<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1996
REGISTRATION NO. 333-3822
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DIAMOND HOME SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1521 36-3886872
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
222 CHURCH STREET
DIAMOND PLAZA
WOODSTOCK, ILLINOIS 60098
(815) 334-1414
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
ANN CROWLEY PATTERSON, ESQ.
VICE PRESIDENT-ADMINISTRATION,
GENERAL COUNSEL AND SECRETARY
DIAMOND HOME SERVICES, INC.
222 CHURCH STREET, DIAMOND PLAZA
WOODSTOCK, ILLINOIS 60098
(815) 334-1414
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Grant A. Bagan, P.C. Glenn W. Reed, Esq.
McDermott, Will & Emery Gardner, Carton & Douglas
227 West Monroe Street Quaker Tower
Chicago, Illinois 60606-5096 321 North Clark Street
Chicago, Illinois 60610
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / / _______
------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission acting pursuant
to said Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
DIAMOND HOME SERVICES, INC.
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K ITEM 501(B)
<TABLE>
<CAPTION>
FORM S-1 ITEM LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Principal and Selling Stockholders
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered........... Prospectus Summary; Capitalization; Description of
Capital Stock
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Outside Front Cover Page; Prospectus Summary; Risk
Factors; Dividend Policy; Capitalization; Selected
Consolidated Financial and Operating Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal and
Selling Stockholders; Description of Capital Stock;
Shares Eligible for Future Sale; Consolidated
Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... *
</TABLE>
- ------------------------
*Inapplicable
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 17, 1996
PROSPECTUS
3,420,000 SHARES
[DIAMOND HOME SERVICES LOGO]
COMMON STOCK
Of the 3,420,000 shares of Common Stock offered hereby, 2,687,000 shares are
being sold by Diamond Home Services, Inc. (the "Company") and 733,000 shares are
being sold by Globe Building Materials, Inc. (the "Selling Stockholder"). See
"Principal and Selling Stockholders." The Company will not receive any proceeds
from the sale of shares by the Selling Stockholder.
After completion of the offering, the directors and executive officers of
the Company as a group will be deemed to beneficially own approximately 53.8% of
the Company's Common Stock, including 47.7% of the Company's Common Stock which
will continue to be owned by the Selling Stockholder (a corporation controlled
by the Company's Chairman of the Board, Chief Executive Officer and President).
See "Risk Factors -- Control by Principal Stockholder." A portion of the net
proceeds from this offering will be utilized by the Company to pay an $8.6
million special, one-time dividend to its existing stockholders. See "Use of
Proceeds."
Prior to the offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $11.00 and $13.00 per share. See "Underwriting" for information
relating to the determination of the initial public offering price. The Common
Stock has been approved for quotation on the Nasdaq National Market under the
symbol "DHMS."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON
STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDER
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total (3)............... $ $ $ $
</TABLE>
(1) The Company, the Selling Stockholder and, in the event the over-allotment
option is exercised, certain other stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company, the Selling Stockholder and certain of the Company's other
stockholders have granted to the Underwriters a 30-day option to purchase up
to an aggregate of 513,000 additional shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If all such shares are
purchased, the total Price to Public, Underwriting Discount, Proceeds to
Company and Proceeds to Selling Stockholder and certain other stockholders
will be $ , $ , $ and $ , respectively.
The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by them and subject to their right to
reject orders in whole or in part. It is expected that delivery of the
certificates for the Common Stock will be made on or about , 1996.
WILLIAM BLAIR & COMPANY
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
GRAPHIC APPENDIX
The inside front cover page contains a multi-colored map of the United
States, indicating the cities in which the Company's headquarters, regional
offices and sales/production offices are located. Above the map, under the
heading "IMPROVING AMERICA'S HOMES," are pictures depicting: a garage door, an
independent contractor installing a garage door, an independent contractor
installing shingles on a roof, a completed roofing job, an independent
contractor installing a gutter, various fences offered by the Company and an
independent contractor installing an entry door.
Across the bottom of the inside front cover page are the following legends:
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements certified by its
independent auditors and quarterly reports containing unaudited consolidated
financial information for the first three quarters of each fiscal year.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The inside back cover contains a series of multi-colored pictures, assembled
inside an outline resembling the shape of a house. The pictures depict: a garage
door, a Marquise Financial credit card and credit application, a security door,
a patio door, various entry doors and fences offered by the Company, independent
contractors installing a chain-link fence, an independent contractor installing
an entry door, an independent contractor installing a garage door, an
independent contractor installing insulation, an independent contractor
installing shingles on a roof, an independent contractor installing a gutter, a
completed roofing job, and independent contractors installing a light commercial
roofing job. Across the bottom of the page are the words "IMPROVING AMERICA'S
HOMES" and across the top of the page (in some instances partially blocked by
the "house" of pictures) are the words "RESIDENTIAL ROOFING. ENTRY DOORS.
SECURITY DOORS. GARAGE DOORS. PATIO DOORS. GUTTERS. FENCING. INSULATION. SOFFIT
FACIA. WINDOWS. FINANCING. LIGHT COMMERCIAL ROOFING. SIDING. GUTTERS." Inside
the "house" of pictures is the Diamond Home Services, Inc. logo.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN
CONJUNCTION WITH THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. EXCEPT AS OTHERWISE NOTED OR CONTAINED IN THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED HEREIN, ALL INFORMATION IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND HAS BEEN
ADJUSTED TO GIVE EFFECT TO THE RECLASSIFICATION AND STOCK SPLIT OF EACH
OUTSTANDING SHARE OF THE COMPANY'S CLASS A VOTING COMMON STOCK AND CLASS B
NONVOTING COMMON STOCK INTO 50 SHARES OF COMMON STOCK, $.001 PAR VALUE (THE
"COMMON STOCK"), EFFECTED IMMEDIATELY PRIOR TO THE OFFERING. SEE
"CAPITALIZATION," "CERTAIN TRANSACTIONS" AND "DESCRIPTION OF CAPITAL STOCK."
UNLESS THE CONTEXT OTHERWISE INDICATES, AS USED HEREIN, THE DEFINED TERMS
"COMPANY" OR "DIAMOND" SHALL MEAN DIAMOND HOME SERVICES, INC. TOGETHER WITH ITS
WHOLLY-OWNED SUBSIDIARIES, DIAMOND EXTERIORS, INC., MARQUISE FINANCIAL SERVICES,
INC. AND SOLITAIRE HEATING AND COOLING, INC. UNLESS THE CONTEXT OTHERWISE
INDICATES, AS USED HEREIN, THE DEFINED TERM "GLOBE" SHALL MEAN GLOBE BUILDING
MATERIALS, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES.
THE COMPANY
The Company is a leading national marketer and contractor of installed home
improvement products, including roofing, gutters, doors and fencing. The Company
markets its home improvement products and services directly to consumers
primarily under the "Sears" name pursuant to a three-year non-exclusive license
agreement with Sears, Roebuck and Co. ("Sears"), which expires December 31,
1998. Sears has been in business for over 100 years and is a nationally
recognized name in the installed home improvement industry. The Company is one
of the largest third-party licensees of Sears home improvement products and
services. The Company currently markets its products directly to residential
customers in 44 states through a combination of national and local advertising
and its approximately 700 sales managers and sales representatives (collectively
referred to herein as "Sales Associates"). The Company has 74 sales offices
located in major cities across the U.S., providing the Company with a presence
in markets covering approximately 77% of the owner-occupied households in the
U.S. The Company installs its products through a network of over 1,300 qualified
independent contractors and purchases its products through local and regional
independent distributors.
The Company was formed in May 1993 by a group consisting primarily of six
former Sears home improvement managers and Globe, a manufacturer of roofing
products, to participate in the consolidation of the installed home improvement
industry. The installed home improvement industry is large and fragmented.
According to the U.S. Department of Commerce, total expenditures for residential
improvements and repairs grew at an annual compounded rate of 5.7% from
approximately $97.5 billion in 1991 to approximately $115.0 billion in 1994. The
Company's competitors are typically small, family-owned independent contractors,
which are facing increasingly complex regulations, additional capital
requirements and the need for more sophisticated sales and marketing resources.
The Company believes that its ability to compete favorably in the installed
home improvement market has been enhanced by several factors, including its
ability to market and sell its premium products and services through targeted
advertising and formal in-home product presentations to prospective customers by
the Company's trained Sales Associates. Under its license to use the nationally
recognized "Sears" name, the Company provides consumers primarily "need-based"
products and services which are used to improve and repair portions of a home or
prevent potential problems, such as a damaged roof or a broken garage door. A
customer's decision to purchase "need-based" products and services tends to be
less discretionary than the decision to purchase other home improvement
products, since a decision to purchase a "need-based" product is typically in
response to a problem that needs to be promptly remedied. The Company provides
readily available financing to qualified customers through Sears and its
affiliates or through Marquise Financial Services, Inc. ("Marquise Financial"),
the Company's newly-formed consumer finance subsidiary. The Company is committed
to superior product offerings and customer service, as reflected in its
extensive labor and product warranty coverage. Additionally, the Company
believes its established relationships with independent contractors assure
reliable and superior product installation.
3
<PAGE>
The license agreement with Sears provides for immediate termination by Sears
for various reasons, including the Company's failure to comply with any material
provision of the license agreement or the receipt by Sears of an excessive
number of complaints regarding the Company. The license agreement is not
exclusive by its terms; however, historically, Sears has not licensed the same
home improvement products to multiple licensees within the same market.
Notwithstanding the foregoing, there can be no assurance that Sears will not
license the same home improvement products to other licensees within the
Company's markets. The Company is not owned or controlled by, or under common
control with, Sears.
Since commencement of the Company's operations in June 1993, the Company's
net sales have increased to $124.8 million for the year ended December 31, 1995.
The Company intends to continue its growth in net sales and profitability by
increasing penetration in existing markets through the addition of new Sales
Associates and sales offices and the generation of additional sales leads. The
Company also intends to add new installed product lines, including proprietary
products and other maintenance-related, "need-based" products and services, and
to increase its conversion rate of sales leads into sales. The Company believes
that the availability of an alternative source of financing for its customers
through Marquise Financial will lead to increased product sales and
profitability.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company........... 2,687,000 shares
Common Stock Offered by the Selling Stock-
holder....................................... 733,000 shares
Common Stock to be Outstanding After the
Offering..................................... 8,936,950 shares (1)
Use of Proceeds............................... To retire indebtedness, to pay an $8.6 million
special, one-time dividend to existing
stockholders, to fund the Company's consumer
finance subsidiary, for the development and
expansion of complementary product lines and
services and for working capital and other
general corporate purposes. See "Use of
Proceeds" and "Certain Transactions --
Transactions with Globe and Globe Affiliates."
Nasdaq National Market Symbol................. DHMS
</TABLE>
- ------------------------
(1) Excludes 670,000 shares of Common Stock reserved for issuance under the
Company's stock option plans, of which 275,000 shares are subject to options
to be granted upon consummation of the offering at an exercise price equal
to the initial public offering price. See "Management -- Stock Option
Plans."
------------------------
The Company was incorporated in Delaware on May 13, 1993 and commenced
operations on June 1, 1993. Diamond Exteriors, Inc. ("Exteriors"), a
wholly-owned subsidiary of the Company, was incorporated in Delaware on May 15,
1995. Marquise Financial and Solitaire Heating and Cooling, Inc. ("Solitaire")
were incorporated in Delaware, as wholly-owned subsidiaries of Exteriors, on
July 13, 1995 and November 27, 1995, respectively. The Company's principal
executive and administrative office is located at 222 Church Street, Diamond
Plaza, Woodstock, Illinois 60098, and its telephone number is (815) 334-1414.
Effective April 18, 1996, the Company transferred substantially all of its
assets and liabilities to Exteriors, its wholly-owned subsidiary. Simultaneous
with such transfer, Exteriors paid a dividend to the Company consisting of all
of the issued and outstanding capital stock of Marquise Financial and Solitaire.
Immediately prior to the consummation of the offering, the Company will
reclassify and split each outstanding share of its Class A Voting Common Stock
and Class B Nonvoting Common Stock into 50 shares of Common Stock.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS ENDED
PERIOD FROM JUNE 1 31, MARCH 31,
TO ---------------------- --------------------
DECEMBER 31, 1993(1) 1994 1995 1995 1996
-------------------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $ 20,548 $ 94,186 $ 124,848 $ 22,362 $ 27,093
Gross profit............................... 7,960 38,047 52,603 9,266 11,800
Operating profit (loss).................... (1,179) 2,951 6,795 256 714
Net income (loss).......................... (1,179) 1,995 3,735 (1) 349
Pro forma net income (2)................... 3,951 403
Pro forma net income per share (3)......... $ 0.53 $ 0.05
Pro forma weighted average common shares
outstanding (4)........................... 7,398 7,398
SELECTED OPERATING DATA:
Number of sales offices (5)................ 38 55 70 64 72
Number of Sales Associates (5)............. 260 496 631 557 674
Number of installed jobs................... 7,294 37,510 55,261 9,916 12,124
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------
ACTUAL AS ADJUSTED (6)
---------- ---------------
<S> <C> <C>
BALANCE SHEET DATA (5):
Working capital (deficit).......................................................... $ (5,293) $ 11,794
Total assets....................................................................... 35,508 44,000
Total debt......................................................................... 12,921 2,015
Common stockholders' equity........................................................ 5,182 26,069
</TABLE>
- ------------------------
(1) Period from inception of the Company's operations to December 31, 1993.
(2) Pro forma to give effect to the offering of Common Stock made hereby, as if
such offering were completed on the first day of the period presented,
assuming the proceeds of which were used solely to retire the Senior Manager
Performance Notes, of which approximately $4.0 million of principal (and no
interest) was outstanding at January 1, 1995, approximately $4.4 million of
principal and interest was outstanding at January 1, 1996 and approximately
$3.3 million of principal and interest remained outstanding at March 31,
1996. See "Use of Proceeds" and "Certain Transactions -- Transactions with
Senior Managers."
(3) Represents pro forma net income divided by pro forma weighted average common
shares outstanding.
(4) Pro forma weighted average common shares outstanding represents historical
weighted average common shares outstanding during the period presented plus
the number of shares, to be issued at an assumed initial public offering
price of $12.00 per share, sufficient to fund the repayment of the Senior
Manager Performance Notes, of which approximately $4.0 million of principal
(and no interest) was outstanding at January 1, 1995, approximately $4.4
million of principal and interest was outstanding at January 1, 1996 and
approximately $3.3 million of principal and interest remained outstanding at
March 31, 1996, and the payment of an $8.6 million special, one-time
dividend to the Company's existing stockholders (including management
stockholders and Globe). See "Certain Transactions -- Transactions with
Globe and Globe Affiliates".
(5) Calculated at the end of the period shown.
(6) As adjusted to reflect the sale by the Company of 2,687,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $12.00
per share and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING ANY SHARES OF COMMON STOCK OFFERED HEREBY.
LIMITED OPERATING HISTORY
The Company was formed in May 1993 by a group consisting primarily of six
former Sears home improvement managers and Globe, and commenced operations on
June 1, 1993 when it entered into a license agreement with Sears. Accordingly,
the Company's operating history is brief and may not serve as an accurate
indicator of the Company's future performance. Since its inception, the Company
has experienced substantial growth in revenue and profitability. There can be no
assurance that the Company's revenue growth and profitability will be sustained.
In January 1993, Sears decided to discontinue the direct selling, furnishing and
installing of product lines currently sold by the Company under the Sears
license agreement and elected instead to conduct such business through licensing
arrangements with third parties. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON SEARS LICENSE
Currently, substantially all of the Company's revenues are derived from
sales of products and services under a license agreement between Exteriors, a
wholly-owned subsidiary of the Company, and Sears. As used herein with respect
to the description of the Sears license agreement, the defined term "Company"
shall mean Diamond Home Services, Inc. together with Exteriors. The license
agreement authorizes the Company to sell, furnish and install roofing, gutters,
doors and fences under the "Sears" name as a Sears authorized contractor in 44
states. The Company entered into a new three-year license agreement with Sears
effective January 1, 1996. The license agreement expires December 31, 1998 and
after the first two years of its term, may be terminated prior to expiration by
either party without cause so long as such party has provided 12-months' written
notice prior to the termination date. The license agreement provides for
immediate termination by Sears for various reasons, including the Company's
failure to comply with any material provision of the license agreement or the
receipt by Sears of an excessive number of complaints regarding the Company. In
addition, Sears has the right upon 12-months' written notice to the Company, to
discontinue the Company's right to sell, furnish and install certain products in
certain markets under the "Sears" name if the sales volume or quality rating of
the Company with respect to such products or markets, as measured by Sears, fall
below the standards contained in the license agreement.
The license agreement is not exclusive by its terms; however, historically,
Sears has not licensed the same home improvement products to multiple licensees
within the same market. Notwithstanding the foregoing, there can be no assurance
that Sears will not license the same home improvement products to other
licensees within the Company's markets. Although in the past Sears has either
renewed or extended the license agreement with the Company, there can be no
assurance that the license agreement will be renewed or extended in the future.
The license agreement provides for the Company to pay Sears a license fee based
on the Company's gross sales for products licensed under the license agreement.
The license fee is fixed during the term of the license agreement at 11% of
gross sales for all products sold under the license agreement, other than doors,
which have a fixed license fee of 13% of gross sales. Termination of the license
agreement or certain rights thereunder, the failure of Sears to renew the
license agreement with the Company on its current terms, an increase in the
rates of the license fee paid by the Company to Sears, the addition of other
Sears licensees marketing the Company's products in the Company's markets, Sears
exercise of its right to discontinue the Company's license in any market or for
any product or a decline in Sears reputation could have a material adverse
effect on the net sales and profitability of the Company. In addition, in 1995,
approximately 44% of the Company's marketing expense was related to advertising
with Sears. In the event the license agreement is terminated or expires, the
Company would need to find alternative methods to market its products. There can
be no assurance that the alternative methods would be as cost-effective as
advertising with Sears and, to the extent such methods are not as
cost-effective, the Company's net
6
<PAGE>
sales and profitability could be adversely affected. The Company is not owned or
controlled by, or under common control with, Sears. Neither Sears nor any of its
affiliates assumes any responsibility with respect to this offering or the
accuracy of any information set forth herein. See "Business -- Sears License
Agreement."
WARRANTY EXPOSURE
The Company provides each customer with a warranty on product and labor.
Depending on the type of product installed, the product and labor warranties
provided by the Company vary from one-year to up to 10 years. Additionally, the
manufacturer provides a warranty on the product and the independent contractor
provides a warranty on the labor. Generally, the product warranty provided by
manufacturers is commensurate as to scope and is typically longer as to duration
than the warranty that the Company provides to its customers. However, certain
manufacturer product warranties often provide a declining amount of coverage
over time, while the Company's warranty coverage does not decline during the
warranty period. The labor warranty that the Company receives from its
independent contractors (generally one to two years) is significantly shorter in
duration than that provided by the Company to its customers. In all cases, the
Company is primarily liable to the customer to fulfill all warranty obligations,
regardless of whether a manufacturer or independent contractor performs its
warranty obligations. The Company attempts to limit its potential warranty
exposure by pre-screening independent contractors, using quality products
produced by nationally known manufacturers and inspecting a portion of all
installations. The Company currently accrues a reserve for warranty claims which
has approximated 2% of net sales since the Company's inception.
Due to the Company's limited operating history and the length of the
warranties provided by the Company, there can be no assurance that the warranty
reserve is adequate. In addition, pursuant to the license agreement with Sears
(i) Sears has the right to settle, at the Company's expense and without the
Company's consent, any customer complaints, (ii) the Company has agreed to and
supports Sears policy of "Satisfaction Guaranteed or Your Money Back" as it
relates to customer complaints and adjustments and (iii) the Company's customers
are third party beneficiaries of the one-year product and labor warranty given
by the Company to Sears with respect to each installation. To the extent the
amount of money spent to reimburse Sears for customer complaint settlements or
to satisfy customers under the "Satisfaction Guaranteed or Your Money Back"
policy, together with any warranty claims settled by the Company materially
exceeds the warranty reserve or if certain manufacturers or a significant number
of independent contractors are unable to fulfill their warranty obligations, the
Company's results of operations could be materially adversely affected. See
"Business -- Warranty."
RELIANCE ON SALES ASSOCIATES
The Company's success depends upon its ability to identify, develop and
retain qualified employees, particularly Sales Associates. As of May 1, 1996,
the Company had 700 Sales Associates as compared to 557 as of March 31, 1995.
New Sales Associates may have limited prior experience in the home improvement
industry. As a result, the Company devotes substantial resources to the training
and development of its Sales Associates. There can be no assurance that the
Company will continue to be able to identify, develop and retain qualified Sales
Associates.
The Company intends to increase the number of Sales Associates by
approximately 50 and to open 1 to 2 sales offices in new and existing markets
during the remainder of 1996. To the extent that the Company does not
successfully hire qualified Sales Associates or they are unable to achieve
anticipated performance levels, the Company's ability to penetrate existing and
new markets and, therefore, the Company's sales growth could be significantly
delayed or adversely affected. See "Business -- Sales."
HIGH TURNOVER OF SALES REPRESENTATIVES
The Company's sales representatives work on a commission-only basis. For
this reason, among others, the Company has experienced significant turnover of
its sales representatives. During the two-year period from January 1, 1994
through December 31, 1995, approximately 62% of the Company's
7
<PAGE>
total sales representatives resigned or were terminated. During the same period,
the Company's 200 top-selling sales representatives (representing approximately
15% of the sales representatives employed by the Company during such period)
generated approximately 61% of the Company's total net sales. Among these
top-selling sales representatives, approximately 30% resigned or were terminated
during the two-year period. The turnover of sales representatives results in
increased recruitment and training costs and a lower than desired conversion
rate of sales leads to sales. To the extent that the turnover rate of sales
representatives continues or increases, or the Company loses a significant
number of its most productive sales representatives, the net sales and
profitability of the Company could be adversely affected. See "Business --
Sales."
DEPENDENCE ON AVAILABILITY OF QUALIFIED INDEPENDENT CONTRACTORS
The Company's success depends upon its ability to continue to hire
independent contractors possessing the technical skills, experience and
financial stability necessary to meet the Company's quality standards and to
satisfy the Company's insurance requirements. Because the Company provides up to
a 10-year warranty for labor on certain of its products, hiring qualified
independent contractors who will perform the work in accordance with the
Company's specifications and predetermined quality standards is extremely
important. The Company must continually identify and evaluate new independent
contractors and reevaluate the independent contractors it is currently
utilizing. Most of the Company's independent contractors also compete directly
with the Company and the Company, to a lesser extent, competes with other home
improvement companies for the services of independent contractors. The Company
only retains an independent contractor at the time an installation is sold. As a
result, no independent contractor is obligated to work for the Company until the
independent contractor accepts an assignment. In the past, the Company has
periodically had difficulty retaining a sufficient number of qualified
independent contractors, especially after periods of extreme weather in specific
geographic areas due to increased demand. There can be no assurance that
qualified independent contractors will continue to be available to, or choose to
work for, the Company in sufficient numbers to satisfy the Company's
installation requirements. The Company's policy requires that its independent
contractors satisfy the Company's workers' compensation and general liability
insurance requirements. In certain circumstances, independent contractors have
not carried or renewed their workers' compensation and general liability
insurance. To the extent that independent contractors do not carry the required
insurance, the Company could incur ultimate liability for any injury or damage
claims. The Company is in the process of taking actions aimed at better ensuring
that each independent contractor meets and continues to meet the Company's
workers' compensation and general liability insurance requirements. See
"Business -- Independent Contractors."
INTEREST RATE SENSITIVITY
The ability to affordably finance purchases, of which the interest rate
charged is a significant component, is an important part of a customer's
decision to purchase the Company's products. The average sales price charged by
the Company for its products and services typically ranges between $1,100 and
$5,000 and during fiscal 1995, approximately 89% of the Company's sales were
financed. As interest rates increase, customers often pay higher monthly
payments which may make the Company's products less affordable, and, as a
result, the Company's net sales and profitability may decrease.
DEPENDENCE ON AVAILABILITY OF SEARS CREDIT
Of the Company's sales which were financed during fiscal 1995, approximately
97% were financed through Sears and its affiliates. Historically, the Company
has been unable to provide financing to certain potential customers as a result
of the inability of these customers to satisfy the credit underwriting criteria
of Sears and its affiliates. Since the Company's inception, the credit approval
rate of Sears and its affiliates for the Company's customers has varied from
time to time based on a variety of factors. To the extent its customers are
unable to obtain financing through Sears and its affiliates, the Company's
results of operations could be adversely affected. See "Business -- Customer
Financing."
8
<PAGE>
NEW CONSUMER FINANCE SUBSIDIARY
In November 1995, Marquise Financial, the Company's consumer finance
subsidiary, commenced operations to provide an additional financing alternative
for purchasers of the Company's products. Many of the Company's customers who
finance their purchases through Marquise Financial may be higher credit risks
than the Company's other customers due to various factors, including, among
other things, their employment status and previous credit history, the absence
or limited extent of their prior credit history or their limited financial
resources. Consistent with the Company's strategy, many customers who finance
their purchases through Marquise Financial have not met and may not meet the
credit underwriting criteria of Sears and its affiliates. Consequently,
providing financing to these customers will likely involve a higher incidence of
default and increased delinquency rates and will involve greater servicing
costs. The Company currently bears the credit risk on the purchases financed
through Marquise Financial, unlike purchases financed through Sears and its
affiliates. Marquise Financial currently maintains a bad debt reserve for
expected losses. Due to Marquise Financial's limited operating history and the
Company's limited experience in consumer financing, there can be no assurance
that the bad debt reserve is adequate. To the extent that losses materially
exceed the bad debt reserve, the Company's results of operations could be
materially adversely affected. There can be no assurance that the credit
performance of its customers will be at the expected level, that Marquise
Financial's systems and controls will be adequate, that losses will be
consistent with the expected bad debt experience or that Marquise Financial will
be able to obtain financing sufficient to support its expanded operations. See
"Business -- Customer Financing."
DEPENDENCE ON KEY PERSONNEL
The Company is currently dependent upon the ability and experience of its
executive officers and there can be no assurance that the Company will be able
to retain all of such officers. The loss of Mr. Clegg and any one of the
Regional Vice Presidents (i.e., Messrs. Gillespie, Cianciosi, Cooper and
Schurter) within a short period of time could have a material adverse effect on
the Company's operations. Certain of the Company's key personnel also hold
executive positions and have responsibilities with Globe, certain of its
affiliates and other companies and expect to continue in these positions
following the offering. Mr. Clegg, the Company's Chairman of the Board, Chief
Executive Officer and President, currently devotes and intends to devote a
majority of his time to the management of the Company. The Company does not have
employment agreements with its executive officers. The Company does not maintain
key-man life insurance on any of its officers or key personnel. See "Management"
for a list of, and information about, each of the executive officers.
HIGHLY COMPETITIVE MARKET
The industry in which the Company competes is fragmented and competitive.
The Company competes for sales with numerous local home improvement installers
and independent contractors in each of its markets, some of which also serve as
independent contractors for the Company. The Company also competes against major
retailers which market and install products similar to the Company's, including
Home Depot, Inc. and Montgomery Ward & Co., Inc. In addition, AMRE, Inc., a
licensee of Century 21 Real Estate Corp. and a former Sears licensee for siding
and windows, is also a competitor. Certain of these competitors are
significantly larger and have greater financial resources than the Company. The
Company competes on the basis of price, Sears name recognition and reputation,
customer service reputation, workmanship and the ability of the Company and the
manufacturer to fulfill their warranty obligations. Because the Company's focus
is on providing additional value to its customers through warranty protection,
proprietary products and superior customer service, the Company typically
charges prices for its products and services which are higher than those of most
of its local competitors. The Company expects that the market for its products
and services will expand and therefore, competition will increase in the future.
There can be no assurance that the Company will remain competitive or that the
Company will be able to maintain its current profitability. See "Business --
Competition."
9
<PAGE>
SEASONALITY; QUARTERLY FLUCTUATIONS
The Company's results of operations may fluctuate from year to year or
quarter to quarter due to a variety of factors. The Company expects lower levels
of sales and profitability during the period from mid-November through
mid-March, impacting the first and fourth quarter of each fiscal year. The
Company believes that this seasonality is caused by winter weather in certain of
the Company's markets located in the northeastern and north central U.S. and
rainy weather, each of which limits the Company's ability to install exterior
home improvements. In addition, the demand for the Company's products and the
Company's results of operations may be affected by the severity of the weather.
For example, mild weather limits the number of roofs in need of repair but
allows the Company to continue to install its products. Conversely, severe
weather increases the number of roofs in need of repair but, due to increased
demand for independent contractors, limits the pool of qualified independent
contractors available to install the Company's products and can delay the time
it takes to complete an installation. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Seasonality" and "--
Quarterly Financial Information."
CONTROL BY PRINCIPAL STOCKHOLDER
Upon completion of the offering (assuming no exercise of the Underwriters'
over-allotment option), the Company's principal stockholder, Globe, will
beneficially own 47.7% of the Company's outstanding shares of Common Stock. As a
result, Globe will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. C. Stephen Clegg, Chairman of the Board,
Chief Executive Officer and President of the Company, is also the Chairman of
the Board, Chief Executive Officer and controlling stockholder of Globe. Of the
five members of the Company's Board of Directors, three members are also
directors of Globe. Future sales by Globe of substantial amounts of Common
Stock, or the potential for such sales, could adversely affect prevailing market
prices. Upon completion of the offering (assuming no exercise of the
Underwriters' over-allotment option) the directors and executive officers of the
Company as a group will be deemed to beneficially own approximately 53.8% of the
Company's Common Stock, including 47.7% of the Common Stock which will continue
to be owned by Globe, and, therefore, the directors and executive officers as a
group will be able to exercise significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. See "Management," "Certain Transactions --
Legal Proceedings," "Principal and Selling Stockholders" and "Shares Eligible
for Future Sale."
CERTAIN TRANSACTIONS WITH AND PAYMENTS TO PRINCIPAL STOCKHOLDER
Immediately prior to the offering, Globe owns 80% of the issued and
outstanding Common Stock of the Company, with the remaining 20% being owned by
senior or former management. Globe manufactures home building products,
including roofing shingles and related roofing products. In 1995, the Company
purchased approximately $1.5 million of Globe roofing products through
independent distributors, representing approximately 16% in dollar volume of all
roofing products purchased by the Company. The Company will continue to purchase
Globe products through independent distributors following the completion of the
offering and the amount of such purchases may increase. The Company believes
that the prices charged by independent distributors for Globe products are
competitive with comparable products of other roofing products manufacturers.
The Company currently has a management agreement and tax sharing agreement with
Globe and its affiliates. In 1994 and 1995, the Company incurred management fees
to Globe in the aggregate amount of $464,000 and $558,000, respectively, and for
1996, through the date of the consummation of the offering, the Company will
have incurred to Globe a management fee of approximately $350,000. The
management agreement and tax sharing agreement will terminate upon the
consummation of the offering. The Company has a policy that all transactions
between the Company and any related party, including Globe and Catalog Holdings
Inc. and their affiliates, will be on terms no less favorable to the Company
than the Company believes would be available from unaffiliated third parties.
Globe licenses the name "Diamond Shield" to the Company pursuant to an
exclusive, royalty-free, perpetual license. The Company anticipates that it will
have the following relationships with Globe and affiliates of Globe and Mr.
Clegg following completion of the offering: Globe will remain a stockholder of
the Company;
10
<PAGE>
Messrs. Clegg, Stinson and Pollock and Ms. Patterson will remain executive
officers and/or directors of Globe and the Company; the Company will continue to
purchase Globe products through independent distributors; the license agreement
with Globe will continue; and the services provided to The Handy Craftsmen, Inc.
will continue (as described below). The Company does not anticipate any other
relationships with Globe and affiliates of Globe and Mr. Clegg following the
offering. See "Management" and "Certain Transactions -- Transactions with Globe
and Globe Affiliates" and "-- Legal Proceedings."
Upon consummation of the offering, the Company will pay an $8.6 million
special, one-time dividend to its currently existing stockholders with a portion
of the net proceeds from the offering. As an 80% stockholder, Globe will receive
approximately $6.9 million of this dividend. The balance of the dividend will be
paid to current and former management stockholders. In April 1996, the Company
redeemed all outstanding shares of Series A Preferred Stock at an aggregate
redemption price of $1.4 million. All of these shares of Series A Preferred
Stock were held by Globe. The price at which the Series A Preferred Stock was
redeemed was equal to the purchase price paid by Globe for the Series A
Preferred Stock in July 1993. No dividends or interest were paid to Globe with
respect to the Series A Preferred Stock. See "Use of Proceeds" and "Certain
Transactions -- Transactions With Globe and Globe Affiliates."
