SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 333-33572
DIAMOND TRIUMPH AUTO GLASS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-2758853
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
220 Division Street, Kingston, Pensylvania 18704
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (570) 287-9915
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
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There is no public market for the registrant's stock. The registrant
had 1,000,000 shares of Common Stock (the "Common Stock"), par value $0.01 per
share, and 35,000 shares of Series A 12% Senior Redeemable Cumulative Preferred
Stock (the "Preferred Stock"), par value $0.01 per share, outstanding as of
March 31, 2000.
Documents Incorporated by Reference:
None.
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Diamond is not subject to the reporting requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934. Any forward-looking statements made by
Diamond herein are not guarantees of future performance, and actual results may
differ materially from those in such forward-looking statements as a result of
various factors. The factors include but are not limited to risk factors
discussed under "Factors Affecting Future Performance," beginning on page 6.
Capitalized terms used herein but not defined herein have the meanings assigned
to them in Diamond's Offering Memorandum relating to the Notes dated March 26,
1998, unless otherwise indicated.
PART I
ITEM 1. BUSINESS
Overview
Diamond is a leading provider of automotive glass replacement and
repair services in the Northeast, Mid-Atlantic, Midwest, Southeast and Southwest
regions of the United States. At December 31, 1999, Diamond operated a network
of 226 automotive glass service centers, approximately 1,041 mobile installation
vehicles and four distribution centers in 39 states. Diamond serves all of its
customers' automotive glass replacement and repair needs, offering windshields,
tempered glass and other related products. Sales and EBITDA for the year ended
December 31, 1999 were $164.5 million and $13.8 million, respectively.
Diamond believes that, due to its sole focus on automotive glass
replacement and repair, it has one of the lowest cost structures in the
automotive glass replacement and repair industry. Diamond's low cost structure
enables it to serve all segments of the industry, which is comprised of: (1)
individual consumers; (2) commercial customers, including commercial fleet
leasing and rental car companies, car dealers, body shops and government
agencies; and (3) insurance customers, including referrals from local agents,
claims offices and centralized call centers. Diamond's 1999 sales to individual
consumers, commercial customers and insurance customers represented 28.6%, 41.5%
and 29.9% of total sales, respectively. While the two largest participants in
the industry primarily focus on servicing automotive glass insurance claims
(including providing related insurance claims processing services) and also
manufacture automotive glass, Diamond has strategically positioned itself solely
as a provider of automotive glass replacement and repair services to a balanced
mix of individual, commercial and insurance customers.
Diamond's sole focus on automotive glass replacement and repair,
combined with its aggressive cost controls, strong purchasing power and
efficient internal distribution system, have positioned Diamond as one of the
lowest cost providers of automotive glass replacement and repair services. These
competitive attributes, together with localized marketing efforts, have enabled
Diamond's new service centers to quickly establish a base of local consumer and
commercial installation business from which Diamond plans to grow all three of
its customer segments.
Diamond's financial performance reflects attractive service
center-level economics. The cash required to open a new service center,
including inventory net of trade payables, averages $33,000. In 1999, over 75%
of Diamond's installations and repairs were performed by mobile technicians at a
customer's home or workplace. Due to the high percentage of mobile installations
and repairs which Diamond performs, service centers are typically located in
commercial or industrial areas, where rents are generally available at low cost.
In 1999, Diamond's 102 mature service centers (service centers open for four
years or longer) averaged approximately $956,000 in sales and approximately
$200,000 of branch operating profit per location. For the year ended December
31, 1999, approximately 82% of Diamond's service centers that had been open for
at least fifteen months achieved positive branch operating profitability.
Diamond believes that the high volume of its automotive glass purchases
positions Diamond as an important customer of the primary automotive glass
manufacturers, thereby reducing Diamond's exposure to product shortages and
maximizing its ability to purchase automotive glass at the lowest available
cost. Diamond's purchasing program utilizes the major domestic original
equipment manufacturers for truckload and spot purchases, and importation of
containers from the larger manufacturers throughout the world. Management
believes that the scope
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and flexibility of Diamond's purchasing program and its efficient distribution
system have enabled Diamond to achieve higher service levels and a lower cost of
goods than most of its competitors.
Recent Developments
On March 31, 1998, Diamond entered into a bank facility with a
syndicate of financial institutions, which provided for borrowings of up to $35
million. On March 27, 2000, Diamond entered into a new revolving credit facility
with The CIT Group/Business Credit, Inc., as lender, which provides for
revolving advances ("Revolving Loans") of up to the lesser of:
o $25,000,000; or
o the sum of 85% of Diamond's Eligible Accounts Receivable (as defined in the
new credit facility) plus 85% of Diamond's Eligible Inventory (as defined
in the new credit facility), less certain reserves; or
o an amount equal to 1.5 times Diamond's EBITDA for the prior twelve months.
For purposes of the new credit facility, EBITDA is defined as earnings
before interest, taxes, depreciation and amortization, plus any accrued and
unpaid management fees payable to Leonard Green & Partners, L.P. ("LGP")
during the period.
At the same time Diamond entered into the new credit facility, it
repaid outstanding borrowings under the old bank facility.
History
Diamond was founded in 1923 by the grandfather of Kenneth Levine and
Richard Rutta, Diamond's Co-Chairmen of the Board and Co-Chief Executive
Officers. Diamond continues to operate a service center at the location of its
original store in Scranton, Pennsylvania. Messrs. Levine and Rutta joined
Diamond in 1979, when Diamond operated only one service center, and acquired
Diamond in 1987, when Diamond operated ten service centers in Pennsylvania and
New York. Under the management of Messrs. Levine and Rutta, Diamond has expanded
its service center and distribution network to serve 226 locations at the end of
1999.
Recapitalization
On January 15, 1998, Diamond, Kenneth Levine, Richard Rutta, Green
Equity Investors II, L.P. and certain affiliated entities of Diamond entered
into a Second Amended and Restated Stock Purchase Agreement, pursuant to which,
among other things:
o Diamond declared and paid a dividend of 3,500 shares of Series
A 12% Senior Redeemable Cumulative Preferred Stock (equal to
10.0% of the Series A 12% Senior Redeemable Cumulative
Preferred Stock outstanding after the Recapitalization, as
defined below) to each of Kenneth Levine and Richard Rutta;
o Kenneth Levine and Richard Rutta transferred all of the issued
and outstanding shares of each of the affiliated entities to
Diamond in consideration for which Diamond issued 6,950,000
shares of Common Stock to Kenneth Levine and Richard Rutta;
o each of the affiliated entities merged with and into Diamond;
o Green Equity Investors II, L.P. purchased:
(1) 770,000 shares of Common Stock, equal to 77.0% of the
Common Stock outstanding after the Recapitalization,
for aggregate consideration equal to $15.4 million,
and
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(2) 28,000 shares of Series A 12% Senior Redeemable
Cumulative Preferred Stock, equal to 80.0% of the
Preferred Stock outstanding following the
Recapitalization, for an aggregate consideration of
$28.0 million;
o Norman Harris and Michael A. Sumsky purchased an aggregate of
30,000 shares of Common Stock, equal to 3.0% of the Common
Stock outstanding after the Recapitalization, for aggregate
consideration of $600,000; and
o Diamond redeemed from Kenneth Levine and Richard Rutta all of
the Common Stock owned by them (other than 100,000 shares
owned by each of them) for approximately $150.7 million in
cash, which resulted in each of Kenneth Levine and Richard
Rutta owning 10.0% of the Common Stock outstanding after the
Recapitalization.
The above transactions were consummated on March 31, 1998, and together
constitute the "Recapitalization." Concurrently with the Recapitalization,
Diamond issued the Notes and entered into the old bank facility, under which
Diamond borrowed $12.5 million in connection with the Recapitalization.
Industry Overview
The automotive glass replacement and repair industry is an
approximately $3.0 billion market. The market for the installation of automotive
glass is highly fragmented, with approximately 20,000 providers of automotive
glass replacement and repair services in the United States. Many participants in
the industry are small "mom and pop" installers who compete less effectively
against large, geographically diversified providers of automotive glass
installation services, such as Diamond. Consequently, the industry has been
consolidating.
Over the past 10 years, management estimates that total industry sales
have grown at approximately 4.0% per year. Replacement volume is influenced by
several factors, including the total vehicle population and the number of miles
driven. Severe weather and road conditions can also increase demand for
automotive glass repair and replacement. Fixing minor damage to a windshield may
be deferred by consumers until a vehicle trade-in, sale or inspection for new
license tags. Therefore, new automobile sales, turnover of used vehicles and
state automobile inspection laws influence automotive glass demand.
Sales growth has been attributable primarily to an increase in the
aggregate number of vehicles on the road, from approximately 181 million
vehicles in 1988 to approximately 212 million vehicles in 1998, and to an
increase in the aggregate number of miles driven per vehicle per year, from
approximately 11,188 miles in 1988 to approximately 12,183 miles in 1998. Growth
in industry sales has also been driven by the use of larger, more complex and
more expensive automotive glass in new vehicles. In 1999, management estimates
that industry replacement units decreased approximately 3%, primarily due to
weak demand. This weaker demand had a negative impact on pricing and resulted in
a decrease in average revenue per installation unit.
Pricing
The price of replacement automotive glass is based on list prices
developed by the National Auto Glass Specification ("NAGS"), an independent
third party. NAGS prices are generally changed following wholesale price
increases announced by original equipment manufacturers. Prices charged by
participants in the automotive glass replacement industry are independently
determined using varying percentage discounts from the NAGS price list. The
impact of NAGS price increases on Diamond's financial results depends on the
level of discounts Diamond grants to its customers and the level of discounts
that Diamond can obtain from its glass suppliers. Effective January 1, 1999,
NAGS significantly modified its published list prices in order to bring actual
prices more in line with published list prices.
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Products
Diamond's primary installation products are automotive windshields
which are made of laminated safety glass. Safety glass consists of two layers of
glass bound together with a thin layer of vinyl which adds strength to the glass
and makes it very difficult for an object to penetrate a windshield upon impact.
As part of Diamond's commitment to serve all of its customers' automotive glass
replacement needs, Diamond also offers tempered automotive glass. Tempered glass
is generally used for side and rear automobile and truck windows and is
significantly stronger than regular glass due to specialized processing which
also causes tempered glass to shatter into dull-edged pebbles, reducing glass
related injuries. In addition, Diamond offers automotive glass repair services.
Customers and Marketing
Diamond provides automotive glass replacement services to each of the
industry's customer segments, which include individual consumers, commercial
customers and insurance customers. Management believes that in addition to
capturing additional consumer sales, broadening Diamond's service center network
and geographic coverage will facilitate Diamond's efforts to obtain an increased
share of the national insurance and fleet markets, whose participants generally
establish multiple providers for their automotive glass replacement
requirements. Diamond's 1999 sales to individual consumers, commercial customers
and insurance customers represented 28.6%, 41.5% and 29.9% of total sales,
respectively. In 1999, Diamond's top ten customer accounts comprised
approximately 18.9% of total sales and no single customer account exceeded 6.0%
of total sales.
Diamond's marketing is conducted through a combination of prominent
Yellow Pages advertising and by a direct sales force of 143 representatives.
Yellow Pages advertising is supported by customer service representatives and
extended hour call centers that answer telephone inquiries, schedule service
appointments and arrange emergency service. Sales representatives market
Diamond's services to insurance claim centers, local agents, fleet operators,
automobile dealers and body shops and have established relationships at all
levels of the major insurance, fleet and rental car company organizations.
Individual Consumers. The marketing focus to the individual consumer
segment is low price and speed of service. Diamond's consumer customers consist
of individuals who are not associated with a related automobile insurance claim.
Customers in this segment typically do not have automobile glass insurance
coverage, have a high insurance deductible or do not want to file a claim with
their insurance carrier. These customers are primarily concerned with price,
quality, convenience and speed of service. A substantial portion of the
industry's consumer sales are generated as a result of localized marketing
efforts, such as Yellow Pages advertising. In order to attract consumer
customers, Diamond's Yellow Pages advertisements are designed to appear in the
first group of display advertisements and promote Diamond's competitive pricing
and fast mobile service. When a customer calls, Diamond's service
representatives are trained to emphasize Diamond's low price guarantee and
prompt service capabilities. The majority of Diamond's services can be provided
by its mobile installation technicians at a customer's home or workplace.
Commercial Customers. Diamond markets to commercial customers through
its direct sales force, which emphasizes high quality service at a low cost.
Diamond's commercial segment customers include commercial fleet leasing
companies, rental car companies, car dealerships, body shops, utilities and
government agencies. Diamond's customers in the commercial segment include Avis
Rent-A-Car, Inc., Enterprise Rent-A-Car and Bell Atlantic Corporation.
Management believes that Diamond's expanding geographic coverage will enable
Diamond to obtain an increased share of the national fleet automotive glass
replacement business.
Insurance Customers. Diamond markets its services to all levels of the
insurance industry, including local agents, claims offices and centralized call
centers. In addition to marketing directly to insurance companies through its
direct sales force, Diamond participates as an approved service provider within
glass replacement networks administered by third parties, including certain of
Diamond's competitors. These third party networks act as outsourced claims
administrators under contract to an insurance company. Historically, insurance
companies which participate in these networks have required that automotive
glass replacement and repair services be provided by more than one service
provider in order to ensure competitive pricing and high quality service.
Diamond is an
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approved service provider for many national insurance carriers, including State
Farm Insurance Company, Nationwide Insurance Company, Allstate Insurance Company
and Travelers Property Casualty Corporation.
Service Centers
Diamond's repair and installation service is performed either on-site
at a service center location or at a customer's home or workplace by a mobile
technician. Diamond operates approximately 1,041 mobile installation vehicles.
In 1999, over 75% of Diamond's installations and repairs were performed by
mobile technicians at a customer's home or workplace. Due to the high percentage
of mobile installations and repairs which Diamond performs, service centers are
typically located in commercial or industrial areas, where rents are generally
available at low cost.
At the end of 1999, Diamond's network comprised 226 service centers in
39 states in the Northeast, Mid-Atlantic, Midwest, Southeast and Southwest
regions of the United States. These service centers are operated under the
following service marks: Triumph Auto Glass and Diamond Auto Glass in the
Northeast and Mid-Atlantic; and Triumph Auto Glass in the Midwest, Southeast and
Southwest. Any expansion into new states will be under the Triumph Auto Glass
registered service mark. Generally, Diamond's service center locations are
approximately 2,600 square feet in size. Due to weak industry conditions,
Diamond opened 24 new service centers in 1999, as compared to an average of 35
new service centers in the three years prior to 1999. Diamond currently plans to
open approximately 4 new service centers in 2000 absent an improvement in
industry conditions.
The following chart provides information concerning Diamond's service
center openings from 1990 to 1999:
Service % Increase
Year Openings Consolidations Centers Over Prior Year
At Year End
1990..... 6 -- 24 33.3%
1991..... 7 -- 31 29.2%
1992..... 12 -- 43 38.7%
1993..... 17 -- 60 39.5%
1994..... 31 -- 91 51.7%
1995..... 17 3 105 15.4%
1996..... 39 2 142 35.2%
1997..... 33 1 174 22.5%
1998..... 33 1 206 18.4%
1999..... 24 4 226 9.7%
Service centers are typically staffed with approximately four persons
and are open for business from 8:00 a.m. to 5:00 p.m. on Monday through Friday
and 8:00 a.m. to 12:00 p.m. on Saturday. Service center employees perform
installation services and process customer inquiries during regular business
hours. After-hours customer inquiries are handled by Diamond's emergency and
extended hour call center. Operators at this call center answer customer
inquiries, schedule mobile installation services and arrange emergency service
from service centers throughout Diamond's network.
Distribution System
Diamond currently operates four distribution centers which operate 7
days a week and are located in Kingston, Pennsylvania; Columbus, Ohio; Atlanta,
Georgia; and Rock Island, Illinois. Diamond's efficient distribution system
enables Diamond to make nightly or weekly deliveries to all of its service
centers both to replenish stock and to provide automotive glass that is not
carried in service center inventories. Through its distribution centers, Diamond
supports over 75% of its sales with internally distributed product, with the
remainder being purchased from the spot market. Diamond's highly efficient
distribution center network, combined with a successful inventory management
program at its service centers, enables Diamond to meet immediate service
demands at a lower cost than if larger quantities of automotive glass were
required to be purchased in the spot market.
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Suppliers
Diamond believes that the high volume of its automotive glass purchases
positions Diamond as an important customer of the primary automotive glass
manufacturers, thereby reducing Diamond's exposure to product shortages and
maximizing its ability to purchase automotive glass at the lowest available
cost. Diamond's purchasing program utilizes the major domestic original
equipment manufacturers for truckload and spot purchases, and importation of
containers from the larger manufacturers throughout the world. Management
believes that the scope and flexibility of Diamond's purchasing program and its
efficient distribution system have enabled Diamond to achieve higher service
levels and a lower cost of goods than those of most of its competitors.
Diamond has numerous domestic and international suppliers, and is
continuing to expand its supplier network by utilizing additional foreign
suppliers in order to hedge against product shortages and to reduce the overall
cost of automotive glass. In 1999, no single supplier represented more than 30%
of Diamond's automotive glass purchases. Due to the competitive nature of the
automotive glass manufacturing industry, Diamond does not anticipate any
difficulty in sourcing its automotive glass requirements in the foreseeable
future.
Competition
The automotive glass replacement and repair industry is highly
competitive, with customer decisions based on price, customer service, technical
capabilities, quality, advertising and geographic coverage. The competition in
the industry could result in additional pricing pressures, which would
negatively affect Diamond's results of operations. In addition, certain of
Diamond's competitors provide insurance companies with claims management
services, including computerized referral management, policyholder call
management, electronic auditing and billing services and management reporting.
While the market is generally highly fragmented, Diamond competes against
several other large competitors in this market, the largest two of which are
Safelite Glass Corporation and Harmon AutoGlass, a division of Apogee
Enterprises, Inc.
Employees
As of December 31, 1999, Diamond employed 1,610 persons. None of
Diamond's employees are covered by a collective bargaining agreement, and
Diamond believes that its relationships with its employees are good.
FACTORS AFFECTING FUTURE PERFORMANCE
Diamond is substantially leveraged and has significant debt service obligations
which could impair its ability to pay the amounts due under the Notes.
Diamond is highly leveraged and has significant debt service
obligations. As of December 31, 1999, Diamond's aggregate consolidated
indebtedness was approximately $107.5 million (of which approximately $7.5
million represented aggregate outstanding indebtedness under Diamond's old bank
facility), and Diamond had $43.0 million (liquidation preference) of outstanding
Preferred Stock and a stockholders' deficit of $78.2 million.
The degree to which Diamond is leveraged may impair Diamond's ability
to pay the amounts due under the Notes. Possible adverse consequences of
Diamond's degree of leverage include the following:
o Diamond's ability to obtain additional financing for working
capital, capital expenditures or general corporate purposes
may be impaired;
o a substantial portion of Diamond's cash flow from operations
goes to the payment of interest and principal on its
outstanding debt, thereby reducing the funds available to
Diamond for other purposes;
o the new credit facility and the indenture governing the Notes
contain certain restrictive financial and operating covenants;
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o Diamond's indebtedness under the new credit facility is at
variable rates of interest, which makes Diamond vulnerable to
increases in interest rates;
o Diamond's indebtedness outstanding under the new credit
facility is secured by a first priority lien on substantially
all of its assets and will become due prior to the time the
principal on the Notes will become due;
o Diamond's substantial degree of leverage will limit its
ability to adjust rapidly to changing market conditions,
reduce its ability to withstand competitive pressures, and
make it more vulnerable in the event of a downturn in general
economic conditions, repeated years of mild weather conditions
or other adverse events in its business.
If Diamond is unable to generate sufficient cash flows from operations
in the future to service its indebtedness, it may be required to refinance all
or a portion of its indebtedness, including the Notes, or to obtain additional
financing or to dispose of material assets or discontinue certain of its
operations. The new credit facility and the indenture governing the Notes
restrict Diamond's ability to sell assets and/or use the proceeds therefrom.
Diamond cannot assure you that any refinancing or asset sales would be possible
under its debt instruments existing at that time, that the proceeds which
Diamond could realize from such refinancing or asset sales would be sufficient
to meet its obligations then due or that Diamond could obtain any additional
financing.
The Notes are subordinated to Diamond's secured indebtedness.
The Notes are:
o senior, unsecured obligations of Diamond and will rank senior
in right and priority of payment to any indebtedness of
Diamond that by its terms is expressly subordinated to the
Notes.
o subordinated to secured indebtedness of Diamond (including
indebtedness under the new credit facility) with respect to
the assets securing such indebtedness. The new credit facility
is secured by a first priority lien on substantially all of
Diamond's assets.
o subordinated to claims of creditors of Diamond's subsidiaries,
except to the extent that holders of the Notes may be
creditors of such subsidiaries pursuant to the Guarantees.
Diamond currently has no subsidiaries, and, accordingly, there
are currently no Guarantees.
Diamond's obligations with respect to the Notes will be guaranteed,
jointly and severally, on a senior, unsecured basis by certain of its future
subsidiaries. Any obligations of Diamond's subsidiaries will be senior to the
claims of the holders of the Notes with respect to the assets of any of these
subsidiaries, except to the extent that the holders of the Notes may be
creditors of a subsidiary pursuant to a Guarantee. Any claim by the holders of
the Notes with respect to the assets of any subsidiary will be subordinated to
secured indebtedness (including indebtedness under the new credit facility) of
that subsidiary with respect to the assets securing such indebtedness. The
rights of Diamond and its creditors, including holders of the Notes, to realize
upon the assets of any subsidiary upon that subsidiary's liquidation or
reorganization (and the consequent rights of holders of the Notes to participate
in those assets) will be subject to the prior claims of that subsidiary's
creditors, except to the extent that Diamond may itself be a creditor with
recognized claims against that subsidiary or to the extent that the holders of
the Notes may be creditors with recognized claims against that subsidiary
pursuant to the terms of a Guarantee (subject, however, to the prior claims of
creditors holding secured indebtedness of any subsidiary with respect to the
assets securing that indebtedness). The new credit facility is secured by a
first priority lien on substantially all of Diamond's assets. In addition, the
indenture governing the Notes will restrict the amount of indebtedness that
subsidiaries are permitted to incur.
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Diamond may not be able to comply with certain provisions in the agreements
governing its outstanding debt that restrict Diamond's actions and require
Diamond to maintain financial ratios.
The new credit facility and the indenture governing the Notes include
certain covenants that, among other things, restrict Diamond's ability to:
o make investments;
o incur additional indebtedness;
o grant liens;
o merge or consolidate with other companies;
o change the nature of its business;
o dispose of assets;
o make loans;
o pay dividends or redeem capital stock;
o guarantee the debts of other persons;
o make capital expenditures; and
o engage in transactions with affiliates.
The old bank facility required Diamond to maintain certain financial
ratios, including interest coverage and leverage ratios. In August 1999, the
lenders of the old bank facility amended the old bank facility to increase the
permitted maximum leverage ratio and decrease the minimum interest coverage
ratio. At December 31, 1999, Diamond did not comply with the revised ratios set
forth in the old bank facility, as amended. Diamond received a waiver from the
lenders under the old bank facility with respect to this non-compliance. The new
credit facility requires Diamond to maintain minimum EBITDA (as defined in the
new credit facility), calculated monthly, for each 12-month period, ending as of
the end of each month, of at least $10.5 million.
Diamond's ability to comply with the minimum EBITDA requirement and the
other provisions of its new credit facility may be affected by events beyond its
control. Diamond's breach of any of these covenants could result in a default
under the new credit facility, in which case the lender would, among other
things, be entitled to elect to declare all amounts owing under the new credit
facility, together with accrued interest, to be due and payable. If Diamond were
unable to repay these borrowings, the lender could proceed against its
collateral. If the indebtedness under the new credit facility were accelerated,
Diamond cannot assure you that its assets would be sufficient to repay in full
that indebtedness and Diamond's other indebtedness, including the Notes.
The Notes are subject to fraudulent conveyance laws.
Diamond's obligations under the Notes may be subject to review under
relevant federal and state fraudulent conveyance laws in the event that a
bankruptcy, reorganization or rehabilitation case by or on behalf of unpaid
creditors of Diamond were to occur. Under these laws, Diamond's obligation to
repay the Notes could be voided, or the Notes could be subordinated to all other
creditors of Diamond, if, at the time Diamond issued the Notes, any of the
following were true:
o Diamond intended to hinder, delay or defraud any existing or
future creditor or contemplated insolvency in order to prefer
one or more creditors to the exclusion in the whole or in part
of others;
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o Diamond was insolvent or was rendered insolvent by reason of
issuing the Notes;
o Diamond was engaged in a business or transaction with
unreasonably small capital; or
o Diamond intended to incur, or believed that it would incur,
debts beyond its ability to pay those debts as they matured.
