally due to allowance for doubtful accounts $ 85 185 Inventories, principally due to additional costs inventoried for tax 955 801
Intangibles for tax purposes 35,562 38,723
Advertising expenses not yet deducted for tax purposes 1,818 1,708
Net operating loss and alternative minimum tax credit carryforward 3,505 4,193
Liabilities and accruals for financial reporting purposes 750 635 ----------- -----------
Total gross deferred tax assets 42,675 46,245 ----------- -----------
Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation and capitalized interest 1,024 921 ----------- -----------
Total gross deferred tax liabilities 1,024 921 ----------- -----------
Net deferred tax assets $ 41,651 45,324 =========== ===========
There was no valuation allowance for deferred tax assets as of December 31, 2001 or 2000. 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 $102,000 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.
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(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 $389, $286 and $292 for 2001, 2000 and 1999, respectively.
(10) Supplemental Cash Flow Information
2001 2000 1999 --------- -------- ---------
Interest paid $ 9,327 9,759 10,090
Noncash investing and financing activities: Preferred stock dividends $ 6,081 5,403 4,800
(11) Legal Proceedings
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financials, results of operations or liquidity.
(12) Quarterly Financial Data (Unaudited)