The Company has engaged in negotiations regarding the purchase of
substantially all of the assets of The Handy Craftsmen, Inc. ("Handy Craftsmen")
from a majority-owned subsidiary of Catalog Holdings Inc. ("Catalog") for
approximately $2.0 million in cash. Mr. Clegg, Chairman of the Board, Chief
Executive Officer and President of the Company, is the Chairman of the Board and
Chief Executive Officer and controlling stockholder of Catalog. Handy Craftsmen
is engaged in the marketing and contracting of home repair services under the
Sears name pursuant to a license agreement with Sears. Catalog acquired a ninety
percent interest, on a fully diluted basis, in Handy Craftsmen in September 1994
for no cash consideration. Simultaneously with the acquisition, Handy Craftsmen
entered into a five-year employment agreement with Mr. Fred Bies, the individual
who, along with his wife, was previously the owner and is, along with his wife,
currently the minority owner of Handy Craftsmen, and a management agreement with
HI, Inc., a wholly-owned subsidiary of Catalog, pursuant to which management
services are provided to Handy Craftsmen. The employment agreement provides for
an annual base salary of $50,000 and an annual incentive bonus of up to $50,000.
Handy Craftsmen has not paid HI, Inc. the management fees as required by the
management agreement. Catalog has loaned approximately $100,000 to Handy
Craftsmen since the acquisition. The Company believes that the acquisition of
Handy Craftsmen, if completed, will expand the range of "need based" services
that the Company offers under the Sears name, will allow the Company to further
utilize the Company's existing sales leads and will provide a good source of
additional leads for the Company's core business. The terms of purchase are
being negotiated on behalf of the Company by Messrs. Gillespie and Cianciosi,
both of whom are executive officers (with Mr. Gillespie also being a director)
of the Company. These individuals have no affiliation with Globe or Catalog. The
terms of purchase are being negotiated on behalf of Catalog by a director of
Catalog who has no affiliation with Diamond or Globe. The Company's valuation of
Handy Craftsmen is based on the value of the Sears license agreement (assuming
it is expanded to cover a greater geographic area than the Chicago and Milwaukee
markets prior to the acquisition), the expected revenues and earnings of Handy
Craftsmen and the synergistic benefits that Handy Craftsmen brings to the
Company. At the time of the acquisition by Catalog, Handy Craftsmen was only
licensed in the Chicago market and was not profitable. Since the acquisition,
Catalog has developed and implemented a computerized system whereby sales leads
are qualified, appointments are scheduled and services are performed in a
streamlined and efficient manner leading to lower costs, increased revenue and
greater profitability and has expanded Handy Craftsmen's operations into the
Milwaukee market. As a result, the Company believes Catalog has added
significant value to Handy Craftsmen. The Company believes that the transaction,
if completed, will be fair and beneficial to the stockholders of the Company.
There is no assurance that the transaction will be consummated or, if
consummated, that the final terms will not differ from those currently
contemplated. The Company has provided computer, payroll and accounting
services, as well as employees and office space to Handy Craftsmen. Handy
Craftsmen has reimbursed the Company for such services on a cost basis.
Following the completion of the offering,
11
<PAGE>
the Company will continue to provide such services to Handy Craftsmen and will
continue to charge Handy Craftsmen the cost of such services. See "Management,"
and "Certain Transactions -- Transactions with Globe and Globe Affiliates" and
"-- Legal Proceedings."
HOLDING COMPANY STRUCTURE; LIMITATIONS ON ACCESS TO CASH FLOW
Currently, all of the revenue of the Company's home improvement and finance
operations is generated by its wholly-owned subsidiaries. The primary asset of
the holding company is the capital stock in such subsidiaries. The holding
company generates minimum cash flow, other than from dividends and other cash
distributions from its subsidiaries. The right of the holding company to
participate in any distribution of earnings or assets of its subsidiaries is
subject to the prior claims, if any, of the creditors of such subsidiaries. In
addition, the Company's bank line of credit, which is secured through Exteriors,
its wholly-owned subsidiary, contains certain restrictive covenants, including
certain covenants that prohibit Exteriors from paying dividends to the Company
unless Exteriors is in compliance, immediately after making such dividends, with
certain financial covenants set forth in the bank line of credit and restrict
Exteriors' ability to make other distributions. See "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
COMPLIANCE WITH GOVERNMENT REGULATIONS
The Company's business and the activities of its independent contractors are
subject to various federal, state and local laws, regulations and ordinances
relating to, among other things, in-home sales, consumer financing, advertising,
the licensing of home improvement independent contractors, OSHA standards,
building and zoning regulations and environmental laws and regulations relating
to the disposal of demolition debris and other solid wastes. In certain
jurisdictions, the Company or one of its employees is required to be licensed as
a contractor. In addition, certain jurisdictions require the Company or the
independent contractor to obtain a building permit for each installation. In
addition, such laws and regulations, may, among other things, regulate the
Company's advertising, warranties and disclosures to customers. Building codes,
licensing requirements and safety laws vary from state to state and, in certain
circumstances, limit the availability and supply of independent contractors and
impose additional costs on the Company in complying with such laws. Although the
Company believes that it has been and is currently in compliance in all material
respects with such laws and regulations, there can be no assurance that in the
future the Company's results of operations will not be materially adversely
affected by existing or new laws or regulations applicable to the Company's
business.
The Company's consumer finance subsidiary, Marquise Financial, is subject to
numerous federal and state consumer protection laws and regulations which may
vary from jurisdiction to jurisdiction and which, among other things, require
the Company to: (i) obtain and maintain certain licenses and qualifications;
(ii) limit the interest rates, fees and other charges the Company is allowed to
charge; and (iii) limit or prescribe certain other terms of the Company's credit
applications and contracts. Although the Company believes that Marquise
Financial has been and is currently in compliance in all material respects with
such laws and regulations, there can be no assurance that in the future a change
in existing laws or regulations or the creation of new laws and regulations
applicable to Marquise Financial's business will not have an adverse effect on
the Company's ability to provide customer financing of its products or on the
profitability of such activities. See "Business -- Government Regulations."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon completion of this offering, the Company will have outstanding an
aggregate of 8,936,950 shares of Common Stock (9,074,900 shares if the
Underwriters' over-allotment option is exercised in full). All of the 3,420,000
shares (assuming the Underwriters' over-allotment is not exercised) sold in this
offering will be freely tradeable by persons other than affiliates of the
Company. The remaining 5,516,950 shares of Common Stock were issued by the
Company in private transactions not involving a public offering. Such shares may
be sold pursuant to Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), depending upon the holding period of such securities and
subject to significant restrictions in the case of shares held by persons deemed
to be affiliates of the Company. In addition, any employee of the Company who
purchased his shares pursuant to certain plans or contracts may be entitled to
rely on the resale provisions of Rule 701 under the Securities Act. The
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<PAGE>
Company sold 268,750 shares of Common Stock to its employees pursuant to Rule
701. Sales of substantial amounts of Common Stock by stockholders, or the
perception that such sales could occur, could adversely affect the market price
in the public market following this offering. The Company, the Selling
Stockholder and all other stockholders have executed "lock-up agreements"
pursuant to which they have, subject to certain exceptions in the case of the
Company, agreed not to sell, contract to sell or otherwise dispose of any shares
of Common Stock, or securities convertible into Common Stock (except Common
Stock issued pursuant to options to be granted and issued upon consummation of
the offering), for a period of 180 days after the date of this Prospectus,
without the prior written consent of William Blair & Company, L.L.C., except for
the Common Stock offered hereby.
Pursuant to an agreement between the Company and Globe, Globe is entitled to
certain registration rights with respect to the shares of Common Stock that it
owns. If Globe, by exercising such registration rights upon expiration of its
lock-up agreement described above, causes a large number of shares to be
registered and sold in the public market, such sales may have an adverse effect
on the market price of the Common Stock. In addition, the Company intends to
file a registration statement under the Securities Act to register an aggregate
of 670,000 shares of Common Stock reserved for issuance under the Company's
stock option plans. The Company will issue options to purchase 275,000 shares
upon consummation of the offering at an exercise price equal to the initial
public offering price. The issuance of such shares could result in the dilution
of the voting power of the shares of Common Stock purchased in this offering and
could have a dilutive effect on earnings per share. See "Management -- Stock
Option Plans," "Description of Capital Stock," "Shares Eligible for Future Sale"
and "Underwriting."
NO PRIOR PUBLIC MARKET; VOLATILITY
Prior to the offering there has been no public market for the Company's
Common Stock. Although the Common Stock has been approved for quotation on the
Nasdaq National Market, there can be no assurance that an active trading market
will develop or be sustained following the offering. The initial public offering
price of the Common Stock offered hereby will be determined in negotiations
among the Company, the Selling Stockholder and William Blair & Company, L.L.C.,
as representative of the several underwriters. See "Underwriting." The trading
price of the Company's Common Stock could be subject to significant fluctuations
in response to variations in quarterly operating results and other factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Financial Information." In addition, in recent years the
stock market in general, and the market for shares of small capitalization
stocks in particular, have experienced extreme price fluctuations which have
often been unrelated to the operating performance of affected companies. General
market price declines or market volatility in the future could affect the market
price of the Common Stock and the negotiated initial public offering price may
not be indicative of future market prices.
ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation (the
"Amended Certificate") and Amended and Restated By-Laws (the "Amended By-Laws")
contain certain provisions that may have the effect of discouraging, delaying or
making more difficult a change in control of the Company even if some, or even
if a majority, of the Company's stockholders were to deem such an attempt to be
in the best interest of the Company. Among other things, the Amended Certificate
allows the Board of Directors to issue up to 4 million shares of Preferred Stock
and to fix the rights, privileges and preferences of those shares without any
further vote or action by the stockholders. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. While the
Company has no present intention to issue shares of Preferred Stock, any such
issuance could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. In addition,
the Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which could have the effect of delaying or
preventing a change of control of the Company. See "Description of Capital
Stock."
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DILUTION
Purchasers of shares of the Common Stock offered hereby (at an assumed
initial public offering price of $12.00 per share) will experience immediate and
substantial dilution of the net tangible book value of the Common Stock of
$11.09 per share from the initial public offering price. See "Dilution."
USE OF PROCEEDS
The net proceeds to be received by the Company from this offering, after
deducting underwriting discounts and estimated offering expenses, are estimated
to be approximately $29.5 million, assuming an initial public offering price of
$12.00 per share. The Company will not receive any proceeds from the sale of the
shares by the Selling Stockholder.
The Company estimates that it will use approximately $15.0 million of the
net proceeds to the Company to repay all amounts expected to be outstanding
under its bank line of credit at the time of the offering, which amounts have
been primarily used to fund Marquise Financial. The Company's bank line of
credit which is secured through Exteriors, its wholly-owned subsidiary, is a
$15.0 million secured revolving facility which bears interest at a rate per
annum equal to, at Exteriors' option, the bank's prime rate (8.25% at May 1,
1996) or LIBOR plus 1.5%. A portion of the bank line of credit, $5.0 million,
matures in March 1997, with the remaining $10.0 million maturing in March 1998.
In addition, the Company estimates that it will use approximately $8.6 million
of the net proceeds to pay the special, one-time dividend to the Company's
existing stockholders (approximately $6.9 million of which will be paid to
Globe) and approximately $3.3 million to repay the principal amount of the
Company's Senior Manager Performance Notes (as defined herein) plus the accrued
interest thereon due to certain current and former management stockholders of
the Company. See "Certain Transactions -- Transactions with Senior Managers."
Stockholders who purchase shares in this offering will not participate in the
$8.6 million special, one-time dividend. The Company expects to use the
remaining approximately $2.6 million for working capital and other general
corporate purposes which may include the development or expansion of
complementary products or services, including the possible acquisition of
substantially all of the assets of Handy Craftsmen. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Certain Transactions -- Transactions with Globe and
Globe Affiliates."
At May 1, 1996, approximately $10.2 million was outstanding under the
Company's bank line of credit, substantially all of which indebtedness was
incurred in connection with the funding of Marquise Financial. The balance of
the amount expected to be outstanding under the bank line of credit at the time
of the offering is expected to be incurred in connection with the additional
funding of Marquise Financial.
Pending such uses, the Company intends to invest the net proceeds of the
offering in short-term, investment-grade, interest-bearing instruments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
Other than the $8.6 million special, one-time dividend described above, the
Company has not declared or paid any cash dividends on its Common Stock since
its formation. The Company's bank line of credit which is secured through
Exteriors, its wholly-owned subsidiary, prohibits Exteriors from paying
dividends to the Company unless Exteriors is in compliance, immediately after
making such dividends, with certain financial covenants set forth in the bank
line of credit. The Company has obtained a waiver from the bank with respect to
the $8.6 million special, one-time dividend. The ability of the Company to pay
dividends in the future will depend primarily on the receipt of cash dividends
and other cash payments from its subsidiaries. The Company currently intends to
retain any future earnings to finance the growth and development of its
businesses and therefore, does not anticipate paying any cash dividends in the
foreseeable future. Payment of any future dividends will depend upon the future
earnings and capital requirements of the Company and other factors which the
Board of Directors considers appropriate.
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CAPITALIZATION
The following table sets forth the short-term debt and total capitalization
of the Company (i) at March 31, 1996, (ii) pro forma to reflect the payment by
the Company of the $8.6 million special, one-time dividend to existing
stockholders (including management stockholders and Globe) and the redemption of
all of the outstanding shares of the Company's Series A Preferred Stock for $1.4
million from Globe, and (iii) pro forma as adjusted to reflect the sale by the
Company of 2,687,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $12.00 per share and the application of the estimated
net proceeds therefrom. See "Use of Proceeds," and "Certain Transactions --
Transactions with Globe and Globe Affiliates."
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Due to stockholders, including interest................................ $ 1,444 $ 11,444 $ 554
Line of credit......................................................... 7,706 7,706 --
--------- -------------- -----------
Total short-term debt................................................ $ 9,150 $ 19,150 $ 554
--------- -------------- -----------
--------- -------------- -----------
Long-term debt due to stockholders....................................... $ 3,861 $ 3,861 $ 1,461
Preferred Stock, at redemption price..................................... 1,400 -- --
Common stockholders' equity:
Common Stock, $.001 par value; 25,000,000 shares authorized; 6,249,950
shares issued and outstanding, actual and pro forma; 8,936,950 shares
issued and outstanding, pro forma as adjusted (1)..................... 6 6 9
Additional paid-in capital............................................. 983 983 30,467
Officer notes receivable............................................... (707) (707) (707)
Retained earnings (deficit)............................................ 4,900 (3,700) (3,700)
--------- -------------- -----------
Total common stockholders' equity (deficit).......................... 5,182 (3,418) 26,069
--------- -------------- -----------
Total capitalization............................................... $ 10,443 $ 443 $ 27,530
--------- -------------- -----------
--------- -------------- -----------
</TABLE>
- ------------------------
(1) Excludes 670,000 shares of Common Stock reserved for issuance under the
Company's stock option plans, of which 275,000 shares are subject to options
to be granted upon consummation of the offering at an exercise price equal
to the initial public offering price. See "Management -- Stock Option
Plans."
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DILUTION
The net tangible book value (deficit) applicable to Common Stock of the
Company as of March 31, 1996, was $(12.8 million) or $(2.05) per share of Common
Stock. The deficit in net tangible book value per share represents the total
assets (excluding intangibles) less total liabilities including the outstanding
Series A Preferred Stock, which was redeemed for $1.4 million from Globe,
divided by the number of shares of Common Stock outstanding. After giving effect
to (i) the receipt of $29.5 million of
estimated net proceeds from the sale by the Company of 2,687,000 shares of
Common Stock in the offering at an assumed initial public offering price of
$12.00 per share and (ii) the use of net proceeds as described under "Use of
Proceeds," including the payment of an $8.6 million special, one-time dividend
to its existing stockholders (including management stockholders and Globe), the
pro forma net tangible book value of the Company as of March 31, 1996 would have
been $8.1 million or $0.91 per share. This represents an immediate increase in
net tangible book value of $2.96 per share to existing stockholders and an
immediate dilution of $11.09 per share to new stockholders purchasing shares of
Common Stock in the offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 12.00
Net tangible book value per share before the offering..... (2.05)
Increase per share attributable to new stockholders....... 2.96
---------
Net tangible book value per share after the offering........ 0.91
---------
Dilution per share to new stockholders...................... $ 11.09
---------
---------
</TABLE>
The following table summarizes, as of March 31, 1996, the differences
between the number of shares purchased from the Company, the total consideration
paid to the Company and the average price per share paid by existing
stockholders and new stockholders:
<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION AVERAGE
------------------------ --------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................. 6,249,950 69.9% $ 989,000 3.0% $ 0.16
New stockholders.................................. 2,687,000 30.1 32,244,000 97.0 12.00
----------- ----- -------------- -----
Total........................................... 8,936,950 100.0% $ 33,233,000 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
</TABLE>
- ------------------------
(1) Excludes 670,000 shares of Common Stock reserved for issuance under the
Company's stock option plans, of which 275,000 shares are subject to options
to be granted upon consummation of the offering at an exercise price equal
to the initial public offering price. See "Management -- Stock Option
Plans."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the consolidated financial statements and
notes thereto and other financial information included elsewhere in this
Prospectus. The statement of operations data for the period from June 1, 1993
(inception of operations) to December 31, 1993 and the years ended December 31,
1994 and 1995, and the balance sheet data as of December 31, 1994 and 1995, are
derived from the consolidated financial statements of the Company included
elsewhere herein, which consolidated financial statements have been audited by
Ernst & Young LLP, independent auditors. The selected consolidated financial
information at December 31, 1993 has been derived from the Company's audited
consolidated financial statements not included herein. The statements of
operations and balance sheet data as set forth below for, and as of the end of,
each of the three-month periods ended March 31, 1995 and 1996 have been derived
from the Company's unaudited financial statements, which have been prepared on
the same basis as the audited financial statements and, in the opinion of
management, include all adjustments which are necessary for a fair statement of
the results of the interim period, and all such adjustments are of a normal
recurring nature. The selected financial and operating data for the three months
ended March 31, 1996 are not necessarily indicative of the results to be
expected for the fiscal year ending December 31, 1996.
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
PERIOD FROM JUNE 1 DECEMBER 31, MARCH 31,
TO ---------------------- --------------------
DECEMBER 31, 1993(1) 1994 1995 1995 1996
-------------------- --------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................................... $ 20,548 $ 94,186 $ 124,848 $ 22,362 $ 27,093
Cost of sales...................................... 12,588 56,139 72,245 13,096 15,293
-------- --------- ----------- --------- ---------
Gross profit....................................... 7,960 38,047 52,603 9,266 11,800
Selling, general and administrative expenses....... 9,113 34,821 45,305 8,884 10,954
Amortization of intangibles........................ 26 275 503 126 132
-------- --------- ----------- --------- ---------
Operating profit (loss)............................ (1,179) 2,951 6,795 256 714
Interest expense, net.............................. -- 39 410 186 66
-------- --------- ----------- --------- ---------
Income (loss) before income taxes.................. (1,179) 2,912 6,385 70 648
Income tax provision............................... -- 917 2,650 71 299
-------- --------- ----------- --------- ---------
Net income (loss).................................. $ (1,179) $ 1,995 $ 3,735 $ (1) $ 349
-------- --------- ----------- --------- ---------
-------- --------- ----------- --------- ---------
Pro forma net income (2)........................... $ 3,951 $ 403
Pro forma net income per share (3)................. $ 0.53 $ 0.05
Pro forma weighted average common shares
outstanding (4)................................... 7,398 7,398
SELECTED OPERATING DATA:
Number of sales offices (5)........................ 38 55 70 64 72
Number of Sales Associates (5)..................... 260 496 631 557 674
Number of installed jobs........................... 7,294 37,510 55,261 9,916 12,124
BALANCE SHEET DATA (5):
Working capital (deficit).......................... $ 42 $ (8,324) $ (4,814) $ (8,786) $ (5,293)
Total assets....................................... 4,837 29,275 30,143 24,756 35,508
Total debt......................................... 1,187 15,553 6,216 10,286 12,921
Common stockholders' equity (deficit).............. (979) 936 4,833 2,336 5,182
</TABLE>
- ------------------------
(1) Period from inception of the Company's operations to December 31, 1993.
17
<PAGE>
(2) Pro forma to give effect to the offering of Common Stock made hereby, as if
such offering were completed on the first day of the period presented,
assuming the proceeds of which were used solely to retire the Senior Manager
Performance Notes, of which approximately $4.0 million of principal (and no
interest) was outstanding at January 1, 1995, approximately $4.4 million of
principal and interest was outstanding at January 1, 1996 and approximately
$3.3 million of principal and interest remained outstanding at March 31,
1996. See "Use of Proceeds" and "Certain Transactions -- Transactions with
Senior Managers."
(3) Represents pro forma net income divided by pro forma weighted average common
shares outstanding.
(4) Pro forma weighted average common shares outstanding represents historical
weighted average common shares outstanding during the period presented plus
the number of shares, to be issued at an assumed initial public offering
price of $12.00 per share, sufficient to fund the repayment of the Senior
Manager Performance Notes, of which approximately $4.0 million of principal
(and no interest) was outstanding at January 1, 1995, approximately $4.4
million of principal and interest was outstanding at January 1, 1996 and
approximately $3.3 million of principal and interest remained outstanding at
March 31, 1996, and the payment of an $8.6 million special, one-time
dividend to the Company's existing stockholders (including management
stockholders and Globe). See "Certain Transactions -- Transactions with
Globe and Globe Affiliates."
(5) Calculated at the end of the period shown.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In June 1993, the Company commenced its operations with a corporate office,
4 regional offices and 5 sales offices. At the commencement of its operations,
the Company received its initial license from Sears to sell roofing and entry
doors on a national basis, and garage doors and gutters in the eastern U.S.,
under the "Sears" name. By December 1993, the Company was operating 38 sales
offices with 260 Sales Associates. The Company has since expanded its product
offerings and markets under the Sears license agreement to include the sale of
fencing, garage doors and gutters in 44 states. In connection with the expanded
product offerings and markets, the Company opened new sales offices and
increased the number of its Sales Associates and the number of independent
contractors with whom it has relationships. At December 31, 1995, the Company
operated 70 sales offices and employed 631 Sales Associates. At May 1, 1996, the
Company had 74 sales offices serving 77% of the owner-occupied households in the
U.S. and employed 700 Sales Associates. Since inception, the Company has
installed over 100,000 jobs. The rapid growth in the Company's net sales and net
income is reflective of the number of sales offices opened, sales leads
generated, and the increased number of Sales Associates employed and independent
contractors contracted with, as well as the nationally recognized "Sears" name
in the home improvement industry. The Company intends to increase the number of
Sales Associates by approximately 50 and to open 1 to 2 sales offices in new and
existing markets during the remainder of 1996.
The Company recognizes revenue upon completion of each installation and
receipt from the customer of a signed certificate of satisfaction. During fiscal
1995, approximately 89% of the Company's sales were financed, and of such
financed sales, approximately 97% were financed through Sears and its
affiliates. The Company receives payment from Sears on sales financed by Sears
and its affiliates approximately seven days after completion of the
installation. Sears and its affiliates have no recourse against the Company for
bad debts relating to such sales. In 1996, the Company began receiving
participation fees from Sears and its affiliates for credit placement equal to
approximately 1.6% of sales financed through Sears and its affiliates. The
participation fees are payable by Sears and its affiliates over a ten-year
period, with 71% of the total participation fee to be paid in the first three
years following each installation financed through Sears and its affiliates. The
Company's right to receive the participation fee is subject to termination under
certain circumstances.
The Company's cost of sales includes the Sears license fee, installation and
material costs and a warranty reserve of 2% of net sales. The Company and Sears
entered into a new three-year license agreement effective January 1, 1996 which
superceded a one-year license agreement that was entered into in March 1995.
Prior to entering into the three-year license agreement, the Company and Sears
had operated pursuant to one-year license agreements. Throughout the term of the
license agreement, the license fee is fixed at 11% of gross sales for all
products sold under the license agreement, other than doors, which have a fixed
license fee of 13% of gross sales. Prior to the renewal of the license agreement
with Sears, the license fee increased from 5-10% (depending upon the type of
product) during 1993 to 8-12% during the second half of 1994 and to 11-13% in
1995. The license fees were initially established at rates favorable to the
Company to assist the Company during the start-up phase of its operations.
The Company retains independent contractors to perform all of its
installations. Payments for installation services are typically made promptly
upon the receipt of a certificate of satisfaction from the customer. Materials
for the installations are purchased locally from independent distributors and,
therefore, the Company does not need to carry inventories of products and
materials. Payment terms with distributors range from 10 to 70 days, with the
majority being 30 days or longer. As a result of the use by most of the
Company's customers of third party credit sources, the Company generally
receives payment for a completed installation before it pays the distributors
for the related materials.
19
<PAGE>
Selling, general and administrative expenses include advertising and
marketing expense, selling commissions and related payroll costs, field
operating expense and general administrative expenses. During fiscal 1995,
approximately 44% of the Company's marketing expense was related to purchasing
space in Sears-produced advertising. Prior to the beginning of each year, the
Company is required to commit to the amount of advertising space that it intends
to purchase from Sears for the upcoming year. The Company has committed to the
placement of 25 direct advertising newspaper inserts with Sears for 1996,
compared to 16 and 25 advertising placements in 1994 and 1995, respectively. In
1994 and 1995, the Company incurred expenses payable to Sears of $1.7 million
and $2.8 million, respectively, for advertising.
In 1994 and 1995, the Company incurred senior management bonuses in the
aggregate amount of $1.3 million and $2.0 million, respectively, pursuant to the
incentive compensation arrangements implemented when the Company was formed. The
Company expects that the bonus amounts paid to management will decrease as a
percentage of operating income in 1996 as a result of the Company's newly
adopted management incentive compensation plan which is in effect for fiscal
1996. The newly adopted management incentive compensation plan more heavily
rewards year to year incremental increases in the Company's profitability and
net sales than the Company's previous management incentive compensation plan.
In 1994, the Company entered into a management agreement with Globe, the
Company's principal stockholder, pursuant to which Globe provides certain
management, treasury, legal, purchasing and other administrative services to the
Company. The Company pays Globe a management fee based upon gross sales.
Management fees were $464,000 and $558,000 for 1994 and 1995, respectively. The
management fee will continue to be paid in 1996 through consummation of the
offering and is expected to be approximately $350,000. The management agreement
will be terminated upon consummation of the offering. See "Certain Transactions
- -- Transactions with Globe and Globe Affiliates." The Company expects that the
elimination of the management fee will be partially offset by increased costs
incurred by the Company to directly procure the services previously provided by
Globe under the management agreement.
Effective September 23, 1994, the Company was included in the consolidated
federal income tax return of Globe. A tax-sharing agreement between the Company
and Globe specifies the allocation and payment of liabilities and benefits
arising from the filing of a consolidated tax return. The agreement requires the
Company to pay its share of the consolidated federal tax liability as if it has
taxable income, and to be compensated if losses or credits generate benefits
that are utilized to reduce the consolidated tax liability. The Company will
continue to be included in the consolidated group with Globe through
consummation of the offering. The tax sharing agreement will be terminated upon
consummation of the offering. See "Certain Transactions -- Transactions with
Globe and Globe Affiliates."
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
net sales and period to period percentage increases of certain line items
reflected in the Company's consolidated statements of operations.
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF NET SALES INCREASE
--------------------------------------------------------------------- (DECREASE)
FROM JUNE 1 YEARS ENDED THREE MONTHS ENDED MARCH -------------
TO DECEMBER 31, 31,
DECEMBER 31, ------------------------ ------------------------
1993 (1) 1994 1995 1995 1996 1994 TO 1995
----------------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales......................... 100.0% 100.0% 100.0% 100.0% 100.0% 32.6%
Cost of sales.................... 61.3 59.6 57.9 58.6 56.4 28.7
----- ----- ----- ----- -----
Gross profit..................... 38.7 40.4 42.1 41.4 43.6 38.3
Selling, general and
administrative expenses......... 44.3 37.0 36.3 39.7 40.5 30.1
Amortization of intangibles...... 0.1 0.3 0.4 0.6 0.5 82.9
----- ----- ----- ----- -----
Operating profit (loss).......... (5.7) 3.1 5.4 1.1 2.6 130.3
Interest expense, net............ -- -- 0.3 0.8 0.2 951.3
----- ----- ----- ----- -----
Income (loss) before income
taxes........................... (5.7) 3.1 5.1 0.3 2.4 119.3
Income tax provision............. -- 1.0 2.1 0.3 1.1 189.0
----- ----- ----- ----- -----
Net income (loss)................ (5.7)% 2.1% 3.0% 0.0% 1.3% 87.2
----- ----- ----- ----- -----
----- ----- ----- ----- -----
<CAPTION>
FIRST QUARTER
1995 TO FIRST
QUARTER 1996
-------------
<S> <C>
Net sales......................... 21.2%
Cost of sales.................... 16.8
Gross profit..................... 27.3
Selling, general and
administrative expenses......... 23.3
Amortization of intangibles...... 4.8
Operating profit (loss).......... 178.9
Interest expense, net............ (64.5)
Income (loss) before income
taxes........................... *
Income tax provision............. *
Net income (loss)................ *
</TABLE>
- ------------------------
* Not meaningful.
(1) Period from inception of the Company's operations to December 31, 1993.
FIRST QUARTER FISCAL 1996 COMPARED TO FIRST QUARTER FISCAL 1995
NET SALES
Net sales increased $4.7 million, or 21.2%, from $22.4 million for the first
quarter 1995 to $27.1 million for the first quarter 1996. Approximately 65.9% of
the increase in net sales was attributable to roofing and gutter products and
services, net sales of which increased $3.1 million to $18.8 million for the
first quarter 1996. Approximately 26.2% of the increase in net sales was
attributable to fencing products and services, net sales of which increased $1.2
million to $3.6 million for the first quarter 1996. Net sales of garage door and
entry door products and services remained constant at $4.2 million. The balance
of the increase in net sales was due to credit participation fee income from
Sears and its affiliates, which was payable beginning January 1, 1996, on
installed sales financed by Sears and its affiliates during the quarter, and
interest income, which was not material, on receivables financed by the
Company's newly-formed consumer finance subsidiary, Marquise Financial. These
increases in net sales were due primarily to an increase in the number of
installations as the Company increased the number of its Sales Associates from
557 to 674 and increased selling prices.
GROSS PROFIT
Gross profit increased $2.5 million, or 27.3%, from $9.3 million, or 41.4%
of net sales, for the first quarter 1995 to $11.8 million, or 43.6% of net
sales, for the first quarter 1996. The increase in gross profit resulted from an
increased number of installations, increased selling prices, the credit
participation fee from Sears and its affiliates and interest income from
Marquise Financial, partially offset by the increase in the Sears license fee.
The license fee incurred to Sears increased $639,000, or 29.7%, from $2.2
million, or 9.6% of net sales, for the first quarter 1995 to $2.8 million, or
10.3% of net sales, for the first quarter 1996. The increase in the license fee
incurred to Sears for the first quarter 1996 was due to the increase in sales
volume and an increase in the license fee rates. Sears and the Company entered
into a new three-year license agreement effective January 1, 1996. Among other
21
<PAGE>
things, the license agreement provides for a fixed license fee, at the March
1995 license fee rate, to be charged during the term of the license agreement.
Gross profit before the Sears license fee, credit participation fee and interest
income increased $2.8 million, or 24.1%, from $11.4 million, or 51.1% of net
sales, for the first quarter 1995 to $14.2 million, or 53.1% of net sales, for
the first quarter 1996. The unit costs of materials, installation labor and
warranty expense remained relatively constant during the period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $2.1 million, or
23.3%, from $8.9 million in the first quarter 1995 to $11.0 million in the first
quarter 1996 and as a percentage of net sales increased from 39.7% to 40.5%. The
increase in selling, general and administrative expenses resulted primarily from
the expenses associated with increased sales volume, the increased number of
Sales Associates and expenses related to the hiring of personnel to support the
expansion of the infrastructure of the Company and the start-up of Marquise
Financial. Direct advertising expense increased $65,000, or 4.5%, from $1.4
million for the first quarter 1995 to $1.5 million for the first quarter 1996;
as a percentage of net sales, however, direct advertising expense decreased from
6.4% for the first quarter 1995 to 5.5% for the first quarter 1996, reflecting
improved utilization of sales leads primarily due to the increase in Sales
Associates. Selling commission expense increased $265,000, or 13.1%, from $2.0
million in the first quarter 1995 to $2.3 million in the first quarter 1996; as
a percentage of net sales, however, selling commission expense decreased from
9.1% in the first quarter 1995 to 8.6% in the first quarter 1996. Sales
representatives are compensated on a variable commission basis depending upon
the type of product sold. Performance-based compensation paid to officers and
regional, sales and production managers increased $126,000, or 55.5%, from
$227,000 in the first quarter 1995 to $353,000 in the first quarter 1996,
primarily due to an increase in operating income. See "Certain Transactions --
Transactions with Senior Managers" and "-- Transactions with Other Managers."