In the event that in the future the Notes are guaranteed by subsidiary
guarantors, the Guarantees may also be subject to review under federal and state
fraudulent transfer laws. If a court were to determine that, at the time a
subsidiary guarantor became liable under its Guarantee, it satisfied certain of
the conditions stated above, the court could void the Guarantee and direct the
repayment of amounts paid thereunder.
The measure of insolvency under fraudulent conveyance statutes varies
depending upon the laws of the jurisdiction being applied. Generally, however,
Diamond would be considered insolvent if, at the time it issued the Notes,
either (1) the sum of its debts was greater than all of its property at a fair
valuation; or (2) if the present fair salable value of its assets is less than
the amount that it would be required to pay on its existing debts as they become
absolute and matured. The obligations of each Subsidiary Guarantor under its
Guarantee, however, will be limited in a manner intended to avoid it being
deemed a fraudulent conveyance under applicable law.
Additionally, under federal bankruptcy or applicable state insolvency
law, if a bankruptcy or insolvency proceeding were initiated by or against
Diamond within 90 days after it made any payment with respect to the Notes, or
if Diamond anticipated becoming insolvent at the time of that payment, all or a
portion of the payment could be avoided as a preferential transfer and the
recipient of that payment could be required to return that payment.
Diamond does not know what standard a court would use to determine
whether Diamond was insolvent at the time the Notes were issued, nor can Diamond
assure you that a court would not find Diamond to be insolvent on that date or
that, regardless of Diamond's solvency, that the issuances of the Notes
constituted fraudulent conveyances on another of the grounds summarized above.
Diamond may not be able to comply with its obligations under the indenture
governing the Notes to purchase all of the Notes upon a change of control.
Upon the occurrence of a change of control, the indenture governing the
Notes requires Diamond to make an offer to repurchase all outstanding Notes at a
price equal to 101% of the aggregate principal amount thereof, together with
accrued and unpaid interest thereon to the date of repurchase. However, the new
credit facility prohibits Diamond from repurchasing any Notes, unless and until
Diamond has paid the indebtedness under the new credit facility in full.
Diamond's failure to repurchase the Notes would result in a default under the
indenture governing the Notes and the new credit facility. Diamond's inability
to pay the indebtedness under the new credit facility, if accelerated, would
also constitute a default under the indenture governing the Notes, which could
have adverse consequences to Diamond and to the holders of the Notes. In the
event of a change of control, Diamond cannot assure you that it would have
sufficient assets to satisfy all of its obligations under the new credit
facility and the Notes.
Diamond's future expansion may be hindered by its lack of sufficient capital or
other factors, which would adversely affect Diamond's continued growth.
Diamond's continued growth depends to a significant degree on its
ability to open new service centers in existing and new markets and to operate
these service centers on a profitable basis. In addition, Diamond will require
additional distribution centers as it implements its program to expand its
service centers to achieve a nationwide presence. Diamond's ability to expand
will depend, in part, on business conditions and the availability of qualified
managers and service representatives, and sufficient capital. Due to weak
industry conditions resulting from reduced demand for auto glass services and
lower average revenue per installation unit, Diamond opened 24 new service
centers in 1999, as compared to an average of 35 new service centers in the
three years prior to 1999. Diamond currently plans to open approximately 4 new
service centers in 2000 absent an improvement in industry conditions. A decline
in Diamond's overall financial performance may adversely impact its ability to
expand in the future. Diamond expects that the net cash generated from
operations, together with borrowings under the new credit facility, should
enable it to finance the expenditures related to its expansion. However, Diamond
cannot assure you that:
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<PAGE>
o it will possess sufficient funds to finance the expenditures
related to its expansion;
o new service centers can be opened on a timely basis;
o new service centers can be operated on a profitable basis; or
that
o Diamond will be able to hire, train and integrate employees.
In the event net cash generated from operations together with working
capital reserves and borrowings under the new credit facility are insufficient
to finance the expenditures related to Diamond's expansion, Diamond may be
required to reduce its expansion in the future.
Diamond's operating results are affected by seasonality and weather.
Weather has historically affected Diamond's sales, net income and
EBITDA, with severe weather generating increased sales and income and mild
weather resulting in lower sales, net income and EBITDA. In addition, Diamond's
business is somewhat seasonal, with the fourth quarter traditionally its slowest
period of activity. Diamond believes these seasonal trends will continue for the
foreseeable future. Although Diamond's installation units increased 18.4% in
fiscal 1999, primarily reflecting the continued maturation of Diamond's service
centers and increased installation productivity, revenue per installation unit
decreased an average of 6% in 1999. The decrease in Diamond's average revenue
per installation unit is primarily attributable to weaker industry demand for
glass replacement services, due primarily to milder weather conditions, which
resulted in price compression throughout the industry.
Diamond competes against other large companies that may be better equipped to
provide customers with automotive glass replacement and repair services.
The automotive glass replacement and repair industry is highly
competitive, with customer decisions based on price, customer service, technical
capabilities, quality, advertising and geographic coverage. The competition in
the industry could result in additional pricing pressures, which could
negatively affect Diamond's results of operations. In addition, certain of
Diamond's competitors provide insurance companies with claims management
services, including computerized referral management, policyholder call
management, electronic auditing and billing services and management reporting.
While the market is generally highly fragmented, Diamond also competes against
several other large competitors in this market, the largest two of which are
Safelite Glass Corporation and Harmon AutoGlass, a division of Apogee
Enterprises, Inc. Many of Diamond's competitors have substantially less leverage
than Diamond, which may allow them greater flexibility in managing their
operations. Diamond cannot assure you that it will be able to continue to
compete effectively with these or other competitors. See
"Business--Competition."
Diamond is dependent on its key personnel and the loss of key personnel could
adversely affect its results of operations.
Diamond success is largely dependent upon the abilities and experience
of its senior management team, including Kenneth Levine, Richard Rutta, Norman
Harris and Michael A. Sumsky. The loss of services of one or more of these
senior executives could adversely affect Diamond's results of operations.
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<PAGE>
Ownership of Diamond is concentrated in Green Equity Investors II, L.P., whose
interests may conflict with those of the holders of Notes.
Green Equity Investors II, L.P., an investment partnership managed by
LGP, owns 77.0% of the outstanding shares of Diamond's Common Stock and 80.0% of
the outstanding shares of Diamond's Series A 12% Senior Redeemable Cumulative
Preferred Stock. As a result, Green Equity Investors II, L.P. has the power to
elect all of the members of Diamond's board of directors, to approve all
amendments to Diamond's certificate of incorporation and bylaws and to effect
fundamental corporate transactions such as mergers, asset sales and public
offerings. Diamond cannot assure you that the interests of Green Equity
Investors II, L.P. will not conflict with the interests of the holders of the
Notes. See "Security Ownership of Certain Beneficial Owners and Management."
Diamond's results of operations may be adversely affected by a downturn in
general economic conditions or an increase in fuel prices.
Diamond's revenues are dependent on the annual number of windshields
replaced, which in turn is influenced by the aggregate number of vehicles on the
road and the number of miles driven per vehicle per year. As a result, a general
economic downturn or higher fuel prices could have a material adverse effect on
Diamond's results of operations.
Diamond's EBITDA has declined due to industry conditions.
In 1999, Diamond's EBITDA declined 25.4%. The decrease in EBITDA was
primarily due to lower average revenue per installation unit that was partially
offset by a decrease in glass product costs, increases in installation
productivity and the leveraging of service center, corporate and administrative
expenses. If Diamond continues to experience further declines in revenue per
installation unit, Diamond would experience further declines in EBITDA which
could limit its ability to meet its ongoing debt service obligations. The new
credit facility requires Diamond to maintain minimum EBITDA (as defined in the
new credit facility), calculated monthly, for each 12-month period, ending as of
the end of each month, of at least $10.5 million.
Diamond's business involves the potential for product liability claims against
Diamond, which may adversely affect Diamond's business, financial condition and
results of operations if the cost of those claims exceeds Diamond's insurance
coverage.
The replacement of windshields entails risk of product liability
claims, particularly if the windshields Diamond uses in its business are
defective. To date, no material product liability claims have been made against
Diamond relating to its replacement of windshields. However, Diamond cannot
assure you that these claims will not be made in the future. A successful
product liability claim (or series of claims) against Diamond in excess of its
insurance coverage could have a material adverse affect on Diamond's business,
financial condition and results of operations.
There is no established market for the Notes and no assurance that a liquid
trading market will develop in the future.
There is no existing market for the Notes, Diamond cannot assure you as
to the liquidity of any markets that may develop for the Notes, the ability of
holders of the Notes to sell their Notes or the price at which holders would be
able to sell their Notes. Future trading prices of the Notes will depend on many
factors, including, among other things, prevailing interest rates, Diamond's
operating results and the market for similar securities.
The Notes are subject to restrictions on transfer.
The Notes are subject to the restrictions on transfer. These
restrictions are described in the legend to the Notes. In general, the Notes may
not be offered or sold unless: (1) they are registered under the Securities Act,
or (2) an exemption from the registration requirements of the Securities Act and
applicable state securities laws is available. Diamond does not currently
anticipate that it will register the outstanding Notes under the Securities Act.
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<PAGE>
ITEM 2. PROPERTIES
The following chart provides information concerning Diamond's
headquarters, distribution facilities and emergency call centers, all of which
are leased:
Area in Square
Facility Function Feet
-------- -------- ----
Kingston, PA............. Headquarters 121,000
Distribution Center
Call Center
Columbus, OH............. Distribution Center 26,000
Atlanta, GA.............. Distribution Center 20,000
Rock Island, IL.......... Distribution Center 16,000
Scranton, PA............. Call Center 2,500
The following chart provides information concerning the number and
location of Diamond's service centers, all of which are leased:
Number of
Service Number of
State Centers State Service Centers
- ----- ------- ----- ---------------
Alabama........... 5 Nebraska.......... 1
Arkansas.......... 1 New Hampshire..... 5
Colorado.......... 4 New Jersey........ 10
Connecticut....... 6 New Mexico........ 1
Delaware.......... 2 New York.......... 27
Florida........... 10 North Carolina.... 8
Georgia........... 9 Ohio.............. 11
Illinois.......... 6 Oklahoma.......... 1
Indiana........... 7 Pennsylvania...... 26
Iowa.............. 3 Rhode Island...... 1
Kansas............ 2 South Carolina.... 4
Kentucky.......... 3 South Dakota...... 1
Louisiana......... 3 Tennessee......... 5
Maine............. 3 Texas............. 5
Maryland.......... 8 Utah.............. 1
Massachusetts..... 9 Vermont........... 3
Michigan.......... 8 Virginia.......... 11
Minnesota......... 4 West Virginia..... 3
Mississippi....... 1 Wisconsin......... 5
Missouri.......... 3
Diamond believes that its facilities are adequate for its current needs
and that suitable additional distribution centers and service locations will be
available to satisfy Diamond's expansion needs.
ITEM 3. LEGAL PROCEEDINGS AND INSURANCE
Diamond is involved in legal proceedings in the ordinary course of its
business. Management believes that the amounts which may be awarded or assessed
against Diamond in connection with these matters, if any, will not have a
material adverse effect on Diamond. In addition, management believes that
Diamond has appropriate insurance coverage to operate its business, including
insurance for its mobile installation units and technicians.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public market for Diamond's Common Stock or
Series A 12% Senior Redeemable Cumulative Preferred Stock.
At March 27, 2000, there were five holders of record of Diamond's
Common Stock and three holders of record of Diamond's Series A 12% Senior
Redeemable Cumulative Preferred Stock.
Diamond's ability to pay dividends is limited by the new credit
facility and the Notes. Diamond does not currently intend to pay dividends on
its capital stock. Any future determination to pay dividends will be at the
discretion of Diamond's Board of Directors and will be dependent upon Diamond's
results of operations, capital requirements, financial condition, contractual
restrictions and other factors deemed relevant at the time by Diamond's Board of
Directors.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected historical and unaudited pro forma condensed financial
data as of December 31, 1995, 1996, 1997, 1998 and 1999 and for each of the
years then ended has been derived from Diamond's audited financial statements.
The report of KPMG LLP, independent auditors, on Diamond's Financial Statements
as of December 31, 1998 and 1999, and for each of the years in the three year
period ended December 31, 1999, is included elsewhere herein.
This summary historical and unaudited pro forma condensed financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Diamond's Financial
Statements and the related notes thereto appearing elsewhere in this Annual
Report.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1996 1997 1998 1999
---- ---- ---- ----- ----
(dollars in thousands)
Statement of Operating Data:
<S> <C> <C> <C> <C> <C>
Sales ............................................... $ 68,102 $ 101,355 $ 122,005 $ 149,609 $ 164,520
Cost of sales ....................................... 20,697 31,423 36,702 43,851 51,456
--------- --------- --------- --------- ---------
Gross profit ........................................ 47,405 69,932 85,303 105,758 113,064
Operating expenses .................................. 40,470 56,883 74,696 89,764 101,894
--------- --------- --------- --------- ---------
Income from operations .............................. 6,935 13,049 10,607 15,994 11,170
Interest income ..................................... (54) (109) (184) (120) (31)
Interest expense .................................... -- -- -- 8,162 11,054
Pre-tax income ...................................... 6,989 13,158 10,791 7,952 147
Provision for income taxes .......................... -- -- -- (37) 138
--------- --------- --------- --------- ---------
Net income .......................................... $ 6,989 $ 13,158 $ 10,791 $ 7,989 $ 9
========= ========= ========= ========= =========
Pro forma (1):
Historical income before provision for income taxes . $ 6,989 13,158 $ 10,791 $ 7,952
Pro forma provision for income taxes ................ 2,796 5,263 4,316 3,181
--------- --------- --------- ---------
Pro forma net income ................................ $ 4,193 $ 7,895 $ 6,475 $ 4,771
========= ========= ========= =========
Other Data:
EBITDA(2) ........................................... $ 8,284 $ 14,948 $ 18,029 $ 18,524 $ 13,796
EBITDA margin ....................................... 12.2% 14.8% 14.8% 12.4% 8.4%
Non-vehicle capital expenditures .................... $ 356 $ 1,616 $ 1,514 $ 1,856 $ 1,892
Vehicle capital expenditures ........................ 1,425 3,730 859 673 479
--------- --------- --------- --------- ---------
Total capital expenditures .......................... 1,781 5,346 2,373 2,529 2,371
Ratio of earnings to fixed charges (excluding
preferred stock dividends) (3) ...................... 1.97x 1.01x
Service centers operated at period end .............. 105 142 174 206 226
Balance Sheet Data (at period end):
Cash and cash equivalents ........................... $ 4,100 $ 5,393 $ 6,255 $ 301 $ 94
Total assets ........................................ 21,069 31,494 36,687 90,692 87,519
Total debt .......................................... -- -- -- 108,500 107,500
Stockholders' equity (deficit) ...................... 15,728 24,294 23,285 (73,441) (78,232)
</TABLE>
(1) Prior to March 31, 1998, Diamond consisted of S corporations and,
accordingly, federal and state income taxes were generally paid at the
stockholder level only. Upon consummation of the Recapitalization (as
defined under "Business--Recapitalization"), Diamond eliminated its S
corporation status and, accordingly, is subject to federal and state income
taxes.
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<PAGE>
(2) EBITDA represents income before income taxes, interest expense,
depreciation and amortization expense and non-recurring executive
compensation expense in 1997 of $5 million. While EBITDA is not intended to
represent cash flow from operations as defined by GAAP and should not be
considered as an indicator of operating performance or an alternative to
cash flow (as measured by GAAP) as a measure of liquidity, it is included
herein to provide additional information with respect to Diamond's ability
to meet its future debt service, capital expenditure and working capital
requirements.
(3) Ratio of earnings to fixed charges equals pre-tax income plus interest
expense divided by interest expense.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Diamond is a leading provider of automotive glass replacement and
repair services in the Northeast, Mid-Atlantic, Midwest, Southeast and Southwest
regions of the United States. At December 31, 1999, Diamond operated a network
of 226 automotive glass service centers, approximately 1,041 mobile installation
vehicles and four distribution centers in 39 states. Diamond serves all of its
customers' automotive glass replacement and repair needs, offering windshields,
tempered glass and other related products. Sales and EBITDA for the year ended
December 31, 1999 were $164.5 million and $13.8 million, respectively.
Diamond believes that, due to its sole focus on automotive glass
replacement and repair, it has one of the lowest cost structures in the
automotive glass replacement and repair industry. Diamond's low cost structure
enables it to serve all segments of the industry, which is comprised of: (1)
individual consumers; (2) commercial customers, including commercial fleet
leasing and rental car companies, car dealers, body shops and government
agencies; and (3) insurance customers, including referrals from local agents,
claims offices and centralized call centers. Diamond's 1999 sales to individual
consumers, commercial customers and insurance customers represented 28.6%, 41.5%
and 29.9% of total sales, respectively. While the two largest participants in
the industry primarily focus on servicing automotive glass insurance claims
(including providing related insurance claims processing services) and also
manufacture automotive glass, Diamond has strategically positioned itself solely
as a provider of automotive glass replacement and repair services to a balanced
mix of individual, commercial and insurance customers.
Recapitalization
On January 15, 1998, Diamond, Kenneth Levine, Richard Rutta, Green
Equity Investors II, L.P. and certain affiliated entities of Diamond entered
into a Second Amended and Restated Stock Purchase Agreement, pursuant to which,
among other things: (1) Diamond declared and paid a dividend of 3,500 shares of
Series A 12% Senior Redeemable Cumulative Preferred Stock (equal to 10.0% of the
Series A 12% Senior Redeemable Cumulative Preferred Stock outstanding after the
Recapitalization, as defined below) to each of Kenneth Levine and Richard Rutta;
(2) Kenneth Levine and Richard Rutta transferred all of the issued and
outstanding shares of each of the affiliated entities to Diamond in
consideration for which Diamond issued 6,950,000 shares of Common Stock to
Kenneth Levine and Richard Rutta; (3) each of the affiliated entities merged
with and into Diamond; (4) Green Equity Investors II, L.P. purchased: (A)
770,000 shares of Common Stock, equal to 77.0% of the Common Stock outstanding
after the Recapitalization, for aggregate consideration equal to $15.4 million,
and (B) 28,000 shares of Series A 12% Senior Redeemable Cumulative Preferred
Stock, equal to 80.0% of the Preferred Stock outstanding following the
Recapitalization, for an aggregate consideration of $28.0 million; (5) Norman
Harris and Michael A. Sumsky purchased an aggregate of 30,000 shares of Common
Stock, equal to 3.0% of the Common Stock outstanding after the Recapitalization,
for aggregate consideration of $600,000; and (6) Diamond redeemed from Kenneth
Levine and Richard Rutta all of the Common Stock owned by them (other than
100,000 shares owned by each of them) for approximately $150.7 million in cash,
which resulted in each of Kenneth Levine and Richard Rutta owning 10.0% of the
Common Stock outstanding after the Recapitalization. These transactions were
consummated on March 31, 1998, and together constitute the "Recapitalization."
Concurrently with the Recapitalization, Diamond issued the Notes and entered
into the old bank facility with a syndicate of financial institutions, under
which Diamond borrowed $12.5 million in connection with the Recapitalization.
Results of Operations
The following discussion and analysis should be read in conjunction
with "Selected Financial Data" and the audited Financial Statements of Diamond
and the notes thereto included elsewhere in this Annual Report.
The following table summarizes Diamond's historical results of
operations and historical results of operations as a percentage of sales for the
years ended December 31, 1997, 1998 and 1999.
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<PAGE>
<TABLE>
<CAPTION>
` Years Ended December 31,
------------------------
1997 1998 1999
---- ---- ----
$ % $ % $ %
-----------------------------------------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Sales....................................... 122.0 100.0 149.6 100.0 164.5 100.0
Cost of Sales............................... 36.7 30.1 43.8 29.3 51.4 31.2
------ ----- ----- ----- ----- -----
Gross Profit................................ 85.3 69.9 105.8 70.7 113.1 68.8
Operating Expenses.......................... 74.7 61.2 89.8 60.0 101.9 61.9
------ ----- ----- ----- ----- -----
Income from Operations...................... 10.6 8.7 16.0 10.7 11.2 6.8
Interest Income............................. (0.2) 0.2 (0.1) 0.1 0.0 0.0
Interest Expense............................ 0.0 0.0 8.1 5.4 11.0 6.7
------ ----- ----- ----- ----- -----
(0.2) 0.2 8.0 5.3 11.0 6.7
------ ----- ----- ----- ----- -----
Income before provision for income taxes.... 10.8 8.9 8.0 5.3 0.2 0.1
Provision for income taxes.................. 0.0 0.0 0.0 0.0 0.2 0.1
----- ------ ----- ----- ---- ---
Net income.................................. 10.8 8.9 8.0 5.3 0.0 0.0
===== ====== ===== ===== ==== ====
EBITDA (1).................................. 18.0 14.8 18.5 12.4 13.8 8.4
</TABLE>
(1) EBITDA represents income before taxes, interest expense, depreciation and
amortization expense and non-recurring executive compensation expense in
1997 of $5 million. While EBITDA is not intended to represent cash flow
from operations as defined by GAAP and should not be considered as an
indicator of operating performance or an alternative to cash flow (as
measured by GAAP) as a measure of liquidity, it is included herein to
provide additional information with respect to Diamond's ability to meet
its future debt service, capital expenditure and working capital
requirements.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Sales. Sales for 1999 increased by $14.9 million, or 10.0%, to $164.5
million from $149.6 million for 1998. This increase was primarily due to an
increase in sales at service centers opened in 1998 and 1999. Although
installation units increased 18.4%, primarily reflecting the continued
maturation of Diamond's service centers and increased installation productivity,
revenue per installation unit decreased an average of 6%. The decrease in
Diamond's average revenue per installation unit is primarily attributable to
weaker industry demand for glass replacement services, due primarily to milder
weather conditions, which resulted in price compression throughout the industry.
Gross Profit. Gross profit for 1999 increased by $7.3 million, or 6.9%,
to $113.1 million from $105.8 million for 1998. Gross margin decreased as a
percentage of sales to 68.8% for 1999 from 70.7% for 1998. The decrease in gross
margin was primarily due to price compression throughout the industry, which
adversely affected average revenue per installation unit. The adverse impact of
price compression was partially offset by a decrease in glass product costs.
Operating Expenses. Operating expenses for 1999 increased by $12.1
million, or 13.5%, to $101.9 million from $89.8 million for 1998. Operating
expenses increased as a percentage of sales to 61.9% for 1999 from 60.0% for
1998. The increase in operating expenses during 1999 was primarily due to an
increase in expenses related to the continued expansion of Diamond's service and
distribution center network which resulted in an increase in service and
distribution center payroll and other operating expenses, such as vehicle
operating leases and rent. The increase in operating expenses as a percentage of
sales is attributable to a decrease in average revenue per installation unit
which was partially offset by an average decrease of 4% in operating expense per
installation unit due to the leveraging of service center, corporate and
administrative expenses. In addition, operating expenses in 1999 included a full
year of costs related to senior management salaries and the management fees paid
to LGP compared to the inclusion of nine months of these costs in 1998 following
the consummation of the Recapitalization.
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<PAGE>
Depreciation and amortization expense for 1999 increased by $0.2
million, or 8.3%, to $2.6 million from $2.4 million for 1998. This increase is
attributable to a $0.5 million increase in amortization expense related to the
implementation of certain sales, billing and financial systems software in
February 1999. The increase in amortization expense was offset by a $0.5 million
decrease in depreciation expense due to the inception of a master fleet leasing
program during 1997 for the lease of mobile installation and distribution
service vehicles.
Income from Operations. Income from operations for 1999 decreased by
$4.8 million, or 30.0%, to $11.2 million from $16.0 million for 1998. This
decrease was primarily due to the decline in average revenue per installation
unit discussed above that was partially offset by a decrease in glass product
costs, an increase in installation productivity and the leveraging of service
center, corporate and administrative expenses.
Interest Expense. Interest expense for 1999 increased by $2.9 million,
or 35.8%, to $11.0 million from $8.1 million for 1998. In 1999, Diamond incurred
a full year of interest expense compared to the inclusion of nine months of
interest expense in 1998 following the consummation of the Recapitalization.
Net Income. Diamond recorded a minimal amount of net income in 1999
compared to $8.0 million of net income in 1998. Net income as a percentage of
sales decreased to 0.0% for 1999 from 5.3% for 1998. The decrease in net income
and net income margin during 1999 was primarily due to the adverse impact of
lower average revenue per installation unit that was partially offset by a
decrease in glass product costs, an increase in installation productivity and
the leveraging of service center, corporate and administrative expenses.
EBITDA. EBITDA for 1999 decreased by $4.7 million, or 25.4%, to $13.8
million from $18.5 million for 1998. EBITDA as a percentage of sales decreased
to 8.4% for 1999 from 12.4% for 1998. The decrease in EBITDA and EBITDA margin
during 1999 was primarily due to the adverse impact of lower average revenue per
installation unit that was partially offset by a decrease in glass product
costs, an increase in installation productivity and the leveraging of service
center, corporate and administrative expenses.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Sales. Sales for 1998 increased by $27.6 million, or 22.6%, to $149.6
million from $122.0 million for 1997. This increase was primarily due to an
increase in sales at service centers opened in 1996, 1997 and 1998.