Management fees incurred to Globe increased, commensurate with the gross sales
increase, from $110,000 in the first quarter 1995 to $131,000 in the first
quarter 1996. The management agreement between Globe and the Company will be
terminated upon consummation of the offering. The balance of selling, general
and administrative expenses, primarily sales lead-generation activities,
administrative, field operation and Marquise Financial payrolls and related
costs and general expenses, increased $1.5 million, or 28.8%, from $5.2 million,
or 23.2% of net sales, in the first quarter 1995 to $6.7 million, or 24.7% of
net sales, in the first quarter 1996. The increase was primarily due to
increased expenses relating to support personnel and services required to manage
the Company's expanding infrastructure and for start-up expenses related to
Marquise Financial.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased from $126,000 in the first quarter
1995 to $132,000 in the first quarter 1996. The amortization expense relates
primarily to goodwill incurred in connection with the September 1994 stock
repurchase from management. See "Certain Transactions -- Transactions with
Senior Managers."
NET INTEREST EXPENSE
Net interest expense decreased $120,000, from $186,000 in the first quarter
1995 to $66,000 in the first quarter 1996, as interest income from invested
excess operating cash partially offset the interest expense related to the notes
payable to certain of the Company's senior managers in connection with the
September 1994 stock repurchase from management. See "Certain Transactions --
Transactions with Senior Managers."
INCOME TAX PROVISION
The Company's income tax provision increased from $71,000, or an effective
rate of 101%, for the first quarter 1995, to $299,000, or an effective rate of
46.1%, for the first quarter 1996. The difference in the effective income tax
rate and the federal statutory rate (34%) is due primarily to amortization of
intangibles which are not deductible for income tax purposes and the effect of
state income taxes.
22
<PAGE>
NET INCOME
The Company's net income increased $350,000, from essentially break-even in
the first quarter 1995 to $349,000 in the first quarter 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
NET SALES
Net sales increased $30.6 million, or 32.6%, from $94.2 million in 1994 to
$124.8 million in 1995. Approximately 42.5% of the increase in net sales was
attributable to roofing and gutter products and services, net sales of which
increased $13.0 million to $87.1 million in 1995. The remaining increase in net
sales was due to garage door and entry door products and services, net sales of
which increased $7.1 million to $19.3 million in 1995 as well as fencing and
other products and services, net sales of which increased $10.5 million to $18.4
million in 1995. These increases in net sales were due primarily to an increase
in the number of installations which resulted from the first full-year impact of
the Company's 55 sales offices and the opening of 15 new sales offices, an
increase in Sales Associates from 496 to 631 and the addition of fencing in
certain markets. Net sales also increased due to increased selling prices.
GROSS PROFIT
Gross profit increased $14.6 million, or 38.3%, from $38.0 million or 40.4%
of net sales, in 1994 to $52.6 million, or 42.1% of net sales, in 1995. The
increase in gross profit resulted from an increased number of installations and
increased selling prices, partially offset by the increase in the Sears license
fee. The license fee incurred to Sears increased $5.6 million, or 75.7%, from
$7.4 million, or 7.9% of net sales, in 1994 to $13.0 million, or 10.4% of net
sales in 1995. The increase in the license fee incurred to Sears in 1995 was due
to the increase in sales volume and an increase in the license fee rates. Sears
and the Company entered into a new three-year license agreement effective
January 1, 1996; among other things, the license agreement provides for a fixed
license fee, at the March 1995 license fee rate, to be charged during the term
of the license agreement. Gross profit before the Sears license fee increased
$20.2 million, or 44.4%, from $45.4 million, or 48.3% of net sales, in 1994 to
$65.6 million, or 52.5% of net sales, in 1995. The unit costs of materials,
installation labor and warranty expense remained relatively constant during the
period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $10.5 million, or
30.1%, from $34.8 million in 1994 to $45.3 million in 1995 and as a percentage
of net sales remained relatively constant at 37.0% in 1994 as compared to 36.3%
in 1995. The increase in selling, general and administrative expenses resulted
primarily from expenses associated with increased sales volume and the increased
number of Sales Associates and, to a lesser extent, expenses related to the
hiring of personnel to support the expansion of the infrastructure of the
Company. Direct advertising expense increased from $6.1 million in 1994 to $6.3
million in 1995; as a percentage of net sales, however, direct advertising
expense decreased from 6.5% in 1994 to 5.0% in 1995. Selling commission expense
increased $2.5 million, or 30%, from $8.5 million in 1994 to $11.0 million in
1995; as a percentage of net sales however, selling commission expense decreased
from 9.0% in 1994 to 8.8% in 1995. Sales representatives are compensated on a
variable commission basis depending upon the type of product sold.
Performance-based compensation paid to officers and regional, sales and
production managers increased from $3.0 million in 1994 to $3.9 million in 1995
primarily due to the increase in operating income. See "Certain Transactions --
Transactions with Senior Managers" and "-- Transactions with Other Managers" for
information regarding future payments to management. Management fees incurred to
Globe increased, commensurate with the gross sales increase, from $464,000 in
1994 to $558,000 in 1995. The management agreement between the Company and Globe
will be terminated upon consummation of the offering. The balance of selling,
general and administrative expenses, primarily sales lead-generation activities,
administrative and field operation payrolls and related costs and general
expenses, increased $6.8 million, or 40.7%, from $16.7 million, or 17.8% of net
sales, in
23
<PAGE>
1994 to $23.5 million, or 18.9% of net sales, in 1995. This increase was
primarily due to the additional number of sales offices and expenses relating to
support personnel and services required to manage the Company's expanding
infrastructure.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased $228,000 from $275,000 in 1994 to
$503,000 in 1995, reflecting the full-year impact of goodwill amortization
related to the September 1994 stock repurchase from management. See "Certain
Transactions -- Transactions with Senior Managers."
NET INTEREST EXPENSE
Net interest expense increased $371,000, from $39,000 in 1994 to $410,000 in
1995, primarily as a result of increased borrowings under the Company's bank
line of credit required to fund the September 1994 stock repurchase and interest
payments on the notes issued to certain of the Company's senior managers in
connection therewith. See "Certain Transactions -- Transactions with Senior
Managers."
INCOME TAX PROVISION
The Company's income tax provision increased from $917,000, or an effective
rate of 31.5%, in 1994, to $2.7 million, or an effective tax rate of 41.5%, in
1995. The increase in the effective income tax rate was primarily due to the
utilization in 1994 of the 1993 net operating loss carryforward.
NET INCOME
The Company's net income increased $1.7 million, from $2.0 million in 1994
to $3.7 million in 1995.
FISCAL 1994 COMPARED TO THE SEVEN MONTHS ENDED DECEMBER 31, 1993
NET SALES
Net sales increased $73.7 million, from $20.5 million for the seven months
ended December 31, 1993 to $94.2 million in 1994. The increase in net sales of
75.3% was attributable to roofing and gutter products and services, net sales of
which increased $55.5 million to $74.0 million in 1994. The remaining increase
in net sales was due to garage door and entry door products and services, net
sales of which increased $10.4 million to $12.1 million in 1994 as well as
fencing and other products and services, net sales of which increased $7.8
million to $8.1 million in 1994. These increases were due primarily to an
increase in the number of installations which resulted from the first full-year
impact of the Company's 38 sales offices, the opening of 17 new sales offices,
an increase in Sales Associates from 260 to 496, and the addition of fencing and
garage doors in certain markets, as well as increased selling prices.
GROSS PROFIT
Gross profit increased $30.1 million, from $8.0 million, or 38.7% of net
sales, for the seven months ended December 31, 1993 to $38.1 million, or 40.4%
of net sales, in 1994. The increased gross profit resulted from an increased
number of installations and increased selling prices, partially offset by the
increase in the Sears license fee. The license fee incurred to Sears increased
$6.2 million, from $1.2 million, or 5.8% of net sales, in the seven months ended
December 31, 1993 to $7.4 million, or 7.9% of net sales, in 1994. The increase
in the license fee incurred in 1994 was due to the increase in sales volume and
an increase in the license fee rates. Gross profit before the Sears license fee
increased $36.2 million, from $9.2 million, or 44.6% of net sales, in the seven
months ended December 31, 1993 to $45.4 million, or 48.3% of net sales, in 1994.
The unit costs of materials, installation labor and warranty expense remained
relatively constant during the period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $25.7 million, from
$9.1 million for the seven months ended December 31, 1993, to $34.8 million in
1994 and as a percentage of net sales, decreased from 44.3% for the seven months
ended December 31, 1993, to 37.0% in 1994. The increase in selling, general and
administrative expenses resulted primarily from expenses associated with
24
<PAGE>
increased sales volume and a full year of operations. The decrease as a
percentage of net sales was due primarily to the charges in 1993 related to the
start-up of the Company. Direct advertising expense increased $4.4 million from
$1.7 million in the seven months ended December 31, 1993 to $6.1 million in
1994; as a percentage of net sales, however, advertising expense decreased from
8.2% for the seven months ended December 31, 1993 to 6.5% in 1994. Selling
commission expense increased $6.8 million, from $1.7 million, or 8.4% of net
sales, in the seven months ended December 31, 1993 to $8.5 million, or 9.0% of
net sales, in 1994. Performance-based compensation paid to officers and
regional, sales and production managers was $3.0 million in 1994, including a
one-time bonus in the aggregate amount of $1.1 million; no such compensation
expense was incurred in the seven months ended December 31, 1993, as the Company
recorded net losses in such period. Management fees incurred to Globe were
$464,000 in 1994; no such fees were incurred for the seven months ended December
31, 1993. The balance of selling, general and administrative expenses, primarily
sales lead-generation activities, administrative and field operation payrolls
and related costs and general expenses, increased $11.0 million, from $5.7
million, or 27.7% of net sales, in the seven months ended December 31, 1993 to
$16.7 million, or 17.8% of net sales, in 1994. This increase was primarily due
to the additional number of sales offices and expenses relating to support
personnel and services required to manage the Company's expanding
infrastructure.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles was $275,000 in 1994 reflecting the impact of
goodwill amortization related to the September 1994 stock repurchase from
management. See "Certain Transactions -- Transactions with Senior Managers."
NET INTEREST EXPENSE
Net interest expense increased by $39,000 as a result of borrowings required
to fund the September 1994 stock repurchase from management.
INCOME TAX PROVISION
The income tax provision was $917,000 in 1994; there was no income tax
provision in the seven months ended December 31, 1993. The effective income tax
rate in 1994 was 31.5%. The increase in income tax provision in 1994 was
primarily due to the income in 1994, offset by the utilization of the net
operating loss carryforward generated in 1993.
NET INCOME
The Company's net income increased $3.2 million from a net loss of $1.2
million for the seven months ended December 31, 1993 to net income of $2.0
million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the growth of the
Company and to fund the September 1994 stock repurchase from management and the
related payment of notes to management in September 1995. See "Certain
Transactions." The Company's primary sources of liquidity have been cash flow
from operations and borrowings under its bank credit facility. The Company's
operations through December 31, 1995 have not been capital intensive. The
Company's capital expenditures for 1993, 1994, 1995 and the first quarter 1996
were approximately $244,000, $573,000, $888,000 and $120,000, respectively.
Capital expenditures for fiscal 1996 are expected to be approximately $1.5
million, primarily related to the ongoing upgrading of computer hardware and
software. Future requirements for capital expenditures are expected to be funded
by cash flow from operations and bank lines of credit. The Company believes that
it has sufficient operating cash flow, working capital and bank financing,
together with the net proceeds from the offering and the financing arrangements
currently being pursued by the Company with respect to Marquise Financial, to
meet all of its obligations for the foreseeable future, including funding for
Marquise Financial and for the development and expansion of complementary
product lines and services.
In November 1995, the Company commenced the operations of Marquise
Financial, its consumer finance subsidiary. Marquise Financial has been
capitalized and funded with the Company's excess
25
<PAGE>
operating cash flow and borrowings under the Company's bank line of credit which
is secured through Exteriors, and the Company is actively pursuing additional
funding of up to $35.0 million for Marquise Financial for 1996. At May 1, 1996,
Marquise Financial had consumer finance receivables of approximately $11.9
million. The Company anticipates that the net proceeds from the offering, the
bank line of credit, the possible sale of consumer finance receivables of
Marquise Financial and cash flow from operations will be sufficient to satisfy
the Company's financing cash requirements in the foreseeable future. In the
event the Company is unable to obtain all requisite financing for its consumer
financing activities, the Company will reduce its consumer financing activities
until it can arrange for other financing alternatives. See "Risk Factors -- New
Consumer Finance Subsidiary" and Notes to Unaudited Condensed Consolidated
Financial Statements.
At March 31, 1996, the Company had approximately $46,000 in cash and cash
equivalents and a net working capital deficit of approximately $5.3 million. The
working capital deficit at March 31, 1996 represents an increase in the working
capital deficit of $479,000 from December 31, 1995, due to repayment of
stockholder notes from management partially offset by earnings in the first
quarter 1996. Borrowings under the bank line of credit increased from zero at
December 31, 1995 to $7.7 million at March 31, 1996. The utilization of excess
cash and the increase in borrowings under the bank line of credit is primarily
attributable to financing the increase in consumer finance receivables by
Marquise Financial.
In September 1994, the Company repurchased 40.2% of its outstanding Common
Stock from the Company's senior management for an aggregate of $17.7 million in
cash, notes and other obligations. The repurchase of the Common Stock was
accounted for under the purchase method of accounting. Since net assets were
already stated at approximate fair market value, the purchase cost of the shares
in excess of their par value and other direct costs incurred by the Company were
recorded as goodwill. Goodwill is being amortized over 40 years. Amortization
expense includes goodwill amortization and amortization of organizational
expenses. See "Certain Transactions -- Transactions with Senior Managers."
From its inception in June 1993 through March 31, 1996, the Company has
generated cash flow from operations of approximately $13.0 million. The Company
used $12.5 million of cash in connection with the repurchase of 40.2% of its
Common Stock from management stockholders and $1.8 million of the cash for
capital expenditures. See "Certain Transactions -- Transactions with Senior
Managers."
The Company's bank line of credit which is secured through Exteriors,
consists of a collateralized line of credit of $15.0 million. As of March 31,
1996, Exteriors had $7.7 million outstanding on its line of credit and
anticipates that approximately $15.0 million will be outstanding upon the
closing of the offering, a substantial portion of which will be used to fund
Marquise Financial. The Company intends to pay amounts outstanding under the
bank line of credit with a portion of the net proceeds of the offering. See "Use
of Proceeds." The bank line of credit bears interest at a rate per annum equal
to, at Exteriors' option, the bank's prime rate or LIBOR plus 1.5%. A portion of
the credit facility, $5.0 million, matures in March 1997, with the remaining
$10.0 million maturing in March 1998. Since inception, the Company has
periodically renewed its bank line of credit, increasing its line of credit from
$2.5 million to $15.0 million and lowering the interest rate charged.
At March 31, 1996, the Company had notes outstanding, plus accrued interest
thereon, and other obligations totaling $5.3 million payable to certain current
and former management stockholders. The Company expects to repay the $3.3
million of principal outstanding and accrued interest under the notes with a
portion of the net proceeds of the offering. See "Use of Proceeds" and "Certain
Transactions -- Transactions with Senior Managers."
26
<PAGE>
QUARTERLY FINANCIAL INFORMATION
The following table sets forth certain unaudited financial information for
each quarter during fiscal 1994 and 1995 and the first quarter of fiscal 1996.
The amounts shown are not necessarily comparable or indicative of actual trends,
since these amounts also reflect the addition of new products and additional
locations during these periods.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994 1995 1995 1995 1995
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $12,915 $23,576 $28,200 $29,495 $22,362 $31,134 $36,459 $34,893
Gross profit............ 5,273 9,687 11,534 11,553 9,266 13,152 15,412 14,773
Operating profit
(loss)................. (126) 1,323 75(a) 1,679 256 1,680 2,667 2,192
Net income (loss)....... (122) 1,185(b) 87(b) 845 (1) 894 1,532 1,310
<CAPTION>
MARCH 31,
1996
---------
<S> <C>
Net sales............... $27,093
Gross profit............ 11,800
Operating profit
(loss)................. 714
Net income (loss)....... 349
</TABLE>
- ------------------------------
(a) Includes a bonus in the aggregate amount of $1.1 million paid to management
and $320,000 of management fees paid to Globe for the nine months ended
September 30, 1994.
(b) Includes tax benefits from the utilization of the Company's 1993 net
operating loss carryforward.
SEASONALITY
The Company's results of operations may fluctuate from year to year or
quarter to quarter due to a variety of factors. The Company expects lower levels
of sales and profitability during the period from mid-November through
mid-March, impacting the first and fourth quarter of each fiscal year. The
Company believes that this seasonality is caused by winter weather in certain of
the Company's markets located in the northeastern and north central U.S. and
rainy weather, each of which limits the Company's ability to install exterior
home improvements. In addition, the demand for the Company's products and the
Company's results of operations may be affected by the severity of the weather.
For example, mild weather limits the number of roofs in need of repair but
allows the Company to continue to install its products. Conversely, severe
weather increases the number of roofs in need of repair but, due to increased
demand for independent contractors, limits the pool of qualified independent
contractors available to install the Company's products and can delay the time
it takes to complete an installation.
INFLATION
Inflation has not had a material impact upon operating results and the
Company does not expect it to have such an impact in the future. To date, in
those instances where the Company has experienced cost increases, it has been
able to increase selling prices to offset such increases in cost. There can be
no assurance, however, that the Company's business will not be affected by
inflation or that it can continue to increase its selling prices to offset
increased costs and remain competitive.
27
<PAGE>
BUSINESS
GENERAL
The Company is a leading national marketer and contractor of installed home
improvement products, including roofing, gutters, doors and fencing. The Company
markets its home improvement products and services directly to consumers
primarily under the "Sears" name pursuant to a three-year non-exclusive license
agreement with Sears which expires December 31, 1998. Sears has been in business
for over 100 years and is a nationally recognized name in the installed home
improvement industry. The Company is one of the largest third-party licensees of
Sears home improvement products and services. The Company currently markets its
products directly to residential customers in 44 states through a combination of
national and local advertising and its approximately 700 Sales Associates. The
Company has 74 sales offices located in major cities across the U.S., providing
the Company with a presence in markets covering approximately 77% of the
owner-occupied households in the U.S. The Company installs its products through
a network of over 1,300 qualified independent contractors and purchases its
products through local and regional independent distributors.
The Company was formed in May 1993 to participate in the consolidation of
the installed home improvement industry. Since commencement of the Company's
operations in June 1993, the Company's net sales have increased to $124.8
million for the year ended December 31, 1995. The Company intends to continue
its growth in net sales and profitability by increasing penetration in existing
markets through the addition of new Sales Associates and sales offices and the
generation of additional sales leads. In addition, the Company intends to add
new installed product lines, including proprietary products and other
maintenance-related, "need-based" products and services, and to increase its
conversion rate of sales leads into sales. The Company also believes that the
availability of an alternative source of credit financing for its customers
through Marquise Financial will lead to increased product sales and
profitability.
INDUSTRY OVERVIEW
According to the U.S. Department of Commerce, total expenditures for
residential improvements and repairs grew at an annual compounded rate of 5.7%
from approximately $97.5 billion in 1991 to approximately $115.0 billion in
1994. The Company believes there are several trends accounting for the growth in
the home improvement market over the past several years. As the inventory of
homes in the U.S. grows each year, the size of the home improvement market grows
in turn. For example, the average age at which most homes in the U.S. are
re-roofed is approximately 17.5 years; as a result, as the number of existing
homes grows each year, the number of homes which need to be re-roofed grows as
well. In addition, the size of the average roof in the U.S. has increased
slightly over the past years, leading to larger projects. Furthermore, the
Company believes that as the value of the average home in the U.S. has
increased, homeowners are more willing to use higher quality or premium products
on their roofs and other parts of their homes to protect or enhance the value of
their homes.
The installed home improvement industry is large and fragmented. Providers
tend to be small, family-owned independent contractors, serving a localized
customer base and often are undercapitalized. Increasingly, providers of home
improvement services are facing a growing array of complex regulation. For
example, most independent contractors are now required to have a valid license
and insurance, including workers' compensation insurance, in order to operate.
As a result of this increased regulatory complexity, the industry is
increasingly characterized by a high rate of local contractors entering and
exiting the home improvement business.
28
<PAGE>
OPERATING STRATEGY
The Company seeks to significantly increase its market share in the
installed home improvement market by providing premium home improvement products
in a cost-effective manner. Key elements of the Company's operating strategy
include:
- EFFICIENT MARKETING, SALES LEAD GENERATION AND SALES. The Company
currently has 74 sales offices with approximately 700 Sales Associates in 44
states covering approximately 77% of the owner-occupied households in the U.S.
The Company has been able to cost-effectively generate sales leads through its
targeted advertising approach. The Company advertises nationally through
Sears-produced advertising and locally through the yellow pages and local
newspapers. In addition, the Company has developed an efficient program for
fielding telephone calls, qualifying potential customers and promptly
dispatching Sales Associates.
- LICENSEE OF NATIONALLY RECOGNIZED SEARS NAME. The Company is licensed to
sell, furnish and install, under the "Sears" name, certain products and services
approved by Sears in 44 states. The Company believes that it realizes
significant benefits from selling and marketing its products under the "Sears"
name. Prior to January 1993, Sears sold, furnished and installed the exterior
home improvement product lines currently sold by the Company and had been
selling, furnishing and installing certain of the Company's product lines for
over 40 years. Sears enjoys a national reputation for its quality products and
commitment to customer satisfaction, which the Company believes provides the
Company with a significant competitive advantage in its markets.
- FOCUS ON "NEED-BASED" PRODUCTS AND OWNER-OCCUPIED HOUSEHOLDS. The
Company markets, sells and installs primarily "need-based" products and services
which are used to improve and repair portions of a home or prevent potential
problems, such as a damaged roof or a broken garage door. A customer's decision
to purchase "need-based" products and services tends to be less discretionary
than the decision to purchase other home improvement products, since a decision
to purchase a "need-based" product is typically in response to a problem that
needs to be promptly remedied. The Company focuses its marketing efforts on
owner-occupied homes. Because most people's largest investment is their home,
the Company believes home-owners are more willing to protect or enhance the
value of their investment by installing "need-based" products.
- VARIABLE COST OPERATIONS. The Company's operating costs are
substantially variable due to its method of purchasing products and retaining
independent contractors and its utilization of incentive-based compensation
programs for its Sales Associates and, to a lesser extent, its administrative
and operating management. The Company does not maintain any inventories of
products but instead purchases products from its independent distributors when a
sale is made to a customer. Likewise, the Company does not retain an independent
contractor to install a job until a sale has been made. Substantially all of the
compensation paid to a sales representative is based on sales generated by the
sales representative. In addition, as a result of the Company's automated
information systems, the Company's administrative and field support operations
are cost-efficient.
- COMMITMENT TO SUPERIOR CUSTOMER SERVICE. The Company promotes
exceptional value to its customers by presenting, delivering and installing a
quality product in a timely manner. The Company trains its Sales Associates to
fully inform customers as to what to expect from the Company's products and
services and to be knowledgeable about the Company's products. The Company
retains independent contractors who are monitored by the Company's quality
control coordinators to ensure conformance to the Company's quality standards.
Unlike many of its competitors, the Company requests no payments from customers
with approved credit until the job is complete and the customer has signed a
written certificate of satisfaction. The Company backs each installation with
labor and product warranties of up to 10 years. In addition, the manufacturers'
product warranties, which are issued directly to the customer, may provide
product warranty coverage for as long as 40 years. Furthermore, the Company,
pursuant to the license agreement has adopted the Sears policy of "Satisfaction
Guaranteed or Your Money Back" with respect to each installation.
29
<PAGE>
- ESTABLISHED RELATIONSHIPS WITH INDEPENDENT CONTRACTORS. Currently, the
Company has established relationships (i.e., independent contractors who have
performed two or more installations for the Company) with approximately 1,300
independent contractors. Prior to retention, the Company generally pre-screens
independent contractors for quality of installations and insurance coverage.
After retaining an independent contractor, the Company's goal is to monitor the
independent contractor's performance to ensure the independent contractor
satisfies the Company's quality and customer satisfaction standards. The Company
believes it is able to attract qualified independent contractors by providing
the independent contractors with prompt payment and predictable workflow and by
relieving the independent contractor of marketing, sales and collection duties.
- CONSUMER FINANCING. The Company is able to offer its customers the
option of financing their purchases through Sears and its affiliates or through
Marquise Financial, the Company's newly-formed consumer finance subsidiary which
began operations in November 1995. The Company believes that its ability to
offer these financing alternatives to qualified customers has a positive effect
on its Sales Associates' ability to close sales.
- AUTOMATED INFORMATION SYSTEMS. The Company operates a sales lead
management, job cost, billing, accounting and management information system at
its headquarters. The Company believes that its procedures permit material
delivery, product installation and job inspection in a cost-effective and timely
manner leading to prompt installation of its products. In addition, sales of
products financed by Sears and its affiliates and the license fee paid by the
Company to Sears are settled electronically between the Company and Sears. The
systems employed by the Company are being further upgraded to more efficiently
link incoming phone calls with a timely in-home sales presentation.
GROWTH STRATEGY
The Company's strategy is to continue its growth by focusing on the
following areas:
- INCREASING PENETRATION OF CURRENT PRODUCT LINES. The Company believes it
has less than 1% of the market for its current product lines. The industry in
which the Company competes is fragmented and characterized by inconsistent
quality and a high turnover of competitors. The Company believes that it can
increase its share of the market and its profitability by effectively promoting
its quality products to generate additional sales leads, increasing the size of
its sales force and increasing its close ratio (i.e., the percentage of sales
leads resulting in sales).
- INCREASING SIZE AND PRODUCTIVITY OF SALES FORCE. The Company has been
rapidly increasing the size of its sales force from 557 Sales Associates at
March 31, 1995, to 700 Sales Associates at May 1, 1996. Additional Sales
Associates will permit the Company to improve its response time to sales leads,
which, based on the Company's experience, improves the percentage of sales leads
resulting in sales. The Company intends to increase the number of Sales
Associates by approximately 50 and to open 1 to 2 sales offices in new and
existing markets during the remainder of 1996. The Company is also in the
process of implementing a professional training program for all Sales Associates
which, based on performance to date, is expected to increase the effectiveness
and productivity of its Sales Associates.
- EXPANDING PRODUCT OFFERINGS AND PROPRIETARY PRODUCTS. The Company plans
to focus on expanding its markets and product lines by adding more "need-based"
products and services. In 1995 and early 1996, the Company began test marketing
the installation, under the "Diamond Exteriors" name, of light commercial
roofing and the provision of heating and air conditioning services, repair and
installation under the "Solitaire" name. Additionally, in conjunction with
certain manufacturers, the Company has developed and is in the process of
further developing certain proprietary products under the "Diamond Shield" name
which the Company licenses from Globe. Currently, the Company sells proprietary
roofing, garage door and fencing products. These proprietary products permit the
Company to offer its customers unique, high quality products with an extended
labor and materials warranty that is not subject to direct price comparisons
with the Company's competitors.
30
<PAGE>
- INCREASED UTILIZATION OF SEARS RELATED SALES LEADS. The Company believes
that, by adding complementary product lines and services to its Sears license
arrangements, it can increase its utilization of its sales leads and therefore
increase profitability. The Company receives sales leads requesting products and
services which the Company currently does not provide. The Company expects to
further utilize sales leads it has already generated at no additional
incremental cost by expanding into complementary Sears product lines. Any such
expansion of the license arrangements will require Sears prior approval.
- ADDITIONAL CREDIT AVAILABILITY. During fiscal 1995, approximately 89% of
the Company's sales were financed, and of such financed sales, approximately 97%
were financed through Sears and its affiliates. Historically, the Company has
been unable to provide financing to certain potential customers as a result of
the inability of these customers to satisfy the credit underwriting criteria of
Sears and its affiliates. Since the Company's inception, Sears credit approval
rate for the Company's customers has varied from time to time based on a variety
of factors. As a result, in November 1995, the Company established a consumer
finance subsidiary, Marquise Financial, to provide potential customers with an
alternate source of financing their purchases, thereby creating opportunities
for increased net sales and profitability.
PRODUCTS
The following table sets forth the net sales and percentage of total net
sales for each of the Company's major product lines.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
PERIOD FROM JUNE 1 TO ---------------------------------------------------- -------------------------
DECEMBER 31, 1993 1994 1995 1995
------------------------- ------------------------- ------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
NET SALES TOTAL NET SALES TOTAL NET SALES TOTAL NET SALES TOTAL
----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Roofing and Gutters..... $ 18,532 90.2% $ 74,015 78.6% $ 87,060 69.7% $ 15,687 70.2%
Garage Doors............ 713 3.5 5,538 5.9 10,606 8.5 2,195 9.8
Entry and Security
Doors.................. 1,029 5.0 6,600 7.0 8,682 7.0 2,039 9.1
Fencing................. 188 0.9 7,358 7.8 17,933 14.3 2,381 10.6
Other................... 86 0.4 675 0.7 567 0.5 60 0.3
----------- ------------ ----------- ----- ----------- ----- ----------- -----
Total............... $ 20,548 100.0% $ 94,186 100.0% $ 124,848 100.0% $ 22,362 100.0%
----------- ------------ ----------- ----- ----------- ----- ----------- -----
----------- ------------ ----------- ----- ----------- ----- ----------- -----
<CAPTION>
1996
-------------------------
PERCENT OF
NET SALES TOTAL
----------- ------------
<S> <C> <C>
Roofing and Gutters..... $ 18,804 69.4%
Garage Doors............ 2,414 8.9
Entry and Security
Doors.................. 1,738 6.4
Fencing................. 3,621 13.4
Other................... 516 1.9
----------- -----
Total............... $ 27,093 100.0%
----------- -----
----------- -----
</TABLE>
The Company purchases all of its products directly from independent
distributors and/or manufacturers. All products sold by the Company under the
license agreement must be pre-approved by Sears. To date, the Company has not
experienced any difficulties obtaining the approval of Sears for any of its
products; however, there can be no assurance that Sears will continue to approve
the Company's new products.
Set forth below is brief description of the products offered by the Company:
ROOFING AND GUTTERS. The Company sells and installs most types of roofing
products, including asphalt, fiberglass, laminate, 3-tab and wood shingles, clay
and concrete tile and metal. The Company also sells and installs a proprietary,
premium shingle under the "Diamond Shield" name, which is manufactured by Globe.
The Diamond Shield shingle has a 30-year warranty and is rapidly becoming the
Company's most popular shingle. Globe licenses the name "Diamond Shield" to the
Company pursuant to an exclusive, royalty-free, perpetual license. See "Certain
Transactions -- Transactions with Globe and Globe Affiliates." The Company does
not sell, install or tear-off asbestos roofing. The Company installs all types
of residential roofs from flat roofs to roofs with multiple peaks. The average
price for a roof installed by the Company is $5,000. The Company also sells and
installs aluminum and steel gutters. The average price of installed gutters is
$1,200. The Company repairs roofs in certain limited markets as a Sears
authorized contractor and provides warranty service on Sears behalf for exterior
home products sold, furnished and installed by Sears prior to Sears exit from
the selling,
31
<PAGE>
furnishing and installing of roofing products. Pursuant to the Sears license
agreement, the Company also sells and installs soffit/facia, siding for dormers
and gable ends, chimney repair and tear-off roofing in connection with its
roofing installations.
The Company, on a limited test basis, also sells and installs, under the
"Diamond Exteriors" name, most types of light commercial roofing products, which
are similar to residential roofing products, including a wide variety of
shingles and various types of modified asphalt and rubber-based roll roofing
products. The average price for a light commercial roof installation is $15,000.
Typically, a light commercial roofing installation involves roofs of less than
13,000 square feet, such as fast food restaurants, convenience stores and small,
single-unit buildings. The light commercial roofing products and services are
not marketed or sold pursuant to a Sears license agreement.
GARAGE DOORS. The Company sells and installs a complete line of wood, steel
and fiberglass garage doors. The average price of an installed garage door,
including custom-made garage doors, is $1,250. In connection with the sales of
garage doors, the Company also sells and installs Sears brand garage door
openers. The Company sells a proprietary, high quality insulated steel garage
door under the "Diamond Shield" name. The Company repairs garage doors as a
Sears authorized contractor.
ENTRY AND SECURITY DOORS. The Company sells and installs exterior entry
doors and security storm doors. The Company offers a variety of pre-finished
energy-efficient steel, wood and fiberglass entry doors in a wide assortment of
colors and styles. The average price of an installed entry door is $1,700. The
Company also offers steel-frame security storm doors which provide energy
efficiency and security. The average price for a fully installed security storm
door is $1,100. In addition, the Company sells patio doors and patio storm
doors.
FENCING. The Company sells and installs a variety of fencing products
including galvanized, steel and aluminized chain link fences, vinyl coated steel
fabric fences with matching color frameworks, wood fences in a variety of styles
and plastic fences. The Company also sells a proprietary chain link fence under
the "Diamond Shield" name which features an extra-strong ribbed design and rust
protection. The average price of an installed fence is $2,000.
OTHER. The Company sells and installs skylights, insulation and a complete
line of exterior home improvement products for mobile homes such as siding,
windows, doors and roofing. The Company is currently testing operations which
will provide, through Solitaire, cleaning, repair and replacement products and
services to the heating and air conditioning market, which services are not
marketed or sold pursuant to a Sears license agreement. This category also
includes financing income from Marquise Financial and credit participation fees
from Sears and its affiliates.
NATIONAL MARKETING AND SALES LEAD GENERATION
The Company's principal marketing activities are conducted by participation
in Sears national advertising campaigns. In 1995, approximately 44% of the
Company's marketing expense was related to Sears-produced advertising. Prior to
the beginning of each year, the Company is required to commit to the amount of
advertising space that it intends to purchase from Sears for the upcoming year.
In 1994 and 1995, the Company incurred expenses to Sears of $1.7 million and
$2.8 million, respectively, for advertising. The Company believes that Sears
national advertising campaigns enable the Company to cost-effectively market its
products. In addition, the Company advertises in the yellow pages, local
newspapers, and, to a lesser extent, on radio and television. To improve the
efficiency of its promotional activities, the Company monitors responses with
internally developed computer software to determine which groups of homeowners
produce the highest percentages of scheduled appointments and sales and to
compile information such as the average sale price per sales lead for each type
of advertising media. The Company's analysis of this information provides the
basis for the ongoing refinement of its advertising program.
The Company's advertisements with Sears display a toll free number for a
potential customer to call. Currently, all calls from potential customers
responding to Sears advertisements, representing approximately 50% of the total
calls received by the Company, go through a call center operated by
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Sears which is operated 24 hours a day. A call-prompt system allows the caller
to select the desired product in response to automated questions outlining the
various products and services. Calls relating to the Company's products are then
automatically transferred to the appropriate Company call center based on the
area code of the caller. The Company call center which receives the telephone
call verifies the products the customer is interested in, schedules an
appointment and transmits the sales lead via facsimile or computer to the
appropriate sales office. The East, Southeast and West regions of the Company
each operate their own call center. These Company call centers are usually
staffed from 8:00 a.m. to 8:00 p.m., Monday through Friday and, depending on the
time of year, on Saturday and Sunday in certain regions. The Central region's
call center is operated by HI, Inc., a call center staffed 24 hours a day and an
affiliate of Mr. Clegg. See "Certain Transactions -- Transactions with Globe and
Globe Affiliates." The sales calls generated by non-Sears advertising are
received either directly at the appropriate Company call center or through HI,
Inc.
SALES
Potential customers who contact the Company are scheduled for an in-home
presentation from a sales representative, generally within two to five days of
the initial contact. Appointment schedules are transmitted by facsimile or
computer from the call centers to the various sales offices two to three times
per day. Sales managers attempt to schedule two to three appointments per sales
representative each day, Monday through Saturday, and each sales representative
is required to report the results of each appointment on a daily basis. Such
data provide the basis for the computer-generated management information upon
which the Company evaluates each sales representative's performance in such
areas as sales as a percentage of appointments, cancellation rate, average
dollar amount of sales, job profitability and amount of commissions earned.
Upon being assigned a qualified sales lead, one of the Company's sales
representatives will make an in-home presentation explaining the Company's
products to the potential customer with the assistance of brochures and videos.
During the in-home presentation, the sales representative will also determine
the specifications of the home improvement project and provide a price estimate
for the work to be performed. The Company follows a policy of requiring no money
down from customers with approved credit, with payment to be made only upon
completion of the job and the receipt of a written statement from the customer
confirming satisfaction.
The Company employs an incentive-based compensation program coupled with
employee benefit programs, including health insurance coverage, for its Sales
Associates. Sales representatives receive a percentage of the revenue generated
by a sale, with the percentage varying, depending upon the type of product sold.
In addition, in the event of improper estimating or other errors which lead to a
reduced profit on an installation, the sales representative's commission is
reduced by a portion of the reduced profit. Sales managers are paid a minimum
base salary, with incentives based on both monthly sales and the quarterly
profits for their sales offices.
The Company places great importance on recruiting skilled, professional and
motivated sales representatives. The attraction and retention of qualified sales
representatives is critical to the Company's goal of continued sales growth. The
Company attracts sales representatives by general advertising and referrals. The
Company has experienced significant turnover in the past, because, among other
reasons, the Company's sales representatives work on a commission-only basis.
During the two-year period from January 1, 1994 through December 31, 1995,
approximately 62% of the Company's total sales representatives resigned or were
terminated. During the same period, the Company's 200 top-selling sales
representatives (representing approximately 15% of the sales representatives
employed by the Company during such period) generated approximately 61% of the
Company's total net sales. Among these top-selling sales representatives,
approximately 30% resigned or were terminated during the two-year period. The
turnover of sales representatives results in increased recruitment and training
costs and a lower than desired conversion rate of sales leads to sales. To the
extent that the turnover rate of sales representatives continues or increases,
or the Company loses a significant number of its most productive sales
representatives, the net sales and profitability
33
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of the Company could be adversely affected. The Company is attempting to reduce
turnover rates through more selective recruiting and better training. See "Risk
Factors -- Reliance on Sales Associates" and "-- High Turnover of Sales
Representatives."
The Company has found that improved training of its Sales Associates
increases the level of service that can be provided to the customer and improves
the percentage of sales leads which ultimately result in sales. The Company
employs, and is in the process of implementing nationwide a one to two week
training program for all Sales Associates. The training program involves
instruction as to the high standards of integrity and customer service required
by the Company, technical information about the various products offered by the
Company and "on the job" training with an experienced Sales Associate. The
Company has developed a series of videos and training materials to assist in the
training process. The Company's product suppliers also provide representatives
to assist in the training programs at the supplier's expense.
The Company's sales and installation activities are organized into four
geographic regions (the East, Southeast, Central and West), each of which is
managed by a regional president. Each region typically has a Vice President of
Sales, to whom the sales managers report, and a Vice President of Operations, to
whom installation managers and quality control coordinators report. The East
Region has two District Managers, reporting to a Vice President of Sales and a
Regional Manager of Operations. Each sales office is electronically connected to
its particular regional office. Currently, each region has a call center (except
the Central region which uses HI, Inc., an affiliate of Mr. Clegg, as its call
center) through which sales leads are assigned to the various sales offices. See
"Certain Transactions -- Transactions With Globe and Globe Affiliates." The
Company currently has 74 sales offices which are typically staffed with a sales
manager, an installation manager and a quality control coordinator. The sales
manager is responsible for assigning sales leads to the sales representatives,
monitoring their performance and recruiting sales representatives. The
installation manager is responsible for scheduling and retaining independent
contractors for particular jobs and recruiting independent contractors. The
quality control coordinator inspects a portion of the installations while they
are in progress or upon completion and qualifies new independent contractors.
INDEPENDENT CONTRACTORS
The Company retains independent contractors to perform all of its
installations. Prior to retention, the Company generally pre-screens each
contractor's background and work to ensure that it meets the Company's quality
standards. Each of the Company's sales offices enters into arrangements with
multiple independent contractors setting forth the compensation structure for
the independent contractor for a specified type and scope of installation.
Independent contractors engaged by the Company employ their own workers and are
required to maintain their own vehicles, equipment, insurance and licenses. The
Company's policy requires that its independent contractors satisfy the Company's
workers' compensation and general liability insurance requirements. In certain
circumstances, independent contractors have not carried or renewed their
workers' compensation and general liability insurance. To the extent that
independent contractors do not carry the required insurance, the Company could
incur ultimate liability for any injury or damage claims. The Company is in the
process of taking actions aimed at better ensuring that each independent
contractor meets and continues to meet the Company's workers' compensation and
general liability insurance requirements. See "Risk Factors -- Dependence on
Availability of Qualified Independent Contractors." The Company has established
relationships (i.e., independent contractors who have performed two or more
installations for the Company) with over 1,300 independent contractors. Each
independent contractor provides the Company with a one to two year warranty for
its work which is significantly shorter in duration than the labor warranty
provided by the Company to its customers. See "-- Warranty."
From time to time, the Company has experienced difficulty retaining a
sufficient number of qualified independent contractors, especially after periods
of extreme weather in specific geographic areas due to increased demand.
However, the Company is in the process of developing and testing
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several programs to increase its ability to attract and retain quality
independent contractors. These programs include a more rapid payment mechanism
and a certification program based on work quality whereby independent
contractors are paid increased rates for their services based on their
certification level. Although these programs will marginally increase the
Company's costs, the Company believes that they will help ensure an adequate
supply of qualified independent contractors and reduce future incidences of
warranty claims. See "Risk Factors -- Dependence on Availability of Qualified
Independent Contractors."
CUSTOMER FINANCING
The average sales price charged by the Company for its products and services
ranges between $1,100 and $5,000. During fiscal 1995, approximately 89% of the
Company's sales were financed, and, of the sales which were financed,
approximately 97% were financed through Sears and its affiliates. A sales
representative is generally able to determine credit availability for a customer
by calling the Sears consumer credit department or Marquise Financial during the
in-home presentation. In the Company's credit arrangements with Sears and its
affiliates, Sears and its affiliates assume all credit risk and the Company
receives from Sears and its affiliates, upon completion of the installation, the
full contract price. Because the Company's target market is a homeowner living
in a single family home, its potential customers generally have a good credit
rating. However, in the past Sears and its affiliates credit approval rate for
the Company's customers has varied from time to time based on a variety of
factors. The continued availability of affordable financing for potential
customers is necessary for the Company to continue to sell its products. See
"Risk Factors -- Interest Rate Sensitivity" and "-- Dependence on Availability
of Sears Credit."
In November 1995, Marquise Financial, the Company's consumer finance
subsidiary, commenced operations to provide an additional financing alternative
for purchasers of the Company's products. If the customer does not want to
finance the purchase through Sears and its affiliates or, in some cases, if
Sears and its affiliates declines the customer's credit application, the
customer may finance the purchase through Marquise Financial, so long as the
customer satisfies Marquise Financial's credit criteria. The sales
representative makes a phone call during the in-home presentation and is
generally able to determine credit availability for a customer with Marquise
Financial within 5 to 10 minutes. Unlike financing through Sears and its
affiliates, the Company bears the credit risk on all financing provided by
Marquise Financial. Customers financing purchases with Marquise Financial can
pay a smaller portion of the principal balance on a monthly basis than is
currently required by Sears and its affiliates. Although this lengthens the term
of the loan, the Company believes that lower monthly payments make its products
more affordable at the time of purchase. The Sears license agreement requires
that Sears and its affiliates be given a right of first refusal with respect to
75% of the total dollar volume of applications for credit received by the
Company in connection with sales made under the Sears license agreement. As of
May 1, 1996, Marquise Financial had $11.9 million in consumer finance
receivables outstanding. The Company is actively pursuing additional funding of
up to $35.0 million for Marquise Financial for 1996. See "Risk Factors -- New
Consumer Finance Subsidiary" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
WARRANTY
The Company provides each customer with a warranty on product and labor.
Depending on the type of product installed, the product and labor warranties
provided by the Company vary from one year to up to 10 years. In addition, the
manufacturer provides a warranty on the product and the independent contractor
provides a warranty on labor. Generally, the product warranty provided by
manufacturers is commensurate as to scope and is typically longer as to duration
than the warranty that the Company provides to its customers. However, certain
manufacturer product warranties often provide a declining amount of coverage
over time, while the Company's warranty coverage does not decline during the
warranty period. The labor warranty that the Company receives from its
independent contractors (generally one to two years) is significantly shorter in
duration than that provided by the Company to its customers. In all cases, the
Company is primarily liable to the customer to fulfill all
35
<PAGE>
warranty obligations, regardless of whether a manufacturer or independent
contractor performs its warranty obligations. In addition, pursuant to the
license agreement with Sears (i) Sears has the right to settle, at the Company's
expense and without the Company's consent, any customer complaints, (ii) the
Company has agreed to and supports Sears policy of "Satisfaction Guaranteed or
Your Money Back" as it relates to customer complaints and adjustments and (iii)
the Company's customers are third-party beneficiaries of the one-year product
and labor warranty given by the Company to Sears with respect to each
installation. The Company attempts to limit its potential warranty exposure by
pre-screening independent contractors, using quality products produced by
nationally known manufacturers and inspecting a portion of all installations. In
addition to the product warranty it provides, the Company generally transfers to
its customers, to the extent transferable, the manufacturers' product warranties
which may provide product warranty coverage for as long as 40 years.
To secure the performance of the independent contractors under their
warranties, the Company requires most independent contractors to deposit with
the Company between 1% and 2% of the payment such independent contractors
receive for each completed installation, up to an aggregate maximum agreed-upon
amount, which amount is held in reserve by the Company. These retentions are
used to secure performance by an independent contractor of any labor warranty
claims. Although the amounts retained may not be sufficient to cover all labor
warranty costs, the Company believes that such retentions provide sufficient
incentive to the independent contractor to perform the installation or needed
repair in accordance with the Company's high quality standards. The Company
currently accrues a reserve for warranty claims, which has approximated 2% of
net sales since the Company's inception. See "Risk Factors -- Warranty
Exposure."
PURCHASING
The Company purchases roofing materials, gutters, doors, fencing and related
products primarily from a variety of local and regional independent distributors
and/or manufacturers. Each independent distributor provides a variety of
services to the Company, including the maintenance of adequate inventories to
support the Company's prompt need for materials, the delivery of requisite
materials to each job site and the provision of extended payment terms for the
products purchased. Through the use of independent distributors, the Company
avoids the costs associated with maintaining an inventory and operating
distribution centers. In many cases, the payment terms extended by the Company's
suppliers permit the Company to collect payment for an installation prior to
payment by the Company of the associated product costs. The independent
distributors benefit from their relationships with the Company due to the
consistent volume of purchases by the Company and the resultant increased
inventory turnover and the limited credit risk posed by the Company. The Company
believes it has good relationships with its independent distributors.
In 1995, approximately 20% of the Company's material purchases were supplied
by ABC Supply Co., inc., an independent distributor having facilities in
multiple locations. The Company believes that other distribution companies would
be able to offer comparable services and pricing to the Company. Approximately
16% in dollar volume of all roofing products purchased by the Company during
1995 were manufactured by Globe, the Company's principal stockholder. See
"Certain Transactions -- Transactions with Globe and Globe Affiliates."
SEARS LICENSE AGREEMENT
Currently, the Company conducts primarily all of its direct marketing and
installation activities under a license agreement between Exteriors and Sears.
As used herein with respect to the description of the Sears license agreement,
the defined term "Company" shall mean Diamond Home Services, Inc. together with
Exteriors. The Company entered into a new three-year license agreement with
Sears effective January 1, 1996. The license agreement authorizes the Company to
sell, furnish and install roofing, gutters, doors and fences under the "Sears"
name as a Sears authorized contractor to residential customers in 44 states.
During the term of the license agreement, the Company may not sell, furnish or
install similar products under either its own or any other retailer's name
without Sears consent. The license agreement expires December 31, 1998 but,
under certain circumstances, may be
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extended for a wind down period of up to six months. After the first two years
of its term, the license agreement may be terminated prior to expiration by
either party without cause so long as such party has provided 12-months' written
notice prior to the termination date. The license agreement also provides for
immediate termination by Sears for various reasons, including failure to comply
with any material provision of the license agreement; allegations that the
approved products infringe a third party's patent, trademark or copyright or
that they are being sold in violation of law; the Company's failure to have
merchantable, conforming products ready for delivery and installation at the
time specified; or receipt by Sears, in its opinion, of an excessive number of
complaints regarding the Company and the Company's failure to timely provide
Sears with adequate assurances, as determined by Sears, that issues involving
such complaints have been resolved to Sears satisfaction. In addition, Sears has
the right, at any time, upon 12 months' notice to the Company to discontinue the
Company's right to sell, furnish and install certain products in certain markets
under the "Sears" name if the sales volume or relative "Quality Every Day!"
standards or "Service Quality Index" scores, as defined in the license
agreement, for such products or services fall below the standards contained in
the license agreement.
Measuring and evaluating sales levels and customer satisfaction is important
to both the Company and Sears. Annually, the Company and Sears review the
Company's following year's sale forecast and operating plan. Quarterly, the
Company and Sears review the "Service Quality Index" ("SQI Index") scores for
the Company with respect to each region and product. The SQI Index is a Sears
measure of the Company's performance against "Quality Every Day!" ("QED")
standards with respect to the Company's delivery of products and services. The
Company's scores are compared against the average scores for Sears licensees as
a group. During the past year, the Company's average SQI Index scores have been
within five percentage points of the average for all Sears licensees. Both the
Company and Sears agree that the Company should improve its customer
satisfaction scores. The Company believes that its rapid growth has resulted in
scores at a level below that which the Company would have received had its
growth been slower. However, the Company believes that it can improve its
quality and service and has taken and is in the process of taking a number of
initiatives involving its systems, reporting, employees, independent
contractors, suppliers and distributors directed at improving its quality and
service.
The license agreement is not exclusive by its terms; however, historically,
Sears has not licensed the same home improvement products to multiple licensees
within the same market. The Company believes Sears does not grant licenses to
more than one licensee in a market to avoid confusion among the customers with
respect to pricing and other factors; provided, however, there can be no
assurance that Sears will continue to limit its licenses. The license agreement
may not be assigned by the Company to a third party other than an affiliate
without Sears consent.
The license agreement provides for the Company to pay Sears a license fee
based on the Company's gross sales for products licensed under the license
agreement. The license fee is a fixed percentage of such sales for certain
products. See "Risk Factors -- Dependence on Sears License" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
license agreement provides for an additional fee of 1% of gross sales for each
sale made pursuant to a customer referral from a Sears retail store associate.
The license agreement imposes quality standards which must be maintained by
the Company, as to both the products and the services it offers. Prior to any
new product introduction, each product sold under the license agreement with
Sears must be approved by Sears. In addition, all marketing materials employing
the "Sears" name are subject to the prior approval of Sears. The license
agreement grants Sears title to all customer information generated by the
Company during the term of the license agreement, as well as to all telephone
numbers used by the Company in connection with its operations under the license
agreement and provides that the Company has no right or interest in such
customer information or goodwill. The Company cannot use such information other
than in connection with the license agreement. The license agreement also
provides Sears the right to settle,
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at the Company's expense and without the Company's consent, any customer
complaints. The Company is not aware of any material claims made against Sears
by customers of the Company which the Company has not directly resolved with the
customer, but no assurances can be given that Sears will not do so in the future
with respect to the Company's customers. The Company has agreed to and supports
Sears policy of "Satisfaction Guaranteed or Your Money Back." The license
agreement also provides that the customers are third-party beneficiaries of the
one-year product and labor warranty from the Company to Sears with respect to
each installation.
The license agreement requires that Sears be given a right of first refusal
with respect to a minimum of 75% of the total dollar volume of applications for
credit received by the Company in connection with sales made pursuant to the
license agreement. If Sears declines any credit application, such application is
referred to the Company and the Company, at its discretion, can provide credit
to the applicant or seek a third party to provide credit. Beginning in 1996, the
Company receives from Sears and its affiliates a participation fee equal to
approximately 1.6% of sales financed through Sears and its affiliates. The
participation fees are payable by Sears and its affiliates over a ten-year
period, with 71% of the total participation fee to be paid in the first three
years following each installation financed through Sears and its affiliates. The
Company's right to receive the participation fee is subject to termination under
certain circumstances.
The Company believes that it has a good relationship with Sears and that it
is one of Sears largest third-party home improvement product licensees measured
by number of installations, gross sales, license fees paid to Sears and the
number of sales offices and markets served. In 1993, 1994 and 1995, the Company
incurred license fees to Sears in the aggregate amount of $1.2 million, $7.4
million and $13.0 million, respectively, and for the three months ended March
31, 1995 and 1996, $2.2 million and $2.8 million, respectively. In the event
that Sears were to terminate or fail to renew the license agreement, the Company
believes that, through its established sales and installation system, its
products and services could be marketed, installed and financed by the Company
independently or under the name of an alternative retail licensor. However,
termination of the license agreement or certain rights thereunder, the failure
of Sears to renew the license agreement with the Company on its current terms,
an increase in the rates of the license fee paid by the Company to Sears, the
addition of other Sears licensees marketing the Company's products in the
Company's markets, Sears exercise of its right to discontinue the Company's
license in any market or for any product or a decline in Sears reputation could
have a material adverse effect on net sales and profitability of the Company.
COMPETITION
The industry in which the Company competes is fragmented and competitive.
The Company believes that it is one of the largest companies in the U.S. engaged
in the sale and installation of exterior home improvement products. The Company
competes for sales with numerous local home improvement installers and
independent contractors in each of its markets, some of which also serve as
independent contractors for the Company. The Company also competes against major
retailers which market and install products similar to the Company's, including
Home Depot, Inc. and Montgomery Ward & Co., Inc. In addition, AMRE, Inc., a
licensee of Century 21 Real Estate Corp. and a former Sears licensee for siding
and windows, is also a competitor. To date, none of the retailer-sponsored
programs has provided significant competition to the Company. However, there is
no assurance that this absence of competition will continue. Certain of these
competitors are significantly larger and have greater financial resources than
the Company. In addition, Home Depot, Inc. and Montgomery Ward & Co., Inc. each
has a nationwide chain of retail stores, which provides them the opportunity to
offer products and services similar to the Company's directly to their
customers. The Company competes on the basis of price, Sears name recognition
and reputation, customer service reputation, workmanship and the ability of the
Company and the manufacturer to fulfill their warranty obligations. Because the
Company's focus is on providing additional value to its customers through
warranty protection, proprietary products and superior customer service, the
Company typically charges prices for its products and services which are higher
than those of most of its local competitors. The Company's ability to operate
under its license agreement to use the "Sears" name is
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of great importance to the Company's ability to compete and has significantly
contributed to the Company's rapid growth. The Company expects that the market
for its products and services will expand and therefore, competition will
increase in the future. There can be no assurance that the Company will remain
competitive or that the Company will be able to maintain its current
profitability. See "Risk Factors -- Highly Competitive Market."
GOVERNMENT REGULATIONS
The Company's business and the activities of its independent contractors are
subject to various federal, state and local laws, regulations and ordinances
relating to, among other things, in-home sales, consumer financing, advertising,
the licensing of home improvement independent contractors, OSHA standards,
building and zoning regulations and environmental laws and regulations relating
to the disposal of demolition debris and other solid wastes. In certain
jurisdictions, the Company or one of its employees is required to be licensed as
a contractor. In addition, certain jurisdictions require the Company or the
independent contractor to obtain a building permit for each installation. The
Company is also subject to certain federal, state and local laws and
regulations, which, among other things, regulate the Company's advertising,
warranties and disclosures to customers. Although the Company believes that it
has been and is currently in compliance in all material respects with such laws
and regulations there can be no assurance that in the future the Company's
results of operations will not be materially adversely affected by existing or
new laws or regulations applicable to the Company's business.
Marquise Financial's operations are subject to supervision by state
authorities (typically state banking, consumer credit or insurance authorities)
that generally require that the Company be licensed to conduct its business. In
many states, issuance of licenses is dependent upon a finding of public
convenience, and of financial responsibility, character and fitness of the
applicant. The Company is generally subject to state regulations, examinations
and reporting requirements, and licenses are revocable for cause. Currently,
Marquise Financial is licensed and qualified to provide financing in 42 states.
The Federal Consumer Credit Protection Act ("FCCPA") is comprised of various
federal statutes governing the consumer finance industry. Included within the
FCCPA are, among other federal statutes, the Truth in Lending Act, the Fair
Credit Reporting Act, the Equal Credit Opportunity Act and the Fair Debt
Collection Practices Act. The Truth in Lending Act requires a written statement
showing the annual percentage rate of finance charges and requires that other
information be presented to debtors when consumer credit contracts are executed.
The Fair Credit Reporting Act requires certain disclosures to applicants for
credit concerning information that is used as a basis for denial of credit. The
Equal Credit Opportunity Act prohibits discrimination against applicants with
respect to any aspect of a credit transaction on the basis of sex, marital
status, race, color, religion, national origin, age, derivation of income from a
public assistance program, or the good faith exercise of a right under the
FCCPA. In addition, the Fair Debt Collections Practices Act proscribes various
debt collection practices which it deems unfair, harassing or deceptive.
Marquise Financial is subject to state usury laws. In certain states and
under certain circumstances, state law has been preempted by federal law,
although for a period of time individual states were permitted to enact
legislation superseding federal law. To be eligible for the federal preemption,
the credit application must comply with certain consumer protection provisions.
A few states have elected to override federal law, but have established maximum
rates that either fluctuate with changes in prevailing rates or are high enough
so that, to date, no state's maximum interest rate has precluded Marquise
Financial from continuing to offer financing in that state. Although the Company
believes that Marquise Financial has been and is currently in compliance in all
material respects with such laws and regulations, there can be no assurance that
in the future a change in existing laws or regulations or the creation of new
laws and regulations applicable to Marquise Financial's business
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will not have an adverse effect on the Company's ability to provide customer
financing of its products or on the profitability of such activities. See "Risk
Factors -- Compliance with Government Regulations."
EMPLOYEES AND INDEPENDENT CONTRACTORS
At May 1, 1996, the Company employed 1,250 persons, including 700 Sales
Associates and 306 part-time employees. In addition, the Company has
relationships (i.e., independent contractors who have performed two or more
installations for the Company) with approximately 1,300 independent contractors
which perform installation services. The Company considers its relations with
its employees and independent contractors to be good.
PROPERTIES
The Company's principal executive and administrative office is currently
located in approximately 23,000 square feet of office and warehouse space in
Woodstock, Illinois pursuant to a lease agreement which expires December 31,
2001. The Company leases four regional offices in Dallas, the Los Angeles area,
the Orlando area and Pittsburgh. The regional offices range in size from 3,400
square feet to 5,900 square feet and have lease terms of between 2 and 4 years.
As of May 1, 1996, the Company leased 70 sales/installation offices. These
offices occupy between 800 and 2,000 square feet and typically have lease terms
of up to three years.
LEGAL PROCEEDINGS
See "Certain Transactions -- Legal Proceedings" for information regarding
certain pending legal proceedings involving the Company, the Chairman of the
Board, Chief Executive Officer and President and one of the Company's other
directors.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ---------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
C. Stephen Clegg (1) 45 Chairman of the Board, Chief Executive
Officer and President
James M. Gillespie (1) 57 Vice President -- Southeastern Region and a
Director
Frank Cianciosi 53 Vice President -- Eastern Region and National
Sales Manager
Richard G. Reece 48 Chief Financial Officer and Treasurer
Ann Crowley Patterson 37 Vice President -- Administration, General
Counsel and Secretary
James F. Bere Jr. (2)(3) 45 Director
Jacob Pollock 71 Director
George A. Stinson (1)(2)(3) 81 Director
OTHER REGIONAL VICE PRESIDENTS:
Jerome E. Cooper 56 Vice President -- Central Region
Ronald D. Schurter 56 Vice President -- Western Region
KEY EMPLOYEES:
S. Austin Sawyer 63 President of Marquise Financial Services,
Inc.
Rodger Ibach 60 Vice President
Marvin Lerman 54 Vice President -- Purchasing
Denis M. Haggerty 55 Vice President -- Sales and Marketing
Alan G. Miller 30 Controller
</TABLE>
- ------------------------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
MR. C. STEPHEN CLEGG has been a director of the Company since September 1993
and has served as the Company's Chairman of the Board and Chief Executive
Officer since February 1996 and President since April 1996. Mr. Clegg also
serves as the Chairman of the Board and the Chief Executive Officer of
Exteriors, the Chief Executive Officer of Marquise and the Chief Executive
Officer, President and sole director of Solitaire. From April 1989 to the
present, Mr. Clegg has served as Chairman of the Board, Chief Executive Officer
and controlling stockholder of Globe, a manufacturer of home building products,
including roofing shingles and related roofing products. Globe is the Company's
principal stockholder. Mr. Clegg has served as the Chairman of the Board and
Chief Executive Officer of Mid-West Spring Manufacturing Company, a
publicly-traded company which manufactures specialty springs, wire forms and
metal stamping products ("Mid-West Spring"), since April 1993 and has served as
a director since 1991. Since April 1994, Mr. Clegg has also served as the
Chairman of the
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Board, Chief Executive Officer and controlling stockholder of Catalog. Catalog
is the parent company of HI, Inc., which receives fees from the Company for
providing call center services and for generating sales leads. See "Certain
Transactions -- Transactions with Globe and Globe Affiliates" and "-- Legal
Proceedings." Mr. Clegg is president of Clegg Industries, Inc., a private
investment firm which he founded in September 1988. Prior to founding Clegg
Industries, Inc., he was a managing director of AEA Investors, Inc. Mr. Clegg is
currently a director of two other public companies, Birmingham Steel
Corporation, a steel production company and Ravens Metal Products, Inc., a
manufacturer of aluminum products. Mr. Clegg intends to continue in his current
capacity with each of the above-referenced companies. Mr. Clegg currently
devotes and intends to devote a majority of his time to the management of the
Company.
MR. JAMES M. (MILT) GILLESPIE has been a director of the Company since May
1995 and Vice President -- Southeastern Region of the Company since April 1996.
He was President -- Southeastern Region of the Company from May 1995 to April
1996, had been Southeastern Region Manager from February 1994 to May 1995 and
was a director of the Company from September 1993 to September 1994. Mr.
Gillespie is also the President -- Southeastern Region of Exteriors. Prior to
joining the Company, Mr. Gillespie held various retail management positions with
Sears from 1962 to 1989 and was a regional business manager of installed home
improvements at Sears from 1989 to May 1993.
MR. FRANK CIANCIOSI has been Vice President -- Eastern Region and the
National Sales Manager of the Company since April 1996 and had earlier served as
a director of the Company from September 1993 to September 1994. He was
President -- Eastern Region of the Company from May 1995 to April 1996 and had
been Eastern Region Manager from February 1994 to May 1995. Mr. Cianciosi is
also the President -- Eastern Region of Exteriors. Prior to joining the Company,
Mr. Cianciosi held various retail management positions with Sears from 1962 to
1989 and was a regional business manager of installed home improvements at Sears
from 1989 to April 1993.
MR. RICHARD G. REECE has served as Chief Financial Officer and Treasurer of
the Company since April 1996. He was assistant treasurer of the Company from
August 1994 to April 1996 and a director from May 1995 to April 1996. Mr. Reece
is also the assistant treasurer of Exteriors, the Chief Financial Officer, Vice
President and Treasurer of Marquise and the Chief Financial Officer of
Solitaire. Mr. Reece is also Vice President and Chief Financial Officer of
Globe. From November 1990 to the present, Mr. Reece has been the sole officer,
director and stockholder of Paradigm 2000 Inc., a consulting firm which he
founded. Mr. Reece will resign his positions at Globe prior to consummation of
the offering and will devote substantially all of his time to the Company. From
June 1986 to December 1990, Mr. Reece was Executive Vice President and Chief
Operating Officer of American Health Companies, Inc. which is the parent
corporation of Diet Center, Inc. Prior to joining American Health Companies,
Inc., Mr. Reece was a partner with Ernst & Young LLP, an international public
accounting firm.
MS. ANN CROWLEY PATTERSON has served as Vice President -- Administration,
General Counsel and Secretary of the Company since April 1996. Ms. Patterson is
also the sole director, Vice President, General Counsel and Secretary of
Marquise Financial and the Vice President, General Counsel and Secretary of
Solitaire. Ms. Patterson also serves as the Vice President, General Counsel and
Secretary of Globe and serves in a similar capacity at Mid-West Spring. Ms.
Patterson also serves as the Vice President and Secretary of Catalog. Ms.
Patterson intends to continue in these current positions. Ms. Patterson
currently devotes and intends to devote a majority of her time to the Company.