Gross Profit. Gross profit for 1998 increased by $20.5 million, or
24.0%, to $105.8 million from $85.3 million for 1997. Gross profit increased as
a percentage of sales to 70.7% for 1998 from 69.9% for 1997. The increase in
gross profit and gross margin during 1998 was primarily due to an increase in
Diamond's sales and an increase in average revenue per installation unit.
Operating Expenses. Operating expenses for 1998 increased by $15.1
million, or 20.2%, to $89.8 million from $74.7 million for 1997. Operating
expenses decreased as a percentage of sales to 60.0% for 1998 from 61.2% for
1997. The decrease in operating expenses as a percentage of sales during 1998
was primarily due to a non-recurring executive compensation expense of $5.0
million accrued for in 1997. Excluding the non-recurring executive compensation
expense in 1997, operating expenses increased as a percentage of sales to 60.0%
for 1998 from 57.1% for 1997. The increase in operating expenses during 1998 was
primarily due to an increase in expenses related to the continued expansion of
Diamond's service and distribution center network. During 1998, Diamond added 32
net new service centers; opened distribution centers in Rock Island, Illinois
and Atlanta, Georgia and consolidated its Raleigh, North Carolina and its
Orlando, Florida distribution centers into Diamond's Atlanta, Georgia
distribution center. The increase in operating expenses as a percentage of sales
is primarily attributable to an increase in service and distribution center
network payroll and other operating expenses combined with weaker demand for
auto glass installation services. In addition, since April 1998 Diamond has
incurred additional costs related to increases in senior management salaries, an
accrual for an incentive based bonus program for senior management and
management fees paid to LGP.
Depreciation and amortization expense for 1998 increased by $0.2
million, or 9.1%, to $2.4 million from $2.2 million for 1997. In 1998, Diamond
commenced amortization of certain software related to the implementation of a
new point of sale system for the service center network. The increase in
amortization expense was offset by a
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<PAGE>
$0.1 million decrease in depreciation expense due to the inception of a master
fleet leasing program during 1997 for the lease of mobile installation and
distribution service vehicles.
Income from Operations. Income from operations for 1998 increased by
$5.4 million, or 50.9%, to $16.0 million from $10.6 million for 1997. Excluding
the impact of the non-recurring executive compensation expense of $5.0 million
in 1997, income from operations for 1998 increased by $0.4 million, or 2.6%, to
$16.0 million from $15.6 million for 1997.
Interest Expense. Interest expense for 1998 was $8.1 million due to the
consummation of the Recapitalization compared to no interest expense for 1997.
Net Income. Net income for 1998 decreased $2.8 million, or 25.9%, to
$8.0 million from $10.8 million for 1997. The primary reason for this decrease
was attributable to interest expense of $8.1 million. This was offset with a
$5.4 million increase in income from operations.
EBITDA. EBITDA for 1998 increased by $0.5 million, or 2.8%, to $18.5
million from $18.0 million for 1997. EBITDA as a percentage of sales decreased
to 12.4% for 1998 from 14.8% for 1997. The increase in EBITDA during 1998 was
primarily due to the increase in sales and gross profit, which was offset by an
increase in operating expenses. The decrease in EBITDA margin during 1998 is
primarily attributable to an increase in the service and distribution center
network payroll and other operating expenses combined with weaker demand for
auto glass installation services. During 1998, Diamond incurred additional costs
related to increases in senior management salaries, an accrual for an incentive
based bonus program for senior management and management fees paid to LGP. The
decrease in EBITDA margin for 1998 related primarily to an increase in operating
expenses which was partially offset by an increase in gross margin.
Liquidity and Capital Resources
Diamond's need for liquidity will arise primarily from interest payable
on the Notes, the new credit facility and the funding of Diamond's capital
expenditures and working capital requirements. There are no mandatory principal
payments on the Notes prior to their maturity on April 1, 2008 and, except to
the extent that the borrowing base under the new credit facility exceeds the
amount outstanding thereunder, no required payments of principal on the new
credit facility prior to its expiration on March 27, 2004.
Net Cash Provided by Operating Activities. Net cash provided by
operating activities for 1999 decreased $1.9 million to $3.3 million from $5.2
million for 1998. The decrease in cash provided by operating activities for 1999
was due to a decrease in Diamond's net earnings, a $1.4 million increase in
inventory and a $1.6 million decrease in accounts payable which was offset by a
$1.9 million decrease in accounts receivable due to newly implemented accounts
receivable and billing systems which improved the accuracy and timeliness of
customer billings and improved post-billing collection efforts. Net cash
provided by operating activities for 1998 decreased $10.5 million to $5.2
million from $15.7 million for 1997. The decrease in cash provided by operating
activities for 1998 was primarily due to a decrease in Diamond's net earnings
and an increase in working capital requirements.
Net Cash Provided by/Used in Investing Activities. Net cash used in
investing activities for 1999 decreased $2.8 million to $2.3 million used from
$0.5 million provided by investing activities for 1998. Net cash provided by
investing activities for 1998 increased $3.6 million to $0.5 million from $3.1
million used in investing activities for 1997. The primary reason for these
variances was the elimination in 1998 of a due from related company of $2.9
million in connection with the Recapitalization.
Net Cash Used in Financing Activities. Net cash used in financing
activities for 1999 decreased $10.4 million to $1.2 million from $11.6 million
for 1998, while net cash used in financing activities for 1998 decreased $0.2
million to $11.6 million from $11.8 million for 1997. The reason for these
variances was the Recapitalization, in which $97.0 million was received from the
issuance of the Notes, $12.5 million from the old bank facility, $28.0 million
from the sale of preferred stock to Green Equity Investors II, L.P. and $16.0
million from the sale of common stock to Green Equity Investors II, L.P., Norman
Harris and Michael A. Sumsky. This was offset by distributions to stockholders
of $4.6 million, the repurchase of common stock for $150.7 million and deferred
loan
-19-
<PAGE>
costs of $5.8 million principally resulting from the issuance of the Notes. In
addition, Diamond repaid $4.0 million of the $12.5 million received from the old
bank facility during 1998 in connection with the Recapitalization.
Capital Expenditures. Net capital expenditures were $2.4 million for
1999 as compared to $2.5 million for 1998 and $2.4 million for 1997. Excluding
vehicle capital expenditures, capital expenditures were $1.9 million for 1999 as
compared to $1.8 million for 1998 and $1.5 million for 1997. Capital
expenditures in 1999 were made primarily to fund the continued upgrade of
Diamond's management information systems. The most significant capital
expenditures contemplated over the next five years will be for the continued
enhancement and maintenance of Diamond's management information systems and
development of Diamond's nationwide expansion program. It is anticipated that
Diamond will annually incur approximately $2.5 to $3.0 million in capital
expenditures primarily to expand its management information systems with the
remaining portion used to expand its service and distribution center network.
Liquidity. Management believes that Diamond will have adequate capital
resources and liquidity to satisfy its debt service obligations, working capital
needs and capital expenditure requirements, including those related to the
opening of new service centers. Diamond's capital resources and liquidity are
expected to be provided by Diamond's net cash provided by operating activities
and borrowings under the new credit facility.
Inflation
Diamond believes that inflation has not had a material impact on its
results of operations for 1997, 1998 or 1999.
Effect of Weather Conditions and Seasonality
Weather has historically affected Diamond's sales, net income and
EBITDA, with severe weather generating increased sales, net income and EBITDA
and mild weather resulting in lower sales, net income and EBITDA. In addition,
Diamond's business is somewhat seasonal, with the fourth quarter traditionally
its slowest period of activity. Diamond believes such seasonal trends will
continue for the foreseeable future. See "--Sales."
-20-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
The following financial statements of Diamond, together with the report
of the independent auditors thereon, are presented on pages F-1 through F-19
hereof as set forth below:
Index to Financial Statements
Page
----
Independent Auditors' Report............................................. F-2
Balance Sheets, December 31, 1999 and 1998............................... F-3
Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997...................................... F-5
Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1999, 1998 and 1997...................................... F-6
Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997..................................... F-7
Notes to Financial Statements.......................................... F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-21-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of
Diamond's directors and executive officers:
Name Age Position
---- --- --------
Kenneth Levine ...................... 46 Co-Chairman of the Board,
Co-Chief Executive Officer
and Director
Richard Rutta........................ 43 Co-Chairman of the Board,
Co-Chief Executive Officer
and Director
Norman Harris........................ 45 President
Michael A. Sumsky.................... 41 Executive Vice President,
Chief Financial Officer and
General Counsel
Gregory J. Annick.................... 36 Director
John G. Danhakl .................... 44 Director
Jonathan D. Sokoloff................. 42 Director
Kenneth Levine has been Diamond's Co-Chairman of the Board and Co-Chief
Executive Officer since March 1998 and a Director of Diamond since March 1987.
Mr. Levine joined Diamond in 1979 and has served as Diamond's effective
Co-President since 1987. In 1987, Mr. Levine, together with Richard Rutta,
purchased all of Diamond's outstanding stock.
Richard Rutta has been Diamond's Co-Chairman of the Board and Co-Chief
Executive Officer since March 1998 and a Director of Diamond since March 1987.
Mr. Rutta joined Diamond in 1979 and has served as Diamond's effective
Co-President since 1987. In 1987, Mr. Rutta, together with Kenneth Levine,
purchased all of Diamond's outstanding stock.
Norman Harris has been Diamond's President since March 1998. Mr. Harris
has served as Diamond's Executive Vice President from 1995 until March 1998. Mr.
Harris joined Diamond in 1993. From 1991 through 1993, Mr. Harris served as
President of Inveauto C.A. of Maracay, Venezuela, a fabricator of automotive
glass and parts. From 1977 until 1991, Mr. Harris was employed by Safelite Glass
Corporation.
Michael A. Sumsky has been Diamond's Executive Vice President, Chief
Financial Officer and General Counsel since joining Diamond in 1995. Prior to
joining Diamond, Mr. Sumsky was the co-founder of a distributorship of seasonal
gift electronics and other consumer products since 1991. Mr. Sumsky was employed
by Emerson Radio Corporation in various financial and legal capacities from 1986
to 1989 and from 1990 to 1991. From 1989 to 1990, Mr. Sumsky was an associate at
Parker, Duryee, Rosoff & Haft, a New York City law firm.
Gregory J. Annick has been a Director of Diamond since March 1998. Mr.
Annick has been an executive officer of LGP, a merchant banking firm that
manages Green Equity Investors II, L.P., since the formation of LGP and Green
Equity Investors II, L.P. in 1994. Mr. Annick joined a merchant-banking firm
affiliated with LGP as an associate in 1989, became a principal in 1993, and
through a corporation became a partner in 1994. From 1988 to 1989, Mr. Annick
was an associate with the merchant banking firm of Gibbons, Green, van
Amerongen. Prior thereto, Mr. Annick was a financial analyst in mergers and
acquisitions with Goldman, Sachs & Co. Mr. Annick is also a director of several
private companies.
John G. Danhakl has been a Director of Diamond since March 1998. Mr.
Danhakl has been an executive officer of LGP since 1995. Mr. Danhakl had
previously been a Managing Director at Donaldson, Lufkin & Jenrette Securities
Corporation ( "DLJ ") and had been with DLJ since 1990. Prior to joining DLJ,
Mr. Danhakl was a Vice President at Drexel Burnham Lambert Incorporated
("Drexel"). Mr. Danhakl is also a director of Twinlab Corporation, The Arden
Group, Inc. and several private companies.
Jonathan D. Sokoloff has been a Director of Diamond since March 1998.
Mr. Sokoloff has been an executive officer of LGP since its formation in 1994.
Since 1990, Mr. Sokoloff had been a partner at a merchant-banking firm
affiliated with LGP. Mr. Sokoloff had previously been a Managing Director at
Drexel. Mr. Sokoloff is also a director of Twinlab Corporation, Gart Sports
Company, Rite Aid Corporation and several private companies.
-22-
<PAGE>
Except for Messrs. Levine and Rutta, who are first cousins, no family
relationship exists between any of Diamond's officers or directors.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
Summary Compensation Table. The following table provides information
about the compensation paid by Diamond to its Co-Chief Executive Officers and
its two other executive officers during the fiscal years ended December 31,
1997, 1998 and 1999. The Co-Chief Executive Officers and the two other executive
officers of Diamond are collectively referred to as the "Named Executive
Officers."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation Awards
-------------------------------------------------------------------------------
Other Securities All
Annual Underlying Other
Name and Principal Position Salary ($) Compensation Options/ Compensation
Year Bonus ($) ($) SARs (#) ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Levine 1999 $300,000 - - - $3,168 (3)
Co-Chairman of the Board 1998 $249,331 $85,386 (1) - - $3,168 (3)
and Co-Chief Executive Officer 1997 $106,000 - (2) - $3,168 (3)
- -----------------------------------------------------------------------------------------------------------------------
Richard Rutta 1999 $300,000 - - - $3,168 (3)
Co-Chairman of the Board 1998 $249,331 $85,386 (1) - - $3,168 (3)
and Co-Chief Executive Officer 1997 $106,000 - (2) - $3,168 (3)
- -----------------------------------------------------------------------------------------------------------------------
Norman Harris 1999 $275,000 - - - $3,168 (3)
President 1998 $256,962 $70,016 (1) - 450 $3,168 (3)
1997 $212,000 - (2) - $2,721 (3)
- -----------------------------------------------------------------------------------------------------------------------
Michael A. Sumsky 1999 $250,000 - - - $2,711 (3)
Executive Vice President, 1998 $221,893 $70,016 (1) - 450 $2,324 (3)
Chief Financial Officer and 1997 $148,400 - (2) - $2,182 (3)
General Counsel
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
(1) This bonus was earned in the year indicated, but paid in the
immediately subsequent year.
(2) During 1997, Diamond accrued an aggregate of $5.0 million in
non-recurring executive compensation for the Named Executive
Officers, which was paid in 1998.
(3) Represents Diamond's net contribution on behalf of the Named
Executive Officer to Diamond's 401(k) Profit Sharing Plan.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values. The following table provides information regarding the exercise
price of stock options during the fiscal year ended December 31, 1999 for each
of Diamond's Named Executive Officers and the year-end value of unexercised
options held by the Named Executive Officers.
-23-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options/SARs at
Options/SARs at Fiscal Year-End ($)
Shares Acquired on Fiscal Year-End (#) Exercisable/
Name Exercise (#) Value Realized ($) Exercisable/ Unexercisable
Unexercisable
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kenneth Levine N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------
Richard Rutta N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------
Norman Harris - - 0/450 0/0
- --------------------------------------------------------------------------------------------------------------------
Michael A. Sumsky - - 0/450 0/0
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Committees of the Board of Directors
There are no committees of the Board of Directors.
Compensation of Directors
Diamond's officers, as well as Messrs. Annick, Danhakl and Sokoloff, do
not receive any compensation directly for their service on Diamond's Board of
Directors. Diamond has agreed, however, to pay LGP certain fees for various
management, consulting and financial planning services, including assistance in
strategic planning, providing market and financial analyses, negotiating and
structuring financing and exploring expansion opportunities. See "Certain
Relationships and Related Transactions."
Stock Option Plan
In September 1998, Diamond's Board of Directors and stockholders
approved and adopted the Diamond Triumph Auto Glass, Inc. 1998 Management Stock
Option Plan (the "1998 Plan"). The purpose of the 1998 Plan is to provide key
employees of Diamond and its subsidiaries with an incentive to remain in the
service of Diamond or its subsidiaries, to enhance Diamond's long-term
performance and to afford key employees the opportunity to acquire a proprietary
interest in Diamond. Currently, the 1998 Plan is administered by Diamond's Board
of Directors. An aggregate of 30,000 shares of Common Stock are authorized for
issuance under the 1998 Plan. As of December 31, 1999, the Board of Directors
had granted options to purchase a total of 27,175 shares of Common Stock under
the 1998 Plan. These options vest in five equal annual installments, commencing
on the first anniversary of the date of grant. Vested options may not be
exercised until the earlier of: (1) 90 days after Diamond's Common Stock has
become publicly traded and (2) 91 days prior to the tenth anniversary of the
date of grant. The 1998 Plan expires in September 2008.
Employment Agreements
On March 31, 1998, Diamond entered into employment agreements with each
of Kenneth Levine and Richard Rutta pursuant to which they each agreed to serve
as the Co-Chairmen of the Board and Co-Chief Executive Officers of Diamond. Each
of the agreements with Messrs. Levine and Rutta provide for the following:
(1) An initial term of five years beginning on March 31, 1998 and
ending on March 31, 2003.
(2) An annual base salary of $300,000, subject to annual review
based on Diamond's and the executive's performance. In
addition, for each calendar year beginning on January 1, 1998,
each executive is entitled to receive an annual bonus equal to
a percentage of Diamond's EBITDA in excess of specified
thresholds, not to exceed $450,000.
(3) In the event the executive is terminated by Diamond for cause
(as defined in the employment agreement) or in the event the
executive resigns, Diamond will pay the executive the
executive's base salary through the date of termination.
-24-
<PAGE>
(4) In the event the executive is terminated due to death or
disability (as defined in the employment agreement), the
executive will receive:
o his base salary for a period of 12 months (but in no
event beyond March 31, 2003); and
o the amount of any bonus payable through the date of
termination.
(5) In the event the executive is terminated by Diamond for any
other reason than as provided in clauses (3) and (4) above,
the executive will receive:
o his base salary through the date of termination;
o the amount of any bonus payable through the date of
termination; and
o in lieu of any further compensation, severance pay equal
to the base salary that the executive would have
otherwise received during the period beginning on the
date of termination and ending on the earlier of (1) the
scheduled termination date of executive's employment
period under the employment agreement and (2) such time
as the executive obtains other permanent employment.
(6) Customary non-competition and non-solicitation provisions,
which provisions survive for one year after the termination of
the executive's employment, and customary non-disclosure and
assignment of inventions provisions.
On March 31, 1998, Diamond entered into an employment agreement with
Norman Harris pursuant to which Mr. Harris agreed to serve as the President of
Diamond at an annual salary of $275,000, subject to annual review based on
Diamond's and the executive's performance. On March 31, 1998, Diamond also
entered into an employment agreement with Michael A. Sumsky pursuant to which
Mr. Sumsky agreed to serve as the Executive Vice President, Chief Financial
Officer and General Counsel of Diamond at an annual salary of $250,000, subject
to annual review based on Diamond's and the executive's performance. Each of the
agreements with Messrs. Harris and Sumsky also provide for the following:
(1) An initial term of three years beginning on March 31, 1998 and
ending on March 31, 2001.
(2) In addition to his base salary, for each calendar year
beginning on January 1, 1998, each executive is entitled to
receive an annual bonus equal to a percentage of Diamond's
EBITDA in excess of specified thresholds, not to exceed
$375,000.
(3) In the event the executive is terminated by Diamond for cause
(as defined in the employment agreement) or in the event the
executive resigns, Diamond will pay the executive the
executive's base salary through the date of termination.
(4) In the event the executive is terminated due to death or
disability (as defined in the employment agreement), the
executive will receive:
o his base salary for a period of 12 months (but in no
event beyond March 31, 2001); and
o the amount of any bonus payable through the date of
termination.
(5) In the event the executive is terminated by Diamond for any
other reason than as provided in clauses (3) and (4) above,
the executive will receive:
o his base salary through the date of termination;
o the amount of any bonus payable through the date of
termination; and
-25-
<PAGE>
o in lieu of any further compensation, severance pay equal
to the base salary that the executive would have
otherwise received during the period beginning on the
date of termination and ending on the earlier of (1) the
scheduled termination date of executive's employment
period under the employment agreement and (2) such time
as the executive obtains other permanent employment for
compensation in an amount reasonably comparable to his
base salary with Diamond.
(6) Customary non-competition, non-solicitation provisions,
non-disclosure and assignment of inventions provisions.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information regarding the beneficial
ownership of Diamond's Common Stock and Series A 12% Senior Redeemable
Cumulative Preferred Stock (referred to in the table as the "Series A Preferred
Stock"), as of March 30, 2000, by (1) each person known by Diamond to be the
beneficial owner of more than 5% of the Common Stock, (2) each director, (3)
Diamond's Named Executive Officers, and (4) all of Diamond's executive officers
and directors as a group. Except as indicated in the footnotes to this table,
Diamond believes that the persons named in this table have sole voting and
investment power with respect to all of the shares of Common Stock and Series A
Preferred Stock indicated.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Common Stock Series A Preferred Stock
Beneficially Owned Beneficially Owned
Number of Percentage of Number of Percentage of
Name Shares Class Shares Class
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Green Equity Investors II, L.P. (1) 770,000 77.0% 28,000 80.0%
- ----------------------------------------------------------------------------------------------------------------------
Gregory J. Annick (1)(2) 770,000 77.0% 28,000 80.0%
- ----------------------------------------------------------------------------------------------------------------------
John G. Danhakl (1)(2) 770,000 77.0% 28,000 80.0%
- ----------------------------------------------------------------------------------------------------------------------
Jonathan D. Sokoloff (1)(2) 770,000 77.0% 28,000 80.0%
- ----------------------------------------------------------------------------------------------------------------------
Kenneth Levine 100,000 10.0% 3,500 10.0%
- ----------------------------------------------------------------------------------------------------------------------
Richard Rutta 100,000 10.0% 3,500 10.0%
- ----------------------------------------------------------------------------------------------------------------------
Norman Harris 15,000 1.5% - -
- ----------------------------------------------------------------------------------------------------------------------
Michael Sumsky 15,000 1.5% - -
- ----------------------------------------------------------------------------------------------------------------------
All directors and executive officers 1,000,000 100.0% 35,000 100.00%
as a group
(7 persons)(3)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The address of Green Equity Investors II, L.P. and Messrs. Annick,
Danhakl and Sokoloff is 11111 Santa Monica Boulevard, Suite 2000, Los
Angeles, California 90025.
(2) The shares shown as beneficially owned by Messrs. Annick, Danhakl and
Sokoloff represent the 770,000 shares of Common Stock and the 28,000
shares of Series A Preferred Stock owned of record by Green Equity
Investors II, L.P. Green Equity Investors II, L.P. is a Delaware
limited partnership managed by LGP, which is an affiliate of the
general partner of Green Equity Investors II, L.P. Each of Leonard I.
Green, Jonathan D. Sokoloff, John G. Danhakl, Peter J. Nolan and
Gregory J. Annick, either directly (whether through ownership interest
or position) or through one or more intermediaries, may be deemed to
control LGP and such general partner. LGP and such general partner may
be deemed to control the voting and disposition of the shares of Common
Stock owned by Green Equity Investors II, L.P. As such, Messrs. Annick,
Danhakl and Sokoloff may be deemed to have shared voting and investment
power with respect to all shares held by Green Equity Investors II,
L.P. However, such individuals disclaim beneficial ownership of the
securities held by Green Equity Investors II, L.P., except to the
extent of their respective pecuniary interests therein.
(3) Includes the shares referred to in Note 2 above.
-26-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Services Agreement
In connection with the Recapitalization, Diamond entered into a
Management Services Agreement with LGP pursuant to which LGP receives an annual
management fee of $685,000. This fee is subordinated in right of payment to the
Notes. The Management Services Agreement also provides that LGP may receive
reasonable and customary fees and reasonable expenses from time to time for
providing financing, advisory and investment banking services to Diamond in
connection with major financial transactions. See "Business - Recapitalization".
Lease
Kenneth Levine and Richard Rutta are the sole partners of a partnership
which leases to Diamond, on an arm's length basis, Diamond's headquarters and
distribution facility in Kingston, Pennsylvania and 18 service center locations.
Following the Recapitalization, at Diamond's request, Kenneth Levine and Richard
Rutta caused the partnership to renew or extend the leases on the facilities
through December 31, 2010, on terms substantially similar to those applicable to
those facilities on January 15, 1998, provided that the monthly rental amounts
increase 4.0% each calendar year beginning January 1, 1999. Rental payments to
the partnership for the facilities aggregated $513,000, $535,000 and $556,000 in
1997, 1998 and 1999, respectively.
Stockholders Agreement
On March 31, 1998, Green Equity Investors II, L.P., Kenneth Levine,
Richard Rutta and Diamond entered into a Stockholders Agreement. The
Stockholders Agreement generally restricts the transferability of shares of
Common Stock held by Kenneth Levine and Richard Rutta. The Stockholders
Agreement also establishes a right of first refusal in favor of Green Equity
Investors II, L.P. or Diamond in the event Kenneth Levine or Richard Rutta seek
to transfer any of their shares of Common Stock to a third party pursuant to a
bona fide offer. In addition, Green Equity Investors II, L.P. has certain
"drag-along" rights and certain sales of Common Stock by Green Equity Investors
II, L.P. are subject to "tag-along" rights of Kenneth Levine and Richard Rutta
to participate in those sales. The Stockholders Agreement also grants demand
registration rights to Green Equity Investors II, L.P. and piggyback
registration rights to Green Equity Investors II, L.P., Kenneth Levine and
Richard Rutta
Pursuant to the Stockholders Agreement, Green Equity Investors II,
L.P., Kenneth Levine and Richard Rutta have agreed to vote their shares of
Common Stock in favor of the election of each of Kenneth Levine and Richard
Rutta as a director of Diamond so long as they are executive officers of
Diamond.