Ms. Patterson was associated with Jones, Day, Reavis & Pogue in New York, New
York and Chicago, Illinois from February 1989 to November 1993 and was
associated with Skadden, Arps, Slate, Meagher & Flom in New York, New York from
September 1984 to February 1989.
MR. JAMES F. BERE, JR. has served as a director of the Company since April
1996. From January 1995 to the present, Mr. Bere has been the Chairman of the
Board of Directors and Chief Executive Officer of Ameritel L.L.C., an
outsourcing solutions company which he founded in 1982 and for which he
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served as President and Chief Executive Officer from 1982 through 1990. From
January 1993 to May 1994, Mr. Bere was a Vice President of PIA Merchandising
Company and from September 1990 to December 1992 he was a Senior Vice President
of Marketing and Business Development for Matrix Marketing, Inc., a division of
Cincinnati Bell.
MR. JACOB POLLOCK has served as a director of the Company since September
1993. He also serves as a director of Globe and Mid-West Spring. From May 1991
to the present, Mr. Pollock has been Chairman of the Board, Chief Executive
Officer and Treasurer of Ravens Metal Products Inc. From April 1989 to the
present, Mr. Pollock has been the Chief Executive Officer and the Chief
Operating Officer of J. Pollock & Co., a company which is principally engaged in
the sale of aluminum, private investing and consulting. From 1949 to 1989, Mr.
Pollock served as Chief Executive Officer of Barmet Aluminum Corporation. Mr.
Pollock also serves as a director of several non-public companies, including
Techno Cast, Inc. and Aluminum Warehouse, Inc. See "Certain Transactions --
Legal Proceedings."
MR. GEORGE A. STINSON has served as a director of the Company since
September 1993. Mr. Stinson also presently serves on the Board of Directors of
Globe and Mid-West Spring. Mr. Stinson is currently retired from active
corporate management and the practice of law. From 1961 until 1982 he served as
Chief Executive Officer of National Steel Corporation and from 1965 to 1981 he
was also its Chairman of the Board. From 1981 to 1985 he was of counsel to the
law firm of Thorp, Reed & Armstrong in Washington, D.C. Mr. Stinson also
presently serves on the Board of Directors of Birmingham Steel Corporation.
MR. JEROME COOPER has been Vice President -- Central Region of the Company
since April 1996. He was President -- Central Region of the Company from May
1995 to April 1996 and had been Central Region Manager from February 1994 to May
1995. Mr. Cooper is also the President -- Central Region of Exteriors. Prior to
joining the Company, Mr. Cooper held various retail management positions with
Sears from 1963 to 1991 and was regional business manager of installed home
improvements at Sears from 1991 to May 1993.
MR. RONALD SCHURTER has been Vice President -- Western Region of the Company
since April 1996. He was President -- Western Region of the Company from May
1995 to April 1996 and had been Western Region Manager from February 1994 to May
1995. Mr. Schurter is also the President -- Western Region of Exteriors. Prior
to joining the Company, Mr. Schurter held various retail management positions
with Sears from 1958 to 1992 and was a regional business manager of installed
home improvements at Sears from 1992 to May 1993.
MR. S. AUSTIN SAWYER has been President of Marquise Financial since March
1996. He has been the President of Cornerstone Financial Corporation, a
commercial lending corporation, since May 1995. Mr. Sawyer intends to continue
in his current capacity with Cornerstone Financial Corporation. Mr. Sawyer was a
Senior Vice President of Bank of Northern Illinois from February 1993 to
February 1995, and was Vice President of the Lending Services Division of Sears
Consumer Financial Corporation from 1990 to January 1993. From 1980 through
1989, Mr. Sawyer was the President and a director of C&S Family Credit Inc., a
division of Citizens & Southern Corporation in Atlanta, Georgia.
MR. RODGER IBACH has been a Vice President of the Company since April 1996.
He was President and Secretary of the Company from its formation in May 1993 to
April 1996 and was a director of the Company from May 1993 to September 1994 and
again from May 1995 to April 1996. Mr. Ibach is also the President of Exteriors.
Prior to joining the Company, Mr. Ibach held various retail management positions
with Sears from 1960 to 1985 and was a manager of contractor relations for
installed home improvements at Sears from 1985 to June 1993.
MR. MARVIN LERMAN has been Vice President -- Purchasing of the Company since
its formation in May 1993 and has served in the same capacity at Exteriors since
April 1996. Prior to joining the Company, Mr. Lerman held various management
positions at Sears from 1963 to May 1993.
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MR. DENIS HAGGERTY has been Vice President -- Sales and Marketing of the
Company since its formation in May 1993 and has served in the same capacity at
Exteriors since April 1996. Prior to joining the Company, Mr. Haggerty held
various management positions at Sears from 1962 to May 1993.
MR. ALAN MILLER has been Controller of the Company since April 1996. He was
Chief Financial Officer and Treasurer of the Company from September 1993 to
April 1996. Mr. Miller is also the Chief Financial Officer of Exteriors. From
November 1989 to December 1993, Mr. Miller was Assistant Controller of Globe.
From June 1987 to November 1989 he was an auditor with Ernst & Young LLP.
TERM OF OFFICE AND ELECTION OF ADDITIONAL DIRECTOR
Each member of the Board of Directors of the Company is elected annually.
All officers serve at the pleasure of the Board of Directors. There are no
family relationships among any of the directors or officers of the Company.
However, three of the officers (Messrs. Clegg and Reece and Ms. Patterson) and
three of the directors (Messrs. Clegg, Pollock and Stinson) of the Company have
positions with other companies controlled by Mr. Clegg. The Company currently
has one director who is not employed by, or otherwise affiliated with, Globe,
the Company or any other companies controlled by Mr. Clegg. The Company intends
to use its best efforts to select an additional director during 1996 who is not
employed by, or otherwise affiliated with, Globe, the Company or any other
companies controlled by Mr. Clegg.
BOARD COMMITTEES
The Board of Directors has established three standing committees: the Audit
Committee, the Compensation Committee and the Executive Committee. The Audit
Committee recommends the appointment of auditors and oversees the accounting and
audit functions of the Company. The Compensation Committee determines executive
officers' and key employees' salaries and bonuses and administers the Stock
Option Plan. The Executive Committee has the authority to take all actions which
the Board of Directors as a whole would be able to take, except as limited by
applicable law. Since April 1996, Messrs. Clegg, Gillespie and Stinson have
served on the Company's Executive Committee and Messrs. Bere and Stinson have
served on the Company's Compensation Committee and Audit Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1995, the Company had no Compensation Committee but the Board of
Directors performed equivalent functions. Of the members of the Board of
Directors in 1995, Mr. Griffin served as the Company's Chief Executive Officer,
Mr. Gillespie served as the Company's President -- Southeastern Region, Mr.
Ibach served as the Company's President and Mr. Reece served as the Company's
assistant treasurer. See "Certain Transactions."
Mr. Clegg is currently a member of the Compensation Committee of the Board
of Directors of Ravens Metal Products, Inc., a company for which Mr. Pollock, a
director of the Company, is the Chairman of the Board, Chief Executive Officer
and Treasurer.
DIRECTOR COMPENSATION
Directors who are not employees or officers of the Company receive $1,000
for each Board and committee meeting attended. In addition, all directors may be
reimbursed for certain expenses in connection with attendance at Board and
committee meetings. Other than with respect to reimbursement of expenses,
directors who are employees or officers of the Company will not receive
additional compensation for service as a director. Nonemployee directors will
also receive options to purchase shares of the Company's Common Stock pursuant
to the Company's Nonemployee Director Stock Option Plan. See "-- Stock Option
Plans."
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EXECUTIVE COMPENSATION
The following table sets forth information with respect to all compensation
paid or earned for services rendered to the Company in 1995 by the Company's
chief executive officer, the Company's four other highest compensated executive
officers and the former chief executive officer of the Company who terminated
service with the Company effective February 12, 1996 (together, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS (1) COMPENSATION COMPENSATION
- ---------------------------------------------------------------- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
C. Stephen Clegg (2)............................................ -- -- -- --
Chairman of the Board, Chief Executive Officer and President
James M. Gillespie.............................................. $ 126,800 $ 247,236 $ 3,080(3) --
Vice President -- Southeastern Region and a Director
Frank Cianciosi................................................. 126,650 410,407 2,997(3) --
Vice President -- Eastern Region and National Sales Manager
Jerome Cooper................................................... 126,800 244,441 282(3) --
Vice President -- Central Region
Rodger Ibach (5)................................................ 116,800 273,292 3,688(3) $ 20,000(4)
Vice President
Donald Griffin (6).............................................. 125,000 408,655 3,488(3) 20,000(4)
</TABLE>
- ------------------------
(1) Reflects bonuses earned under the Company's 1995 Executive Bonus Plan and
monthly payments of $5,000 per month with respect to each of Messrs.
Cianciosi, Cooper and Ibach; $5,416.67 per month with respect to Mr.
Gillespie; and $15,751.67 per month with respect to Mr. Griffin, pursuant to
security agreements between such individuals and the Company. See "--
Agreements with Managers" and "Certain Transactions -- Transactions With
Senior Managers."
(2) Mr. Clegg received no compensation from the Company in 1995. For a
discussion of the management fees paid by the Company in 1995 to Globe, for
which Mr. Clegg is the Chairman of the Board, Chief Executive Officer and
controlling stockholder, pursuant to a management agreement between the
Company and Globe, see "Certain Transactions -- Transactions with Globe and
Globe Affiliates." On February 12, 1996, Mr. Clegg became the Chairman of
the Board and Chief Executive Officer of the Company and in April 1996 he
became the Company's President. As a result, Mr. Clegg will receive
compensation from the Company in 1996.
(3) Reflects amounts paid to the individuals during the fiscal year for the
payment of certain taxes.
(4) Reflects insurance premiums paid by the Company on behalf of the individuals
listed.
(5) Mr. Ibach was President of the Company at December 31, 1995. Since April
1996, Mr. Ibach has been a Vice President of the Company and the President
of Exteriors.
(6) Mr. Griffin resigned as the Chief Executive Officer, Chairman of the Board
and a director of the Company effective February 12, 1996.
STOCK OPTION PLANS
Under the Company's 1996 Incentive Stock Option Plan (the "Stock Option
Plan"), key employees may be granted non-qualified stock options, incentive
stock options, stock appreciation rights and
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stock awards. "Key employees" are those employees who, in the opinion of the
Compensation Committee of the Board of Directors (the "Committee") have
demonstrated a capacity for contributing in a substantial measure to the success
of the Company. The Company has reserved 620,000 shares of Common Stock for
future issuance under the Stock Option Plan, subject to anti-dilution
adjustments.
The Committee is authorized to determine, among other things, the key
employees to whom, and the times at which, options and other benefits are to be
granted, the number of shares subject to each option or benefit, the applicable
vesting schedule and the exercise price (provided that the exercise price may
not be less than 85% of fair market value of the Common Stock at the date of
grant). The maximum term of a stock option under the Stock Option Plan is ten
years. The Committee also determines the treatment to be afforded a participant
in the event of termination of employment for any reason, including death,
disability or retirement.
The exercise price of incentive stock options granted under the Stock Option
Plan must be at least equal to 100% of the fair market value of the stock
subject to the option on the date of grant. The exercise price of incentive
stock options granted to an optionee who owns stock possessing more than 10% of
the voting power of the Company's outstanding capital stock must equal at least
110% of the fair market value of the stock subject to the option on the date of
grant.
The Board of Directors has the power to amend the Stock Option Plan from
time to time, without stockholder approval, except that stockholder approval is
required for any amendment which would (i) result in any member of the Committee
losing his or her status as a "disinterested person" under applicable securities
laws, or (ii) result in the Stock Option Plan losing its status as a protected
plan under applicable securities laws.
Stock options with respect to 275,000 shares of Common Stock will be granted
to certain employees pursuant to the Stock Option Plan effective on the date the
offering is consummated. The exercise price for such options will be equal to
the initial public offering price of the Common Stock offered hereby.
The Company has also adopted the 1996 Nonemployee Director Stock Option Plan
(the "Director Stock Plan"). The purpose of the Director Stock Plan is to enable
the Company to attract and retain outstanding individuals to serve as members of
the Board of Directors by providing such persons opportunities to acquire Common
Stock of the Company. The Director Stock Plan contains a formula which provides
for automatic annual grants beginning one year after a director's election to
each non-employee director of non-qualified stock options to purchase 1,000
shares of Common Stock. The purchase price per share for such options will be
equal to the fair market value of a share of Common Stock on the date of grant.
Any such option will not be exercisable until one year after the date of grant
and will terminate ten years after the date of grant. The Company has reserved
50,000 shares of Common Stock for issuance under the Director Stock Plan,
subject to anti-dilution adjustments.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended Certificate contains provisions eliminating the
personal liability of its directors for monetary damages resulting from breaches
of their fiduciary duty to the extent permitted by the General Corporation Law
of Delaware. These provisions in the Amended Certificate do not eliminate the
duty of care and, in appropriate circumstances, equitable remedies such as an
injunction or other forms of non-monetary relief would remain available under
Delaware law. Each director will continue to be subject to liability for breach
of a director's duty of loyalty to the Company or its stockholders, for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for any transaction from which the director derived an
improper personal benefit and for improper distributions to stockholders. These
provisions also do not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
The Company's Amended By-Laws provide that the Company will indemnify its
directors and officers to the fullest extent permitted by law. The Company's
Amended By-Laws also permit it to
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<PAGE>
secure insurance on behalf of any person it is required or permitted to
indemnify for any liability arising out of his or her actions in such capacity,
regardless of whether the Amended By-Laws would permit indemnification. The
Company maintains liability insurance for its directors and officers.
The Company has entered into agreements to indemnify its directors and
certain of its officers, in addition to the indemnification provided for in the
Company's Amended By-Laws. These agreements, among other things, will indemnify
the Company's directors and such officers for all direct and indirect expenses
and costs (including, without limitation, all reasonable attorneys' fees and
related disbursements, other out of pocket costs and reasonable compensation for
time spent by such persons for which they are not otherwise compensated by the
Company or any third person) and liabilities of any type whatsoever (including,
but not limited to, judgments, fines and settlement fees) actually and
reasonably incurred by such person in connection with either the investigation,
defense, settlement or appeal of any threatened, pending or completed action,
suit or other proceeding, including any action by or in the right of the
corporation, arising out of such person's services as a director or officer of
the Company or as a director, officer, employee or other agent of any subsidiary
of the Company or any other company or enterprise to which the person provides
services at the request of the Company if such director or officer acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to,
the best interests of the Company and, with respect to any criminal action or
proceeding, if he or she had no reasonable cause to believe his or her conduct
was unlawful. The Company believes that these provisions and agreements are
necessary to attract and retain talented and experienced directors and officers.
At present, except as described under "Certain Transactions -- Legal
Proceedings," there is no pending litigation or proceeding involving any
director or officer of the Company where indemnification will be required or
permitted. The Company is not aware of any threatened litigation or proceeding
that might result in a claim for such indemnification.
AGREEMENTS WITH MANAGERS
The Company has security agreements with sixteen of its managers, including
the Senior Managers (as hereinafter defined), which provide for monthly payments
by the Company, beginning January 1, 1995 and ending December 1, 1999. Pursuant
to these security agreements, each manager has agreed not to compete with the
Company for 18 months following the termination of his employment with the
Company or an affiliate of the Company and to maintain the confidentiality of
the Company's proprietary information. See "Certain Transactions."
401(K) PLAN
The Company sponsors a voluntary contribution plan qualified under Section
401(k) of the Internal Revenue Code of 1986, as amended (the "401(k) Plan"). All
full-time employees of the Company who have worked for the Company for at least
12 continuous months and have attained the age of 21 are eligible to participate
in the 401(k) Plan. Under the 401(k) Plan, each employee may elect to contribute
to the 401(k) Plan, through payroll deductions, a specified percentage of his or
her compensation up to the statutory limitation. Each employee is fully vested
at all times with respect to his or her contributions. The Company pays only the
administrative expenses of the 401(k) Plan and currently makes no contributions
to the 401(k) Plan.
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
In connection with its formation in May 1993, the Company issued 100% of its
initially issued shares of Common Stock to certain of its managers (the "Senior
Managers") in exchange for $100,000. The Senior Managers consisted of the
following seven individuals, all of whom are also stockholders: Messrs.
Cianciosi, Cooper, Gillespie, Griffin, Ibach, Lerman, and Schurter. In July
1993, the Company issued to Globe shares of Common Stock representing a 50%
equity interest in the Company and 1,400 shares of Series A Preferred Stock in
exchange for $100,000 and $1.4 million, respectively. Following these issuances,
the Senior Managers as a group and Globe each owned 50% of the Common Stock and
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<PAGE>
Globe owned all of the Series A Preferred Stock. Globe, by virtue of an
agreement among the stockholders affording Globe the right to elect a majority
of the Board of Directors of the Company, has had and continues to exercise
control over the Company. This agreement will terminate upon consummation of the
offering. See "Principal and Selling Stockholders."
TRANSACTIONS WITH SENIOR MANAGERS
In September 1994, the Company repurchased (the "Senior Manager Repurchase")
40.2% of the Common Stock then outstanding from the Senior Managers. In exchange
for the stock, the Company paid to the Senior Managers an aggregate of (i) $9.4
million in cash; (ii) $1.5 million in subordinated notes (the "Senior Manager
Notes") and (iii) $4.0 million in subordinated performance notes (the "Senior
Manager Performance Notes"). In addition, at the time of the Senior Manager
Repurchase, the Company and each of the Senior Managers amended each Senior
Manager's employment agreement with the Company, so that, among other things,
the Company agreed to pay to the Senior Managers an aggregate amount of
approximately $2.8 million in 60 monthly security payments beginning January 1,
1995 and ending December 1, 1999. In 1995, the Company made security payments of
an aggregate of $60,000 to each of Messrs. Cianciosi, Cooper, Ibach, Lerman and
Schurter; $65,000 to Mr. Gillespie; and $189,020 to Mr. Griffin. As discussed
further below, upon Mr. Griffin's resignation from the Company, in February
1996, he and the Company executed a Settlement Agreement which modifies and
supercedes the terms of all previous payment arrangements between Mr. Griffin
and the Company. In April 1996, each of the employment agreements with the
remaining Senior Managers was superceded by security agreements providing for
certain monthly payments to be made by the Company to each of the Senior
Managers in exchange for non-competition and non-disclosure covenants from each
Senior Manager. The security agreements do not contain any specified term of
employment. See "Management -- Agreements with Managers." At April 1, 1996, an
aggregate of approximately $1.4 million of such security payments remained to be
paid with an aggregate of $225,000 to be paid to each of Messrs. Cianciosi,
Cooper, Ibach, Lerman and Schurter and an aggregate of $243,750 to be paid to
Mr. Gillespie. These security payments are not contingent on future employment.
In September 1995, the Company paid to the Senior Managers an aggregate of
approximately $1.6 million representing the principal and accrued interest due
on all of the Senior Manager Notes (Messrs. Cianciosi, Cooper, Gillespie, Ibach,
Lerman and Schurter each received $218,000 and Mr. Griffin received $327,000).
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Interest on the Senior Manager Performance Notes accrues at an annual rate
of 9% and is payable annually each year ending December 31, 1995 through
December 31, 1999, only if certain earnings targets are met for such year.
Likewise, principal payments on the Senior Manager Performance Notes are to be
paid each year only if either (i) that year's earnings target is met or (ii) a
cumulative earnings target equal to the sum of all previous years' earnings
targets is satisfied. Any principal amount of the Senior Manager Performance
Notes which has not been paid by December 31, 2000 is to be paid 90 days after
the end of the fiscal year in which the Company's cumulative earnings before
interest and taxes for the years ended December 31, 1995 through such year are
at least $56.0 million. No payments are to be due or paid with respect to the
Senior Manager Performance Notes if the earnings targets have not been achieved
by December 31, 2009 and no interest payments are to be made after December 31,
1999. The Company met the 1995 annual earnings target and accordingly paid the
Senior Managers, including Mr. Griffin, an aggregate of $800,000 of the
principal amount of the Senior Manager Performance Notes (Mr. Griffin received
$200,000 and each of Messrs. Cianciosi, Cooper, Gillespie, Ibach, Lerman and
Schurter received $100,000) plus accrued interest in March 1996 with respect to
1995 performance. Following such payment, there remained $800,000 principal
amount outstanding on the Senior Manager Performance Note payable to Mr. Griffin
and $400,000 principal amount outstanding on the Senior Manager Performance
Notes payable to each of Messrs. Cianciosi, Cooper, Gillespie, Ibach, Lerman and
Schurter. Notwithstanding the payment provisions described above, in the event
of a public offering of stock by the Company (or a company
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which controls the Company), the Company has agreed to use its best efforts to
use the proceeds from such an offering to pay all of the outstanding principal
and interest under the Senior Manager Performance Notes. The Company intends to
utilize a portion of the net proceeds of this offering to fund such repayment.
See "Use of Proceeds."
Mr. Griffin ("Griffin") resigned from the Company on February 12, 1996. In
connection with his resignation, Griffin and the Company entered into a
settlement and non-competition agreement (the "Settlement Agreement"). Under the
Settlement Agreement, Griffin has released the Company from any and all actions
which he may have against the Company and is to receive, as full satisfaction
and settlement of any and all claims that he may have against the Company: (i)
$30,751.66 per month from February 1996 through February 1997; (ii) $20,751.66
per month from March 1997 through February 1999; (iii) $15,751.66 per month from
March 1999 through December 1999; and (iv) payment, pursuant to its terms, of
the Senior Manager Performance Note which was issued by the Company to Griffin,
and which, at March 15, 1996 had an aggregate principal amount outstanding of
$800,000. In addition, the Company has agreed to pay all amounts due and payable
to a health insurance carrier for the cost of providing health insurance
coverage to Griffin until the earlier to occur of (x) January 1, 1997 and (y)
the date on which Griffin becomes employed.
Under the terms of the Settlement Agreement and pursuant to a waiver to the
Stockholders Agreement among the Company and each of its stockholders, Griffin
retained ownership of 138,700 shares of the Company's Common Stock; the
remaining 92,500 shares of Common Stock which Griffin owned prior to his
resignation were repurchased by the Senior Managers and the Managers (as defined
below) in accordance with the Stockholders Agreement. The Stockholders Agreement
will terminate upon consummation of the offering.
TRANSACTIONS WITH OTHER MANAGERS
In January 1995, the Company issued shares representing an aggregate of
approximately 4% of its outstanding Common Stock to certain other members of the
Company's management (the "Managers") in exchange for (i) cash for the par value
of the securities purchased and (ii) secured promissory notes from such Managers
payable in an aggregate amount of $869,295 (the "Manager Purchase Notes"). The
Manager Purchase Notes accrue interest at a rate of 7% per annum and interest is
payable annually beginning December 31, 1995, with the principal and a final
interest payment to be paid December 31, 1999. The amounts due under the Manager
Purchase Notes may be prepaid at any time without penalty. The Manager Purchase
Notes are secured by a pledge of the individual Managers' shares of Common
Stock. Since the Company exceeded its 1995 performance goal, in December 1995
the Company paid a special bonus to each Manager equal to (i) all interest
accrued on the Manager Purchase Note through December 31, 1995 and (ii) 20% of
the outstanding principal amount of the Manager Purchase Note.
In November 1994, the Company and the Managers also entered into security
agreements. The security agreements provide, among other things, for the payment
to the Managers of an aggregate amount of $4.2 million, payable in 60 monthly
installments beginning January 1, 1995 and ending December 1, 1999. At March 1,
1996, approximately $3.0 million of such payments remained to be paid. The
payments under these security agreements are contingent upon the Manager's
continued employment with the Company. See "Management -- Agreements with
Managers."
TRANSACTIONS WITH GLOBE AND GLOBE AFFILIATES
As described above, in July 1993, the Company issued to Globe shares of
Common Stock representing a 50% equity interest in the Company and 1,400 shares
of Series A Preferred Stock in exchange for $100,000 and $1.4 million,
respectively. Globe, by virtue of an agreement among the stockholders affording
Globe the right to elect a majority of the Board of Directors of the Company,
has had and continues to exercise control over the Company. This agreement will
terminate upon consummation of the offering. The Series A Preferred Stock was
redeemed for $1.4 million in April 1996. Mr. Clegg, Chairman of the Board, Chief
Executive Officer and President of the Company, is also the Chairman of the
Board, Chief Executive Officer and controlling stockholder of Globe.
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In 1994, the Company and Globe entered into a management agreement, pursuant
to which Globe provides certain management, treasury, legal, purchasing and
other administrative services to the Company. The amount of the management fee
paid by the Company to Globe for services rendered under the management
agreement is based on a percentage of the Company's gross sales; provided,
however, that after December 31, 1997, such management fee cannot exceed
$750,000 plus expenses for any given year. The Company incurred management fees
to Globe of $464,000 and $558,000 for services in 1994 and 1995, respectively,
and through the date of the consummation of the offering will have incurred
management fees to Globe of approximately $350,000 for services in 1996. The
management agreement will be terminated upon consummation of the offering.
As a result of the July 1993 issuances and the Senior Manager Repurchase, in
September 1994, the Company and Globe became a consolidated group for federal
tax purposes. As a result, Globe and the Company entered into a tax-sharing
agreement which specifies the allocation and payment of liabilities and benefits
arising from the filing of a consolidated tax return. The tax sharing agreement
requires the Company to pay its share of the consolidated federal tax liability,
as if it has taxable income, and to be compensated if losses or credits generate
benefits that are utilized to reduce the consolidated tax liability. The Company
will continue to be included in the consolidated group with Globe through the
consummation of the offering. The tax sharing agreement will be terminated upon
consummation of the offering.
The Company purchases, through independent distributors, shingles and other
roofing products manufactured by Globe. The Company does not purchase any
products directly from Globe. In 1995, the Company purchased approximately $1.5
million of Globe roofing products through independent distributors, representing
approximately 16% in dollar volume of all roofing products purchased by the
Company. The Company believes that the prices charged by independent
distributors for Globe products are competitive with comparable products of
other roofing product manufacturers. The Company will continue to purchase Globe
products through independent distributors following the completion of the
offering and the amount of such purchases may increase.
In February 1996, the Company loaned Globe $1.5 million, at an interest rate
of approximately 8.25% per annum. The entire amount of such principal plus
interest was repaid in April 1996. In June 1995, the Company loaned Globe $1.0
million at an interest rate of approximately 9.65% per annum. The entire amount
of such principal plus interest was repaid in November 1995. During 1994, the
Company loaned Globe $1.5 million at an interest rate of approximately 7.5% per
annum. The entire amount of such principal plus interest was repaid by Globe in
September 1994. The Company does not intend to loan money to Globe in the
future. In addition, in the past the Company has guaranteed a certain portion of
Globe's indebtedness. The amount the Company guaranteed was limited by the
available borrowing under the Company's bank line of credit; provided, however,
that the amount guaranteed by the Company could not exceed $3.0 million. Until
July 1995, the Company guaranteed $3.0 million of Globe's indebtedness. Since
July 1995, the Company has not guaranteed any of Globe's indebtedness and does
not intend to guarantee any of Globe's indebtedness in the future.
During 1994, the Company paid $150,000 to Catalog, of which Mr. Clegg
(Chairman of the Board, Chief Executive Officer and President of the Company) is
the Chairman of the Board, Chief Executive Officer and controlling stockholder,
for (i) warrants (the "Catalog Warrants") to purchase 3,275 shares of Class A
Common Stock, par value $.01 per share, of Catalog (the "Catalog Common"), (ii)
the prepayment for 3,000 to 4,000 sales leads expected to be generated by the
home improvement catalog produced by Catalog's wholly-owned subsidiary, HI, Inc.
and (iii) the prepayment for certain call center services provided by HI, Inc.
to the Company. HI, Inc. provided the Company with all of the sales leads and
call center services set forth above in 1994 and 1995. The Catalog Warrants are
exercisable at a price of $100 per share of Catalog Common (subject to
adjustment) at any time before August 1, 1997, at which time the Catalog
Warrants expire. No value was ascribed to the Catalog Warrants because the fair
market value of the shares of Catalog Common into which they are exercisable was
determined to be below the exercise price. Transfer of the Catalog Warrants is
restricted to certain individuals or entities.
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<PAGE>
HI, Inc. provides call center services for certain of the Company's regions
for which HI, Inc. is paid a predetermined amount for each sales lead that it
handles. The $150,000 payment described above covered the costs of all sales
leads and call center services purchased by the Company from HI, Inc. through
December 31, 1995. The Company believes that the prices charged by HI, Inc. are
competitive with the prices charged by comparable call center providers. The
Company will continue to purchase call center services from HI, Inc. following
completion of the offering.
The Company has engaged in negotiations regarding the purchase of
substantially all of the assets, including customer lists and the right to use
the "Handy Craftsmen" name, from Handy Craftsmen, a majority-owned subsidiary of
Catalog, for approximately $2.0 million in cash. Handy Craftsmen is engaged in
the marketing and contracting of home repair services under the Sears name
pursuant to a license agreement with Sears. Catalog acquired a ninety percent
interest, on a fully diluted basis, in Handy Craftsmen in September 1994 for no
cash consideration. Simultaneously with the acqusition, Handy Craftsmen entered
into a five-year employment agreement with Mr. Fred Bies, the individual who,
along with his wife, was previously the owner and is, along with his wife,
currently the minority owner of Handy Craftsmen, and a management agreement with
HI, Inc., a wholly-owned subsidiary of Catalog, pursuant to which management
services are provided to Handy Craftsmen. The employment agreement provides for
an annual base salary of $50,000 and an annual incentive bonus of up to $50,000.
Handy Craftsmen has not paid HI, Inc. the management fees as required by the
management agreement. Catalog has loaned approximately $100,000 to Handy
Craftsmen since the acquisition. The Company believes that the acquisition of
Handy Craftsmen, if completed, will expand the range of "need based" services
that the Company offers under the Sears name, will allow the Company to further
utilize the Company's existing sales leads and will provide a good source of
additional leads for the Company's core business. The terms of purchase are
being negotiated on behalf of the Company by Messrs. Gillespie and Cianciosi,
both of whom are executive officers (with Mr. Gillespie also being a director)
of the Company. These individuals have no affiliation with Globe or Catalog. The
terms of purchase are being negotiated on behalf of Catalog by a director of
Catalog who has no affiliation with Diamond or Globe. The Company's valuation of
Handy Craftsmen is based on the value of the Sears license agreement (assuming
it is expanded to cover a greater geographic area than the Chicago and Milwaukee
markets prior to the acquisition), the expected revenues and earnings of Handy
Craftsmen and the synergistic benefits that Handy Craftsmen brings to the
Company. At the time of the acquisition by Catalog, Handy Craftsmen was only
licensed in the Chicago market and was not profitable. Since the acquisition,
Catalog has developed and implemented a computerized system whereby sales leads
are qualified, appointments are scheduled and services are performed in a
streamlined and efficient manner leading to lower costs, increased revenue and
greater profitability and has expanded Handy Craftsmen's operations into the
Milwaukee market. As a result, the Company believes Catalog has added
significant value to Handy Craftsmen. The Company believes that the transaction,
if completed, will be fair and beneficial to the stockholders of the Company.
There is no assurance that the transaction will be consummated or, if
consummated, that the final terms will not differ from those currently
contemplated. The Company has provided computer, payroll and accounting
services, as well as employees and office space to Handy Craftsmen. Handy
Craftsmen has reimbursed the Company for such services on a cost basis.
Following the completion of the offering, the Company will continue to provide
such services to Handy Craftsmen and will continue to charge Handy Craftsmen the
cost of such services. See "Risk Factors -- Certain Transactions with and
Payments to Principal Stockholder", "Use of Proceeds" and "-- Legal
Proceedings."
The Company anticipates that it will continue to purchase Globe products and
HI, Inc. call center services. The Company has adopted a policy that all
transactions between the Company and any related party, including Globe and
Catalog and their affiliates, will be on terms no less favorable to the Company
than terms the Company believes would be available from unaffiliated third
parties. Globe licenses the name "Diamond Shield" to the Company pursuant to an
exclusive, royalty-free, perpetual license. The Company anticipates that it will
have the following relationships with Globe and affiliates of Globe and Mr.
Clegg following completion of the offering: Globe will remain a stockholder of
the Company; Messrs. Clegg, Stinson and Pollock and Ms. Patterson will remain
executive officers and/or
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<PAGE>
directors of Globe and the Company; the Company will continue to purchase Globe
products through independent distributors; the license agreement with Globe will
continue; and the services provided to Handy Craftsmen will continue. The
Company does not anticipate any other relationships with Globe and affiliates of
Globe and Mr. Clegg following the offering. See "Management" and "-- Legal
Proceedings."