Subject to early termination of the provisions described above (other
than those relating to registration rights) at the time, if any, as the Common
Stock is publicly held, the Stockholders Agreement terminates on the tenth
anniversary of the date thereof.
Management Share Agreements
On March 31, 1998, Diamond and Green Equity Investors II, L.P. entered
into Management Subscription and Stockholders Agreements with each of Norman
Harris and Michael A. Sumsky, which are collectively referred to as the
"Management Share Agreements." Pursuant to the Management Share Agreements, the
shares of Common Stock purchased by Messrs. Harris and Sumsky in the
transactions related to the Recapitalization are subject to various transfer
restrictions and purchase rights. The Management Share Agreements also contain
certain "piggyback," registration rights, "tag-along" sale rights, "drag-along"
sale obligations and a right of first refusal in favor of Green Equity Investors
II, L.P. or Diamond in the event Messrs. Harris or Sumsky seek to transfer their
shares of Common Stock to a third party pursuant to a bona fide offer.
-27-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) (1) All financial statements of Diamond for the year ended
December 31, 1999 are filed herewith. See Item 8 of this
Report for a list of such financial statements.
(2) All financial statement schedules have been omitted as the
required information is inapplicable or has been included in
the financial statements and notes thereto.
(3) Exhibits - See response to paragraph (c) below.
(b) Reports on Form 8-K.
Not applicable.
(c) Exhibits.
Exhibit
Number Description
------ -----------
2.1 (1) Second Amended and Restated Stock Purchase and Sale Agreement,
dated as of January 15, 1998, by and among, VGMC Corp., Green
Equity Investors II, L.P., Diamond Triumph Auto Glass, Inc.,
Triumph Auto Glass, Inc., Diamond Auto Glass Works, Inc., A
Above Average Glass Company by Diamond, inc., A-AA Triumph Auto
Glass, Inc., Scranton Holdings, Inc., Diamond/Triumph Auto
Export Sales Co. Inc., A-Auto Glass by Triumph, Inc., A-Auto
Glass Company by Diamond, Inc. and Kenneth Levine and Richard
Rutta.
3.1 (1) Amended and Restated Certification of Incorporation of Diamond
Triumph Auto Glass, Inc.
3.2 (1) Certificate of Designations of Series A 12% Senior Redeemable
Cumulative Preferred Stock of Diamond Triumph Auto Glass, Inc.
3.3 (1) Certificate of Amendment of Certificate of Incorporation of
Diamond Triumph Auto Glass, Inc., dated April 28, 1998.
3.4 (1) Certificate of Amendment of Certificate of Incorporation of
Diamond Triumph Auto Glass, Inc., dated September 15, 1998.
3.5 (1) By-laws of Diamond Triumph Auto Glass, Inc.
4.1 (1) Indenture, dated as of March 31, 1998, between Diamond Triumph
Auto Glass, Inc., as Issuer, and State Street Bank and Trust
Company, as Trustee, regarding the 91/4% Senior Notes Due 2008.
4.2 (1) Registration Rights Agreement, dated as of March 31, 1998,
among Diamond Triumph Auto Glass, Inc., First Union Capital
Markets, a division of Wheat First Securities, Inc., BT Alex.
Brown Incorporated and Donaldson, Lufkin & Jenrette Securities
Corporation.
4.3 (1) Note Purchase Agreement, dated March 26, 1998, among Diamond
Triumph Auto Glass, Inc., First Union Capital Markets, a
division of Wheat First Securities, Inc., BT Alex. Brown
Incorporated and Donaldson, Lufkin & Jenrette Securities
Corporation.
10.1 (1) Management Subscription and Stockholders Agreement, dated as of
March 31, 1998, among Diamond Triumph Auto Glass, Inc., Green
Equity Investors II, L.P. and Norman Harris.
10.2 (1) Management Subscription and Stockholders Agreement, dated as of
March 31, 1998, among Diamond Triumph Auto Glass, Inc., Green
Equity Investors II, L.P. and Michael Sumsky.
-28-
<PAGE>
Exhibit
Number Description
------ -----------
10.3 (1) Stockholders Agreement, dated as of March 31, 1998, among Green
Equity Investors II, L.P., Kenneth Levine, Richard Rutta and
Diamond Triumph Auto Glass, Inc.
10.4 (1) Employment Agreement, dated as of March 31, 1998, between
Diamond Triumph Auto Glass, Inc. and Kenneth Levine.
10.5 (1) Employment Agreement, dated as of March 31, 1998, between
Diamond Triumph Auto Glass, Inc. and Richard Rutta.
10.6 (1) Employment Agreement, dated as of March 31, 1998, between
Diamond Triumph Auto Glass, Inc. and Norman Harris.
10.7 (1) Employment Agreement, dated as of March 31, 1998, between
Diamond Triumph Auto Glass, Inc. and Michael Sumsky.
10.8 (1) Non-Competition Agreement, dated March 31, 1998, between
Kenneth Levine and Diamond Triumph Auto Glass, Inc.
10.9 (1) Non-Competition Agreement, dated March 31, 1998, between
Richard Rutta and Diamond Triumph Auto Glass, Inc.
10.10 (1) Management Services Agreement, dated as of March 31, 1998,
between Diamond Triumph Auto Glass, Inc. and Leonard Green &
Partners, L.P.
10.11 (2) Finance Agreement, dated March 27, 2000, between The CIT
Business Group/Business Credit, Inc. and Diamond Triumph Auto
Glass, Inc.
10.12 (1) Diamond Triumph Auto Glass, Inc. 1998 Management Stock Option
Plan.
27 (2) Financial Data Schedule.
(1) Incorporated by reference to Diamond's Registration Statement on Form
S-4 filed with the SEC on March 30, 2000.
(2) Filed herewith.
-29-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIAMOND TRIUMPH AUTO GLASS, INC.
By: /s/ Kenneth Levine
---------------------------------
Name: Kenneth Levine
Title: Co-Chief Executive Officer
Date: April 11, 2000
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title(s) Date
--------- -------- ----
/s/ Kenneth Levine Co-Chairman of the Board, April 11, 2000
- ------------------------------- Co-Chief Executive
Kenneth Levine Officer and Director
/s/ Richard Rutta Co-Chairman of the Board, April 11, 2000
- ------------------------------- Co-Chief Executive
Richard Rutta Officer and Director
/s/ Michael A. Sumsky Executive Vice President, April 11, 2000
- ------------------------------- Chief Financial Officer
Michael A. Sumsky and General Counsel
/s/ Norman Harris President April 11, 2000
- -------------------------------
Norman Harris
/s/ Gregory J. Annick Director April 11, 2000
- -------------------------------
Gregory J. Annick
/s/ John G. Danhakl Director April 11, 2000
- -------------------------------
John G. Danhakl
/s/ Jonathan D. Sokoloff Director April 11, 2000
- -------------------------------
Jonathan D. Sokoloff
-30-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report........................................... F-2
Balance Sheets, December 31, 1999 and 1998............................. F-3
Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997.................................. F-5
Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1999, 1998 and 1997...................... F-6
Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.................................. F-7
Notes to Financial Statements.......................................... F-8
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Diamond Triumph Auto Glass, Inc.:
We have audited the accompanying balance sheets of Diamond Triumph Auto Glass,
Inc. as of December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the three
year period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Diamond Triumph Auto Glass,
Inc. as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the years in the three year period ended December 31,
1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Allentown, Pennsylvania
February 22, 2000, except for Note 12 which is as of March 27, 2000
F-2
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Balance Sheets
December 31, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Assets 1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 94 301
Accounts receivable, less allowance for doubtful accounts
of $956 and $800 for 1999 and 1998 respectively 10,895 12,727
Other receivables 189 1,610
Inventories 12,620 11,264
Prepaid expenses 962 841
Deferred income taxes 3,081 2,826
-------- --------
Total current assets 27,841 29,569
-------- --------
Equipment and leasehold improvements:
Vehicles 10,289 11,040
Computers and office equipment 3,173 2,667
Computer software 3,901 2,566
Other equipment 524 488
Leasehold improvements 140 123
-------- --------
18,027 16,884
Accumulated depreciation and amortization (10,334) (8,906)
-------- --------
Net equipment and leasehold improvements 7,693 7,978
Deferred loan costs and senior notes discount, net 7,502 8,152
Deferred income taxes 44,082 44,619
Other assets 401 374
-------- --------
Total assets $ 87,519 90,692
======== ========
</TABLE>
F-3
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Balance Sheets
December 31, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity (Deficit) 1999 1998
--------- ---------
<S> <C> <C>
Current liabilities:
Accounts payable $ 7,950 9,586
Accrued expenses
Payroll and related items 3,314 3,166
Accrued interest 2,363 2,326
Accrued income taxes 1,216 1,955
Other 362 354
--------- ---------
Total accrued expenses 7,255 7,801
--------- ---------
Total current liabilities 15,205 17,387
--------- ---------
Long-term debt:
Bank facility 7,500 8,500
Senior notes 100,000 100,000
--------- ---------
Total long-term debt 107,500 108,500
--------- ---------
Total liabilities 122,705 125,887
--------- ---------
Series A 12% senior redeemable cumulative preferred stock - par
value $0.01 per share; authorized 100,000 shares; issued and
outstanding 35,000 in 1999 and 1998, at liquidation preference value 43,046 38,246
--------- ---------
Stockholders' equity (deficit):
Common stock, 1999 and 1998- par value $0.01 per share; authorized
1,100,000 shares; issued and outstanding 1,000,000 shares 10 10
Additional paid-in capital 52,747 57,547
Retained earnings (accumulated deficit) (130,989) (130,998)
--------- ---------
Total stockholders' equity (deficit) (78,232) (73,441)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 87,519 90,692
========= =========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Statements of Operations
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 164,520 149,609 122,005
Cost of sales 51,456 43,851 36,702
--------- --------- ---------
Gross profit 113,064 105,758 85,303
--------- --------- ---------
Operating expenses:
Payroll 61,434 54,377 47,653
Advertising and promotional 10,349 9,499 7,360
Other operating expenses 27,516 23,478 17,445
Depreciation and amortization 2,595 2,410 2,238
--------- --------- ---------
101,894 89,764 74,696
--------- --------- ---------
Income from operations 11,170 15,994 10,607
Other (income) expense:
Interest income (31) (120) (184)
Interest expense 11,054 8,162 --
--------- --------- ---------
11,023 8,042 (184)
--------- --------- ---------
Income before provision for income taxes 147 7,952 10,791
Provision for income taxes 138 (37) --
--------- --------- ---------
Net income 9 7,989 10,791
Preferred stock dividends 4,800 3,246 --
--------- --------- ---------
Net (loss) income applicable to common stockholders $ (4,791) 4,743 10,791
========= ========= =========
Historical income before provision for income taxes $ 7,952 10,791
Pro forma provision for taxes 3,181 4,316
--------- ---------
Pro forma net income 4,771 6,475
Preferred stock dividends 3,246 --
--------- ---------
Pro forma net income applicable to common stockholders $ 1,525 6,475
========= =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION> Retained
Common stock Additional earnings
------------------------ paid-in (accumulated
Shares Amount capital deficit) Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 2,300 4 -- 24,290 24,294
Issuance of common stock -- -- -- -- --
Net income -- -- -- 10,791 10,791
Distributions to stockholders -- -- -- (11,800) (11,800)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 2,300 4 -- 23,281 23,285
Net income -- -- -- 7,989 7,989
Distributions to stockholders -- -- -- (11,597) (11,597)
Reclassification of common stock 698,500 6 -- (6) --
Common stock issued as stock
purchase shares 6,950,000 69 -- (69) --
Sale of common stock 800,000 8 15,992 -- 16,000
Redemption of stockholders'
common stock and
recapitalization followed by
cancellation of treasury stock
including income tax effects (7,450,800) (77) 44,801 (150,596) (105,872)
Preferred stock dividends -- -- (3,246) -- (3,246)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 1,000,000 10 57,547 (130,998) (73,441)
Net income -- -- -- 9 9
Preferred stock dividends -- -- (4,800) -- (4,800)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 1,000,000 $ 10 52,747 (130,989) (78,232)
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9 7,989 10,791
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and other amortization 2,595 2,410 2,238
Amortization of deferred loan costs and senior notes discount 882 661 --
Provision for doubtful accounts 1,341 1,063 662
(Gain) on sale of fixed assets (32) (40) (2)
Changes in assets and liabilities:
Decrease (increase) in accounts and other receivables 1,912 (5,586) (4,824)
(Increase) decrease in inventories (1,356) (3,027) 886
(Increase) decrease in prepaid expenses (121) 363 (207)
(Decrease) increase in accounts payable (1,635) 3,655 911
(Decrease) increase in accrued expenses (546) (2,339) 5,290
Increase in deferred income taxes 282 25 --
-------- -------- --------
Total adjustments 3,322 (2,815) 4,954
-------- -------- --------
Net cash provided by operating activities 3,331 5,174 15,745
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (2,371) (2,529) (2,373)
Proceeds from sale of equipment 92 186 105
(Increase) decrease in other assets (27) (69) 83
Due from (to) related company -- 2,866 (898)
-------- -------- --------
Net cash (used in) provided by investing activities (2,306) 454 (3,083)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of senior notes -- 97,000 --
Net proceeds from bank facility 26,000 18,500 --
Proceeds from issuance of preferred stock -- 28,000 --
Distributions to stockholders, net -- (4,597) (11,800)
Payments on bank facility (27,000) (10,000) --
Issuance of common stock -- 16,000 --
Deferred loan costs (232) (5,813) --
Repurchase of common stock -- (150,672) --
-------- -------- --------
Net cash used in financing activities (1,232) (11,582) (11,800)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (207) (5,954) 862
Cash and cash equivalents, beginning of year 301 6,255 5,393
-------- -------- --------
Cash and cash equivalents, end of year $ 94 301 6,255
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
(1) Description of Entity, Basis of Presentation and Recapitalization
Prior to March 31, 1998, Diamond Triumph Auto Glass, Inc. (formerly Diamond
Auto Glass Works, Inc. and affiliates) included Diamond Auto Glass Works,
Inc., Triumph Auto Glass, Inc., Triumph Auto Glass of Ohio, Inc., A Above
Average Auto Glass Company by Diamond, Inc., A-AA Triumph Auto Glass, Inc.,
and Scranton Holding Co., all of which were owned equally by two
stockholders. All significant intercompany balances and transactions were
eliminated in combination prior to March 31, 1998.
The Company, Kenneth Levine and Richard Rutta (together, the "Company
Principals"), Green Equity Investors II, L.P. ("GEI"), and certain
affiliated entities of the Company (the "Affiliated Companies") entered
into a Second Amended and Restated Stock Purchase and Sale Agreement, dated
as of January 15, 1998 and which was consummated on March 31, 1998,
pursuant to which, among other things, (a) the Company declared and paid a
dividend of 3,500 shares ($3,500) of Preferred Stock, to each of the
Company Principals, equal to 10.0% of the Preferred Stock to be outstanding
following the Recapitalization (as hereinafter defined); (b) the Company
Principals transferred all of the issued and outstanding shares of each of
the Affiliated Companies to Diamond and as consideration for such transfers
Diamond issued 6,950,000 shares of Common Stock (the "Stock Purchase
Shares") to the Company Principals; (c) certain Affiliated Companies merged
with and into the Company (the "Merger"); (d) GEI purchased (i)
approximately 770,000 shares of Common Stock, equal to 77.0% of the Common
Stock outstanding following the Recapitalization, for aggregate
consideration of $15,400, and (ii) 28,000 shares of Preferred Stock, equal
to 80.0% of the Preferred Stock outstanding following the Recapitalization,
for aggregate consideration of $28,000; (e) certain members of the
Company's management purchased 30,000 shares of Common Stock, equal to 3.0%
of the Common Stock outstanding following the Recapitalization, for
aggregate consideration of $600; and (f) the Company redeemed from the
Company Principals all of the Stock Purchase Shares and other shares of
Common Stock owned by them (other than 100,000 shares owned by each of
them) for cash, resulting in each of the Company Principals owning 10.0% of
the Common Stock to be outstanding following the Recapitalization.
Concurrently, with the consummation of the transactions set forth in
clauses (a) through (f) above (the "Recapitalization"), the Company issued
$100,000 in aggregate principal amount of senior notes in a private
placement (the "Note Offering") and entered into a five year $35,000
revolving credit facility (the "Old Bank Facility") with a syndicate of
financial institutions, of which $12,500 was borrowed in connection with
the Recapitalization.
On March 27, 2000, the Company replaced the Old Bank Facility with a new
revolving credit facility (the "Credit Facility") (See Note 12 - Subsequent
Event).
The Company, headquartered in Kingston, Pennsylvania, is a provider of
automotive glass replacement and repair services in the Northeast,
Mid-Atlantic, Midwest, Southwest and Southeast regions of the United
States. At December 31, 1999, the Company operated a network of 226 service
centers and four distribution centers in 39 states.
F-8
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Investments with original maturities of three months or less are
considered cash equivalents.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the rolling average method with costs incurred on a
first-in, first-out basis.
(c) Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost.
Depreciation and amortization is calculated using the straight-line
method over the following useful lives:
Vehicles 5 years
Computers and office equipment 5-7 years
Computer software 3-5 years
Other equipment 5 years
Leasehold improvements 39 years
Costs in 1999 and 1998 related to the development of software for a
new back office sales audit and financial accounting system and point
of sale system were capitalized. Upon completion of each of the
projects in 1999 and 1998, the Company commenced amortizing the
software costs over the estimated useful life of five years.
Unamortized computer software costs were $3,218 and $2,503 at December
31, 1999 and 1998, respectively. Amortization expense in 1999 and 1998
for capitalized computer software costs was $620 and $61,
respectively.
(d) Income Taxes
Effective March 31, 1998, the date of conversion from S Corporation
status to C Corporation status, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes, and has reported the effect of recognizing deferred tax assets
and liabilities in income tax expense in the 1998 statement of
operations.
Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date of any change.
F-9
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
(e) Deferred Loan Costs and Senior Notes Discount
Deferred loan costs and senior notes discount are amortized over
the life of the related debt and included in interest expense. Costs
and accumulated amortization are summarized as follows:
Accumulated
December 31, 1999 Amount Amortization Balance
----------------- ------ ------------ -------
Deferred loan costs $ 6,013 1,017 4,996
Discount on senior notes 3,000 525 2,475
-------- -------- --------
$ 9,013 1,542 7,471
======== ======== ========
December 31, 1998
-----------------
Deferred loan costs $ 5,813 436 5,377
Discount on senior notes 3,000 225 2,775
-------- -------- --------
$ 8,813 661 8,152
======== ======== ========
(f) Revenue Recognition
Revenue from auto glass installation and related services is
recognized when the installation is complete or the service is
performed.
(g) Advertising
The Company expenses all advertising costs as incurred. The costs of
yellow pages advertising are expensed at the time the yellow pages
phone book is published. Total advertising expense was $8,150, $7,444
and $5,902 in 1999, 1998 and 1997, respectively.
(h) Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting For the Impairment of
Long-lived Assets and For Long-lived Assets to Be Disposed Of". Under
the provisions of this statement, the Company has evaluated its
long-lived assets for financial impairment, and will continue to
evaluate them as events or changes in circumstances indicate that the
carrying amount of such assets may not be fully recoverable.
(i) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-10
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
(3) Fair Value of Financial Instruments
For purposes of estimating the fair value of financial instruments, the
Company has determined that the carrying amounts recorded on the balance
sheet approximate the fair value for cash and cash equivalents, accounts
and other receivables and current liabilities. In making this
determination, the Company considered the short-term maturity of those
assets and liabilities. The carrying amount of the Company's Old Bank
Facility approximates fair value based on borrowing rates available to the
Company for loans with similar terms. On March 27, 2000, the Company
replaced the Old Bank Facility with the new Credit Facility (See Note 12 -
Subsequent Event). The fair value of the Company's Senior Notes is
estimated based on quoted market prices for those or similar investments.
The estimated fair value of the Corporation's Senior Notes is $70,000 and
$100,000 at December 31, 1999 and 1998, respectively. The fair value of the
Company's Series A 12% Senior Redeemable Cumulative Preferred Stock
approximates the liquidation preference.
(4) Long -Term Debt
Long-term debt consists of the following:
1999 1998
-------- --------
Bank facility $ 7,500 8,500
Senior notes 100,000 100,000
-------- --------
Total $107,500 108,500
======== ========
The Old Bank Facility was scheduled to expire on April 1, 2003 and provided
for borrowings of up to $35,000. Borrowings under the Old Bank Facility
bore interest, at the Company's discretion, at either the Base Rate, as
defined, or at the Eurodollar Rate, plus a margin of 1.50% for the Base
Rate and 2.50% for the Eurodollar Rate from August 13, 1999. Prior to
August 13, 1999, borrowings under the Old Bank Facility bore interest, at
the Company's discretion, at either the Base Rate, as defined, or at the
Eurodollar Rate, plus a margin of 1.00% for the Base Rate and 2.00% for the
Eurodollar Rate. In addition, a commitment fee of 0.375% was charged
against any unused balance of the Old Bank Facility. The effective interest
rate on borrowings under the Old Bank Facility ranged from 9.00% to 10.00%
as of December 31, 1999. Interest rates were subject to increases or
reductions based upon the Company meeting certain financial tests. The
proceeds of the Old Bank Facility were available for working capital
requirements and for general corporate purposes, including permitted
acquisitions. A portion of the Old Bank Facility not to exceed $5,000 was
available for the issuance of letters of credit, which generally have an
initial term of one year or less. The Company had $852 and $673 in
outstanding letters of credit at December 31, 1999 and 1998, respectively.
The Old Bank Facility was secured by first priority security interests in
all of the tangible and intangible assets of the Company. In addition, the
Old Bank Facility contained certain restrictive covenants including, among
other things, the maintenance of certain debt coverage ratios, as well as
restrictions on additional indebtedness, dividends and certain other
significant transactions. At December 31, 1999, the Company was not in
compliance with certain financial covenants of its Old Bank Facility and
received a waiver from its lenders. As previously described, the Company
replaced the Old Bank Facility with the new Credit Facility, which is the
basis for the classification of the debt as long-term debt.
F-11
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
The Senior Notes mature on April 1, 2008 and bear interest at a rate of
9.25% per annum. The Senior Notes and the obligations of the Company under
the indenture governing the Senior Notes (the "Note Indenture") are
unconditionally guaranteed on a senior, unsecured basis by any Subsidiary
Guarantor, of which there are currently none. The Senior Notes are callable
after five years at a premium to par which declines to par after eight
years. Upon a change of control, as defined, the Company is required to
offer to redeem the Senior Notes at 101% of the principal amount plus
accrued and unpaid interest. Restrictive covenants contained in the Note
Indenture include, among other things, limitations on additional
indebtedness, investments, dividends and certain other significant
transactions. The Company was in compliance with all such covenants as of
December 31, 1999.
Maturities of long-term debt are as follows:
2000 $ --
2001 --
2002 --
2003 --
2004 7,500
Thereafter 100,000
-----------
$ 107,500
===========
(5) Preferred Stock
On March 27, 1998, the Company's Board of Directors adopted a Certificate
of Designation creating $35,000 in Series A 12% Senior Redeemable
Cumulative Preferred Stock (the "Preferred Stock"). The Preferred Stock has
a liquidation preference over the Common Stock equal to the initial
liquidation value of the Preferred Stock plus accrued and unpaid dividends
thereon. The Preferred Stock will be subject to mandatory redemption on
April 1, 2010 at 100% of the liquidation value plus accrued and unpaid
dividends. The Company may, at its option, redeem at any time the Preferred
Stock, in whole or in part, at 100% of the liquidation value plus accrued
and unpaid dividends. Upon a Change of Control (as defined), the Company
must offer to repurchase the Preferred Stock at 100% of its liquidation
value plus accrued and unpaid dividends, provided, however, that the
Company shall not be obligated to (and shall not) offer to repurchase the
Preferred Stock if such repurchase would violate the terms of the new
Credit Facility or the terms of the Note Indenture.
F-12
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
The Preferred Stock bears cumulative quarterly dividends at a rate per
annum equal to 12.0% of the liquidation value. Dividends may, at the option
of the Company, be paid in cash or by adding to the then liquidation value
of the Preferred Stock an amount equal to the dividends then accrued and
payable. The terms of the Preferred Stock contain restrictions on
distributions and on purchases of junior securities. The Preferred Stock
has no voting rights with respect to general corporate matters except as
provided by law or for certain class voting rights in connection with the
issuance of senior or parity equity securities of the Company and any
amendments to the Company's Certificate of Incorporation that adversely
affect the rights of the Preferred Stock.