Upon consummation of the offering, the Company will pay a special, one-time
dividend of $8.6 million to its currently existing stockholders, which include
management and Globe, with a portion of the net proceeds from the offering. In
April 1996, the Company redeemed all of its outstanding Series A Preferred Stock
for $1.4 million from Globe. As an 80% stockholder, Globe will receive
approximately $6.9 million of the dividend. The price at which the Series A
Preferred Stock was redeemed was equal to the purchase price paid by Globe for
the Series A Preferred Stock in July 1993. No dividends or interest were paid to
Globe with respect to the Series A Preferred Stock. See "Use of Proceeds."
LEGAL PROCEEDINGS
International Equity Capital Growth Fund, L.P. ("IECGF") owns approximately
24% of the common stock (on a fully diluted basis) of Globe. In October 1994,
IECGF indicated to Mr. Clegg that it desired liquidity and wanted to sell its
interest in Globe. Discussions took place among various Globe representatives
and representatives of IECGF regarding such a transaction, but IECGF has
demanded a price which Globe has been unwilling and unable to meet. Globe is
aware of negotiations which IECGF has had with parties unrelated to Globe in
attempts to sell its position, however, no transaction has occurred. In light of
this, representatives of IECGF have taken a variety of actions which, in the
opinion of certain members of Globe management, have been detrimental to Globe
and are intended to strengthen the negotiating position of IECGF. In a meeting
in April 1996, counsel for IECGF, in the course of negotiations regarding the
possible purchase of IECGF's interest, threatened to file litigation if Globe
did not arrange to purchase the IECGF position. This threat of litigation did
not include any indication of the nature of the claims that would be asserted by
IECGF.
On May 14, 1996, IECGF filed a purported derivative action on behalf of
Globe and the Company against Mr. Clegg and Jacob Pollock, a director of both
Globe and the Company, in the Court of Chancery of the State of Delaware. The
complaint alleges, among other things, that Mr. Clegg breached his fiduciary
duty to the Company by causing Catalog (in lieu of the Company) to acquire Handy
Craftsmen and by virtue of the $2,000,000 purchase price the Company is
contemplating paying to Catalog for the assets of Handy Craftsmen. IECGF claims
such price is in excess of the true value of those assets by an unspecified
amount. The complaint also challenges as excessive the $150,000 payment to
Catalog described above which was paid for the purchase of warrants, sales leads
and call center services. No other specific transactions are challenged in the
complaint relating to the Company's affairs. The complaint also makes
allegations against Mr. Clegg and Mr. Pollock which include breach of fiduciary
duty as a result of alleged conflicts of interest related to certain
transactions which have been consummated at Globe.
The Company believes that the allegations of the complaint are wholly
without merit. Mr. Clegg and Mr. Pollock strongly deny the breaches alleged by
the complaint. Globe believes that the conduct of IECGF in bringing such action
is an attempt at forcing Globe to purchase IECGF's interest on terms that Globe
believes are not in Globe's best interest. Mr. Clegg and Mr. Pollock have
indicated that they intend to vigorously defend the action.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of May 1, 1996
regarding the beneficial ownership of the Company's Common Stock by (i) the
Selling Stockholder, (ii) each stockholder known by the Company to be the
beneficial owner of more than five percent of the outstanding shares of the
Company's Common Stock, (iii) each director of the Company, (iv) each Named
Executive Officer and (v) all directors and executive officers of the Company as
a group. Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Stock listed below, based on information provided by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws where applicable. Except as set forth below,
the address of each of the stockholders named below is the Company's principal
executive and administrative office.
<TABLE>
<CAPTION>
NUMBER OF
SHARES BENEFICIALLY OWNED SHARES BEING SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING OFFERED AFTER OFFERING (1)
-------------------------- ------------ --------------------------
NAME NUMBER PERCENT (2) NUMBER NUMBER PERCENT (2)
- ----------------------------------------------- ----------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Globe Building Materials, Inc. (3)............. 5,000,000 80.0% 733,000 4,267,000 47.7%
C. Stephen Clegg (4)........................... 5,000,000 80.0 733,000 4,267,000 47.7
James M. Gillespie............................. 136,350 2.2 -- 136,350 1.5
Frank Cianciosi................................ 136,350 2.2 -- 136,350 1.5
James F. Bere, Jr.............................. -- -- -- -- --
Jacob Pollock (3)(5)........................... 5,000,000 80.0 733,000 4,267,000 47.7
George A. Stinson (3)(5)....................... 5,000,000 80.0 733,000 4,267,000 47.7
Jerome Cooper.................................. 136,350 2.2 -- 136,350 1.5
Rodger Ibach (1)............................... 136,350 2.2 -- 136,350 1.5
Donald Griffin (1)(6).......................... 138,700 2.2 -- 138,700 1.6
All directors and executive officers as a group
(10 persons) (4).............................. 5,545,400 88.7 733,000 4,812,400 53.8
</TABLE>
- ------------------------
(1) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to 100,000 shares from Globe, 137,950 shares from the Company and an
aggregate of 275,050 shares from Messrs. Ibach and Griffin. See
"Underwriting."
(2) Percentage of beneficial ownership is based on 6,249,950 shares of Common
Stock outstanding as of May 1, 1996, and 8,936,950 shares of Common Stock
outstanding after completion of the offering.
(3) The address of Globe Building Materials, Inc. is 2230 Indianapolis Blvd.,
Whiting, Indiana 46394. Mr. Clegg controls approximately 57.0% of the common
stock of Globe through direct ownership and through ownership by entities
Mr. Clegg controls. In addition, Mr. Clegg controls approximately 11.0% of
the common stock of Globe through voting agreements with other Globe
stockholders. Messrs. Pollock and Stinson own approximately 1.7% and 1.4% of
the common stock of Globe, respectively.
(4) Includes all shares owned by Globe. Mr. Clegg may be deemed to be the
beneficial owner of such shares by virtue of his positions as Chairman of
the Board, Chief Executive Officer and controlling stockholder of Globe.
(5) Includes all shares owned by Globe. Messrs. Pollock and Stinson may be
deemed beneficial owners of the shares owned by Globe by virtue of their
positions as directors of Globe. Messrs. Pollock and Stinson disclaim
beneficial ownership of such shares.
(6) The address of Mr. Griffin is 3637 Woodlake Dr., Bonita Springs, Florida
33923. Mr. Griffin resigned as Chief Executive Officer, Chairman of the
Board and a director of the Company effective February 12, 1996.
Certain of the shares as to which the Underwriters hold an over-allotment
option will be sold to the Underwriters, if such option is exercised, by Messrs.
Ibach and Griffin. The defined term "Selling Stockholders" means Globe and
Messrs. Ibach and Griffin, collectively.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 29,000,000 shares,
of which 25,000,000 shares are Common Stock, par value $.001 per share, and
4,000,000 shares are Preferred Stock, par value $.001 per share. At December 31,
1995, after giving effect to (i) the reclassification and stock split of each
outstanding share of the Company's Class A Voting Common Stock and Class B
Nonvoting Common Stock into 50 shares of Common Stock and (ii) the redemption of
all of the Company's outstanding Series A Preferred Stock, there were 6,249,950
shares of Common Stock outstanding and held of record by 18 stockholders and no
shares of Preferred Stock outstanding. After completion of the offering,
8,936,950 shares of Common Stock will be issued and outstanding, assuming no
exercise of the Underwriters' over-allotment option.
The following description of the capital stock of the Company and certain
provisions of the Company's Amended Certificate and Amended By-Laws is a summary
and is qualified in its entirety by the provisions of the Amended Certificate
and Amended By-Laws, which have been filed as exhibits to the Company's
Registration Statement, of which this Prospectus is a part.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares being
offered hereby will, upon payment therefor, be validly issued, fully paid and
nonassessable. Subject to the right of holders of Preferred Stock, the holders
of outstanding shares of Common Stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the Board
of Directors may from time to time determine. See "Dividend Policy." The shares
of Common Stock are neither redeemable nor convertible, and the holders thereof
have no preemptive or subscription rights to purchase any securities of the
Company. Upon liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to receive, pro rata, the assets of the Company
which are legally available for distribution, after payment of all debts and
other liabilities and subject to the prior rights of any holders of Preferred
Stock then outstanding. Each outstanding share of Common Stock is entitled to
one vote on all matters submitted to a vote of stockholders. There is no
cumulative voting in the election of directors.
PREFERRED STOCK
The Company's Amended Certificate authorizes the Board of Directors to issue
the Preferred Stock in classes or series and to establish the designations,
preferences, qualifications, limitations or restrictions of any class or series
with respect to the rate and nature of dividends, the price and terms and
conditions on which shares may be redeemed, the terms and conditions for
conversion or exchange into any other class or series of the stock, voting
rights and other terms. The Company may issue, without approval of the holders
of Common Stock, Preferred Stock which has voting, dividend or liquidation
rights superior to the Common Stock and which may adversely affect the rights of
holders of Common Stock. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of Common Stock and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plan
to issue any shares of Preferred Stock.
CERTAIN STATUTORY PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"). Section 203 prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the time of the transaction in which the person
became an interested stockholder, unless (i) prior to such time of the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, the transaction is approved by the board of directors of
the corporation, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owns
at least 85% of the outstanding voting stock, or (iii) at or subsequent to such
time, the business combination is approved by the board of directors and by the
affirmative vote
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<PAGE>
of at least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank, Chicago, Illinois.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have outstanding 8,936,950
shares of Common Stock (9,074,900 shares if the Underwriters' over-allotment
option is exercised in full). All of the 3,420,000 shares (assuming the
Underwriters' over-allotment option is not exercised) sold in this offering will
be freely tradeable by persons other than affiliates of the Company. The
remaining 5,516,950 shares of Common Stock were issued by the Company in private
transactions not involving a public offering, are treated as "restricted
securities" for purposes of Rule 144, and may not be resold unless they are
registered under the Securities Act or are resold pursuant to an exemption from
registration, including the exemption provided under Rule 144 of the Securities
Act.
RULE 144
In general, Rule 144, as currently in effect, provides that a person who is
an affiliate of the Company or who beneficially owns shares which are issued and
sold in reliance upon exemptions from registration under the Securities Act
("Restricted Shares") must own such Restricted Shares for at least two years
before they may be sold. Further, Rule 144 limits the amount of Restricted
Shares which can be sold, so that the number of shares sold by a person (or
persons whose sales are aggregated), within any three-month period does not
exceed the greater of 1% of the then outstanding shares of Common Stock
(beginning on the 91st day immediately after the offering) or the average weekly
trading volume in the Common Stock during the four calendar weeks preceding the
filing of a notice of intent to sell. Sales under Rule 144 are also subject to
certain manner-of-sale provisions, notice requirements and the availability of
current public information about the Company. However, a person who is not
deemed to have been an "affiliate" of the Company at any time during the three
months preceding a sale, and who has beneficially owned Restricted Shares for at
least three years, would be entitled to sell such shares under Rule 144 without
regard to volume limitations, manner-of-sale provisions, notice requirements or
the availability of current public information about the Company.
In addition, any employee of the Company who purchased his shares pursuant
to certain plans or contracts may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the public information, volume
limitation or notice provisions of Rule 144. In both cases, a holder of Rule 701
shares is required to wait until the 91st day immediately after the offering
before selling such shares. The Company sold 268,750 shares of Common Stock to
its employees pursuant to Rule 701.
The Company, the Selling Stockholder and the other stockholders, holding in
the aggregate 5,516,950 shares of Common Stock, or 61.7% of the shares of Common
Stock outstanding after the offering, have, subject to certain exceptions in the
case of the Company, agreed that they will not sell, contract to sell or
otherwise dispose of any shares of Common Stock or securities convertible into
Common Stock (except Common Stock issued pursuant to options to be granted and
issued upon consummation of the offering) for a period of 180 days after the
date of this Prospectus, without the
55
<PAGE>
prior written consent of William Blair & Company, L.L.C., except for the Common
Stock offered hereby. See "Underwriting." After the expiration of the lock-up
period, up to 5,516,950 shares may be freely tradeable, subject to compliance
with the terms and conditions of Rule 144.
Prior to the offering, there has been no established trading market for the
Common Stock, and no predictions can be made as to the effect that sales of
Common Stock under Rule 144, pursuant to a registration statement or otherwise,
or the availability of shares of Common Stock for sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common Stock
in the public market, or the perception that such sales could occur, could
depress the prevailing market price. Such sales may also make it more difficult
for the Company to sell equity securities or equity-related securities in the
future at a time and price that it deems appropriate. See "Risk Factors --
Shares Eligible for Future Sale; Registration Rights."
The Company intends to file a registration statement under the Securities
Act to register an aggregate of 670,000 shares reserved for issuance under the
Stock Option Plan and the Director Stock Plan, thus permitting the resale of
such shares by non-affiliates in the public market without restriction under the
Securities Act, subject, however, to vesting requirements with the Company and
the lock-up agreements described above.
REGISTRATION RIGHTS
Pursuant to an agreement between Globe and the Company, Globe is entitled to
certain rights with respect to the registration of its shares of Common Stock
under the Securities Act. If the Company proposes to register any of its
securities under the Securities Act, Globe is entitled to notice of such
registration and is entitled to include, at the Company's expense, all or a
portion of its shares therein, subject to certain conditions. Globe also may,
subject to certain conditions, require the Company, on not more than 2 occasions
(not including this offering), at the Company's expense, to file a registration
statement on Form S-1 under the Securities Act with respect to its shares of
Common Stock, and the Company is required to use its best efforts to effect the
registration. In addition, Globe may, subject to certain conditions, require the
Company, on not more than two occasions per year, at the Company's expense, to
register its shares on Forms S-2 and S-3 when such forms become available to the
Company.
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<PAGE>
UNDERWRITING
The Company and the Selling Stockholder have entered into an Underwriting
Agreement (the "Underwriting Agreement") with the underwriters listed in the
table below (the "Underwriters"), for whom William Blair & Company, L.L.C. is
acting as representative (the "Representative"). Subject to the terms and
conditions set forth in the Underwriting Agreement, the Company and the Selling
Stockholder have agreed to sell to each of the Underwriters, and each of the
Underwriters has severally agreed to purchase from the Company and the Selling
Stockholder, the number of shares of Common Stock set forth opposite each
Underwriter's name in the table below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
William Blair & Company, L.L.C.............................................
-----------------
Total.................................................................. 3,420,000
-----------------
-----------------
</TABLE>
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold pursuant
to the Underwriting Agreement if any is purchased (excluding shares covered by
the over-allotment option granted therein). In the event of a default by any
Underwriter, the Underwriting Agreement provides that, in certain circumstances,
purchase commitments of the non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Representative has advised the Company and the Selling Stockholder that
the Underwriters propose to offer the Common Stock to the public initially at
the public offering price set forth on the cover page of this Prospectus and to
selected dealers at such price less a concession of not more than $ per
share. Additionally, the Underwriters may allow, and such dealers may re-allow,
a concession not in excess of $ per share to certain other dealers. After the
initial public offering, the public offering price and other selling terms may
be changed by the Representative.
The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable within 30 days after the date of this Prospectus, to
purchase up to an aggregate of an additional 137,950 and 375,050 shares,
respectively, of Common Stock at the same price per share to be paid by the
Underwriters for the other shares offered hereby. If the Underwriters purchase
any of such additional shares pursuant to this option, each Underwriter will be
committed to purchase such additional shares in approximately the same
proportion as set forth in the table above. The Underwriters may exercise the
option only for the purpose of covering over-allotments, if any, made in
connection with the distribution of the Common Stock offered hereby.
The Company, the Selling Stockholders and all other current stockholders of
the Company have agreed not to sell, contract to sell or otherwise dispose of
any shares of Common Stock or securities convertible into Common Stock (except
Common Stock issued pursuant to options to be granted and issued upon
consummation of the offering) for a period of 180 days after the date of this
Prospectus, without the written consent of the Representative, except for the
Common Stock offered hereby. See "Shares Eligible For Future Sale -- Rule 144."
There has been no public market for the Common Stock prior to the offering.
The initial public offering price of the shares of Common Stock will be
determined by negotiation between the Company, the Selling Stockholder and the
Representative. Among the factors to be considered in determining the initial
public offering price are prevailing market and economic conditions, revenues
and earnings
57
<PAGE>
of the Company, estimates of the business potential and prospects of the
Company, the present state of the Company's business operations, an assessment
of the Company's management and the consideration of the above factors in
relation to market valuations of selected publicly-traded companies.
The Representative has informed the Company that the Underwriters will not,
without customer authority, confirm sales to any accounts over which they
exercise discretionary authority.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters and their controlling persons against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.
The Common Stock has been approved for quotation and trading on the Nasdaq
National Market under the symbol "DHMS."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by McDermott, Will & Emery, Chicago, Illinois. Certain
legal matters will be passed upon for the Underwriters by Gardner, Carton &
Douglas, Chicago, Illinois.
EXPERTS
The financial statements of the Company for the period from June 1, 1993
(inception of operations) to December 31, 1993 and as of December 31, 1994 and
1995 and for the years ended December 31, 1994 and 1995 included in this
Prospectus and the Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto, the "Registration Statement") under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement.
Statements made in the Prospectus as to the contents of any contract, agreement
or other document are not necessarily complete; with respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement and the exhibits thereto
may be inspected, without charge, at the public reference facilities maintained
by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Northwestern
Atrium Center, 500 West Madison Street, Room 1400, Chicago, IL 60661, and 7
World Trade Center, Suite 1300, New York, NY 10048. Copies of such material can
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
58
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Audited Financial Statements:
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995............................................... F-3
Consolidated Statements of Operations for the period from June 1, 1993 (inception of operations) to
December 31, 1993 and for the years ended December 31, 1994 and 1995...................................... F-4
Consolidated Statements of Changes in Common Stockholders' Equity for the period from June 1, 1993
(inception of operations) to December 31, 1993 and for the years ended December 31, 1994 and 1995......... F-5
Consolidated Statements of Cash Flows for the period from June 1, 1993 (inception of operations) to
December 31, 1993 and for the years ended December 31, 1994 and 1995...................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
Unaudited Financial Statements:
Unaudited Condensed Consolidated Balance Sheet at March 31, 1996........................................... F-14
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 1995 and
1996...................................................................................................... F-15
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1995 and
1996...................................................................................................... F-16
Notes to Unaudited Condensed Consolidated Financial Statements............................................. F-17
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Diamond Home Services, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Diamond Home
Services, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, changes in common stockholders'
equity, and cash flows for the period from June 1, 1993 (inception of
operations) to December 31, 1993 and for the two years ended December 31, 1995.
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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Diamond Home Services, Inc. and Subsidiaries at December 31, 1994 and 1995, and
the consolidated results of their operations and their cash flows for the period
from June 1, 1993 (inception of operations) to December 31, 1993 and for the two
years ended December 31, 1995, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
February 23, 1996, except as to the
first paragraph of Note 1 for which
the date is April 18, 1996
and Note 14 for which the date is
April 8, 1996
F-2
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $ 5,048 $ 4,715
Accounts receivable...................................................................... 3,548 3,931
Prepaids and other current assets........................................................ 530 567
Deferred income taxes.................................................................... 496 404
--------- ---------
Total current assets....................................................................... 9,622 9,617
Property and equipment..................................................................... 847 1,732
Less: Accumulated depreciation............................................................. (95) (295)
--------- ---------
Net property and equipment................................................................. 752 1,437
Intangible assets, net..................................................................... 17,791 17,395
Deferred income taxes...................................................................... 491 1,051
Other...................................................................................... 619 643
--------- ---------
Total assets............................................................................... $ 29,275 $ 30,143
--------- ---------
--------- ---------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 4,897 $ 7,643
Borrowings under bank line of credit..................................................... 7,283 --
Accrued liabilities...................................................................... 2,808 5,434
Due to stockholders...................................................................... 2,054 1,354
Income taxes payable..................................................................... 904 --
--------- ---------
Total current liabilities.................................................................. 17,946 14,431
Long-term liabilities:
Warranty................................................................................. 2,201 3,652
Retention................................................................................ 576 965
Due to stockholders...................................................................... 6,216 4,862
--------- ---------
Total long-term liabilities................................................................ 8,993 9,479
Commitments and contingencies (Notes 10 and 11)............................................ -- --
Preferred stock, at redemption price....................................................... 1,400 1,400
Common stockholders' equity:
Common stock $.001 par value; 25,000,000 shares authorized; 6,249,950 shares issued and
outstanding............................................................................. 6 6
Additional paid-in capital............................................................... 119 983
Officer notes receivable................................................................. -- (707)
Treasury stock, at cost (268,750 shares in treasury in 1994)............................. (5) --
Retained earnings........................................................................ 816 4,551
--------- ---------
Total common stockholders' equity.......................................................... 936 4,833
--------- ---------
Total liabilities and common stockholders' equity.......................................... $ 29,275 $ 30,143
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-3
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JUNE 1 TO DECEMBER 31, 1993
AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................................ $ 20,548 $ 94,186 $ 124,848
Cost of sales............................................................ 12,588 56,139 72,245
--------- --------- -----------
Gross profit............................................................. 7,960 38,047 52,603
Operating expenses:
Selling, general and administrative expenses........................... 9,113 34,821 45,305
Amortization expense................................................... 26 275 503
--------- --------- -----------
Operating profit (loss).................................................. (1,179) 2,951 6,795
Interest expense, net.................................................... -- 39 410
--------- --------- -----------
Income (loss) before income taxes........................................ (1,179) 2,912 6,385
Income tax provision..................................................... -- 917 2,650
--------- --------- -----------
Net income (loss)........................................................ $ (1,179) $ 1,995 $ 3,735
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JUNE 1 TO DECEMBER 31, 1993
AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL OFFICER RETAINED
COMMON PAID-IN NOTES TREASURY EARNINGS
STOCK CAPITAL RECEIVABLE STOCK (DEFICIT) TOTAL
----------- ----------- ----------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Issuance of stock (June 1, 1993).............. $ 10 $ 190 $ -- $ -- $ -- $ 200
Net loss -- 1993.............................. -- -- -- -- (1,179) (1,179)
----- ----- ----------- ----- --------- ---------
December 31, 1993............................. 10 190 -- -- (1,179) (979)
Purchase and retire stock..................... (4) (71) -- -- -- (75)
Purchase of stock for treasury................ -- -- -- (5) -- (5)
Net income -- 1994............................ -- -- -- -- 1,995 1,995
----- ----- ----------- ----- --------- ---------
December 31, 1994............................. 6 119 -- (5) 816 936
Sale of treasury stock........................ -- 864 (869) 5 -- --
Repayment of officer notes.................... -- -- 162 -- -- 162
Net income -- 1995............................ -- -- -- -- 3,735 3,735
----- ----- ----------- ----- --------- ---------
December 31, 1995............................. $ 6 $ 983 $ (707) $ -- $ 4,551 $ 4,833
----- ----- ----------- ----- --------- ---------
----- ----- ----------- ----- --------- ---------
</TABLE>
See accompanying notes.
F-5
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JUNE 1 TO DECEMBER 31, 1993
AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
--------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities
Net income (loss).............................................................. $ (1,179) $ 1,995 $ 3,735
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization.............................................. 44 393 706
Deferred income taxes...................................................... -- (987) (468)
Other...................................................................... (377) (225) 37
Changes in operating assets and liabilities:
Accounts receivable...................................................... (1,830) (1,718) 163
Prepaids and other assets................................................ (194) (335) (37)
Accounts payable......................................................... 2,065 2,832 2,746
Accrued expenses......................................................... 743 2,035 2,120
Income taxes payable..................................................... -- 904 (904)
Warranty................................................................. 308 1,893 1,957
Retention................................................................ 112 463 389
--------- ---------- ---------
Net cash provided by (used in) operating activities.......................... (308) 7,250 10,444
Investing activities
Capital expenditures......................................................... (244) (573) (888)
Loans originated............................................................. -- -- (546)
Organizational costs......................................................... (262) -- (107)
Cash value of life insurance................................................. -- (17) (61)
Acquisition spending......................................................... -- (240) --
--------- ---------- ---------
Net cash used in investing activities........................................ (506) (830) (1,602)
Financing activities
Payments on notes receivable from officers for treasury stock................ -- -- 162
Borrowings (repayment) of bank line of credit................................ 1,187 6,096 (7,283)
Borrowings from (payments to) stockholders................................... -- 8,270 (2,054)
Proceeds from issuance of common stock....................................... 200 -- --
Proceeds from issuance of preferred stock.................................... 1,400 -- --
Payments for purchase of common stock........................................ -- (17,711) --
--------- ---------- ---------
Net cash provided by (used in) financing activities.......................... 2,787 (3,345) (9,175)
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents......................... 1,973 3,075 (333)
Cash and cash equivalents at beginning of period............................. -- 1,973 5,048
--------- ---------- ---------
Cash and cash equivalents at end of period................................... $ 1,973 $ 5,048 $ 4,715
--------- ---------- ---------
--------- ---------- ---------
Supplemental cash flow disclosure:
Interest paid.............................................................. $ -- $ 78 $ 233
--------- ---------- ---------
--------- ---------- ---------
Income taxes paid.......................................................... $ -- $ 1,000 $ 4,082
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
See accompanying notes.
F-6
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS ARE IN THOUSANDS)
1. BUSINESS AND ORGANIZATION
Diamond Home Services, Inc., formerly Diamond Exteriors, Inc. (Home Services
or the Company) is a majority-owned subsidiary of Globe Building Materials, Inc.
(Globe) and was incorporated on May 13, 1993. Effective April 18, 1996, the
Company transferred substantially all of its assets and liabilities to its newly
formed wholly-owned subsidiary, Diamond Exteriors, Inc. (Exteriors), as a
capital contribution and Exteriors made a dividend to the Company of all of the
capital stock of its two wholly-owned subsidiaries, Marquise Financial Services,
Inc. (Marquise), which was incorporated in Delaware on July 14, 1995 and
Solitaire Home Heating and Cooling, Inc. (Solitaire), which was incorporated in
Delaware on November 27, 1995. The accompanying financial statements are
presented as if such transfer and dividend had taken place on June 1, 1993.
Accordingly, the accompanying consolidated financial statements include the
accounts of the Company's wholly-owned subsidiaries, Exteriors, Marquise and
Solitaire, collectively referred to as the Company.
The Company provides in-home direct sales and marketing for installed home
improvement products, through direct consumer marketing under a license between
Exteriors and Sears, Roebuck and Co. (Sears), for the sale, furnishing and
installation of roofing, gutters, doors, fencing, and related installed exterior
home improvement products. The Company commenced its roofing, door, and related
exterior home improvement business on June 1, 1993, and entered into its first
license with Sears on that date. During 1994, the Company was granted the
license for fencing in certain additional markets. In conjunction with obtaining
the fencing license, certain assets were acquired from the former licensee. See
Note 9 for information regarding Marquise.
Exteriors has negotiated a new three-year license agreement with Sears
effective January 1, 1996. License fees are based on gross sales and vary by
product. License fees approximated $1,160,000, $7,400,000, and $13,000,000 in
1993, 1994, and 1995.
On September 23, 1994, the Company and its stockholders approved and adopted
a Stock Purchase Agreement. The agreement resulted in the Company's purchase of
4,018,800 shares of common stock in exchange for cash and notes payable totaling
$10.9 million, non-interest-bearing agreements with stockholders providing
$2,770,100 in equal monthly installments over five years beginning January 1995
and performance notes payable to the stockholders totaling $4,000,000 and
bearing interest at 9% per annum effective January 1, 1995. The performance
notes are payable as to both principal and interest in annual amounts following
each of the years 1995 through 1999 if annual earnings, as defined, through 1999
equal or exceed $6,000,000, $8,000,000, $11,000,000, $14,000,000, and
$17,000,000, respectively. No interest will accrue or be paid if earnings do not
equal the predetermined bases. Any performance note principal not paid because
of failure to achieve the required earnings through 1999 will be paid in the
event cumulative earnings, as defined, equal or exceed $56,000,000 before
December 31, 2009. Such performance notes are subordinate to the bank line of
credit. The Company met the 1995 annual earnings requirement related to the
performance notes. In the event of an initial public offering of its common
stock, the Company will use its best efforts to pay the entire unpaid principal
and interest due on the performance notes at the time of an offering.
The stock acquisitions described above have been reflected in the
accompanying financial statements using the purchase method of accounting as if
Globe made the acquisitions and pushed-down its basis to the Company. Globe, by
virtue of an agreement among the stockholders affording Globe the right to elect
a majority of the Board of Directors of the Company, has had and continues to
exercise control over the Company. This agreement will terminate upon
consummation of the offering. The cost of the shares purchased in excess of
their par value and the direct costs incurred by the Company have been assigned
to goodwill which is classified on the balance sheet as intangible assets.
F-7
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS ARE IN THOUSANDS)
1. BUSINESS AND ORGANIZATION (CONTINUED)
The Company retired 3,750,050 shares of the common stock in 1994. The
remaining shares (268,750) were sold on a subscription basis to employees on
January 2, 1995, in exchange for $5,000 in cash and stock subscription notes
receivable totaling approximately $864,000. The notes bear interest at 7%
payable annually.
The preferred stock of the Company and approximately 80% of the Company's
outstanding common stock were owned by Globe at December 31, 1995 (approximately
83% at December 31, 1994).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after eliminating significant intercompany
accounts and transactions.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and time deposits. The Company
considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is based on the
straight-line method over the estimated useful lives of five to seven years.
REVENUE RECOGNITION
The Company recognizes revenue upon completion of each installation and
receipt from the customer of a signed certificate of satisfaction.
GOODWILL
The Company amortizes goodwill over 40 years. The Company at each balance
sheet date evaluates for recognition of potential impairment of its recorded
goodwill against the current and undiscounted expected future cash flows.
Impairment in recorded goodwill is charged to income when identified.
Goodwill at December 31, 1994 and December 31, 1995, was $17,608,000 and
$17,157,000, net of accumulated amortization of $223,000 and $674,000.
WARRANTY
The Company warrants its installed home improvement products and services to
meet certain manufacturing and material and labor specifications. The warranty
policy is unique for each installed product and service, ranges from 2 to 10
years, is generally for the material cost and labor, and requires the owner to
meet certain preconditions such as proof of purchase. The Company accrues for
estimated warranty costs based on an analysis of historical claims data.
ORGANIZATIONAL COSTS
Organizational costs are included in intangible assets and amortized on the
straight-line method over five years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-8
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS ARE IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made in the 1993 and 1994 consolidated
financial statements to conform to the 1995 classifications.
3. PROPERTY AND EQUIPMENT
The cost of property and equipment at December 31 is as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Equipment......................................................... $ 746 $ 1,182
Leasehold improvements............................................ -- 341
Furniture and fixtures............................................ 101 209
--------- ---------
$ 847 $ 1,732
--------- ---------
--------- ---------
</TABLE>
4. ADVERTISING
The Company expenses the cost of advertising as such costs are incurred,
except for direct response advertising, which is capitalized and expensed over
its expected period of future benefit. Direct response advertising consists
primarily of newspaper and radio advertisements that require the use of
designated phone numbers for responding. The capitalized costs of direct
advertising are expensed when the jobs are completed and the revenue related
thereto is recognized, generally within one to three months of the date of sale.
At December 31, 1994 and 1995, $550,000 and $500,000 of deferred
direct-response advertising costs was reported as noncurrent assets. Net
advertising expense was $1,688,000, $6,132,000, and $6,239,000 in 1993, 1994,
and 1995.
5. ACCRUED LIABILITIES
The components of accrued liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Payroll and payroll-related.................................... $ 2,531 $ 3,979
Warranty....................................................... 103 609
Interest payable to stockholders............................... 34 360
Other.......................................................... 140 486
--------- ---------
$ 2,808 $ 5,434
--------- ---------
--------- ---------
</TABLE>
6. DEBT
At December 31, 1994, the Company had $7,283,000 outstanding under a
$12,500,000 bank line of credit, which was repaid as of the expiration date on
July 31, 1995. Interest on bank borrowings was payable monthly at the bank's
prime rate plus 2.75% (11.25% at December 31, 1994). Borrowings were secured by
substantially all of the Company's assets.
Effective February 6, 1996, the Company reestablished a bank line of credit
for maximum borrowings of $15,000,000. Interest on bank borrowings is payable
monthly at the bank's prime rate or at LIBOR plus 1.5%. The bank line of credit
requires the Company to maintain defined levels of equity and working capital,
and certain financial ratios, and limits the payment of dividends to common
stockholders.
F-9
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS ARE IN THOUSANDS)
6. DEBT (CONTINUED)
Non-interest-bearing agreements with stockholders provide for the payment of
$2,770,100 in equal monthly installments over five years beginning January 1995.
The Company made payments to stockholders of $554,000 during 1995 related to the
non-interest-bearing agreements. Also included in amounts due to stockholders
are performance notes totaling $4,000,000 and bearing interest at 9% per annum
effective January 1, 1995 (see Note 1). All amounts due to stockholders are
subordinate to the bank line of credit.