At December 31, 1999 and 1998 the liquidation value of the Preferred Stock
recorded on the Company's Balance Sheet was $43,046 and $38,246,
respectively, which includes dividends of $8,046 and $3,246, respectively,
added to the liquidation value.
(6) Commitments and Related Party Transactions
The Company leases service center and warehouse space and is responsible
for all related occupancy costs. Rental expense in 1999, 1998 and 1997
aggregated $4,419, $3,931 and $3,135, respectively, of which $556, $535 and
$513, respectively, were for realty owned by two stockholders and executive
officers. Certain of the leases with unrelated parties contain various
renewal options, and right of refusal purchase options.
In addition, the Company leases certain vehicles under operating leases
having lease terms of 367 days. The leases have renewal options for up to
eight years. Total rent expense for such leases amounted to $2,587, $1,808
and $539 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Total lease commitments, including vehicles, are as follows:
Third Related
parties parties Total
------------- --------------- --------------
2000 $ 5,764 562 6,326
2001 3,930 539 4,469
2002 2,368 561 2,929
2003 1,102 583 1,685
2004 333 606 939
The Company entered into a Management Services Agreement on March 31, 1998
with a related party pursuant to which the Company pays an annual fee of
$685. Expense under this agreement was $685 and $514 in 1999 and 1998,
respectively.
The Company has employment agreements with certain of its executive
officers (some of whom are also stockholders) which expire on March 31,
2001 and 2003.
F-13
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
(7) Stock Option Plan
In September 1998, the Board of Directors and stockholders of the Company
approved and adopted the Diamond Triumph Auto Glass 1998 Stock Option Plan
(the "1998 Plan"). The 1998 Plan provides for the issuance of a total of
30,000 authorized and unissued shares of common stock. In 1998, the Board
of Directors granted 27,175 options to key employees of the Company with an
exercise price of $20.00 per share, which approximates fair value at the
date of grant. No options were granted in 1999. The options vest evenly
over five years and may not be exercised until the earlier of (a) 90 days
after the Company's Common Stock has become publicly traded or (b) 91 days
prior to the tenth anniversary of the date of the grant. The 1998 Plan
expires in September 2008.
The Company applies APB Opinion No. 25 in accounting for the 1998 Plan and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined its stock options
under SFAS No. 123, the Company's net income would have been changed to the
pro forma amounts indicated below.
Years Ended December 31,
1999 1998
--------- ---------
Net income:
As reported $ 9 7,987
Pro forma (6) 7,985
The per share fair value of stock options granted during fiscal 1998 was
$2.84 on the date of grant and was determined using the Black-Scholes
option-pricing model based upon the following assumptions:
1998
-------
Expected dividend yield 0.00%
Expected volatility 0.00%
Risk-free rate 4.65%
Expected life (in years) 9.75
F-14
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
Summarized stock option data is as follows:
Exercise Shares
Price Under Option
---------- ------------
Outstanding at December 31, 1997 $ -- --
Granted 20.00 27,125
Exercised -- --
Cancelled -- --
--------
Outstanding at December 31, 1998 -- 27,125
Granted -- --
Exercised -- --
Cancelled -- (3,000)
--------
Outstanding at December 31, 1999 20.00 24,125
========
Exercisable $ -- --
(8) Income Taxes
Prior to the consummation of the Merger, all of the Affiliated Companies
were S Corporations and as such federal and state taxes were generally paid
at the stockholder level only. There was no provision for income taxes
through the consummation of the Merger on March 31, 1998.
As discussed in Note 2, the Company adopted SFAS No. 109 as of March 31,
1998. The effect of recognizing deferred tax assets and liabilities from
other than the Merger transaction as of March 31, 1998 was the recording of
net deferred tax assets of $1,643, reflected as a reduction in 1998 income
tax expense.
Upon consummation of the Merger, the Affiliated Companies terminated their
S Corporation status. The Merger of Diamond Auto Glass Works, Inc., Triumph
Auto Glass, Inc., A Above Average Auto Glass Company by Diamond, Inc., A-AA
Triumph Auto Glass, Inc., and Scranton Holding Co. into Diamond Triumph
Auto Glass, Inc. (formerly Triumph Auto Glass of Ohio, Inc.) was treated as
a taxable asset acquisition of the merged Affiliated Companies for Federal
and state income tax purposes and as a recapitalization for financial
accounting purposes. For Federal and state income tax purposes, the
purchase price was allocated among the various merged Affiliated Companies
and their respective assets and liabilities based on the respective fair
values as of the closing of the Merger. This resulted in different book and
tax asset bases for the assets of these companies, which resulted in
deferred tax assets of approximately $44,801 credited to additional paid-in
capital.
F-15
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
Income tax expense consists of:
Current Deferred Total
-------- -------- --------
Year ended December 31, 1999:
Federal $ -- 107 107
State (144) 175 31
-------- -------- --------
$ (144) 282 138
======== ======== ========
Current Deferred Total
-------- -------- --------
Year ended December 31, 1998:
Federal $ 161 (302) (141)
State 446 (342) 104
-------- -------- --------
$ 607 (644) (37)
======== ======== ========
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income as a result of the
following:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Computed "expected" tax expense $ 50 2,704
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal income tax benefit 21 68
Recognition of deferred tax due to change in tax status -- (1,643)
Pretax income applicable to portion of year as S Corporation
for which income taxes have not been provided -- (1,572)
Permanent items 67 173
Other, net -- 233
------ ------
$ 138 (37)
====== ======
</TABLE>
F-16
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred assets and deferred tax liabilities at December
31, 1999 and 1998 are presented below.
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 382 320
Inventories, principally due to additional
costs inventoried for tax 651 741
Intangibles 41,885 45,046
Prepaid Advertising expenses not yet
deducted for tax purposes 1,650 1,501
Net operating loss and alternative minimum
tax credit carryforward 3,130 83
Liabilities and accruals for financial reporting purposes 420 269
------- -------
Total gross deferred tax assets 48,118 47,960
------- -------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and capitalized interest 955 515
------- -------
Total gross deferred tax liabilities 955 515
------- -------
Net deferred tax assets $47,163 47,445
======= =======
</TABLE>
There was no valuation allowance for deferred tax assets as of December 31,
1999 or 1998, or March 31, 1999. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during periods in which those temporary
differences become deductible. Management considers the reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. In order to realize the deferred tax
assets, the Company will need to generate future taxable income of
approximately $115,000 prior to expiration of the 15-year amortization
period for the intangible assets in 2012 and the subsequent net operating
loss carryforward period of 20 years. Taxable income (loss) for the years
ended December 31, 1999, 1998 and 1997 was $(8,000), $4,500 and $9,000,
respectively. Based upon the level of historical taxable income and
projections of future taxable income over the period the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences. The
amount of the deferred tax assets considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
amortization period are reduced.
F-17
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
(9) Employee Benefit Plans
The Company has a defined contribution plan covering all employees who meet
the age and service requirements. Contributions to the plan are determined
by the Company and are based upon a percentage of the annual compensation
of all participants. The expense related to the plan amounted to $292,
$250 and $206 for 1999, 1998 and 1997, respectively.
(10) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest paid $10,090 5,175 --
Income taxes paid -- 202 --
======= ======= =======
Noncash investing and financing activities:
Preferred stock dividends $ 4,800 3,246 --
Deferred tax assets -- 44,801 --
Distribution of preferred stock -- 7,000 --
======= ======= =======
</TABLE>
(11) Legal Proceedings
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
(12) Subsequent Event
On March 27, 2000, the Company entered into the new Credit Facility. The
new Credit Facility has an initial term of four years and provides for
revolving advances of up to the lesser of: (1) $25,000; (2) the sum of 85%
of the Company's Eligible Accounts Receivable (as defined in the new Credit
Facility) plus 85% of the Company's Eligible Inventory (as defined in the
new Credit Facility), less certain reserves; or (3) an amount equal to 1.5
times the Company's EBITDA (as defined in the new Credit Facility) for the
prior twelve months. A portion of the new Credit Facility, not to exceed
$3,000, is available for the issuance of letters of credit. Borrowings
under the new Credit Facility bear interest, at the Company's discretion,
at either the Chase Manhattan Bank Rate (as defined in the new Credit
Facility) or LIBOR, plus a margin of 0.50% for the Chase Manhattan Rate and
2.25% for the LIBOR Rate. In addition, a commitment fee of 0.25% is charged
against any unused balance of the new Credit Facility. Interest rates are
subjected to increases or reductions based upon the Company meeting certain
EBITDA levels. The proceeds of the new Credit Facility are available for
working capital requirements and for general corporate purposes. The new
Credit Facility is secured by first priority security interests in all of
the tangible and intangible assets of the Company. In addition, the new
Credit Facility contains certain restrictive covenants including, among
other things, the
F-18
<PAGE>
DIAMOND TRIUMPH AUTO GLASS, INC.
Notes to Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
maintenance of a minimum EBITDA level for the prior twelve months, as well
as restrictions on additional indebtedness, dividends and certain other
significant transactions.
F-19
Exhibit 10.11
FINANCING AGREEMENT
The CIT Group/Business Credit, Inc.
(as Lender)
And
DIAMOND TRIUMPH AUTO GLASS, INC.
(as Borrower)
Dated: March 27, 2000
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1 Definitions..................................................1
SECTION 2. Conditions Precedent........................................10
SECTION 3. Revolving Loans.............................................13
SECTION 4. Intentionally Omitted.......................................15
SECTION 5. Letters of Credit...........................................15
SECTION 6. Collateral..................................................18
SECTION 7. Representations, Warranties and Covenants...................20
SECTION 8. Interest, Fees and Expenses.................................25
SECTION 9. Powers......................................................27
SECTION 10. Events of Default and Remedies..............................28
SECTION 11. Termination.................................................31
SECTION 12. Miscellaneous...............................................31
Schedules
Schedule 1 - Existing Liens
Schedule 2 - Collateral Locations, Chief Executive Office, Jurisdiction of
Organization
i
<PAGE>
THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation,
(hereinafter "CITBC") with offices located at 300 South Grand Avenue, Third
Floor, Los Angeles, California 90071, is pleased to confirm the terms and
conditions under which CITBC shall make revolving loans, advances and other
financial accommodations to DIAMOND TRIUMPH AUTO GLASS, INC. (herein the
"Company"), a Delaware corporation with a principal place of business at 220
Division Street, Kingston, Pennsylvania 18704.
SECTION 1. Definitions
Accounts shall mean all of the Company's now existing and future: (a)
accounts receivable, (whether or not specifically listed on schedules furnished
to CITBC), and any and all instruments, documents, contract rights, chattel
paper, general intangibles, including, without limitation, all accounts created
by or arising from all of the Company's sales of goods or rendition of services
to its customers, and all accounts arising from sales or rendition of services
made under any of the Company's trade names or styles, or through any of the
Company's divisions; (b) unpaid seller's rights (including rescission, replevin,
reclamation and stoppage in transit) relating to the foregoing or arising
therefrom; (c) rights to any goods represented by any of the foregoing,
including rights to returned or repossessed goods; (d) reserves and credit
balances arising hereunder; (e) guarantees or collateral for any of the
foregoing; (f) insurance policies or rights relating to any of the foregoing;
and (g) cash and non-cash proceeds of any and all the foregoing.
Anniversary Date shall mean the date occurring one (1) year from the
date hereof and the same date in every year thereafter.
Availability shall mean at any time the lesser of: (I) the Line of
Credit, or (II) the excess of the sum of a) eighty-five percent (85%) of
Eligible Accounts Receivable and b) eighty-five percent (85%) of Eligible
Inventory, valued at the lower of cost or market, or (III) one and one-half
(1.5) multiplied by EBITDA of the Company for the prior rolling 12-month period,
over the sum, without duplication, of x) the outstanding aggregate amount of all
Obligations of the Company, and y) the Availability Reserve.
Availability Reserve shall mean, at any time of determination, the sum
of the then outstanding amount of all Letters of Credit, plus the sum of three
(3) months rental payments with respect to all of Company's leased distribution
centers for which it has not delivered to CITBC a landlord's waiver (in form and
substance satisfactory to CITBC in the exercise of its reasonable business
judgment), as such amounts may be adjusted from time to time hereafter upon (i)
delivery to CITBC of any such acceptable waiver, (ii) the opening or closing of
a distribution center and/or (iii) any change in rental payment.
Business Day shall mean any day on which both CITBC and The Chase
Manhattan Bank are open for business.
Blocked Account shall mean each Concentration Account owned by the
Company which is governed by a blocked account or similar agreement in form
substantially similar to Exhibit A attached hereto and which account is subject
to written instructions only from the Company unless and until CITBC shall give
the institution holding such Concentration Account written
1
<PAGE>
instructions to the contrary in accordance with the terms of paragraph 4 of
Section 3 of this Financing Agreement.
Capital Expenditures for any period shall mean the aggregate of all
expenditures of the Company during such period that in conformity with GAAP are
required to be included in or reflected by the property, plant or equipment or
similar fixed asset account reflected in the balance sheet of the Company.
Capital Lease shall mean any lease of property (whether real, personal
or mixed) which, in conformity with GAAP, is accounted for as a capital lease or
a Capital Expenditure on the balance sheet of the Company.
Chase Bank Rate shall mean the rate of interest per annum announced by
The Chase Manhattan Bank from time to time as its prime rate in effect at its
principal office in the City of New York. (The prime rate is not intended to be
the lowest rate of interest charged by The Chase Manhattan Bank to its
borrowers).
Chase Bank Rate Margin shall mean the amounts corresponding to EBITDA,
calculated quarterly, for the prior rolling four-quarter period:
EBITDA Chase Bank Rate Margin
------ ----------------------
In excess of $17 million 0.25 percentage points
$13 million - $17 million 0.50 percentage points
Less than $13 million 0.75 percentage points
Collateral shall mean all present and future Accounts, Equipment,
Inventory, Documents of Title, General Intangibles and Real Estate of the
Company. In addition, the Collateral shall include, to the extent not included
in the foregoing, the following property of the Company: (a) investment
property, documents, instruments, deposit accounts, letter-of-credit rights,
accounts, chattel paper, commercial tort claims, goods, equipment, fixtures,
inventory and general intangibles as such terms are defined under the Uniform
Commercial Code; and (b) all cash and other monies and property in the
possession or control of CITBC, all books, records, ledger cards, disks and
related data processing software at any time evidencing or containing
information relating to any of the Collateral described herein or otherwise
necessary or helpful in the collection thereof or realization thereon, and all
cash and non-cash proceeds of any of the foregoing.
Collateral Management Fee shall mean the sum of $50,000 which shall be
paid to CITBC in accordance with paragraph 8 of Section 8 hereof to offset the
expenses and costs of CITBC in connection with record keeping, periodic
examinations, analyzing and evaluating the Collateral.
Concentration Account shall mean any account owned by the Company which
receives funds from (i) the Depository Accounts, (ii) the credit card companies
and/or (iii) another Concentration Account.
2
<PAGE>
Consolidated Financial Statement shall mean a consolidated balance
sheet, income statement, cash flow statement and statement of stockholders'
equity for the Company, and its subsidiaries, if any, eliminating all
inter-company transactions and prepared in accordance with GAAP, except that
monthly and quarterly financial statements need not have footnotes.
Consolidating Financial Statement shall mean a Consolidated Financial
Statement plus, if the Company has any subsidiaries, individual balance sheets,
income statements, cash flow statements and statements of stockholders' equity
for the Company each showing all elimination of inter-company transactions and
prepared in accordance with GAAP and including a balance sheet for the Company
exclusively, except that monthly and quarterly financial statements need not
have footnotes.
Credit Card Agreement shall mean the Credit Card Agreements entered
into among the Company, CITBC, and the credit card payment clearing
organizations, respecting payments made to the Company by credit card charges.
Customarily Permitted Liens shall mean
(a) liens of local or state authorities for franchise or other like
taxes provided the aggregate amounts of such liens shall not exceed $250,000 in
the aggregate at any one time;
(b) statutory liens of landlords and liens of carriers, warehousemen,
mechanics, materialmen and other like liens imposed by law, created in the
ordinary course of business and for amounts not yet due (or which are being
contested in good faith by appropriate proceedings or other appropriate actions
which are sufficient to prevent imminent foreclosure of such liens) and with
respect to which adequate reserves or other appropriate provisions are being
maintained in accordance with GAAP; and
(c) deposits made (and the liens thereon) in the ordinary course of
business consistent with past practices (including, without limitation, security
deposits for leases, surety bonds and appeal bonds), deposits in connection with
utilities, workers' compensation, unemployment insurance and other types of
social security benefits or to secure the performance of tenders, bids,
contracts (other than for the repayment or guarantee of borrowed money or
purchase money obligations), statutory obligations and other similar
obligations.
Default shall mean any event specified in Section 10 hereof, whether or
not any requirement for the giving of notice, the lapse of time, or both, or any
other condition, event or act, has been satisfied.
Default Rate of Interest shall mean a rate of interest per annum equal
to the sum of: a) two percent (2%) and b) the applicable Chase Bank Rate, which
CITBC shall be entitled to charge the Company on all Obligations due CITBC by
the Company to the extent provided in paragraph 2 of Section 10 of this
Financing Agreement.
Depository Accounts shall mean those accounts (other than the
Concentration Accounts) designated for the deposit of proceeds of Collateral.
3
<PAGE>
Documentation Fee shall mean CITBC's standard and reasonable fees
relating to any and all modifications, waivers, releases, amendments or
additional collateral with respect to this Financing Agreement, the Collateral
and/or the Obligations.
Documents of Title shall mean all present and future warehouse
receipts, bills of lading, shipping documents, chattel paper, instruments and
similar documents, all whether negotiable or not and all goods and inventory
relating thereto and all cash and non-cash proceeds of the foregoing.
Early Termination Date shall mean the date on which the Company
terminates this Financing Agreement or the Line of Credit which date is prior to
the third Anniversary Date.
Early Termination Fee shall: i) mean the fee CITBC is entitled to
charge the Company in the event the Line of Credit or this Financing Agreement
is terminated by the Company on a date prior to the third Anniversary Date; and
ii) be determined by multiplying the Line of Credit by (x) one percent (1%) if
the Early Termination Date occurs on or prior to the first Anniversary Date, or
(y) one-half percent (1/2%) if the Early Termination Date occurs after the first
Anniversary Date but prior to the third Anniversary Date.
EBITDA shall mean, in any period, all earnings before all (i) interest
and tax obligations, (ii) depreciation, (iii) amortization for said period, all
determined in accordance with GAAP on a basis consistent with the latest audited
financial statements of the Company, and calculated based upon the most recent
financial statements, and (iv) LGP Management Fees accrued and unpaid during
such period.
Event(s) of Default shall have the meaning provided for in Section 10
of this Financing Agreement.
Eligible Accounts Receivable shall mean the gross amount of the
Company's Trade Accounts Receivable that conform to the warranties contained
herein, less, without duplication, the sum of (a) allowances for doubtful
accounts and other reserves as required by GAAP, and (b) the sum of reserves
for: i) sales in excess of ten percent (10%) to the United States of America or
to any agency, department or division thereof; ii) foreign sales in excess of
ten percent (10%) other than sales secured by stand-by letters of credit (in
form and substance satisfactory to CITBC) issued or confirmed by, and payable
at, banks having a place of business in the United States of America and payable
in United States currency, and which sales otherwise comply with all other
criteria for eligibility hereunder; iii) Trade Accounts Receivable of any
customer to the extent in excess of twenty-five percent (25%) or more of all
outstanding Trade Accounts Receivable; iv) Trade Accounts Receivable which
remain unpaid more than 180 days from invoice date; and v) Trade Accounts
Receivable arising from sales to any company affiliated with the Company in any
way.
Eligible Inventory shall mean the gross amount of the Company's
inventory that conform to the warranties contained herein less reserves required
by GAAP, any work-in-process and goods (other than goods in transit) not present
in the United States of America.
Equipment shall mean all present and hereafter acquired machinery,
equipment, furnishings and fixtures, and all additions, substitutions and
replacements thereof, wherever
4
<PAGE>
located, together with all attachments, components, parts, equipment and
accessories installed thereon or affixed thereto and all proceeds of whatever
sort.
ERISA shall mean the Employee Retirement Income Security Act or 1974,
as amended from time to time and the rules and regulations promulgated
thereunder from time to time.
GAAP shall mean generally accepted accounting principles in the United
States of America as in effect from time to time and for the period as to which
such accounting principles are to apply.
General Intangibles shall have the meaning set forth in the Uniform
Commercial Code as in effect in the State of Pennsylvania and shall include,
without limitation, all present and future right, title and interest in and to
all tradenames, trademarks (together with the goodwill associated therewith),
patents, licenses, customer lists, distribution agreements, supply agreements
and tax refunds, together with all monies and claims for monies now or hereafter
due and payable in connection with any of the foregoing or otherwise, and all
cash and non-cash proceeds thereof.
Indebtedness shall mean, without duplication, all liabilities,
contingent or otherwise, which are any of the following: (a) obligations in
respect of borrowed money or for the deferred purchase price of property,
services or assets, other than Inventory, or (b) lease obligations which, in
accordance with GAAP, have been, or which should be capitalized.
Intellectual Property Security Agreement shall mean a security
agreement executed by Company, in form and substance reasonably acceptable to
CITBC, by which the Company grants a security interest and lien in all of its
patents, trademarks, and copyrights to CITBC.
Inventory shall mean all of the Company's present and hereafter
acquired merchandise and inventory, and all additions, substitutions and
replacements thereof, wherever located, together with all goods and materials
used or usable in manufacturing, processing, packaging, selling, promoting or
shipping same; in all stages of production- from raw materials through
work-in-process to finished goods - and all proceeds thereof of whatever sort.
Issuing Bank shall mean any bank issuing Letters of Credit for the
Company.
Letters of Credit shall mean all letters of credit issued with the
assistance of CITBC by the Issuing Bank for or on behalf of the Company.
Letter of Credit Guaranty shall mean any guaranty delivered by CITBC to
the Issuing Bank of the Company's reimbursement obligation under the Issuing
Bank's reimbursement agreement, application for Letter of Credit or other like
document.
Letter of Credit Guaranty Fee shall mean the fee CITBC may charge the
Company under paragraph 3 of Section 8 of this Financing Agreement for: i)
issuing the Letter of Credit Guaranty or ii) otherwise aiding the Company in
obtaining Letters of Credit pursuant to Section 5.
5
<PAGE>
LGP Management Fees shall mean the management fees payable by the
Company to Leonard Green & Partners, L.P. pursuant to that certain Management
Services Agreement, dated March 31, 1998, as in effect as of the date hereof.
Libor shall mean at any time of determination, and subject to
availability, for each interest period the higher of the applicable London
Interbank Offered rate paid in London on dollar deposits from other banks as (x)
quoted by The Chase Manhattan Bank or (y) published under "Money Rates" in the
New York City edition of the Wall Street Journal or if there is no such
publication or statement therein as to Libor then in any publication used in the
New York City financial community.
Libor Loan shall mean those Revolving Loans for which the Company has
elected to use Libor for interest rate computations.
Libor Period shall mean the Libor for one month, two month or three
month U.S. dollar deposits, as selected by the Company.
Libor Margin shall mean the amounts corresponding to EBITDA, determined
quarterly, for the prior rolling four-quarter period:
EBITDA Libor Margin
------ ------------
In excess of $17 million 2.00 percentage points
$13 million - $17 million 2.25 percentage points
Less than $13 million 2.50 percentage points
Line of Credit shall mean the commitment of CITBC to make loans and
advances pursuant to Section 3 of this Financing Agreement and to assist the
Company in obtaining Letters of Credit under Section 4 of this Financing
Agreement in the aggregate amount equal to $25,000,000; provided, however, that
the amount of the Line of Credit may from time to time be permanently reduced
under paragraph 9 of Section 3.
Line of Credit Fee shall: i) mean the fee due CITBC at the end of each
month for the Line of Credit, and ii) be determined by multiplying the
difference between the Line of Credit, and the average daily Revolving Loans and
outstanding Letters of Credit of the Company for said month by one-quarter of
one percent (1/4 of 1%) per annum for the number of days in said month during
which this Financing Agreement was in effect.
Loan Facility Fee shall mean the fee payable to CITBC in accordance
with, and pursuant to, the provisions of paragraph 7 of Section 8 of this
Financing Agreement.
Obligations shall mean all loans and advances made or to be made by
CITBC to the Company or to others for the Company's account; any and all
indebtedness and obligations which may at any time be owing by the Company to
CITBC howsoever arising, whether now in existence or incurred by the Company
from time to time hereafter; whether secured by pledge, lien upon or security
interest in any of the Company's assets or property or the assets or property of
any other person, firm, entity or corporation; whether such indebtedness is
absolute or contingent, joint or several, matured or unmatured, direct or
indirect and whether the Company is
6
<PAGE>
liable to CITBC for such indebtedness as principal, surety, endorser, guarantor
or otherwise. Obligations shall also include indebtedness owing to CITBC by the
Company under this Financing Agreement or under any other agreement or
arrangement now or hereafter entered into between the Company and CITBC;
indebtedness or obligations incurred by, or imposed on, CITBC as a result of
environmental claims arising out of the Company's operation, premises or waste
disposal practices or sites; the Company's liability to CITBC as maker or
endorser on any promissory note or other instrument for the payment of money;
the Company's liability to CITBC under any instrument of guaranty or indemnity,
or arising under any guaranty, endorsement or undertaking which CITBC may make
or issue to others for the Company's account, including any accommodation
extended with respect to applications for Letters of Credit, CITBC's acceptance
of drafts or CITBC's endorsement of notes or other instruments for the Company's
account and benefit.
Out-of-Pocket Expenses shall mean all of CITBC's present and future
reasonable and documented expenses incurred relative to this Financing
Agreement, whether incurred heretofore or hereafter, which expenses shall
include, without being limited to, the cost of record searches, all costs and
expenses incurred by CITBC in opening bank accounts, depositing checks,
receiving and transferring funds, and any charges imposed on CITBC due to
"insufficient funds" of deposited checks and CITBC's standard fees relating
thereto, any amounts paid by, incurred by or charged to, CITBC by the Issuing
Bank under the Letter of Credit Guaranty or the Company's reimbursement
agreement, application for Letter of Credit or other like document which pertain
either directly or indirectly to such Letters of Credit, and CITBC's standard
fees relating to the Letters of Credit and any drafts thereunder, local counsel
fees, if any, and taxes relative to the filing of financing statements, and all
expenses, costs and fees set forth in paragraph 3 of Section 10 of this
Financing Agreement; provided that Out-of-Pocket Expenses shall not include
internal, administrative, or overhead costs of CITBC (other than allocated fees
of internal legal counsel), or items covered by the Collateral Management Fee.
Permitted Affiliate Transactions shall mean: (i) transactions, expenses
and payments pursuant to the terms of or contemplated by (a) the Employment
Agreements and Non-Competition Agreements between the Company and each of
Kenneth Levine and Richard Rutta, each dated as of March 31, 1998, as in effect
on the date hereof; (b) the Employment Agreements between the Company and each
of Norman Harris and Michael A. Sumsky, each dated as of March 31, 1998, as in
effect on the date hereof; (c) the Management Services Agreement between Leonard
Green & Partners, L.P. and the Company dated as of March 31, 1998, as in effect
on the date hereof; (d) the Stockholders Agreement among Green Equity Investors
II, L.P., Kenneth Levine, Richard Rutta and the Company dated as of March 31,
1998, as in effect on the date hereof; (e) the Management Subscription and
Stockholders Agreements among the Company, Green Equity Investors II, L.P. and
each of Norman Harris and Michael A. Sumsky, each dated as of March 31, 1998, as
in effect on the date hereof; (f) the leases between the Company and Richard
Rutta and Kenneth Levine, General Partnership as in effect on the date hereof,
and as any such leases may be extended or amended from time to time if on
substantially identical terms; and (g) indemnification and other similar
obligations under the Stock Purchase Agreement (as such term is defined in the
Indenture governing the Senior Unsecured Debt), as in effect on the date hereof;
(ii) compensation, indemnification and other benefits paid or made available for
or in connection with services actually rendered and comparable to those
generally paid or made available in the same or similar businesses (including
stock options and related
7
<PAGE>
stock option agreements, reimbursement of reasonable out-of-pocket expenses,
loans to officers, directors and employees in the ordinary course of business
consistent with past practice and directors' and officers' liability insurance)
as determined in good faith by the Company's Board of Directors or senior
management; and (iii) other transactions on terms that are no less favorable to
the Company than those that could reasonably be expected to be obtained in a
comparable transaction entered into on an arm's length basis from a person or
entity that is not an affiliate of the Company.
Permitted Encumbrances shall mean: i) liens expressly permitted, or
consented to, by CITBC and listed on such Schedule 1, if any, as is attached
hereto or as may be consented to, in writing, by CITBC in the future; ii)
Purchase Money Liens; iii) Customarily Permitted Liens; iv) liens granted CITBC
by the Company; v) liens of judgment creditors provided such liens do not
exceed, in the aggregate, at any time, $150,000.00 (other than liens stayed,
satisfied, bonded or insured to the reasonable satisfaction of CITBC); vi) liens
for taxes, levies or assessments not yet due and payable or which are being
diligently contested in good faith by the Company by appropriate proceedings and
which liens are not for taxes due the United States of America; vii) liens and
other encumbrances in existence on the date hereof and disclosed in writing to
CITBC and accepted in writing by CITBC; viii) any extension, renewal or
replacement of any of the foregoing, provided that any extension, renewal or
replacement lien shall be limited to the property or assets covered by the lien
extended, renewed or replaced and the obligation secured by such extension,
renewal or replacement lien shall be in an amount not greater than the
obligations secured by the lien extended, renewed or replaced plus the amount of
all expenses, fees, premiums and penalties paid in connection with such
extension, renewal or replacement; (ix) easements, licenses, rights-of-way,
restrictions, encroachments, minor defects or irregularities in title, charges
or other encumbrances, in each case not interfering in any material respect with
the ordinary conduct of the business of the Company or any of its subsidiaries;
(x) any (a) interest or title of a lessor or sublessor under any lease not
prohibited by this Financing Agreement, (b) restriction or encumbrance that the
interest or title of such lessor or sublessor may be subject to, or (c)
subordination of the interest of the lessee or sublessee under such lease to any
restriction or encumbrance referred to in the preceding clause (b); (xi) any
zoning or similar law or right reserved to or vested in any governmental office
or agency to control or regulate use of any real property and (xii) leases or
subleases in the ordinary course of business, not involving Inventory or Trade
Accounts Receivable, and granted to third parties not otherwise prohibited by
this Financing Agreement and not interfering in any material respect with the
ordinary conduct of the business of the Company or any of its subsidiaries.
Permitted Indebtedness shall mean: i) current indebtedness maturing in
less than one year and incurred in the ordinary course of business for
Inventory, supplies, equipment, services, or taxes and indebtedness incurred in
the ordinary course of business for labor; ii) the indebtedness secured by the
Purchase Money Liens; iii) future Subordinated Debt, if any, which is
subordinated to the prior payment and satisfaction of the Company's Obligations
to CITBC by means of a subordination agreement in form and substance
satisfactory to CITBC; iv) indebtedness arising under or in connection with the
Letters of Credit and this Financing Agreement; v) deferred taxes and other
expenses incurred in the ordinary course of business; vi) the Senior Unsecured
Debt and other indebtedness existing on the date of execution of this Financing
Agreement and listed in the most recent financial statement delivered to CITBC
or otherwise disclosed to CITBC in writing; (vii) Capital Leases provided that
the Indebtedness
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incurred under such Capital Leases shall not exceed $250,000 in any fiscal year;
(viii) other unsecured Indebtedness in an aggregate principal amount not
exceeding $5,000,000 at any time outstanding; and (ix) any extension, renewal or
replacement of any of the foregoing, provided that any extension, renewal or
replacement shall (a) be in an amount not greater than the Indebtedness so
extended, renewed or replaced (plus the amount of expenses, fees and any premium
or penalty paid in connection with such extension, renewal or replacement), and
(b) in the case of Subordinated Debt, shall (1) have an amortization schedule
that results in the same or longer average life to maturity than the
Subordinated Debt and (2) contain subordination provisions which are
substantially similar to those in the documents evidencing the Subordinated
Debt.
Permitted Investments shall mean (i) commercial paper and municipal
bonds, in each case issued or guaranteed by a party rated P-1 or better by
Moody's Investors Service, Inc. ("Moody's") or A-1 or MIG-1 or better by
Standard & Poor's Rating Services ("S & P"), (ii) certificates of deposit, time
deposits, Eurodollar deposits or bankers' acceptances maturing not more than one
year after the date of issue, issued by any commercial banking institution,
which is a member of the Federal Reserve System and has a combined capital and
surplus and undivided profits of not less than $100,000,000, (iii) repurchase
agreements having maturities of not more than one year and which are secured by
readily marketable direct obligations of the Government of the United States of
America or any agency thereof, (iv) readily marketable obligations of the
Government of the United States of America or any agency thereof; (v) readily
marketable obligations issued by any state of the United States or any political
subdivision thereof having a rating by Moody's or S & P of "A" or its equivalent
or better; (vi) mutual funds which are regularly traded in the United States of
America whose investments are limited to those described in clauses (i) through
(v) above or the Evergreen Money Market Fund; (vii) investments received by the
Company in settlement of or other resolution of claims or disputes or in
connection with a plan of reorganization in connection with a bankruptcy or
insolvency of an entity indebted to the Company and, in each case, extensions,
modifications and renewals thereof; (viii) loans and advances to officers,
directors and employees of the Company in an aggregate amount not to exceed
$200,000 outstanding at any time; and (ix) other loans, advances and investments
in an aggregate amount not to exceed $500,000 at any time outstanding.
Purchase Money Liens shall mean liens on any items of Equipment
acquired after the date of this Financing Agreement provided that i) each such
lien shall attach only to the property to be acquired, ii) a description of the
property so acquired is furnished to CITBC, and iii) the debt incurred in
connection with such acquisitions shall not exceed in the aggregate $500,000 in
any fiscal year.
Real Estate shall mean the Company's fee and/or leasehold interests in
the real property which has been, or will be, encumbered, mortgaged, pledged or
assigned to CITBC or its designee.
Retained Cash shall mean an amount of cash sufficient to provide the
Company with cash in an amount necessary to stock the Company's cash registers
at its retail locations and consistent with the business practices of the
Company as of the date hereof.
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Revolving Loans shall mean the loans and advances made, from time to
time, to or for the account of the Company by CITBC pursuant to Section 3 of
this Financing Agreement.
Senior Unsecured Debt shall mean that unsecured Indebtedness
outstanding from time to time under that certain Indenture, dated as of March
31, 1998, between the Company, as issuer, and State Street Bank and Trust
Company, as trustee.
Subordinated Debt shall mean any future debt due a Subordinating
Creditor (and the note evidencing such) which will be subordinated, by the
Subordination Agreement, to the prior payment and satisfaction of the
Obligations of the Company to CITBC.
Subordinating Creditor shall mean any future holder of future
Subordinated Debt.
Subordination Agreement shall mean any future agreement respecting any
future Subordinated Debt among the Company, the Subordinating Creditor and CITBC
pursuant to which the Subordinated Debt will be subordinated to the prior
payment and satisfaction of the Company's Obligations to CITBC.
Trade Accounts Receivable shall mean, at any time of determination, the
amounts due the Company by (i) any credit card issuer and (ii) any customer
obligated on an invoice, in each instance due as a result of a sale of inventory
and/or the rendition of services by the Company.
Uniform Commercial Code shall mean the Uniform Commercial Code, as
amended and supplemented from time to time, as in effect in the applicable
jurisdiction.
SECTION 2. Conditions Precedent
The obligation of CITBC to make loans hereunder is subject to the
satisfaction of, or waiver of, immediately prior to or concurrently with the
making of such loans, the following conditions precedent (or as conditions
subsequent if so expressly indicated):
(a) Lien Searches - CITBC shall have received tax, judgment and Uniform
Commercial Code searches satisfactory to CITBC for all locations presently
occupied or used by the Company.
(b) Casualty Insurance - The Company shall have delivered to CITBC
evidence satisfactory to CITBC that casualty insurance policies listing CITBC as
loss payee or mortgagee, as the case may be, are in full force and effect, all
as set forth in Section 7, paragraph 5 of this Financing Agreement.
(c) Financial Projections - CITBC shall have received, reviewed and be
satisfied with a two years Company financial projections, including monthly
detail and projected borrowing availability for the first year, together with a
balance sheet, profit and loss statement, and statement of cash flows,
accompanied by a management discussion and analysis as well as detail of
material assumptions, all in form an substance satisfactory to CITBC.
(d) UCC Filings - Any documents (including without limitation, financing
statements) required to be filed in order to create, in favor of CITBC, a first
and exclusive
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perfected security interest in the Collateral with respect to which a security
interest may be perfected by a filing under the Uniform Commercial Code shall
have been properly filed in each office in each jurisdiction required in order
to create in favor of CITBC a perfected lien on the Collateral under the Uniform
Commercial Code in effect as of the date hereof and as would be in effect if the
revisions to Uniform Commercial Code Article 9 are adopted in any relevant
jurisdiction as adopted in California effective July 1, 2001. CITBC shall have
received acknowledgement copies of all such filings (or, in lieu thereof, CITBC
shall have received other evidence satisfactory to CITBC that all such filings
have been made); and CITBC shall have received evidence that all necessary
filing fees and all taxes or other expenses related to such filings have been
paid in full.
(e) Blocked Account Agreements - CITBC shall have received the Blocked
Account Agreements, duly executed by all parties thereto.
(f) Credit Card Agreements - CITBC shall have received the Credit Card
Agreements, duly executed by all parties thereto; provided that the Credit Card
Agreements may be delivered within 21 days after the date hereof (and Company
covenants to do the same).
(g) Examination & Verification - CITBC shall have completed to the
satisfaction of CITBC an examination and verification of the Trade Accounts
Receivable, Inventory, books and records of the Company, which examination shall
indicate that, after giving effect to all loans, advances and extensions of
credit to be made at closing, the Company shall have an opening additional
aggregate Availability of at least $5,000,000. It is understood that such
requirement contemplates that all debts, obligations and payables are current in
accordance with the Company's usual business practices. The Company shall
deliver all agreements in effect as of the Closing Date with respect to
Permitted Affiliate Transactions with 21 days following the Closing Date (and
Company covenants to do the same).
(h) Opinions - Counsel for the Company shall have delivered to CITBC
opinions satisfactory to CITBC opining, inter alia, that, subject to the i)
filing, priority and remedies provisions of the Uniform Commercial Code, ii) the
provisions of the Bankruptcy Code, insolvency statutes or other like laws, iii)
the equity powers of a court of law and iv) such other matters as may be agreed
upon with CITBC: a) this Financing Agreement x) is valid, binding and
enforceable according to its terms, y) is duly authorized and z) does not
violate any terms, provisions, representations or covenants in the charter or
by-laws of the Company or, to the best knowledge of such counsel, of any loan
agreement, mortgage, deed of trust, note, security or pledge agreement or
indenture, identified by the Company to such counsel as material, to which the
Company is a signatory or by which the Company or its assets are bound.
(i) Additional Documents - The Company shall have executed and delivered
to CITBC all loan documents necessary to consummate the lending arrangement
contemplated between the Company and CITBC; provided that the Intellectual
Property Security Agreement may be delivered within 21 days after the date
hereof (and the Company covenants to do the same).
(j) Board Resolution - CITBC shall have received a copy of the
resolutions of the Board of Directors of the Company authorizing the execution,
delivery and performance
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of (i) this Financing Agreement, and (ii) any related agreements, in each case
certified by the Secretary or Assistant Secretary of the Company as of the date
hereof, together with a certificate of the Secretary or Assistant Secretary of
the Company as to the incumbency and signature of the officers of the Company
executing this Financing Agreement and any certificate or other documents to be
delivered by it pursuant hereto, together with evidence of the incumbency of
such Secretary or Assistant Secretary.
(k) Corporate Organization - CITBC shall have received (i) a copy of the
Certificate of Incorporation of the Company certified by the Secretary of State
of its incorporation, and (ii) a copy of the By-Laws (as amended through the
date hereof) of the Company and certified by the Secretary or Assistant
Secretary of the Company.
(l) Officer's Certificate - CITBC shall have received an executed
Officer's Certificate of the Company, satisfactory in form and substance to
CITBC, certifying that (i) the representations and warranties contained herein
are true and correct in all material respects on and as of the date hereof; (ii)
the Company is in compliance with all of the terms and provisions set forth
herein; and (iii) no Event of Default or Default has occurred.
(m) Absence of Default - No Default, Event of Default or material
adverse change in the financial condition, business, prospects, profits,
operations or assets of the Company shall have occurred since January 31, 2000.
(n) Existing Revolving Credit Agreement -- The Company's existing credit
agreement with the syndicate of financial institutions lead by Deutsche Bank
shall be (x) terminated, (y) all loans and obligations of the Company thereunder
shall be paid or satisfied in full utilizing the proceeds of the initial
Revolving Loans to be made under this Financing Agreement and (z) all liens upon
or security interest in favor of such lending syndicate shall be terminated
and/or released upon such payment.
(o) Legal Restraints/Litigation - At the date of execution of this
Financing Agreement, there shall be no x) litigation, investigation or
proceeding (judicial or administrative) pending or threatened against the
Company or its assets by any agency, division or department of any county, city,
state or federal government arising out this Financing Agreement, y) injunction,
writ or restraining order restraining or prohibiting the consummation of the
financing arrangements contemplated under this Financing Agreement or z) suit,
action, investigation or proceeding (judicial or administrative) pending or
threatened against the Company or its assets, which is reasonably likely to
result in a material adverse effect on the business, operation, assets,
financial condition or Collateral of the Company.
(p) Disbursement Authorization - The Company shall have delivered to
CITBC all information necessary for CITBC to issue wire transfer instructions on
behalf of the Company for the initial and subsequent loans and/or advances to be
made under this Agreement including, but not limited to, disbursement
authorizations in form acceptable to CITBC.
Upon the execution of this Financing Agreement and the initial
disbursement of loans hereunder, all of the above Conditions Precedent shall
have been deemed satisfied except as the Company and CITBC shall otherwise agree
herein or in a separate writing.
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SECTION 3. Revolving Loans
1. CITBC agrees, subject to the terms and conditions of this Financing
Agreement from time to time, and within the Availability, but subject to CITBC's
right to make "overadvances", to make loans and advances to the Company on a
revolving basis (i.e. subject to the limitations set forth herein, the Company
may borrow, repay and re-borrow Revolving Loans). All requests for loans and
advances must be received by an officer of CITBC no later than 1:00 p.m., New
York time, of the Business Day on which such loans and advances are required.
Should CITBC for any reason honor requests for advances in excess of the
limitations set forth herein, such advances shall be considered "overadvances"
and shall be made in CITBC's sole discretion, subject to any additional terms
CITBC deems necessary.
2. In furtherance of the continuing collateral assignment and security
interest in the Company's Trade Accounts Receivable and Inventory, the Company
shall deliver to CITBC not later than: (1) twenty (20) days after the end of
each month an aging of the Company's Trade Accounts Receivable in such form and
manner as CITBC may reasonably require but consistent with the current practices
of the Company and (2) twenty (20) days after the end of each month, a monthly
inventory confirmation statement stating the aggregate amount of Eligible
Inventory of the Company. In addition, the Company will provide to CITBC such
additional information and material with respect to the Trade Accounts
Receivable and Inventory, in such form and detail, as CITBC may reasonably
request to effectively evaluate the Trade Accounts Receivable and the
collectibility thereof and the mix of the Inventory and such other information
as CITBC may reasonably require to evaluate the Company's Trade Accounts
Receivable and Inventory, such as returns, claims, credits, allowances and
information identifying and describing the Trade Accounts Receivable. Failure to
provide CITBC with the foregoing information will in no way affect, diminish,
modify or limit the security interest granted herein. Such reports are to be
executed by an authorized officer of the Company. The Company shall deliver
monthly (by the last Business Day of the month) reports respecting the preceding
month with respect to the borrowing base.
3. The Company hereby represents and warrants that: each Trade Accounts
Receivable is based on an actual and bona fide sale and delivery of goods or
rendition of services to customers, made by the Company in the ordinary course
of its business; the Inventory being sold and/or supplied and the Trade Accounts
Receivable created are the exclusive property of the Company and are not and
shall not be subject to any lien, consignment arrangement, encumbrance, security
interest or financing statement whatsoever, other than the Permitted
Encumbrances; the invoices evidencing such Trade Accounts Receivable or credit
card receipts evidencing credit card sales are in the name of the Company; and
except for disputes, offsets, defenses, counterclaims, contras, returns or
credits, all arising in the normal course of the Company's business or except as
may be promptly disclosed to the CITBC, the Company's customers owe and are
obligated to pay the amount stated in the invoices or credit card receipts. The
Company confirms to CITBC that any and all taxes or fees relating to its
business, its sales, the Trade Accounts Receivable or goods relating thereto,
are its sole responsibility and that same will be paid by the Company (except as
otherwise permitted by this Financing Agreement) and that none of said taxes or
fees represent a lien on or claim against the Trade Accounts Receivable. The
Company also warrants and represents that it is a duly and validly existing
corporation and is qualified in all states where the failure to so qualify would
have a material
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adverse effect on the business of the Company or the ability of the Company to
enforce collection of Trade Accounts Receivable due from customers residing in
that state. The Company agrees to maintain such books and records regarding
Trade Accounts Receivable as CITBC may reasonably require, consistent with the
Company's current recordkeeping practices, and agrees that the books and records
of the Company will reflect CITBC's interest in the Trade Accounts Receivable as
CITBC may reasonably request. All of the books and records of the Company will
be available to CITBC at normal business hours, including any records handled or
maintained for the Company by any other company or entity.
4. During the term of this Financing Agreement, the Company may and
will, at its expense, consistent with the Company's existing practices, enforce,
collect and receive all amounts owing on the Trade Accounts Receivable. Except
for the Retained Cash, checks or cash from the sale of Inventory or the
rendering of services must be deposited promptly to a Blocked Account or to the
Depository Accounts, and promptly thereafter and therefrom, to a Blocked
Account. The Company shall require that all amounts due under credit card sales
be remitted by the credit card companies to a Blocked Account. The Company
agrees that it will only direct the flow of funds from the Depository Accounts
and the credit card remitters to the Blocked Accounts. The institutions holding
such Blocked Accounts will be instructed that when it is satisfied that such
funds on deposit are "good funds", such institution will remit such "good funds"
to the Company's operating account. Notwithstanding anything herein contained to
the contrary, if there is then an Event of Default, CITBC may advise the banks
holding the Blocked Accounts to remit all proceeds of Collateral to CITBC for
its account. CITBC will immediately rescind those instructions upon the waiver
of the Event of Default or upon the cure thereof to CITBC's reasonable
satisfaction. All amounts received by CITBC will be credited to the Obligations
upon CITBC's receipt of "good funds" at its bank account in New York, New York
on the Business Day of receipt if received no later than 2 p.m. New York time or
on the next succeeding Business Day if received after 2 p.m. New York time. No
checks, drafts or other instruments received by CITBC will constitute final
payment unless and until such instruments have actually been collected. If the
loan account reflects a zero Revolving Loan balance and there is then no Event
of Default, then CITBC shall promptly remit to the operating account of the
Company any credit balances in the loan account.
5. The Company agrees to notify CITBC promptly of any matters materially
affecting the value, enforceability or collectability of the Trade Accounts
Receivable and of all material customer disputes, offsets, defenses,
counterclaims, returns, rejections and all material reclaimed or repossessed
merchandise or goods.
6. CITBC shall maintain a separate account on its books in the Company's
name in which the Company will be charged with loans and advances made by CITBC
to it or for its account, and with any other Obligations, including any and all
reasonable and documented costs, expenses and reasonable and documented
attorney's fees which CITBC may incur in connection with the exercise by or for
CITBC of any of the rights or powers herein conferred upon CITBC, or in the
prosecution or defense of any action or proceeding to enforce or protect any
rights of CITBC in connection with this Financing Agreement or the Collateral
assigned hereunder, or any Obligations owing to CITBC by the Company. The
Company will be credited with all amounts received by CITBC from the Company or
from others for the Company's account, including, as above set forth, all
amounts received by CITBC in payment of assigned Accounts and such
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amounts will be applied to payment of the Obligations. In no event shall prior
recourse to any Accounts or other security granted to or by the Company be a
prerequisite to CITBC's right to demand payment of any Obligation. Further, it
is understood that CITBC shall have no obligation whatsoever to perform in any
respect any of the Company's contracts or obligations relating to the Accounts.
7. After the end of each month, CITBC shall promptly send the Company a
statement showing the accounting for the charges, loans, advances and other
transactions occurring between CITBC and the Company during that month. The
monthly statements shall be deemed correct and binding upon the Company and
shall constitute an account stated between the Company and CITBC unless CITBC
receives a written statement of the exceptions within thirty (30) days of the
date of the monthly statement.
8. In the event that the sum of (i) the outstanding balance of Revolving
Loans and (ii) outstanding balance of Letters of Credit exceeds (x) the maximum
amount thereof available under Section 3 and 5 hereof or (y) the Line of Credit
(herein the amount of any such excess shall be referred to as the "Excess") such
Excess shall be due and payable to CITBC immediately upon CITBC's demand
therefor.