The Company's debt approximates fair value at December 31, 1995.
7. INCOME TAXES
For the period from September 23, 1994 through December 31, 1994 and for the
year ended December 31, 1995, the Company is included in the consolidated U.S.
federal income tax return of Globe. A tax-sharing agreement exists between the
Company and Globe specifying the allocation and payment of liabilities and
benefits arising from the filing of a consolidated tax return. The impact of the
tax allocation method requires the Company to pay its share of the consolidated
U.S. federal tax liability if it has taxable income, and to be compensated for
losses or credits for benefits which are utilized to reduce the consolidated tax
liability. There would be no difference in the Company's tax liability if a
tax-sharing agreement did not exist.
The provision (benefit) for the year ended December 31 is as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Current:
Federal...................................................... $ 1,519 $ 2,567
State........................................................ 385 551
Deferred:
Federal...................................................... (813) (385)
State........................................................ (174) (83)
--------- ---------
$ 917 $ 2,650
--------- ---------
--------- ---------
</TABLE>
No current or deferred taxes were recorded in 1993 since a valuation
allowance was established to offset net deferred tax assets at December 31,
1993.
A reconciliation of the Company's provision for income taxes based on the
federal statutory income tax rate to the Company's effective tax rate is as
follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Federal statutory income tax rate.............................. 34.0% 34.0%
Increase (decrease) resulting from:
State income tax, net of federal tax benefit................. 4.8 4.8
Goodwill amortization........................................ 2.6 2.0
Utilization of federal tax loss carryforward................. (12.9) --
Other, net................................................... 3.0 0.7
----- -----
Effective tax rate............................................. 31.5% 41.5%
----- -----
----- -----
</TABLE>
Deferred tax assets and liabilities are recognized for the expected future
tax impact of temporary differences between the carrying amounts and the tax
basis of assets and liabilities.
F-10
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS ARE IN THOUSANDS)
7. INCOME TAXES (CONTINUED)
The significant components of deferred tax assets and liabilities at
December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Warranty..................................................... $ 887 $ 1,640
Other........................................................ 599 473
--------- ---------
Total deferred tax assets...................................... 1,486 2,113
Deferred tax liabilities:
Advertising.................................................. (315) (235)
Depreciation................................................. (30) (120)
Other........................................................ (154) (303)
--------- ---------
Total deferred tax liabilities................................. (499) (658)
--------- ---------
Net deferred tax assets........................................ $ 987 $ 1,455
--------- ---------
--------- ---------
</TABLE>
8. EMPLOYEE BENEFIT PLAN
The Company has one defined-contribution plan that covers substantially all
employees. Annual contributions are determined by formula based on earnings.
Since inception, there have been no contributions to the Plan.
9. CONSUMER FINANCING
Marquise began operations on November 20, 1995. Marquise provides consumer
financing through direct consumer loans to customers of the Company. Finance
receivables are payable through monthly installments and may be secured or
unsecured. Marquise's first billings for monthly installments to consumers
occurred on January 9, 1996. Interest income from finance receivables is
recognized using the interest method. Accrual of interest income on finance
receivables is suspended when a loan is contractually delinquent for 90 days or
more and resumes when the loan becomes contractually current. No interest income
was recorded during 1995. Provisions for credit losses are charged to income in
amounts sufficient to maintain the allowance at a level considered adequate to
cover the losses of principal and interest in the existing portfolio. It is
Marquise's policy to charge off finance receivables when they are 210 days past
due.
The following summarized financial information for Marquise is before
elimination of intercompany transactions in consolidation.
F-11
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS ARE IN THOUSANDS)
9. CONSUMER FINANCING (CONTINUED)
Financial position at December 31:
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Assets
Accounts receivable....................................................... $ 542
Other assets.............................................................. 127
---------
Total assets............................................................ $ 669
---------
---------
Liabilities and stockholder's equity
Due to Diamond Exteriors, Inc............................................. $ 442
Other liabilities......................................................... 3
---------
Total liabilities....................................................... 445
Stockholder's equity...................................................... 224
---------
Total liabilities and stockholder's equity.............................. $ 669
---------
---------
Operations for the period ended December 31:
<CAPTION>
1995
---------
<S> <C>
Total finance and other income............................................. $ --
Other costs and expenses.................................................. (43)
---------
Loss before income tax benefit............................................ (43)
Income tax benefit........................................................ 17
---------
Net loss.................................................................. $ (26)
---------
---------
Cash flows for the period ended December 31:
<CAPTION>
1995
---------
<S> <C>
Net cash used in operating activities..................................... $ (36)
Net cash used in investing activities..................................... (656)
Net cash provided by financing activities................................. 692
---------
Cash at December 31, 1995................................................. $ --
---------
---------
</TABLE>
10. COMMITMENTS
The Company leases certain real property and equipment under long-term
noncancelable leases expiring at various dates through 2001. Future minimum
lease payments under noncancelable operating leases with initial terms of one
year or more consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
1996....................................................... $ 857
1997....................................................... 655
1998....................................................... 424
1999....................................................... 270
2000....................................................... 178
Thereafter................................................. 107
---------
Total minimum lease payments............................... $ 2,491
---------
---------
</TABLE>
Rent expense was $280,000, $685,000, and $850,000 in 1993, 1994, and 1995.
F-12
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS ARE IN THOUSANDS)
10. COMMITMENTS (CONTINUED)
During 1994, the Company entered into agreements with certain employees
providing for the payment of $4,230,000 in equal monthly installments over five
years beginning January 1995, contingent on the continued employment of each
employee. During 1995, payments of $861,000 were made to the related employee
group and one employee resigned forfeiting $274,000 in payments. The remaining
liability of $3,095,000 for such contingent payments is not reflected in the
consolidated financial statements at December 31, 1995.
11. CONTINGENCIES
The Company is involved in various legal actions arising in the ordinary
course of business. Although management cannot predict the ultimate outcome of
these matters with certainty, it believes, after taking into consideration legal
counsel's evaluation of such actions, that the outcome of these matters will not
have a material effect on the financial position or operations of the Company.
12. PREFERRED STOCK
The preferred stock of the Company consists of 20,000 authorized shares, of
which 1,400 shares are outstanding and issued to Globe. The preferred stock is
nonvoting and redeemable upon a liquidation or sale of control of the Company,
or at any time at the Company's option, at $1,000 per share. The preferred stock
is not subject to dividend payments.
13. RELATED PARTY TRANSACTIONS
The Company has an agreement with Globe for the performance of various
administrative services. In consideration for such services, the Company pays
management fees based on annual net sales, as defined. The Company believes that
the cost of such services, on a stand-alone basis, approximates the management
fees incurred by the Company in 1994 and 1995. The Company incurred management
fees of $464,000 and $558,000 for 1994 and 1995, of which $54,000 and $18,000
were payable at December 31, 1994 and 1995. No management agreement existed in
1993.
14. SUBSEQUENT EVENT
On April 8, 1996 the Board of Directors of the Company approved the
reclassification and split of each share of its Class A Voting Common Stock and
Class B Nonvoting Common Stock into 50 shares of Common Stock to be effected
immediately prior to the offering. The accompanying financial statements are
presented as if the reclassification and split had taken place on June 1, 1993.
F-13
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEEET
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA (1)
MARCH 31, 1996 MARCH 31, 1996
--------------- --------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 46 $ 46
Accounts receivable........................................................... 6,184 6,184
Finance company accounts receivable........................................... 7,427 7,427
Prepaids and other current assets............................................. 717 717
Deferred income taxes......................................................... 427 427
--------------- --------------
Total current assets............................................................ 14,801 14,801
Net property and equipment...................................................... 1,492 1,492
Intangible assets, net.......................................................... 17,286 17,286
Deferred income taxes........................................................... 1,063 1,063
Other........................................................................... 866 866
--------------- --------------
Total assets.................................................................... $ 35,508 $ 35,508
--------------- --------------
--------------- --------------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities...................................... $ 11,034 $ 11,034
Borrowings under bank line of credit.......................................... 7,706 7,706
Due to stockholders........................................................... 1,354 9,954
--------------- --------------
Total current liabilities....................................................... 20,094 28,694
Long-term liabilities:
Warranty and retention........................................................ 4,971 4,971
Due to stockholders........................................................... 3,861 3,861
--------------- --------------
Total long-term liabilities..................................................... 8,832 8,832
Preferred stock, at redemption price............................................ 1,400 1,400
Common stockholders' equity..................................................... 5,182 (3,418 )
--------------- --------------
Total liabilities and common stockholders' equity............................... $ 35,508 $ 35,508
--------------- --------------
--------------- --------------
</TABLE>
- ------------------------
(1) Pro forma to reflect the payment by the Company of the $8.6 million special,
one-time dividend to existing stockholders (including management
stockholders and Globe). See "Use of Proceeds" and "Certain Transactions --
Transactions with Globe and Globe Affiliates."
See notes to condensed consolidated financial statements
F-14
<PAGE>
DIAMOND HOME SERVICES, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net sales.................................................................................. $ 22,362 $ 27,093
Cost of sales.............................................................................. 13,096 15,293
--------- ---------
Gross profit............................................................................... 9,266 11,800
Selling, general and administrative expenses............................................... 8,884 10,932
Operating interest expense................................................................. 0 22
Amortization expense....................................................................... 126 132
--------- ---------
Operating profit........................................................................... 256 714
Interest expense........................................................................... 186 66
--------- ---------
Income before income taxes................................................................. 70 648
Income tax provision....................................................................... 71 299
--------- ---------
Net income (loss).......................................................................... $ (1) $ 349
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements
F-15
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Operating activities
Net income (loss)........................................................................... $ (1) $ 349
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization........................................................... 155 197
Deferred income taxes................................................................... (347) (35)
Changes in operating assets and liabilities:
Accounts receivable and other assets.................................................. (114) (3,172)
Accounts payable and accrued expenses................................................. 235 (2,043)
Warranty and retention................................................................ 514 354
--------- ---------
Net cash provided by (used in) operating activities....................................... 442 (4,350)
Investing activities
Loans originated.......................................................................... -- (6,881)
Capital expenditures...................................................................... (224) (120)
Organizational costs...................................................................... -- (23)
--------- ---------
Net cash used by investing activities..................................................... (224) (7,024)
Financing activities
Borrowings (repayment) of bank line of credit............................................. (5,099) 7,706
Payments to stockholders.................................................................. (167) (1,001)
--------- ---------
Net cash (used in) provided by financing activities....................................... (5,266) 6,705
--------- ---------
Net decrease in cash and cash equivalents................................................. (5,048) (4,669)
Cash and cash equivalents at beginning of period.......................................... 5,048 4,715
--------- ---------
Cash and cash equivalents at end of period................................................ $ -- $ 46
--------- ---------
--------- ---------
Supplemental cash flow disclosure:
Interest paid........................................................................... $ 65 $ 378
--------- ---------
--------- ---------
Income taxes paid....................................................................... $ 548 $ 94
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements
F-16
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(TABULAR AMOUNTS ARE IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996. For further information, refer to the consolidated financial statements
included elsewhere herein.
2. SIGNIFICANT ACCOUNTING POLICIES
Credit participation fees paid by Sears and its affiliates are recognized in
the period the receivables are placed with Sears and its affiliates, without
recourse to the Company, utilizing the discounted present value of the
contractual payment stream. Approximately 71% of the total credit participation
fee earned is received in cash during the first three years.
3. CONSUMER FINANCING
The Company's consumer finance subsidiary, Marquise Financial, began
operations on November 20, 1995. Marquise Financial provides consumer financing
through direct consumer loans to customers of the Company. Finance receivables
are payable through monthly installments and may be secured or unsecured.
Marquise Financial's first billings for monthly installments to consumers
occurred on January 9, 1996. Interest income from finance receivables is
recognized using the interest method. Accrual of interest income on finance
receivables is suspended when a loan is contractually delinquent for 90 days or
more and resumes when the loan becomes contractually current. No interest income
was recorded during 1995. Provisions for credit losses are charged to income in
amounts sufficient to maintain the allowance at a level considered adequate to
cover the losses of principal and interest in the existing portfolio. It is
Marquise Financial's policy to charge off finance receivables when they are 210
days past due. Interest income for the three months ended March 31, 1996 was not
material.
The following summarized condensed financial information for Marquise
Financial is before eliminations of intercompany transactions in consolidation:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
--------------- -----------
<S> <C> <C>
ASSETS:
Cash and financing receivables................................................ $ 542 $ 7,473
Other current assets.......................................................... 5 41
Intangibles (net)............................................................. 122 122
----- -----------
$ 669 $ 7,636
----- -----------
----- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Due to Diamond................................................................ $ 442 $ 7,456
Other......................................................................... 3 39
----- -----------
Total liabilities......................................................... 445 7,495
Total stockholder's equity.................................................... 224 141
----- -----------
Total liabilities and stockholder's equity................................ $ 669 $ 7,636
----- -----------
----- -----------
</TABLE>
F-17
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(TABULAR AMOUNTS ARE IN THOUSANDS)
3. CONSUMER FINANCING (CONTINUED)
Results of operations for the three months ended March 31, 1996:
<TABLE>
<S> <C>
Financing income............................................................ $ 39
General and administrative expenses......................................... 177
---------
Loss before tax benefit................................................. (138)
Income tax benefit.......................................................... 55
---------
Net loss................................................................ $ 83
---------
---------
</TABLE>
Cash flow for the three months ended March 31, 1996:
<TABLE>
<S> <C>
Net cash used in operating activities...................................... $ (83)
Net cash used in investing activities...................................... (6,885)
Net cash provided by financing activities.................................. 7,014
---------
Cash at March 31, 1996................................................. $ 46
---------
---------
</TABLE>
F-18
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 14
Dividend Policy................................ 14
Capitalization................................. 15
Dilution....................................... 16
Selected Consolidated Financial and Operating
Data.......................................... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 19
Business....................................... 28
Management..................................... 41
Certain Transactions........................... 47
Principal and Selling Stockholders............. 53
Description of Capital Stock................... 54
Shares Eligible for Future Sale................ 55
Underwriting................................... 57
Legal Matters.................................. 58
Experts........................................ 58
Additional Information......................... 58
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------
UNTIL , 1996 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,420,000 SHARES
[DIAMOND HOME SERVICES LOGO]
COMMON STOCK
----------------
PROSPECTUS
, 1996
----------------
WILLIAM BLAIR & COMPANY
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses (other than the SEC registration
fee, NASD filing fee and the Nasdaq National Market application fee) of the
issuance and distribution of the securities being registered, all of which will
be paid by the Company.
<TABLE>
<CAPTION>
SEC registration fee............................................. $ 17,631
<S> <C>
NASD filing fee.................................................. 5,613
Nasdaq National Market application fee........................... 39,843
Printing expenses................................................ 100,000
Fees and expenses of counsel..................................... 200,000
Fees and expenses of accountants................................. 100,000
Transfer agent and registrar fees................................ 4,000
Blue sky fees and expenses....................................... 15,000
Miscellaneous.................................................... 17,913
---------
Total........................................................ $ 500,000
</TABLE>
The Company intends to pay all expenses of registration, issuance and
distribution, excluding underwriters' discounts and commissions, with respect to
the shares being sold by the Selling Stockholder and, in the event that the
underwriters exercise the over-allotment option, the Company will pay all
expenses of registration, issuance and distribution of the shares of Common
Stock sold by certain of the Company's other stockholders, excluding
underwriters' discounts and commissions and fees and expenses of such
stockholders' counsel.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Delaware law, a corporation may indemnify any person who was or is a
party or is threatened to be made a party to an action (other than an action by
or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the corporation's request, as a director, officer, employee or agent of another
corporation or other enterprise, against expenses (including attorneys' fees)
that are actually and reasonably incurred by him ("Expenses"), and judgments,
fines and amounts paid in settlement that are actually and reasonably incurred
by him, in connection with the defense or settlement of such action, provided
that he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was unlawful. Although Delaware law permits a corporation to indemnify
any person referred to above against Expenses in connection with the defense or
settlement of an action by or in the right of the corporation, provided that he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests, if such person has been judged
liable to the corporation, indemnification is only permitted to the extent that
the Court of Chancery (or the court in which the action was brought) determines
that, despite the adjudication of liability, such person is entitled to
indemnity for such Expenses as the court deems proper. The determination as to
whether a person seeking indemnification has met the required standard of
conduct is to be made (1) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even though less than a quorum or
(2) if there are no such directors or if such directors so direct, by
independent legal counsel in a written opinion, or (3) by the stockholders. The
General Corporation Law of the State of Delaware also provides for mandatory
indemnification of any director, officer, employee or agent against Expenses to
the extent such person has been successful in any proceeding covered by the
statute. In addition, the General Corporation Law of the State of Delaware
provides the general authorization of advancement of a director's or officer's
litigation expenses in lieu of requiring the authorization of such advancement
by the board of directors in specific cases, and
II-1
<PAGE>
that indemnification and advancement of expenses provided by the statute shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement or otherwise.
The Company's Amended By-Laws provide for indemnification of the Company's
directors and officers, to the fullest extent not prohibited by the Delaware
law.
The Company has entered into agreements to indemnify its directors and
certain of its officers, in addition to the indemnification provided for in the
Company's Amended By-Laws. These agreements, among other things, will indemnify
the Company's directors and such officers for all direct and indirect expenses
and costs (including, without limitation, all reasonable attorneys' fees and
related disbursements, other out of pocket costs and reasonable compensation for
time spent by such persons for which they are not otherwise compensated by the
Company or any third person) and liabilities of any type whatsoever (including,
but not limited to, judgments, fines and settlement fees) actually and
reasonably incurred by such person in connection with either the investigation,
defense, settlement or appeal of any threatened, pending or completed action,
suit or other proceeding, including any action by or in the right of the
corporation, arising out of such person's services as a director or officer of
the Company or as a director, officer, employee or other agent of, any
subsidiary of the Company or any other company or enterprise to which the person
provides services at the request of the Company if such director or officer
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to the best interests of the Company and, with respect to any
criminal action or proceeding, if he or she had no reasonable cause to believe
his or her conduct was unlawful. The Company believes that these provisions and
agreements are necessary to attract and retain talented and experienced
directors and officers.
The Company maintains liability insurance for the benefit of its directors
and officers.
Under the terms of the Underwriting Agreement, the Underwriters have agreed
to indemnify, under certain conditions, the Company, its directors, certain of
its officers and persons who control the Company within the meaning of the
Securities Act of 1933, as amended (the "Securities Act") against certain
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below is information as to securities of the Company issued or
sold by the Company within the past three years which were not registered under
the Securities Act and were issued upon the exemption from registration provided
by Section 4(2) or Section 3(a)(9) of the Securities Act or pursuant to Rule 701
promulgated under the Securities Act. No underwriters were involved in any of
the sales so there were no underwriting discounts or commissions.
1. In June 1993, pursuant to Section 4(2) of the Securities Act, the
Company issued an aggregate of 5,000 shares of Class A Voting Common Stock, par
value $1.00 per share, and 95,000 shares of Class B Nonvoting Common Stock, par
value $1.00 per share, to certain of the Company's managers in exchange for
$100,000.
2. In July 1993, pursuant to Section 4(2) of the Securities Act, the
Company issued 5,000 shares of Class A Voting Common Stock and 95,000 shares of
Class B Nonvoting Common Stock to Globe, an accredited investor, in exchange for
$100,000.
3. In July 1993, pursuant to Section 4(2) of the Securities Act, the
Company issued to Globe, an accredited investor, 1,400 shares of Series A
Preferred Stock, par value $1.00 per share, in exchange for $1.4 million.
4. In January 1995, the Company issued an aggregate of 268 shares of Class
A Voting Common Stock and 5,107 shares of Class B Nonvoting Common Stock to
certain of the Company's managers in accordance with Rule 701 promulgated under
the Securities Act, in exchange for cash for the par value and secured
promissory notes from such managers payable for an aggregate of $869,295, or
$161.73 per share purchased.
II-2
<PAGE>
5. Immediately prior to the offering, pursuant to Section 3(a)(9) of the
Securities Act, the Company will reclassify and split each outstanding share of
Class A Voting Common Stock and Class B Nonvoting Common Stock into 50 shares of
Common Stock, $.001 par value per share.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement
3.1* Form of Amended and Restated Certificate of Incorporation of Diamond Home Services, Inc.
3.2* Form of Amended and Restated By-Laws of Diamond Home Services, Inc.
5.1* Opinion of McDermott, Will & Emery regarding legality
10.1* Registration Rights Agreement between Diamond Home Services, Inc. and Globe Building
Materials, Inc.
10.1(a)* Amendment to Registration Rights Agreement between Diamond Home Service Inc. and Globe
Building Materials, Inc.
10.2* Form of Indemnity Agreement between Diamond Home Services, Inc. and its directors and
certain officers.
10.3 License Agreement between Sears, Roebuck and Co. and Diamond Exteriors, Inc., dated January
1, 1996.
10.4* Lease between Diamond Home Services, Inc. and Haldun Square Partners dated May 3, 1995.
10.5* Form of Agreement between Diamond Home Services, Inc. and each of the following managers of
Diamond Home Services, Inc.: Frank Cianciosi, Jerome Cooper, James M. Gillespie, Rodger
Ibach, Marvin Lerman and Ronald Schurter.
10.6* Form of Agreement between Diamond Home Services, Inc. and certain of its managers.
10.7* Diamond Home Services, Inc. Incentive Stock Option Plan.
10.8* Diamond Home Services, Inc. 1996 Nonemployee Director Stock Option Plan.
10.9* Credit Agreement between American National Bank and Trust Company of Chicago and Diamond
Home Services, Inc.
10.9(a)* First Waiver and Consent to Loan and Security Agreement between Diamond Home Services, Inc.
and American National Bank and Trust Company of Chicago.
10.9(b)* First Amendment, Waiver and Consent to Loan and Security Agreement between Diamond Home
Services, Inc. and American National Bank and Trust Company of Chicago.
10.9(c)* Assignment, Delegation and Assumption Agreement among Diamond Home Services, Inc. Diamond
Exteriors, Inc. and American National Bank of Trust Company of Chicago.
10.9(d) Second Amendment and Consent to Loan and Security Agreement between Diamond Exteriors, Inc.
and American National Bank and Trust Company of Chicago.
10.9(e) Subordination Agreement among Diamond Home Services, Inc., Diamond Exteriors, Inc. and
American National Bank and Trust Company of Chicago.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
10.10* Settlement Agreement between Diamond Home Services, Inc. and Donald Griffin.
<S> <C>
10.11* License Agreement between Globe Building Materials, Inc. and Diamond Home Services, Inc.
21.2* Subsidiaries of Diamond Home Services, Inc.
23.1 Consent of Ernst & Young LLP
23.2* Consent of McDermott, Will & Emery (included in Exhibit 5.1)
24.1* Power of Attorney (included with the signature page to the registration statement)
</TABLE>
- ------------------------
* Previously filed.
(b) Financial Statement Schedules:
None.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
representative of the Underwriters at the closings specified in the Underwriting
Agreement certificates in such denominations and registered in such names as
required by such representative to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that for purposes of
determining any liability under the Securities Act, (i) the information omitted
from the form of prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective and (ii) each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Chicago, Illinois on
June 14, 1996.
DIAMOND HOME SERVICES, INC.
By: /s/ RICHARD G. REECE
-------------------------------------
Richard G. Reece
CHIEF FINANCIAL OFFICER AND TREASURER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- --------------------------------------------------- ----------------------------------------------- -----------------------
*
---------------------------------------- Chairman of the Board, Chief Executive Officer June 14, 1996
C. Stephen Clegg and President (Principal Executive Officer)
/S/ RICHARD G. REECE
---------------------------------------- Chief Financial Officer and Treasurer June 14, 1996
Richard G. Reece (Principal Financial and Accounting Officer)
*
---------------------------------------- Director June 14, 1996
James Bere
*
---------------------------------------- Director June 14, 1996
Jacob Pollock
*
---------------------------------------- Director June 14, 1996
George A. Stinson
*
---------------------------------------- Director June 14, 1996
James M. Gillespie
* By Power of Attorney
/S/ RICHARD G. REECE
----------------------------------------
Richard G. Reece
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
1.1* Form of Underwriting Agreement
3.1* Form of Amended and Restated Certificate of Incorporation of Diamond Home Services, Inc.
3.2* Form of Amended and Restated By-Laws of Diamond Home Services, Inc.
5.1* Opinion of McDermott, Will & Emery regarding legality
10.1* Registration Rights Agreement between Diamond Home Services, Inc. and Globe Building
Materials, Inc.
10.1(a)* Amendment to Registration Rights Agreement between Diamond Home Service Inc. and Globe
Building Materials, Inc.
10.2* Form of Indemnity Agreement between Diamond Home Services, Inc. and its directors and
certain officers.
10.3 License Agreement between Sears, Roebuck and Co. and Diamond Exteriors, Inc., dated January
1, 1996.
10.4* Lease between Diamond Home Services, Inc. and Haldun Square Partners dated May 3, 1995.
10.5* Form of Agreement between Diamond Home Services, Inc. and each of the following managers of
Diamond Home Services, Inc.: Frank Cianciosi, Jerome Cooper, James M. Gillespie, Rodger
Ibach, Marvin Lerman and Ronald Schurter.
10.6* Form of Agreement between Diamond Home Services, Inc. and certain of its managers.
10.7* Diamond Home Services, Inc. Incentive Stock Option Plan.
10.8* Diamond Home Services, Inc. 1996 Nonemployee Director Stock Option Plan.
10.9* Credit Agreement between American National Bank and Trust Company of Chicago and Diamond
Home Services, Inc.
10.9(a)* First Waiver and Consent to Loan and Security Agreement between Diamond Home Services, Inc.
and American National Bank and Trust Company of Chicago.
10.9(b)* First Amendment, Waiver and Consent to Loan and Security Agreement between Diamond Home
Services, Inc. and American National Bank and Trust Company of Chicago.
10.9(c)* Assignment, Delegation and Assumption Agreement among Diamond Home Services, Inc. Diamond
Exteriors, Inc. and American National Bank of Trust Company of Chicago.
10.9(d) Second Amendment and Consent to Loan and Security Agreement between Diamond Exteriors, Inc.
and American National Bank and Trust Company of Chicago.
10.9(e) Subordination Agreement among Diamond Home Services, Inc., Diamond Exteriors, Inc. and
American National Bank and Trust Company of Chicago.
10.10* Settlement Agreement between Diamond Home Services, Inc. and Donald Griffin.
10.11* License Agreement between Globe Building Materials, Inc. and Diamond Home Services, Inc.
21.2* Subsidiaries of Diamond Home Services, Inc.
23.1 Consent of Ernst & Young LLP
23.2* Consent of McDermott, Will & Emery (included in Exhibit 5.1)
24.1* Power of Attorney (included with the signature page to the registration statement)
</TABLE>
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* Previously filed.
<PAGE>
Exhibit 10.3
LICENSE AGREEMENT
THIS LICENSE AGREEMENT ("License Agreement") is made and entered into as of
the 1st day of January, 1996, by and between SEARS, ROEBUCK AND CO., a New York
corporation (hereinafter called "Sears") and DIAMOND EXTERIORS, Inc., a Delaware
corporation (hereinafter referred to as "Licensee"), which said parties in
consideration of the mutual covenants and promises contained herein, hereby
mutually agree as follows:
1. (A) (LICENSE) - Sears hereby grants to Licensee the privilege of
conducting and operating, and Licensee hereby agrees to conduct and operate,
pursuant to the terms, provisions and condition contained in this License
Agreement, a business for the selling, furnished and installing of certain Sears
approved products ("Approved Products") in the Sears Market Areas designated in
Exhibit A, attached hereto and make a part hereof.
(B) (LIMITED TO NON-COMMERCIAL RESIDENTIAL CUSTOMERS) - This License
Agreement is limited to non-commercial residential customers (herein referred to
as "customers"). For the purposes of this License Agreement, a contract entered
into with respect to four or more connected and/or attached residential units
shall be deemed to be a contract with a commercial residential customer.
However, any residence attached to a store front business shall be considered
residential provided the residence contains less than four units and the
business is confined to the first floor. A contract entered into with respect
to a residential condominium unit which is negotiated and paid for by the
management of the condominium is deemed commercial.
(C) (STANDARDS) - All Licensee procedures and policies covering the
selling and installation and servicing of Approved Products shall be in
conformance with Sears HIPS *Quality Every day!* (QED) standards and initiatives
as presented in the attachment, Customer Quality Requirements and Standards, of
this agreement. Sears shall use customer surveys to measure Licensee adherence
to QED standards. From time to time Sears may use other methods to measure
Licensee's adherence to QED standards. Sears shall survey all HIPS customers
who purchased Approved Product from Licensee and a statistical sampling of
Customers who allowed Licensee into their home to conduct a sales presentation
but elected not to purchase Approved Product. Service Quality Index (SQI)
scores and full diagnostic report covering every survey question will be
furnished to Licensee. Licensee must maintain a minimum level of service, as
indicated by the reported SQI score, that is acceptable to Sears. Sears agree
to use reasonable efforts to assist Licensee to improve Licensee's SQI scores
that are deemed by Sears to be unacceptable. However, if
<PAGE>
noted improvements are not evident Licensee's subsequent SQI scores, Sears may
initiate actions to terminate either specific Licensee markets as authorized
pursuant t this License Agreement or License Agreement in its entirety.
Licensee agrees to provide Sears with copies of its written procedures and
policies establishing standards of quality and performance for Approved Products
sold and installed or applied pursuant to this License Agreement. Licensee
agrees to promptly advise Sears of any revisions to such standards. Without
limiting Paragraph 10. (A), Licensee agrees to observe no less than the minimum
standards of quality and/or performance set forth in Exhibit A hereto. Licensee
agrees that Sears has the right to visit Licensee's offices, work sites and/or
other place of business at any reasonable time for the purpose of verifying
Licensee's compliance with said standards of quality and/or performance.
Notwithstanding the above, nothing herein will be deemed a waiver by Sears of
Sears right to terminate this License Agreement pursuant to the terms,
provisions, and conditions of paragraph 26.
(D) (SEARS TERMINATION OF MARKETS AND/OR APPROVED PRODUCTS) Sears
shall have the right to give Licensee twelve (12) months written notice of any
market or any product in such market that Sears feels should be
closed/discontinued due to an unreasonably low sales volume pursuant to the
agreed upon sales plan and/or QED Service Quality Index scores as set forth in
Paragraph 1C that are three (3) or more points below the applicable overall
Sears National year-to-date Buyer SQI score or the Sears National product SQI
score. After the allotted twelve (12) months, Licensee shall immediately cease
to sell or market said Approved Product(s) under the Sears name in related
market(s). Following the Licensee's departure of such market, Sears shall have
the right, without penalty or other obligation to Licensee, to enter into a
License Agreement with another party in any such market, and Licensee shall be
deemed to have waived all rights, obligations and privileges with respect to the
use of Sears name in such market. However, Licensee shall continue to assume
any and all obligations which Licensee had under this Licensee Agreement arising
out of the operation hereunder prior to the Licensee's departure from such
markets. Licensee shall have the right to offer similar products and services
in its own name in such termination markets.
2. (A) (TERM AND TERMINATION) The Agreement shall be effective as of
January 1, 1996, and shall remain in effect for a term ("Term") of three (3)
years, expiration effective midnight December 31, 1998.
(B) (WIND DOWN PERIOD) Notwithstanding Paragraph 2A above, the
Parties have mutually agreed to a Wind Down Period
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that will follow the expiration of the Term of this Agreement. Such Wind Down
Period shall be as follows:
(i) If either party gives the other party written notice of its
intent not to renew the License Agreement within the last six (6) months of the
Term, the Wind Down Period shall be six (6) months from the date of such notice
or;
(ii) If there is no notice of non-renewal, then the Wind Down
Period shall commence on the day after expiration of the License Agreement and
shall extend for a period of six (6) months thereafter.
This Wind Down Period will enable the parties to conduct an orderly transition.
All Terms and Conditions of this License Agreement shall be applicable during
this Wind Down Period.
There will not be a Wind Down Period if notice of non-renewal is given six (6)
months prior to the expiration of the License Agreement.
(C) This Wind Down Period is only applicable to the expiration of the
Agreement and does not apply to any termination hereunder by either Sears or
Licensee.