9. The Company may at any time, on five (5) Business Days prior written
notice to CITBC, reduce the Line of Credit provided that: (i) any reduction
shall be permanent and irrevocable; (ii) a reduction must be for at least
$2,500,000.00 or whole multiples thereof; (iii) the Company shall immediately
repay CITBC the amount by which the Obligations exceed Availability; (iv) the
Company may not reduce the Line of Credit to less than $15,000,000; and (v) if
the Company shall reduce the amount of the Line of Credit pursuant to the
proviso in the preceding sentence prior to the third Anniversary Date, the
Company shall immediately pay CITBC a fee determined by multiplying the amount
of the reduction by (x) one percent (1%) if the reduction occurs prior to the
first Anniversary Date or (y) one-half percent (1/2%) if the reduction occurs on
or after the first Anniversary Date but prior to the third Anniversary Date.
SECTION 4. Intentionally Omitted
SECTION 5. Letters of Credit
In order to assist the Company in establishing or opening Letters of
Credit with an Issuing Bank to cover the purchase of imported Inventory,
Equipment or otherwise (including standby Letters of Credit), the Company has
requested CITBC to join in the applications for such Letters of Credit, and/or
guarantee payment or performance of such Letters of Credit and any drafts or
acceptances thereunder through the issuance of the Letters of Credit Guaranty,
thereby lending CITBC's credit to the Company and CITBC has agreed to do so.
These arrangements shall be handled by CITBC subject to the terms and conditions
set forth below.
1. Within the Line of Credit and Availability, CITBC shall assist the
Company in obtaining Letter(s) of Credit in an amount not to exceed $3,000,000
in the aggregate outstanding at any one time. CITBC's assistance for amounts in
excess of the limitation set forth herein shall at all times and in all respects
be in CITBC's sole discretion. It is understood that the form and purpose of
each Letter of Credit must be acceptable to CITBC in its reasonable business
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judgment. Any and all outstanding Letters of Credit shall be treated as a
Revolving Loan for Availability purposes. Notwithstanding anything herein to the
contrary, upon the occurrence of a Default and/or Event of Default, CITBC's
assistance in connection with the Letter of Credit Guaranty shall be in CITBC's
sole discretion unless such Default and/or Event of Default is cured to CITBC's
reasonable satisfaction or waived by CITBC in writing. The amount, purpose and
extent of the Letters of Credit and changes or modifications thereof by the
Company and/or the Issuing Bank of the terms and conditions thereof shall in all
respects be subject to the prior approval of CITBC in the exercise of its
reasonable discretion, and the Letter of Credit and all documentation in
connection therewith shall be in form and substance satisfactory to the Company,
CITBC and the Issuing Bank.
2. CITBC shall have the right, without notice to the Company, to charge
the Company's account on CITBC's books with the amount of any and all
indebtedness, liability or obligation of any kind incurred by CITBC under the
Letters of Credit Guaranty at the earlier of a) payment by CITBC under the
Letters of Credit Guaranty, or b) upon the termination of this Financing
Agreement. Any amount charged to Company's loan account shall be deemed a
Revolving Loan hereunder and shall incur interest at the rate provided in
Section 8, paragraph 1 of this Financing Agreement.
3. The Company unconditionally indemnifies CITBC and holds CITBC
harmless from any and all loss, claim or liability incurred by CITBC arising
from any transactions or occurrences relating to Letters of Credit established
or opened for the Company's account, the collateral relating thereto and any
drafts or acceptances thereunder, and all Obligations thereunder, including any
such loss or claim due to any action taken by, or any errors, omissions,
negligence or misconduct by, any Issuing Bank, other than for any such loss,
claim or liability arising out of the gross negligence or willful misconduct by
CITBC. The Company's unconditional obligation to CITBC hereunder shall not be
modified or diminished for any reason or in any manner whatsoever, other than as
a result of CITBC's gross negligence or willful misconduct. The Company agrees
that any charges incurred by CITBC for the Company's account by the Issuing Bank
shall be conclusive on CITBC and may be charged to the Company's account.
4. In connection with any Letter of Credit, CITBC shall not be
responsible for: the existence, character, quality, quantity, condition,
packing, value or delivery of the goods purporting to be represented by any
documents; any difference or variation in the character, quality, quantity,
condition, packing, value or delivery of the goods from that expressed in the
documents; the validity, sufficiency or genuineness of any documents or of any
endorsements thereon, even if such documents should in fact prove to be in any
or all respects invalid, insufficient, fraudulent or forged, other than as a
result of the gross negligence or willful misconduct of CITBC; the time, place,
manner or order in which shipment is made; partial or incomplete shipment, or
failure or omission to ship any or all of the goods referred to in the Letters
of Credit or documents; any deviation from instructions; delay, default, or
fraud by the shipper and/or anyone else in connection with the goods which are
the subject of any Letter of Credit or the shipping thereof; or any breach of
contract between the shipper or vendors and the Company. Furthermore, without
being limited by the foregoing, CITBC shall not be responsible for any act or
omission with respect to or in connection with any good which are the subject of
any Letter of Credit.
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5. In connection with any Letter of Credit, the Company agrees that any
action taken by CITBC, if taken in good faith, or any action taken by any
Issuing Bank, under or in connection with the Letters of Credit, the guarantees,
the drafts or acceptances, or the goods which are the subject of any Letter of
Credit, shall, as between CITBC and the Company, be binding on the Company and
shall not put CITBC in any resulting liability to the Company other than as a
result of the gross negligence or willful misconduct of CITBC. During the
continuance of an Event of Default, CITBC shall have the full right and
authority to clear and resolve any questions of non-compliance of documents; to
give any instructions as to acceptance or rejection of any documents or goods;
to execute any and all steamship or airways guaranties (and applications
therefor), indemnities or delivery orders; to grant any extensions of the
maturity of, time of payment for, or time of presentation of, any drafts,
acceptances, or documents; and to agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of any
of the applications, Letters of Credit, drafts or acceptances; all in CITBC's
sole name, and the Issuing Bank shall be entitled to comply with and honor any
and all such documents or instruments executed by or received solely from CITBC,
all without any notice to or any consent from the Company.
6. In connection with any Letter of Credit, the Company agrees that any
necessary import, export or other licenses or certificates for the import or
handling of the goods which are the subject of any Letter of Credit will have
been promptly procured and all foreign and domestic governmental laws and
regulations in regard to the shipment and importation of such goods, or the
financing thereof will have been promptly and full complied with, except to the
extent that any such non-procurement or non-compliance will not materially
adversely effect the Collateral by $250,000 or more; and any certificates in
that regard that CITBC may at any time reasonably request will be promptly
furnished. In this connection, the Company warrants and represents that all
shipments made under any such Letters of Credit are in accordance with the laws
and regulations of the countries in which the shipments originate and terminate,
and are not prohibited by any such laws and regulations, except to the extent
that any failure to so comply will not materially adversely effect the
Collateral by $250,000 or more. The Company assumes all risk, liability and
responsibility for, and agrees to pay and discharge, all present and future
local, state, federal or foreign taxes, duties, or levies in connection with any
goods purchased, imported or acquired under a Letter of Credit. Any embargo,
restriction, laws, customs or regulations of any country, state, city, or other
political subdivision, where the Collateral is or may be located, or wherein
payments are to be made, or wherein drafts may be drawn, negotiated, accepted,
or paid, shall be solely the Company's risk, liability and responsibility.
7. Upon any payments made to the Issuing Bank under the Letter of Credit
Guaranty, CITBC shall acquire by subrogation, any rights, remedies, duties or
obligations granted or undertaken by the Company to the Issuing Bank in any
application for Letters of Credit, any standing agreement relating to Letters of
Credit or otherwise, all of which shall be deemed to have been granted to CITBC
and apply in all respects to CITBC and shall be in addition to any rights,
remedies, duties or obligations contained herein.
8. Nothing in this Financing Agreement is intended to relieve any
Issuing Bank from any liability to any person or entity.
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SECTION 6. Collateral
1. As security for the prompt payment in full of all loans and advances
made and to be made to the Company from time to time by CITBC pursuant hereto,
as well as to secure the payment in full of the other Obligations, the Company
hereby pledges and grants to CITBC a continuing general lien upon and security
interest in all of its:
(a) present and hereafter acquired Inventory;
(b) present and hereafter acquired Equipment;
(c) present and future Accounts;
(d) present and future Documents of Title;
(e) present and future General Intangibles;
(f) Real Estate; and
(g) all other present and future Collateral.
2. The security interests granted hereunder shall extend and attach to
the following property of the Company:
(a) All Collateral which is presently in existence and which is
owned by the Company or in which the Company has any interest including as
lessee (but only to the extent of such interest), whether held by the Company or
others for its account, and, if any Collateral is Equipment, whether the
Company's interest in such Equipment is as owner or conditional vendee;
(b) All Equipment whether the same constitutes personal property or
fixtures, including, but without limiting the generality of the foregoing, all
dies, jigs, tools, benches, tables, accretions, component parts thereof and
additions thereto, as well as all accessories, motors, engines and auxiliary
parts used in connection with or attached to the Equipment; and
(c) All Inventory and any portion thereof which may be returned,
rejected, reclaimed or repossessed by either CITBC or the Company from the
Company's customers.
Anything in this Financing Agreement to the contrary notwithstanding, the
Collateral shall not include, and no security interest granted hereunder shall
extend or attach to, the Company's rights (other than rights to payment) under
any license agreements or lease agreements existing as of the date hereof, or
any leases of real property or leases of motor vehicles or other personal
property now or hereafter existing that prohibit the grant of a security
interest or lien therein to the extent, and only to the extent, that the terms
prohibiting the grant of such security interest or lien have not been waived or
consented to by the licensor, lessor or other necessary person or entity under
such agreement.
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3. The Company agrees to take reasonable steps, consistent with current
business practices, to safeguard, protect and hold all Inventory and make no
disposition thereof except in the regular course of the business of the Company.
Inventory sold to customers may only be sold and shipped by the Company to its
customers in the ordinary course of the Company's business, for cash, credit
card sales or on open account on terms customary in the industry, provided that
all proceeds of all sales (but excluding the Retained Cash and accounts
receivable) are deposited in accordance with paragraph 4 of Section 3 of this
Financing Agreement. Upon the sale, exchange, or other disposition of Inventory,
as herein provided, the security interest in the Company's Inventory provided
for herein shall, without break in continuity and without further formality or
act, continue in, and attach to, all proceeds, including any instruments for the
payment of money, accounts receivable, contract rights, documents of title,
shipping documents, chattel paper and all other cash and non-cash proceeds of
such sale, exchange or disposition. As to any such sale, exchange or other
disposition, CITBC shall have a security interest in all of the rights of the
Company as an unpaid seller, including stoppage in transit, replevin, rescission
and reclamation.
4. The Company agrees at its own cost and expense to take reasonable
steps, consistent with current business practices, to safeguard, protect and
hold all Equipment and to make no dispositions thereof except in the ordinary
course of business, provided that all proceeds of all dispositions of Equipment
in the form of cash, checks, notes, instruments for the payment of money and
similar proceeds shall be deposited in the Depository Accounts and/or the
Concentration Accounts or otherwise paid over or delivered to CITBC; provided,
that in no event shall the aggregate amount of all such dispositions exceed
$500,000 per year. Upon the sale, exchange, or other disposition of the
Equipment, as herein provided, the security interest provided for herein shall,
without break in continuity and without further formality or act, continue in,
and attach to, all proceeds, including any instruments for the payment of money,
accounts receivable, contract rights, documents of title, shipping documents,
chattel paper and all other cash and non-cash proceeds of such sales, exchange
or disposition. As to any such sale, exchange or other disposition, CITBC shall
have a security interest in all of the rights of the Company as an unpaid
seller, including stoppage in transit, replevin, rescission and reclamation.
5. The rights and security interests granted to CITBC hereunder are to
continue in full force and effect, notwithstanding the termination of this
Financing Agreement or the fact that the account maintained in the Company's
name on the books of CITBC may from time to time be temporarily in a credit
position, until the satisfaction in full of all Obligations and the termination
of this Financing Agreement. Any delay, or omission by CITBC to exercise any
right hereunder, shall not be deemed a waiver thereof, or be deemed a waiver of
any other right, unless such waiver be in writing and signed by CITBC. A waiver
on any one occasion shall not be construed as a bar to or waiver of any right or
remedy on any future occasion. Upon the final satisfaction in full of all
Obligations and the termination of this Financing Agreement, CITBC will take, at
the Company's request and expense, all actions and do all things reasonably
necessary to release the rights and security interests in the Collateral. Upon a
disposition of Collateral permitted hereunder, CITBC will take, at the Company's
request and expense, all actions and do all things reasonably necessary to
release the rights and security interests in the Collateral that is the subject
of such partial release.
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6. To the extent that the Obligations are now or hereafter secured by
any assets or property other than the Collateral or by the guarantee,
endorsement, assets or property of any other person, then CITBC shall have the
right in its sole discretion to determine which rights, security, liens,
security interests or remedies CITBC shall at any time pursue, foreclose upon,
relinquish, subordinate, modify or take any other action with respect to,
without in any way modifying or affecting any of them, or any of CITBC's rights
hereunder.
7. Any reserves or balances to the credit of the Company and any other
property or assets of the Company in the possession of CITBC may be held by
CITBC as security for any Obligations and applied in whole or partial
satisfaction of such Obligations when due. The liens and security interests
granted herein and any other lien or security interest CITBC may have in any
other assets of the Company, shall secure payment and performance of all now
existing and future Obligations. CITBC may in its discretion charge any or all
of the Obligations to the account of the Company when due.
8. The Company shall give to CITBC from time to time such pledge or
security agreements with respect to General Intangibles and capital stock owned
by the Company as CITBC shall require to obtain valid first liens thereon.
SECTION 7. Representations, Warranties and Covenants
1. The Company hereby warrants and represents and/or covenants that: i)
the fair value of the Company's assets exceeds the book value of the Company's
liabilities; ii) the Company is generally able to pay its debts as they become
due and payable; and iii) the Company does not have unreasonably small capital
to carry on its business as it is currently conducted absent extraordinary and
unforeseen circumstances. The Company further warrants and represents that
except for the Permitted Encumbrances, the security interests granted herein
constitute and shall at all times constitute the first and only liens on the
Collateral; that, except for the Permitted Encumbrances, the Company is or will
be at the time additional Collateral is acquired by it, the absolute owner of
the Collateral with full right to pledge, sell, consign, transfer and create a
security interest therein, free and clear of any and all claims or liens in
favor of others; that the Company will at its expense warrant and, at CITBC's
request, defend the same from any and all claims and demands of any other person
other than the Permitted Encumbrances; that the Company will not grant, create
or permit to exist, any lien upon or security interest in the Collateral, or any
proceeds thereof, in favor of any other person other than the holders of the
Permitted Encumbrances; and that the Equipment does not comprise a part of the
Inventory of the Company and that the Equipment is and will only be used by the
Company in its business and will not be held for sale or lease, or removed,
except in the ordinary course of business, from its premises, or otherwise
disposed of by the Company without the prior written approval of CITBC except as
otherwise permitted in paragraph 4 of Section 6 of this Financing Agreement.
Company further warrants and represents that Schedule 2 hereto correctly and
completely sets forth its chief executive office, jurisdiction of organization,
and all of its Collateral locations.
2. The Company is also to advise CITBC promptly, in sufficient detail,
of any material adverse change relating to the type, quantity or quality of the
Collateral or on the security interests granted to CITBC therein. The Company
agrees to maintain accurate books and
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records pertaining to the Collateral consistent with past practices. If an Event
of Default does not exist, CITBC or its agents may, from time to time upon
reasonable notice, enter upon the Company's premises at any time during normal
business hours, or at such other times as CITBC and the Company may agree upon,
for the purpose of inspecting the Collateral and any and all records pertaining
thereto, all at CITBC's expense. During the continuance of an Event of Default,
CITBC or its agents may, at the Company's expense, enter the Company's premises,
upon reasonable notice and during normal business hours, and as often as it
deems reasonably necessary, to inspect the Collateral and the books and records
of the Company. The Company agrees to afford CITBC prior written notice of any
change in the location of any Collateral (other than motor vehicles and other
than Collateral that is in transit), other than to locations that are known to
CITBC and at which CITBC has filed financing statements and otherwise fully
perfected its liens thereon.
3. The Company agrees to: execute and deliver to CITBC, from time to
time, solely for CITBC's convenience in maintaining a record of the Collateral,
such written statements, and schedules as CITBC may reasonably require,
designating, identifying or describing the Collateral pledged to CITBC
hereunder. The Company's failure, however, to promptly give CITBC such
statements, or schedules shall not affect, diminish, modify or otherwise limit
CITBC's security interests in the Collateral.
4. The Company agrees, to the extent reasonably requested by CITBC, to
comply with the requirements of all state and federal laws in order to grant to
CITBC valid and perfected first security interests in the Collateral, subject
only to the Permitted Encumbrances, provided, however, that perfection as to
leasehold interests in Real Estate shall not be required, and further provided
that (except in the case of distribution centers) fixture filings shall not be
required. CITBC is hereby authorized, to the extent permitted by applicable law,
by the Company to file any financing statements covering the Collateral whether
or not the Company's signature appears thereon. The Company agrees to do
whatever CITBC may reasonably request, from time to time, by way of: filing
notices of liens, financing statements, amendments, renewals and continuations
thereof; cooperating with CITBC's agents and employees; keeping Collateral
records; transferring proceeds of Collateral to CITBC's possession in accordance
with the terms of this Financing Agreement; and performing such further acts as
CITBC may reasonably require in order to effect the purposes of this Financing
Agreement.
5. The Company agrees to maintain insurance on the Equipment and
Inventory in amounts and on terms no less favorable than the insurance coverage
on Equipment and Inventory in place as of the date hereof. All policies covering
the Equipment and Inventory are, subject to the rights of any holders of
Permitted Encumbrances holding claims senior to CITBC, to be made payable to
CITBC, in case of loss, under a standard non-contributory "mortgagee", "lender"
or "secured party" clause and are to contain such other provisions as CITBC may
reasonably require to fully protect CITBC's interest in the Inventory and
Equipment and to any payments to be made under such policies with respect to the
Inventory and the Equipment. All original policies or true copies thereof or
certificates thereof are to be delivered to CITBC, with all premiums current,
with the loss payable endorsement in CITBC's favor, and shall provide for not
less than thirty (30) days prior written notice to CITBC of the exercise of any
right of cancellation. At the Company's request, or if the Company fails to
maintain such insurance, CITBC may arrange for such insurance, but at the
Company's expense and without any
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responsibility on CITBC's part for: obtaining the insurance, the solvency of the
insurance companies, the adequacy of the coverage, or the collection of claims.
During the continuance of an Event of Default which is not waived, CITBC shall,
subject to the rights of any holders of Permitted Encumbrances holding claims
senior to CITBC, have the sole right, in the name of CITBC or the Company, to
file claims under any insurance policies with respect to the Inventory and the
Equipment, to receive, receipt and give acquittance for any payments that may be
payable thereunder with respect to the Inventory and the Equipment, and to
execute any and all endorsements, receipts, releases, assignments, reassignments
or other documents that may be necessary to effect the collection, compromise or
settlement of any claims under any such insurance policies. In the event of any
loss or damage by fire or other casualty, insurance proceeds relating to
Collateral shall be deposited in the Depository Accounts or the Concentration
Accounts in accordance with paragraph 4 of Section 3 of this Financing
Agreement.
6. The Company agrees to pay, when due, all taxes, assessments, claims
and other charges (herein "taxes") lawfully levied or assessed upon the Company
or the Collateral; provided, however, that such taxes need not be paid on or
before the due date thereof if: (i) such taxes are being diligently contested by
the Company in good faith and by appropriate proceedings; (ii) the Company
establishes such reserves as may be required by GAAP; (iii) such taxes (if in
excess of $100,000) are not secured by a filed lien which CITBC reasonably
determines could be or become senior to the liens of CITBC on the Collateral,
and (iv) such taxes secured by a filed lien are not due to the United States of
America. To prevent the imminent foreclosure of any tax liens (whether such
liens are senior or junior to the liens of CITBC) or in the event CITBC is
exercising its remedies as a secured creditor on Collateral, then CITBC may, on
the Company's behalf, pay any taxes then due and secured by a lien on the
Collateral and the amount thereof shall be an Obligation secured hereby.
7. Subject to the provisions of the preceding paragraph, the Company:
(a) agrees to comply with all acts, rules, regulations and orders of any
legislative, administrative or judicial body or official, which the failure to
comply with would have a material and adverse impact on the Collateral, or any
material part thereof, or on the operation of the Company's business, provided
that the Company may contest any acts, rules, regulations, orders and directions
of such bodies or officials in any reasonable manner which will not materially
and adversely effect CITBC's rights or priority in the Collateral; (b) agrees to
comply with all environmental statutes, acts, rules, regulations or orders as
presently existing or as adopted or amended in the future, applicable to the
ownership and/or use of its real property and operation of its business, which
the failure to comply with would have a material and adverse impact on the
Collateral, or any material part thereof, or on the operation of the business of
the Company. The Company hereby indemnifies CITBC and agrees to defend and hold
CITBC harmless from and against any and all loss, damage, claim, liability,
injury or expense which CITBC may sustain or incur in connection with: any claim
or expense asserted against CITBC as a result of any environmental pollution,
hazardous material or environmental clean-up of the Company's real property; or
any claim or expense which results from the Company's operations (including, but
not limited to, the Company's off-site disposal practices) and the Company
further agrees that this indemnification shall survive termination of this
Financing Agreement as well as the payment of all Obligations or amounts payable
hereunder; and (c) shall not be deemed to have breached any provision of this
paragraph 7 if (i) the failure to comply with the requirements of this paragraph
7 resulted
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from good faith error or innocent omission, (ii) the Company promptly commences
and diligently pursues a cure of such breach and such cure is eventually, within
a reasonably time frame, but not to exceed 45 days, based upon the circumstances
and the amount work required, completed and (iii) such failure has not resulted
in a materially adverse effect on any material portion of the Collateral or the
business, financial condition or operations of the Company.
8. Until termination of this Financing Agreement and payment and
satisfaction of all Obligations due hereunder, the Company agrees that, unless
CITBC shall have otherwise consented in writing, the Company will furnish to
CITBC, within ninety (90) days after the end of each fiscal year of the Company,
a Consolidated Financial Statement and a Consolidating Financial Statement as at
the close of and for such year, audited by independent public accountants
selected by the Company and satisfactory to CITBC (CITBC hereby agrees that KPMG
Peat Marwick or any other "big 5" accounting firm is satisfactory CITBC); within
forty-five (45) days after the end of each fiscal quarter a Consolidated
Financial Statement and Consolidating Financial Statement as at the end of such
period, certified by an authorized financial or accounting officer of the
Company; and within thirty (30) days after the end of each month a Consolidated
Financial Statement as at the end of and for such period, certified by an
authorized financial or accounting officer of the Company; and from time to
time, such further information regarding the business affairs and financial
condition of the Company as CITBC may reasonably request, including without
limitation annual cash flow projections in form reasonably satisfactory to
CITBC. Each financial statement which the Company is required to submit
hereunder must be accompanied by an officer's certificate, signed by the
President, Vice President, Controller, or Treasurer, pursuant to which any one
such officer must certify that: (i) the financial statement(s) in all material
respects fairly and accurately represent(s) the Company's financial condition at
the end of the particular accounting period, as well as the Company's operating
results during such accounting period, subject to year-end audit adjustments
and, in the case of monthly and quarterly financial statements, the absence of
footnotes; (ii) during the particular accounting period: (x) there has been no
Default or Event of Default under this Financing Agreement, provided, however,
that if any such officer has knowledge that any such Default or Event of
Default, has occurred during such period, the existence of and a detailed
description of same shall be set forth in such officer's certificate; and (y)
the Company has not received any notice of cancellation with respect to its
property insurance policies or certifying as to replacement policies therefor;
and (iii) the exhibits attached to such financial statement(s) constitute
detailed calculations showing compliance with all financial covenants contained
in this Financing Agreement.
9. The Company shall maintain EBITDA, calculated monthly, for each
rolling 12-month period of at least $10,500,000.
10. Until termination of the Financing Agreement and payment and
satisfaction of all Obligations due hereunder, the Company agrees that, without
the prior written consent of CITBC, except as otherwise herein provided, the
Company will not:
A. Mortgage, pledge, or otherwise permit any lien, charge, security
interest, encumbrance or judgment, (whether as a result of a
purchase money or title retention transaction, or other security
interest, or otherwise) to exist on any of its
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assets or goods, whether real, personal or mixed, whether now owned
or hereafter acquired, except for the Permitted Encumbrances;
B. Incur or create any Indebtedness other than the Permitted
Indebtedness;
C. Except for Permitted Indebtedness secured by Permitted
Encumbrances, borrow any money on the security of the Company's
Collateral from sources other than CITBC;
D. Sell, lease, assign, transfer or otherwise dispose of i) Collateral
consisting of cash, Trade Accounts Receivable, Inventory, Equipment
or Permitted Investments, except as otherwise permitted by this
Financing Agreement, ii) or any other Collateral having a value in
excess of $250,000 per year, or iii) either all or substantially
all of the Company's assets, which do not constitute Collateral;
E. Merge, consolidate, reincorporate or otherwise alter or modify its
corporate name, principal place of business, jurisdiction of
incorporation and organization, its structure, corporate good
standing status or existence, or enter into or engage in any
business other than businesses engaged in by the Company on the
date hereof and similar or related businesses or businesses
incidental thereto; provided, however, that on thirty (30) days
prior notice to CITBC, the Company may, without obtaining the
consent of CITBC, alter or modify its corporate name or principal
place of business;
F. Assume, guarantee, endorse, or otherwise become liable upon the
obligations of any other person, firm, entity or corporation,
except (i) by the endorsement of negotiable instruments for deposit
or collection or similar transactions in the ordinary course of
business, (ii) in connection with subleases or assignments of
leases or (iii) in the ordinary course of the Company's business
consistent with current practices provided that the outstanding
obligations under this clause (iii) shall not at any time exceed
$500,000;
G. Declare or pay any dividend of any kind on, or purchase, acquire,
redeem or retire, any of its capital stock or equity interest, of
any class whatsoever, whether now or hereafter outstanding other
than (i) dividends payable solely in shares of capital stock of the
Company and (ii) dividends on the Company's Preferred Stock to the
extent paid by increasing the liquidation preference of such
Preferred Stock; or
H. Make any advance or loan to, or any investment in, any firm,
entity, person or corporation other than Permitted Investments.
11. Without the prior written consent of CITBC, the Company will not
make Capital Expenditures (whether subject to a security interest or otherwise)
during any fiscal year in the aggregate amount in excess of $3,000,000.
12. Intentionally Omitted
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13. Intentionally Omitted
14. The Company agrees to advise CITBC in writing of: a) all
expenditures (actual or anticipated) in excess of $50,000.00 in any fiscal year
for x) environmental clean-up, y) environmental compliance or z) environmental
testing and the impact of said expenses on the Company's working capital; and b)
any notices the Company receives from any local, state or federal authority
advising the Company of any environmental liability (real or potential) stemming
from the Company's operations, its premises, its waste disposal practices, or
waste disposal sites used by the Company and to provide CITBC with copies of all
such notices if so required.
15. Except for Permitted Affiliate Transactions, without the prior
written consent of CITBC, the Company agrees that it will not enter into any
transaction, including, without limitation, any purchase, sale, lease, loan or
exchange of property with any subsidiary or affiliate of the Company.
SECTION 8. Interest, Fees and Expenses
1. (a) Interest on the Revolving Loans shall be payable monthly as of
the end of each month and shall be an amount equal to (a) the applicable Chase
Bank Rate Margin plus the Chase Bank Rate, per annum, on the average of the net
balances owing by the Company to CITBC in the Company's account at the close of
each day during such month on balances other than Libor Loans and (b) the
applicable Libor Margin plus the applicable Libor on each Libor Loan, on a per
annum basis, on the average of the net balances owing by the Company to CITBC in
the Company's account in respect of such Libor Loan at the close of each day
during such month. In the event of any change in said Chase Bank Rate, the rate
under clause (a) above shall change, as of the first of the month following any
change, so as to remain equal to the new Chase Bank Rate plus the applicable
Chase Bank Rate Margin. In addition, the rate applicable under clause (a) or (b)
above shall change based upon any change of the applicable Chase Bank Rate
Margin or the Libor Margin; provided that any such change in such a margin such
be effective on the first Business Day of the month following the month in which
the Company shall have delivered, at least five (5) Business Days before the end
of the month, to CITBC the financial statements demonstrating the change in
EBITDA giving rise to such change in the margin, and any change in the Libor
Margin shall affect only Libor Loans not yet funded as of that date. The rate
hereunder shall be calculated based on a 360-day year. CITBC shall be entitled
to charge the Company's account at the rate provided for herein when due until
all Obligations have been paid in full.
(b) During the continuance of an Event of Default, after the giving of
any required notice by CITBC, and the satisfaction of any other applicable
conditions, in accordance with the provisions of Section 10, Paragraph 2, clause
ii) hereof, all Obligations shall bear interest at the Default Rate of Interest.
2. The Company may elect to use Libor as to any new or then outstanding
Revolving Loans provided A) there is then no Default or Event of Default, B) the
Company has so advised CITBC of its election to use Libor and the Libor Period
selected no later than three (3) Business Days preceding the first day of a
Libor Period and C) the election and Libor shall be
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effective, provided, there is then no Default or Event of Default, on the fourth
Business Day following said notice. The Libor elections must be for $500,000 or
whole multiples thereof and there shall be no more than five (5) Libor Loans
outstanding at one time. If no such election is timely made or can be made, or
if the Libor rate can not be determined, then CITBC shall use the Chase Bank
Rate to compute interest. In addition, the Company shall pay to CITBC, upon the
request of CITBC such amount or amounts as shall compensate CITBC for any loss,
costs or expenses incurred by CITBC (as reasonably determined by CITBC) as a
result of: (i) any payment or prepayment on a date other than the last day of a
Libor Period for such Libor Loan, or (ii) any failure of the Company to borrow a
Libor Loan on the date for such borrowing specified in the relevant notice; such
compensation to include, without limitation, an amount equal to any loss or
expense suffered by CITBC during the period from the date of receipt of such
payment or prepayment or the date of such failure to borrow to the last day of
such Libor Period if the rate of interest obtained by CITBC upon the
reemployment of an amount of funds equal to the amount of such payment,
prepayment or failure to borrow is less than the rate of interest applicable to
such Libor Loan for such Libor Period. The determination by CITBC of the amount
of any such loss or expense, when set forth in a written notice to the Company,
containing CITBC calculations thereof in reasonable detail, shall be conclusive
on the Company, in the absence of manifest error. Calculation of all amounts
payable to the CITBC under this paragraph with regard to Libor Loans shall be
made as though CITBC had actually funded the Libor Loans through the purchase of
deposits in the relevant market and currency, as the case may be, bearing
interest at the rate applicable to such Libor Loans in an amount equal to the
amount of the Libor Loans and having a maturity comparable to the relevant
interest period provided, however, that CITBC may fund each of the Libor Loans
in any manner the CITBC see fit and the foregoing assumption shall be used only
for calculation of amounts payable under this paragraph. In addition,
notwithstanding anything to the contrary contained herein, CITBC shall apply all
proceeds of Collateral, including the Accounts, and all other amounts received
by it from or on behalf of the Company (i) initially to the Chase Bank Rate
loans and (ii) subsequently to Libor Loans; provided, however, during the
continuance of an Event of Default or y) in the event the aggregate amount of
outstanding Libor Rate Loans exceeds Availability or the applicable maximum
levels set forth therefor, CITBC may apply all such amounts received by it to
the payment of Obligations in such manner and in such order as CITBC may elect
in its reasonable business judgment. In the event that any such amounts are
applied to Revolving Loans which are Libor Loans, such application shall be
treated as a prepayment of such loans and CITBC shall be entitled to
indemnification hereunder.
3. In consideration of the Letter of Credit Guaranty of CITBC, the
Company shall pay CITBC the Letter of Credit Guaranty Fee which shall be an
amount equal to one and one-half percent per annum, payable monthly, on the face
amount of each outstanding Letter of Credit less the amount of any and all
amounts previously drawn under such Letters of Credit.
4. Any charges, fees, commissions, costs and expenses charged to CITBC
for the Company's account by any Issuing Bank in connection with or arising out
of Letters of Credit issued pursuant to this Financing Agreement or out of
transactions relating thereto will be charged to the Company's account in full
when charged to or paid by CITBC and when made by any such Issuing Bank shall be
conclusive on CITBC.
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5. The Company shall reimburse or pay CITBC, as the case may be, for:
i) all Out-of-Pocket Expenses of CITBC and b) any applicable Documentation Fee.
6. Upon the last Business Day of each month, commencing with April,
2000, so long as this Financing Agreement is in effect, the Company shall pay
CITBC the Line of Credit Fee.
7. To induce CITBC to enter into this Financing Agreement and to extend
to the Company the Revolving Loans, the Company shall pay to CITBC a Loan
Facility Fee in the amount of $220,000 payable upon execution of this Financing
Agreement.
8. Upon the execution of this Agreement and annually thereafter on each
Anniversary Date, so long as this Financing Agreement is in effect, the Company
shall pay to CITBC the Collateral Management Fee.
9. The Company hereby authorizes CITBC to charge the Company's accounts
with CITBC with the amount of all payments due hereunder as such payments become
due. In the event CITBC is unable or unwilling to charge any such payment to the
Company's account, then CITBC shall so notify the Company in writing and the
amount of such payment shall be immediately due and payable.
SECTION 9. Powers
The Company hereby constitutes CITBC or any person or agent CITBC may
designate as its attorney-in-fact, at the Company's cost and expense, to
exercise all of the following powers, which being coupled with an interest,
shall be irrevocable until all of the Company's Obligations to CITBC have been
paid in full:
(a) To receive, take, endorse, sign, assign and deliver, all in the
name of CITBC or the Company, any and all checks, notes, drafts, and other
documents or instruments relating to the Collateral for (i) deposit to a Blocked
Account (consistent with the terms of paragraph 4 of Section 3 of this Financing
Agreement) or (ii) after the acceleration by CITBC of the Obligations, for
application to satisfaction of the Obligations consistent with the terms of
Paragraph 3 of Section 10 hereof;
(b) To receive, open and dispose of all mail addressed to the
Company and to notify postal authorities to change the address for delivery
thereof to such address as CITBC may designate;
(c) To request from customers indebted on Accounts at any time, in
the name of CITBC or the Company or that of CITBC's designee, information
concerning the amounts owing on the Accounts;
(d) To transmit to customers indebted on Trade Accounts Receivable
notice of CITBC's interest therein and to notify customers indebted on Trade
Accounts Receivable to make payment directly to CITBC for the Company's account;
and
27
<PAGE>
(e) To take or bring, in the name of CITBC or the Company, all
steps, actions, suits or proceedings reasonably deemed by CITBC necessary or
desirable to enforce or effect collection of the Accounts.
Notwithstanding anything hereinabove contained to the contrary, the
powers set forth in (a), (b), (d) and (e) above may only be exercised after the
occurrence of an Event of Default and until such time as such Event of Default
is waived.
SECTION 10. Events of Default and Remedies
1. Notwithstanding anything hereinabove to the contrary, CITBC may
terminate this Financing Agreement immediately upon the occurrence of any of the
following (herein "Events of Default"):
(a) cessation of the business of the Company or the calling of a
general meeting of the creditors of the Company for purposes of compromising the
debts and obligations of the Company;
(b) the Company admits in writing its inability to generally pay
its debts as they mature;
(c) the commencement by the Company of any bankruptcy, insolvency,
arrangement, reorganization, receivership or similar proceedings under any
federal or state law;
(d) the commencement against the Company of any bankruptcy,
insolvency, arrangement, reorganization, receivership or similar proceedings
under any federal or state law, provided, however, that such Default shall not
be deemed an Event of Default if the proceeding, petition, case or arrangement
is commenced or supported by creditors by creditors holding $2,500,000 or less
of indebtedness and is dismissed within 60 days of the filing of, or the
commencement of, such petition, case, proceeding or arrangement;
(e) material breach by the Company of any warranty, representation
or covenant contained herein (other than those referred to in sub-paragraph f
below) or in any other written agreement between the Company or CITBC relating
to this Financing Agreement, provided that such Default by the Company of any of
the warranties, representations or covenants referred in this clause e shall not
be deemed to be an Event of Default unless and until such Default shall remain
unremedied to CITBC's satisfaction for a period of fifteen (15) Business Days
from the date of such Default;
(f) breach by the Company of any warranty, representation or
covenant of Section 3, Paragraphs 3 (other than the third sentence of paragraph
3) and 4; Section 6, Paragraphs 3 and 4 (other than the first sentence of
paragraph 4); Section 7, Paragraphs 1,5,6, and 9 through 11 (other than 10E as
it relates to corporate good standing status);
(g) failure of the Company to pay any of the Obligations within
five (5) Business Days of the due date thereof, provided that nothing contained
herein shall prohibit CITBC from charging such amounts to the Company's account
on the due date thereof;
28
<PAGE>
(h) Company shall i) engage in any "prohibited transaction" as
defined in ERISA, ii) have any "accumulated funding deficiency" as defined in
ERISA, iii) have any Reportable Event as defined in ERISA, iv) terminate any
Plan, as defined in ERISA or v) be engaged in any proceeding in which the
Pension Benefit Guaranty Corporation shall seek appointment, or is appointed, as
trustee or administrator of any Plan, as defined in ERISA, and with respect to
this sub-paragraph h such event or condition x) remains uncured for a period of
60 days from date of occurrence and y) could reasonably be expected to subject
the Company to any tax, penalty or other liability materially adverse to the
business, operations or financial condition of the Company;
(i) without the prior written consent of CITBC, the Company shall
x) amend or modify the Senior Unsecured Debt, any Subordinated Debt, or y) make
any payment on account of any Subordinated Debt except as permitted in the
applicable Subordination Agreement or on account of the Senior Unsecured Debt
except for regularly scheduled payments (but no prepayments or redemptions,
including optional redemptions or those arising due to a Change of Control under
and as defined in the Senior Unsecured Debt) as contemplated under the Indenture
evidencing the Senior Unsecured Debt as in effect as of the date hereof; or
(j) the occurrence of any default or event of default (after giving
effect to any applicable grace or cure periods) under any instrument or
agreement evidencing (x) Subordinated Debt, (y) the Senior Unsecured Debt, or
(z) any other Indebtedness of the Company having a principal amount in excess of
$1,000,000 if the effect of such default or event of default is to permit the
holder or holders of such Subordinated Debt, Senior Unsecured Debt or other
Indebtedness, as the case may be, to cause the same to become or be declared due
and payable prior to its stated maturity or (except in the case of the Senior
Unsecured Debt relating to the March 2000 SEC filing) charge an increased rate
of interest.
2. Upon the occurrence of a Default and/or an Event of Default, at the
option of CITBC, all loans and advances provided for in Sections 3 and 5 of this
Financing Agreement shall be thereafter in CITBC's sole discretion and the
obligation of CITBC to make revolving loans and/or open Letters of Credit shall
cease unless such Default is cured to CITBC's reasonable satisfaction within the
applicable grace period or Event of Default is waived by CITBC and at the option
of CITBC upon the occurrence of an Event of Default: i) all Obligations shall
upon notice (provided, however, that no such notice is required if the Event of
Default is the Event of Default listed in paragraph 1(c) or 1(d) of this Section
10) become immediately due and payable; ii) CITBC may charge the Company the
Default Rate of Interest on all then outstanding or thereafter incurred
Obligations in lieu of the interest provided for in Section 8 of this Financing
Agreement; provided (a) the CITBC has given notice of the imposition of the
Default Rate of Interest, provided, however, that no notice is required if the
Event of Default is the Event listed in paragraph 1(c) or 1(d) of this Section
10 and b) the Company has failed to cure the Event of Default within ten (10)
Business Days after x) CITBC deposited such notice in the United States mail or
y) the occurrence of the Event of Default listed in paragraph 1(c) or 1(d) of
this Section 10; and iii) CITBC may immediately terminate this Financing
Agreement upon notice to the Company, provided, however, that no notice of
termination is required if the Event of Default is the Event listed in paragraph
1(c) or 1(d) of this Section 10. Notwithstanding anything herein contained to
the contrary, if CITBC waives all Events of Default, then by written notice to
the Company, the acceleration of the Obligations
29
<PAGE>
will be rescinded and all remedies and actions then being exercised by CITBC
shall cease. The exercise of any option is not exclusive of any other option
which may be exercised at any time by CITBC.
3. Immediately upon the occurrence of any Event of Default, CITBC may
to the extent permitted by law: (a) remove from any premises where same may be
located any and all documents, instruments, files and records relating to the
Accounts, or CITBC may use, at the Company's expense, such of the Company's
personnel, supplies or space at the Company's places of business or otherwise,
as may be necessary to properly administer and control the Accounts or the
handling of collections and realizations thereon; (b) bring suit, in the name of
the Company or CITBC, and generally shall have all other rights respecting said
Accounts, including without limitation the right to: accelerate or extend the
time of payment, settle, compromise, release in whole or in part any amounts
owing on any Accounts and issue credits in the name of the Company or CITBC; (c)
sell, assign and deliver the Collateral and any returned, reclaimed or
repossessed merchandise, with or without advertisement, at public or private
sale, for cash, on credit or otherwise, at CITBC's sole option and discretion,
and, to the extent permitted by applicable law, CITBC may bid or become a
purchaser at any such sale, free from any right of redemption, which right is
hereby expressly waived by the Company; (d) foreclose the security interests
created herein by any available judicial procedure, or to take possession of any
or all of the Inventory and Equipment without judicial process, and to enter any
premises where any Inventory and Equipment may be located for the purpose of
taking possession of or removing the same; and (e) exercise any other rights and
remedies provided in law, in equity, by contract or otherwise, to the extent
permitted by applicable law. CITBC shall have the right, without notice or
advertisement, to sell, lease, or otherwise dispose of all or any part of the
Collateral whether in its then condition or after further preparation or
processing, in the name of the Company or CITBC, or in the name of such other
party as CITBC may designate, either at public or private sale or at any
broker's board, in lots or in bulk, for cash or for credit, with or without
warranties or representations, and upon such other terms and conditions as CITBC
in its sole discretion may deem advisable, and CITBC shall have the right to
purchase at any such sale. If any Inventory and Equipment shall require
rebuilding, repairing, maintenance or preparation, CITBC shall have the right,
at its option, to do such of the aforesaid as is necessary, for the purpose of
putting the Inventory and Equipment in such saleable form as CITBC shall deem
appropriate. The Company agrees, at the request of CITBC, to assemble the
Inventory and Equipment and to make it available to CITBC at premises of the
Company or such other location reasonably designated by CITBC and to make
available to CITBC the premises and facilities of the Company for the purpose of
CITBC's taking possession of, removing or putting the Inventory and Equipment in
saleable form. However, if notice of intended disposition of any Collateral is
required by law, it is agreed that ten (10) Business Days notice shall
constitute reasonable notification and full compliance with the law. The net
cash proceeds resulting from CITBC's exercise of any of the foregoing rights,
(after deducting all charges, costs and expenses, including reasonable
attorneys' fees) shall be applied by CITBC to the payment of the Company's
Obligations, whether due or to become due, in such order as CITBC may elect, and
the Company shall remain liable to CITBC for any deficiencies, and CITBC in turn
agrees to remit to the Company or its successors or assigns, any surplus
resulting therefrom. The enumeration of the foregoing rights is not intended to
be exhaustive and the exercise of any right shall not preclude the exercise of
any other rights, all of which shall be cumulative.
30
<PAGE>
SECTION 11. Termination
Except as otherwise permitted herein, CITBC may terminate this
Financing Agreement and the Line of Credit only as of the fourth or any
subsequent Anniversary Date and then only by giving the Company at least sixty
(60) days prior written notice of termination. Notwithstanding the foregoing
CITBC may terminate the Financing Agreement immediately upon the occurrence of
an Event of Default upon notice to the Company, provided, however, that if the
Event of Default is an event listed in paragraph 1(c) or 1(d) of Section 10 of
this Financing Agreement, CITBC may regard the Financing Agreement as terminated
and notice to that effect is not required. This Financing Agreement, unless
terminated as herein provided, shall automatically continue from Anniversary
Date to Anniversary Date. The Company may terminate this Financing Agreement and
the Line of Credit at any time upon at least sixty (60) days' prior written
notice to CITBC. If the Financing Agreement is terminated by the Company on a
date earlier than the third Anniversary Date, then the Company shall pay to
CITBC immediately on demand, an Early Termination Fee. All Obligations shall
become due and payable as of any termination hereunder or under Section 10
hereof and, pending final payment in full of all Obligations, CITBC may withhold
any balances in the Company's account (unless supplied with an indemnity
satisfactory to CITBC) to cover all of the Company's Obligations, whether
absolute or contingent provided, however, that if the remaining unpaid
Obligations arise solely out of the outstanding amounts of Letters of Credit,
CITBC will, at the Company's request, retain, solely as collateral, cash
collateral in an amount equal to one hundred and five percent (105%) of the then
outstanding amounts of Letters of Credit unless the Company provides CITBC with
back-to-back letters of credit from a financial institution reasonably
acceptable to CITBC on terms reasonably acceptable to CITBC, in an amount equal
to one hundred and five percent (105%) of the then outstanding amounts of
Letters of Credit. When the outstanding amount of Letters of Credit have been so
secured by cash or by the back-to-back letter of credit, in either event, in an
amount equal to one hundred and five percent (105%) of the then outstanding
amounts of Letters of Credit pursuant to a fully executed agreement between
CITBC and the Company and pursuant to which the Company agrees to reimburse
CITBC for any Letter of Credit claims that exceed the cash collateral or the
back-to-back letter of credit, then for all purposes of this Financing
Agreement, this Financing Agreement shall be treated by the parties thereto as
terminated and all other Collateral will be released. All of CITBC's rights,
liens and security interests shall continue after any termination until all
Obligations have been paid and satisfied in full.
SECTION 12. Miscellaneous
1. Except as otherwise expressly provided in this Financing Agreement,
the Company hereby waives diligence, demand, presentment and protest and any
notices thereof as well as notice of nonpayment. No delay or omission of CITBC
or the Company to exercise any right or remedy hereunder, whether before or
after the happening of any Event of Default, shall impair any such right or
shall operate as a waiver thereof or as a waiver of any such Event of Default.
No single or partial exercise by CITBC of any right or remedy precludes any
other or further exercise thereof, or precludes any other right or remedy.
2. This Financing Agreement and the documents executed and delivered in
connection therewith constitute the entire agreement between the Company and
CITBC;
31
<PAGE>
supersede any prior agreements; can be changed only by a writing signed by both
the Company and CITBC; and shall bind and benefit the Company and CITBC and
their respective successors and assigns.
3. In no event shall the Company, upon demand by CITBC for payment of
any indebtedness relating hereto, by acceleration of the maturity thereof, or
otherwise, be obligated to pay interest and fees in excess of the amount
permitted by law. Regardless of any provision herein or in any agreement made in
connection herewith, CITBC shall never be entitled to receive, charge or apply,
as interest on any indebtedness relating hereto, any amount in excess of the
maximum amount of interest permissible under applicable law. If CITBC ever
receives, collects or applies any such excess, it shall be deemed a partial
repayment of principal and treated as such; and if principal is paid in full,
any remaining excess shall be refunded to the Company. This paragraph shall
control every other provision hereof and of any other agreement made in
connection herewith.
4. If any provision hereof or of any other agreement made in connection
herewith is held to be illegal or unenforceable, such provision shall be fully
severable, and the remaining provisions of the applicable agreement shall remain
in full force and effect and shall not be affected by such provision's
severance. Furthermore, in lieu of any such provision, there shall be added
automatically as a part of the applicable agreement a legal and enforceable
provision as similar in terms to the severed provision as may be possible.
5. THE COMPANY AND CITBC EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY
IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS FINANCING AGREEMENT. THE COMPANY
HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE OF
PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED.
6. Except as otherwise herein provided, any notice or other
communication required hereunder shall be in writing, and shall be deemed to
have been validly served, given or delivered when hand delivered or sent by
facsimile, or three Business Days after deposit in the United State mails, with
proper first class postage prepaid and addressed to the party to be notified as
follows:
(A) if to CITBC, at:
The CIT Group/Business Credit, Inc.
300 South Grand Avenue, Third Floor
Los Angeles, California 90071
Attn: Regional Manager
Facsimile Number: (213) 346-3361
32
<PAGE>
(B) if to the Company at:
Diamond Triumph Auto Glass, Inc.
220 Division Street
Kingston, Pennsylvania 18704
Attn: Chief Financial Officer
Facsimile Number: (570) 287-2149
with a copy to:
Green Equity Investors II, L.P.
11111 Santa Monica Boulevard
Los Angeles, California 90025
Attention: Gregory J. Annick
Facsimile Number: (310) 954-0404
or to such other address as any party may designate for itself by like notice.
7. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS FINANCING
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.
IN WITNESS WHEREOF, the parties hereto have caused this Financing
Agreement to be executed, agreed to, accepted and delivered in Los Angeles,
California by their proper and duly authorized officers as of the date set forth
above.
THE CIT GROUP/BUSINESS CREDIT, INC.
By: /s/ Frank Brown
---------------------------------
Vice President
DIAMOND TRIUMPH AUTO GLASS, INC.
By: /s/ Michael A. Sumsky
-----------------------------
Title: Executive Vice President
33
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<CIK> 0001109531
<NAME> DIAMOND TRIUMPH AUTO GLASS, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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<TOTAL-ASSETS> 87,519
<CURRENT-LIABILITIES> 15,205
<BONDS> 107,500
43,046
0
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<TOTAL-LIABILITY-AND-EQUITY> 87,519
<SALES> 164,520
<TOTAL-REVENUES> 164,520
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