3. (USE OF SEARS NAME) - Licensee shall offer the sale and installation of
Roofing, Roof Ventilation Accessories, Skylights, Mobile Home Roofovers, Mobile
Hole Skirting, Patio Products for Mobile Homes, Continuous Gutter, Insulation,
Entry Doors, Security Doors, Patio Doors, Garage Doors, Patio Storm Doors,
Fencing and Roof and Garage Door Repair, as more specifically designated in
Exhibit A, Exhibit A(i), Exhibit A(ii) and Exhibit A(iii), which are attached
hereto and made a part hereof, in the name of Sears and only under the terms,
provisions and conditions of this License Agreement. Under this License
Agreement, Licensee may offer the sale and installation of Sears authorized
Soffit/Facia and Storm Doors to customers only as a part of and only at the same
time as an offer to sell Roofing, Roof Ventilation Accessories, Mobile Home
Roofovers, Insulation, Entry Doors, Security Doors, Patio Doors, Patio Storm
Doors, Garage Doors and Continuous Gutter and may offer the sale of Garage Door
Openers only as part of and only at the same time as a Garage Door sale and may
offer Siding (up to 5 Squares above the roof line) of Dormers or Gable Ends,
Chimney Repair and Tearoff Roofing only as part of and only at the same time as
a Roofing sale. Under this license Agreement, Licensee may not advertise the
sale and installation of Siding, Soffit/Facia, Chimney Repairs, Garage Door
Openers or Storm Doors in Sears name. Licensee grants to Sears the right to
approve, prior to use thereof, the full name under which services and/or
products shall
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<PAGE>
be offered by Licensee under this License Agreement. Licensee shall not
commence the conduct of any business activity under this License Agreement,
without Sears prior written approval of the name to be used in conjunction with
the services and/or products licensed hereunder.
4. (A) (SEARS TRADEMARKS) - Licensee expressly recognizes and
acknowledges that the use of Sears trademark, service mark or trade name shall
not confer upon Licensee any proprietary rights to such trademark, service mark
or trade name. Upon expiration or upon termination of Licensee's rights to use
the licensed trademark, service mark or trade name for any cause, Licensee shall
immediately cease all use of the licensed trademark, service mark or trade name
and will not use the same thereafter. Upon expiration or termination of rights
to use the licensed trademark, service mark or trade name pursuant to this
License Agreement for any cause, Licensee will execute all necessary or
appropriate documents to confirm Sears said ownership or to transfer any rights
it may have acquired to Sears.
(i) Licensee shall not question, contest or challenge the
ownership by Sears of the licensed trademark, service mark, and trade name
during the term of this License Agreement or thereafter. Licensee will claim n
right, title or interest in such licensed trademark, service mark or trade name,
except the right to use the same pursuant to the terms, provisions and
conditions of this License Agreement, and will not seek to register the same.
(ii) Nothing in this License Agreement shall be construed to bar
Sears from protecting its right to the exclusive use of its trademarks, service
marks or trade names against infringement thereof by any party or parties,
including Licensee, either during the term of this License Agreement or
following any expiration or termination of Licensee's right to use the licensed
trademark, service mark or trade name pursuant to this License Agreement for any
cause.
(B) (REGISTRATION OF TRADEMARKS, SERVICE MARKS OR TRADE NAMES)
Licensee acknowledges that Sears may register any and all of the licensed
trademarks, service marks or trade names for the products and/or services
licensed under this License Agreement in its own name, and that Licensee's use
thereof shall inure to the benefit of Sears for such purpose, as well as for all
other purposes. Licensee shall cooperate in any such registration by Sears or
application thereof.
(C) (REMEDIES FOR UNAUTHORIZED USE) - Licensee recognizes that the
trademark, service mark or trade name licensed under the License Agreement
possesses a special unique
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<PAGE>
and extraordinary character which makes it difficult to assess the monetary
damage which Sears would sustain in the event of unauthorized use. Licensee
expressly recognizes and agrees that irreparable injury would be caused to Sears
by such unauthorized use, and agrees that preliminary or permanent injunctive
relief would be appropriate in the event of breach of its License Agreement by
Licensee, provided that such remedy shall not be exclusive of any legal remedies
otherwise available.
(D) (POLICING THE TRADEMARK) - Licensee agrees that if it receives
knowledge of any manufacture or sale by anyone else of such products and/or
services as would be confusingly similar in the minds of the public and which
bear or are promoted in association with the licensed trademark, service mark or
trade name or any names, symbols, emblems, designs or colors which would be
confusingly similar in the minds of the public to such licensed trademark,
service mark or trade name, Licensee will promptly notify Sears. Sears shall
have the sole right to take such action as it determines, in its sole
discretion, is appropriate. Licensee shall provide reasonable cooperation and
assistance in such protest or legal action at Sears expense. If demanded by
Sears, Licensee shall joint in such protest or legal action at Sears expense.
Licensee shall not undertake such protest or legal action on its won behalf
without first securing Sears written permission to do so. If Sears permits
Licensee to undertake such protest or legal action, such protest or legal action
shall be at Licensee's sole expense. Sears shall provide reasonable cooperation
and assistance therein, at Licensee's expense. For the purposes of the
foregoing, expenses shall include reasonable attorneys' fees. All recovery in
the form of legal damages or settlement shall belong to the party bearing the
expense of such protest or legal action.
5. (LICENSEE'S LOCATION) - Licensee, at its expense, shall provide and
maintain a location(s) from which it shall operate and Sears shall not have any
responsibility or liability relating to said location(s). Unless authorized in
writing by the National Operations Manager; Sears Roebuck and Co.; D/610, D2
181B; 3333 Beverly Road; Hoffman Estates, Illinois 60179, nothing on the
premises of said location(s) visible to the public shall make any reference to
Sears or the relationship created under this License Agreement.
6. (A) (LICENSEE'S EMPLOYEES) - Licensee shall have no authority to
employ persons on behalf of Sears and no employees of Licensee shall be deemed
to be employees or agents of Sears, said employees at all times remaining
Licensee's employees. Licensee shall have the sole and exclusive control over
its labor and employee relations policies and policies relating to wages, hours,
working conditions, or conditions of its employees.
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<PAGE>
Licensee shall have the sole and exclusive right to hire, transfer, suspend,
layoff, recall, promote, assign, discipline, adjust grievances and discharge
said employees, provided, however, that at any time Sears so requests, Licensee
will give consideration to the transfer, from the sale or installation of Sears
approved products, of any employee who is objectionable to Sears for reasons of
health, safety and/or security of Sears customers, employees or Sears
merchandise and/or whose manner impairs Sears customer relations.
(B) Licensee shall not concurrently engage any Sears Associates as
sales employees for Licensee. Licensee further agrees not to hire or otherwise
engage any Sears Department 610 HIPS Associate as an employee concurrently
during the term of this License Agreement.
(C) Licensee is solely responsible for all salaries and other
compensation of all Licensee's employees and will make all necessary salary
deductions and withholdings from its employee's salaries and other compensation,
and is solely responsible for the payment of any and all contributions, taxes
and assessments and shall meet all other requirements of the Federal Social
Security. State Unemployment Compensation and Federal, State and Local Income
Tax withholding laws on all salary and other compensation of its employees.
(D) Licensee will comply with any other Federal, State or local law or
regulation regarding but not limited to compensation, hours of work, or other
conditions of employment including but not limited to Federal or State laws or
regulations regarding minimum compensation, overtime and equal opportunities for
employment and in particular Licensee warrants and agrees to comply with the
terms of the Federal Civil Rights Act, Age Discrimination in Employment Act,
Occupational Safety and Health Act and the Federal Fair Labor Standards Act
whether or not Licensee may be exempt from the aforesaid acts by reasons of
Licensee's size or the nature of Licensee's business or any other reason
whatsoever.
(E) Licensee agrees and warrants that said employees while working in
connection with this License Agreement will comply with any and all applicable
Federal, State and local laws, rules, regulations and ordinances applicable to
Licensee.
7. (LICENSEE'S FACILITIES AND EQUIPMENT) - Licensee, at its sole expense,
shall provide all facilities, tools and equipment as may be necessary and proper
for the operation of its business pursuant to this License Agreement including
but not limited to any equipment needed to make electronic settlements and fund
transfers as herein stated (such vehicles, tools and equipment
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<PAGE>
being herein for convenience referred to as "Licensee's Equipment"). Licensee
shall maintain Licensee's Equipment and facilities in good working order and
repair.
8. (RELATIONSHIP) - Licensee shall operate in the capacity of an
independent contractor. Nothing contained in or done pursuant to this License
Agreement shall be construed as creating a partnership, agency (except as del
credere agent as described in Paragraph 22(b) hereof) or joint venture and,
except as may be otherwise expressly provided in this License Agreement, neither
party shall become bound by any representation, act or omission of the other
party hereto.
9. (UNAUTHORIZED SERVICE) - Licensee shall offer for sale only those
services and merchandise expressly authorized by this License Agreement.
Licensee, acting in its sole discretion, may engage in any other business or
business activities. However, Licensee agrees not to advertise or display
Approved Products or provide services in such manner that will cause confusion
to the public with respect to the origin of other products or services.
Licensee may sell, install or apply the Approved Products and products similar
thereto for commercial customers, as long as such sales are made in Licensee's
own name and without reference to any relationship with, or responsibility of,
Sears with respect to such sales. Licensee may sell, install or apply under its
own name the Approved Products and products similar thereto in markets where
they are currently not licensed to transact business under this License
Agreement. Such sales shall be without any reference to any relationship with
or responsibility of Sears. To ensure that the distinguishing characteristics
of Sears Approved Products and services are maintained and to prevent confusion
to customers, Licensee agrees not to sell or install home improvement products
or services under the name or trademark of other retailers without the express
written consent of Sears.
10. (A) (WARRANTY) - Licensee, in addition to any and all covenants,
promises and agreements contained in this License Agreement, extends to Sears a
warranty covering the application and/or installation of the product.
Licensee's warranty assures the quality of product, labor and materials.,
Licensee further assures and warrants that the finished job shall be of high
quality and that said applied or installed product and its application and/or
installation shall remain in good condition and be free from defects in material
and/or workmanship for a period of at least one year from the date of
application and/or installation (except repairs which shall be warranted for a
period of at least (90) days). Licensee agrees that Sears customers are third
party beneficiaries of the warranties extended herein by Licensee.
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<PAGE>
(B) (CUSTOMER ADJUSTMENTS) - All of the work and services performed by
Licensee shall be consistently of high quality. Licensee shall at all times
maintain the general policy of satisfaction of customers and shall adjust all
complaints of, and controversies with customers, with respect to said sales made
under this License Agreement. In any case, in which said adjustment is
unsatisfactory to the customer, Sears reserves and shall have the right, at
Licensee's expense, to make such further adjustment as Sears may deem necessary
under the circumstances and such adjustment made by Sears, event when in excess
of the sales price of the products or services in question, shall be conclusive
and binding upon Licensee. Licensee agrees to and supports Sears policy of
"Satisfaction Guaranteed or Your Money Bank" as it relates to customer
complaints and adjustments. Licensee shall maintain and make payable to Sears
files pertaining to customer complaints and their adjustment. Sears agrees to
promptly forward to Licensee information received by Sears with respect to
customer complaints to assist Licensee in its efforts to respond to customer
complaints in a timely manner.
11. (A) (ADVERTISING) - At Licensee's expense, Licensee shall advertise
and actively promote the Approved Products and services licensed by Sears under
this License Agreement. Prior to Licensee's use thereof, in connection with
this License Agreement, Licensee shall submit all signs and advertising copy,
including, but not limited to sales brochures, newspaper and yellow page
advertisements, radio and television commercials, all sales promotional plans
and devices, and all customer contract forms, warranty certificates and other
forms and materials, to Manager, Contractor Relations whose address is specified
in Paragraph 33, or to a designee, for approval. Licensee will not use any such
advertising materials or sales promotional plans or devices without such prior
approval.
(B) Sears shall have the right to disapprove any or all the forms,
materials, plans or devices which may be utilized with respect to Licensee's
operation hereunder insofar as they, in Sears opinion, do not properly use Sears
trademark, service mark or trade name; may subject Sears to liability, loss of
good will, or damage to Sears reputation or Sears customer relations; may fail
to adhere to the requirements of any Federal, State or local governmental rules,
regulations and laws; or may fail to conform to community or Sears standards of
good taste and honest dealing. Licensee agrees that it will use Sears name only
when communicating with customers or potential customers. Licensee agrees that
it will not use Sears name orally or in writing (including but not limited to
use as part of any letterhead) when communicating with persons or entities,
other than customers or potential customers. All references to selling
furnishing and installing or the entity that sells, furnishes and installs with
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<PAGE>
respect to licensee's operation hereunder shall be "Sold, Furnished and
installed by (NAME UNDER WHICH LICENSEE WILL CONDUCT SEARS BUSINESS), A Sears
Authorized Contractor or some facsimile thereof subject to Sears' prior written
approval. Licensee shall not represent the Approved Products and services
licensed by Sears hereunder as sold, furnished, or installed by Sears.
12. (PUBLICITY) - Licensee will not issue any publicity or press release
regarding its contractual relations with Sears hereunder or regarding Licensee's
activities hereunder without obtaining Sears' prior written approval and consent
to such releases from National Operations Manager; Sears, Roebuck and Co.;
D/610, D2 181B; 3333 Beverly Road; Hoffman Estates, Illinois 60179.
13. (GOOD WILL) - Licensee acknowledges that the commission rate
established in Paragraph 19(A) takes into consideration that all customer
information (including customer lists) as described in Paragraph 14(a) hereof
and good will generated by the operation under this License Agreement shall be
owned by Sears and inure completely to the benefit of Sears and that Licensee
has no right or interest in said customer information and good will.
14. (A) (CUSTOMER INFORMATION) - Any customer information (including
customer lists) developed by or acquired by Licensee, its employees or agents
from the operation of or from records generated as a result of this License
Agreement, during the term of this License Agreement or thereafter, are deemed
to be exclusively owned by Sears.
(B) (i) Licensee agrees not to use or permit the use of such customer
information in any manner except the performance of this License Agreement.
Licensee shall at all times maintain any such customer information physically
separate and distinct from any customer information Licensee may maintain that
is unrelated to this License Agreement.
(ii) Licensee shall not reproduce, release or in any way make
available or furnish, either directly or indirectly, to any person, firm,
corporation, association or organization at any time, any such customer
information which will or may be used to solicit sales or business from such
customers including but not limited to the type of sales or business covered by
this License Agreement.
(C) Licensee shall use its best efforts to protect all such customer
information from destruction, loss or theft during
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the term of this License Agreement and until all copies of such customer
information are delivered to Sears.
(D) Upon expiration or termination of this License Agreement, Licensee
shall immediately deliver all customer information to Sears at a mutually agreed
upon reproduction cost to be paid by Sears. Licensee, its officers, employees,
successors and assigns shall not use any such customer information to solicit
any such customers.
15. (TELEPHONE) - All telephone numbers used by Licensee to conduct
business hereunder shall be separate from telephone numbers used by Licensee in
its other business operations, and such telephone numbers used by Licensee
hereunder shall be deemed to be the property of Sears. Upon expiration or
termination of this License Agreement, Licensee shall immediately, upon demand
by Sears, cease to use such telephone numbers used by Licensee hereunder and
shall transfer such telephone numbers to Sears or to any party Sears designates.
Licensee shall immediately notify the telephone company of any such transfer and
Licensee shall use its best efforts to assist Sears in an orderly transfer.
16. (PURCHASES) - Licensee will not make any purchases and/or incur any
obligation or expense of any kind in the name of Sears. Licensee shall promptly
pay all the obligations of Licensee including those for labor and material.
Licensee will not allow a lien(s) to attach to a customer's property for failure
to pay such sums. In the event that Licensee causes a lien to be attached to a
customer's property, Licensee shall fully reimburse Sears and/or the customer
for all costs and expenses incurred to release said lien. Upon request by
Sears, Licensee shall furnish Sears with the names of all parties from whom
Licensee purchases merchandise for sale under this License Agreement, as well as
the names of all other parties with whom Licensee may have any business or
contractual relations in connection with the conduct of its business under this
License Agreement.
17. (LICENSES AND PERMITS) - Licensee, at its expense, shall obtain ALL
PERMITS AND LICENSES which may be required under any applicable Federal, State
or local law, ordinance, rule or regulation by virtue of any acts performed by
Licensee in the performance of this License Agreement. Licensee shall in the
conduct of said business and in the performance of this License Agreement comply
fully with all applicable Federal, State and local laws, ordinances, rules and
regulations, including, without limiting the forgoing, compliance with all rules
and regulations of the Federal Trade Commission.
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18. (FEES, TAXES) - Licensee, at is expense, shall pay and discharge all
license fees, business, use, sales, gross receipts, income, property or other
similar or different taxes or assessments which may be charged or levied upon
Licensee by reason of anything performed under this License Agreement,
excluding, however, all taxes and assessments applicable to Sears' income from
Sears Commission hereunder.
19. (A) (SEARS COMMISSION) - In consideration of the privilege herein
granted to Licensee to conduct and operate under the terms, provisions and
conditions of this License Agreement, Licensee, in addition to its other
undertakings herein, shall pay to Sears, and Sears shall be entitled to receive
from Licensee, a Commission (hereinafter called "Sears Commission") which shall
be a sum equal to thirteen percent (13%) of Gross Sales on all Door settlements
and a sum equal to eleven percent (11%) of Gross Sales on all other products.
Tearoff Roofing has a commission rate of zero percent (0%) in Diamond West
Region only. Insurance Repair Commission shall be at rate of six percent (6%)
as indicated on Exhibit A(iii), attached.
(i) The Sears Commission rate specified above is subject to any
modifications for specific markets that may be set forth in the exhibits to this
License Agreement.
(B) (GROSS SALES) - Licensee's said "Gross Sales" shall include all
services and materials provided to customers by Licensee which directly or
indirectly arise out of the operation hereunder including but not limited to
sales arising out of referrals, contacts, or recommendations obtained through
the operation. For purposes of calculating Sears Commission, Gross Sales shall
exclude sales tax and permit fees and documented third party permit acquisition
costs. Partial adjustments made as a result of customer complaints shall not
reduce Gross Sales. However, if subsequent to installation and settlement to
Sears, full refunds are made to customers for Approved Product sold by Licensee,
Sears agrees to return the applicable commission amount, for the product
returned or adjusted to the Licensee.
(C) (REFERRAL SERVICE FEE) - Licensee agrees to pay to Sears, Roebuck
and Co., in addition to the Sears Commission prescribed in Paragraph 19(A), a
Referral Service Fee of a minimum of one percent (1%) of the total Gross Sales
for each lead supplied by a Sears associate that results in a sale.
(i) Lead referrals may be supplied to Licensee directly by the
Sears associate, the HIPS Region Office or via the 1-800-44-SEARS MATRIXX line.
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(ii) Licensee will not make any payments directly to Sears
associates.
(iii) Licensee will maintain records in reasonable detail of all
referrals received by Sears. The records will contain the date; store number of
referral; the associate's (ID) number of the Sears associate making the
referral; the customer's name and address and the final disposition of the lead.
(iv) For referrals that results in a sale, Licensee on the last
settlement date of each month will submit the information required to be kept by
Sub-Paragraph (iii) above and a check made out to Sears, Roebuck and Co. for the
full amount of all Referral Service Fees owed for settlements processed during
the month. Payments of Referral Service Fees shall be made to the applicable
Sears HIPS Region Office(s).
20. (A) (SALES INFORMATION) - Weekly on a predetermined schedule that has
been established by Sears, Licensee shall report the amount of Gross Sales
completed during the period ending with the preceding day to the National
Operations Manager, Department 610 D2-181B, 3333 Beverly Road, Hoffman Estates,
Illinois 60179. Licensee shall transmit to Sears all customer and sales
information for transactions included in the funds transfer described in
Paragraph 21(B) via Sears approved electronic format. Further, Licensee shall
during the same transmission submit to Sears all information on customers who
allowed Licensee into their home to conduct a sales presentation but elected not
to purchase an Approved Product.
(B) (SALES RECEIPTS) - On the next business day after the transmission
of sales information described in Paragraph 20(A), Licensee shall deliver to the
applicable Sears HIPS Region Office(s), designated in Exhibit A, copies or
document images acceptable to Sears, all fully signed contracts of sale,
including changes or additions in said contracts, whether signed prior to or
during installation/application, all details of financing upon completion of all
financial arrangements for such sales, any signed waivers to rights of recision
and signed completion certificates relating to the sales that were reported.
21. (A) (SETTLEMENTS) - A settlement between the parties with respect to
the Sears Commission on Gross Sales reported in accordance with Paragraph 20
hereof shall be mae no later than the next business day after the transmission
of sales information on Gross Sales.
(B) (ELECTRONIC FUNDS TRANSFERS) - Such settlements shall be remitted
by ways of electronic funds transfer to a bank
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account designated by Sears for all cash and credit transactions completed
during the preceding week. Completion occurs when the job is installed/applied;
and
(i) Licensee receives cash payment from the customer, or,
(ii) Licensee receives funding from Sears for Sears credit
transactions; or,
(iii) Licensee receives customer acceptance of a job financed by
Licensee or by a third party.
(C) (CHECKS) - Any and all losses which may be sustained by reason of
nonpayment of checks accepted by Licensee in payment for sales under this
License Agreement shall be borne by Licensee, and Sears shall have no liability
with respect thereto. Checks accepted in payment for sales under this License
Agreement may be made payable to "Licensee Name" or "Sears/Licensee Name" as the
case may be, but shall be for the account of Licensee. In no case shall
customer checks be made payable solely to Sears, Roebuck, Co., Sears, or any
derivation thereof.
22. (A) (CREDIT SALES) - Licensee will comply with all provisions of
Federal or State laws governing credit sales, including but not limited to
provisions dealing with proper disclosures to customers, finance charges and the
like, with respect to credit sales or their solicitation and the right of
rescission.
(B) (SEARS CREDIT SALES) - The Sears Credit Addendum attached to this
License Agreement as Exhibit B, outlines requirements regarding the use of Sears
Credit and is herein incorporated and made a part of this License Agreement.
(C) (THIRD PARTY FINANCING) - Licensee will comply with all provisions
of Federal or State laws governing credit sales, including but not limited to
provisions dealing with proper disclosures to customers, finance charges, the
right of rescission, if applicable, and the like, with respect to credit sales
or their solicitation. Licensee may arrange for a customer purchase to be
financed by a financial institution. Such financial institution shall be
independent of and unrelated to Licensee. Licensee shall not sell directly on
credit unless otherwise provided for in this License Agreement. Any financial
institution which is a parent company, sister company or subsidiary of or
otherwise related to Licensee shall for the purpose of the License Agreement be
deemed the same as Licensee.
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<PAGE>
(D) (LICENSEE'S CREDIT SALES) - As an exception to 22(C) Licensee may
sell directly on credit, or through a company owned by the Licensee or its
stockholders ("Licensee's Finance Company") provided that Sears shall not be
responsible for or charged with any credit losses and further provided as
follows:
(i) consistent with Paragraph 11 hereof all credit documentation
used by Licensee or Licensee's Finance Company shall be submitted to Sears;
(ii) Licensee or Licensee's Finance company shall not commence or
cause to be commenced, any action to collect any obligations pursuant to this
License Agreement from a delinquent customer in the name of Sears or to
otherwise use the name of Sears in any collection or judicial enforcement action
to collect any such obligations;
(iii) Licensee or Licensee's Finance Company shall not commence
or cause to be commenced, any collection or judicial enforcement action against
any delinquent customer or during the pendency of any unresolved customer
complaint without thirty (30) days prior written notification.
(iv) Should Licensee or Licensee's Finance Company sell, transfer
or assign any customer's contract or negotiable instrument to any third party,
either Licensee or Licensee's Finance Company shall maintain all processing
rights, which shall include all rights to commence judicial enforcement against
any delinquent customer subject to notice requirements in paragraph 22(iii)
herein.
(v) Licensee or Licensee's Finance Company shall take no action
to foreclose or otherwise enforce any lien, whether arising by operation of law
or by recording, against the property of any customer unless Sears has been
notified in writing, a reasonable attempt at negotiating a mutually acceptable
resolution has been made and has been futile, and at least ninety (90) days have
elapsed since payment was due and remains unpaid.
23. (AUDIT RIGHT) - Licensee shall keep and maintain reports, books and
records which accurately reflect the sales and other operations of Licensee
under this License Agreement. Said reports, books and records shall be kept and
maintained according to consistently applied generally accepted accounting
practices. Sears reserves the right to review and audit Licensee's reports,
books, records and financial statements for both Sears related transactions as
well as all and any other transactions relating to any other business Licensee
may be engaged in involving the same and or similar product at any reasonable
time. Licensee
-14-
<PAGE>
agrees to provide Sears with a copy of its annual report annually within ninety
(90) days after the close of the Licensee's fiscal year. Such report shall be
certified by an accountant, or by the President/Owner of Licensee's business in
the event that no audit is performed. Such report shall include, but is not
limited to the profit and loss statement and balance sheet.
24. (A) (ASSIGNMENT, TRANSFER OR FRANCHISING) - The rights granted to
Licensee hereunder are unique and personal in nature, and neither this License
Agreement nor the Licensee granted therein may be assigned by Licensee
(including without limitation by operation of law) without Sears' prior written
consent, which may be withheld in Sears' sole discretion, but not unreasonably
denied. Notwithstanding the foregoing Licensee may transfer or assign the
rights and obligations granted hereunder:
(i) to an Affiliate controlled by Licensee, which Affiliate
agrees in writing to be bound to the terms of this Agreement; or
(ii) to another corporation or entity that is acquiring all or
substantially all of the assets of Licensee, provided that such surviving
corporation or entity
(a) agrees in writing to be bound by the terms of the
Agreement,
(b) shall be credit-worthy as evidenced by Certificate of
Confirmation by an investment firm selected by Sears at Licensee's expense and
with approval by Licensee or at Sears' sole discretion, and
(c) has and throughout the Term will have, no single
individual controlling stockholders.
(B) Any transfer or attempt to transfer hereof Licensee either
expressly or by operation of law without Sears' prior written consent, except
expressly permitted herein shall, at the option of Sears, without any notice
whatsoever, immediately terminate this License Agreement. The sale of
Licensee's business or any other transaction which shifts the rights or
liabilities of Licensee to another controlling interest shall be such a
transfer. Licensee shall not franchise, sub-license, assign in whole or in part
this License Agreement, or delegate any duties hereunder without Sears' prior
written consent; any such franchise, sub-license, assignment, or delegation of
duties by Licensee without such consent shall be null and void. The foregoing
notwithstanding, Licensee may utilize services of independent contractors with
respect to the installation or application of Approved Product.
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<PAGE>
25. (A) (DEFAULT) - Sears shall have the right to immediately terminate
this License Agreement without affecting any other rights or remedies if:
(i) Licensee does not have products and/or materials, which are
merchantable and conforming to specifications, ready for delivery and
installation in the quantities and at the time specified;
(ii) it should be alleged that any products and/or materials
infringe any patent, trade mark or copyright or were manufactured or were to be
sold in violation of any statute, ordinance or administrative order, rule or
regulation;
(iii) Licensee is negligent in the performance of its services;
(iv) Licensee shall refuse to furnish appropriate guarantees to
protect Sears as permitted by law, rule or regulation;
(v) any bankruptcy or insolvency proceedings should be commenced
by or against Licensee or a substantial part of the property of Licensee passes
into the hands of any receiver, assignee, officer of the law or creditor;
(vi) Licensee admits, in writing, its inability to pay its debts
as they become due;
(vii) Licensee vacates, abandons or ceases to operate under this
License Agreement;
(viii) Licensee otherwise fails to comply with any material
provision of this License Agreement and fails to cure such default after fifteen
(15) days' written notice from Sears; or
(ix) Licensee is in default of any other License Agreement with
Sears.
(B) Any transfer or attempt to transfer hereof Licensee either
expressly or by operation of law without Sears' prior written consent, except
expressly permitted herein shall, at the option of Sears, without any notice
whatsoever, immediately terminate this License Agreement. The sale of
Licensee's business or any other transaction which shifts the rights or
liabilities of Licensee to another controlling interest shall be such a
transfer. Licensee shall not franchise, sub-license, assign in whole or in part
this License Agreement, or delegate any duties hereunder without Sears' prior
written
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<PAGE>
consent; any such franchise; sub-license, assignment, or delegation of duties by
Licensee without such consent shall be null and void. The foregoing
notwithstanding, Licensee may utilize services of independent contractors with
respect to the installation or application of Approved Product.
26. (A) (MUTUAL TERMINATION) - This Agreement may be terminated after the
first two years of the Term, without any penalty or other liability, by either
Sears of Licensee, by providing written notice to the other not less than twelve
(12) months prior to the proposed termination date. If termination occurs
pursuant to this subsection, Sears may, by providing written notice not less
than six (6) months prior to the date of termination, require Licensee to
continue to operate under the License Agreement for a Wind Down Period as
described in Paragraph 2B and C.
(B) In the event that Sears in its sole discretion terminates this
Agreement and gives Licensee notice of termination as provided for in this
Agreement, Licensee acknowledges and agrees that:
(i) such termination by Sears was entirely contemplated by Sears
and Licensee and was within the spirit of negotiations between them for the
licenses granted hereunder prior to, and at the time of, the execution of this
Agreement by the parties;
(ii) the provisions of this paragraph are equitable and non-
oppressive to Licensee;
(iii) Sears has advised Licensee prior to the execution of this
Agreement that they have the right to obtain independent legal advice and that
by the execution of this Agreement that they have either obtained such advice or
have waived the right to such advice; and
(iv) Sears will have no liability to Licensee for any
disengagement or termination costs. Without limiting the generality of the
foregoing, Licensee will assume, to the complete exoneration of Sears, all costs
and expenses relating to administration, overhead, employees' wages and all
other costs relating to severance, pensions, unemployment insurance, employer-
employee contracts and or Service Associate Agreements and Licenses will
indemnify Sears from any and all claims or actions arising therefrom and costs
thereof.
(C) (FURTHER OBLIGATIONS) - After the termination of this License
Agreement by expiration of time or otherwise, Licensee shall have no right or
interest in future contracts with
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<PAGE>
Sears relating to any operation similar to that under this License Agreement,
and Sears may, without incurring any liability to Licensee:
(i) enter into License Agreement for the operation of a similar
business with any person or entity Sears chooses, including, but not limited to,
Licensee or any of Licensee's counterparts,
(ii) directly operate a similar business itself,
(iii) terminate the operation of the business.
(D) (SURVIVAL OF OBLIGATIONS) - No termination of this License
Agreement by expiration of time or otherwise, shall relieve the parties of
liability for obligations arising out of the operation of the Licensee's
business before termination.
27. (A) (INDEMNIFICATION) - Licensee agrees that it will protect, defend,
hold harmless and indemnify Sears, its successors, assigns, directors, officers
and employees, and their respective heirs and representatives from and against
any and all claims, demands, actions, liabilities, damages, losses, fines,
penalties, costs and expenses (including attorneys' fees) of any kind whatsoever
(including without limitation of the foregoing, those relating to actual or
alleged death of or injury to person and damage to property), actually or
allegedly, directly or indirectly, arising or resulting from or connected with:
(i) Licensee's performance or failure of performance of this
License Agreement;
(ii) Licensee carrying out its functions hereunder including, but
not limited to, all allegations that the products, materials and/or services
prepared by, or distributed by or through Licensee constitute:
(a) libel, slander and/or defamation;
(b) trademark, infringement or dilution, unfair competition
or infringement of any statutory copyright, common law right, title or slogan;
(c) piracy, plagiarism, the misappropriation of another's
ideas or unfair competition; and/or
(d) invasion of rights of privacy or rights of publicity;
-18-
<PAGE>
(iii) any actual or alleged defect in such products and/or
materials, whether latent or patent, including actual or alleged improper
construction or design of such products and/or materials or the failure of such
products and/or materials to comply with specifications or with any express or
implied warranties of Licensee;
(iv) Licensee's assembly or installation of products and/or
materials covered by this License Agreement;
(v) all purchases, contracts, debts and/or obligations made by
Licensee;
(vi) any third party financing utilized by Licensee in connection
with this License Agreement;
(vii) the omission or commission of any act, lawful or unlawful,
by Licensee or of any of Licensee's agents or employees, whether or not such act
is within the scope of administrative order, rule or regulation;
(viii) the failure of Licensee or this License Agreement to
comply with or any actual or alleged violation of any applicable law, statute,
ordinance, governmental administrative order, rule or regulation;
(ix) inquiries and/or investigations of any governmental agency;
(x) the failure of Licensee to comply with any provision of this
License Agreement;
(B) Notwithstanding anything contained in the foregoing, Licensee
shall not be liable for damage to third parties which is solely caused by the
negligence of Sears.
28. (A) (INSURANCE) - Licensee, at its expense, shall obtain and maintain
during the term of this License Agreement the following policies of insurance
with insurers rated at least A VIII or better by A.M. Best Company that are
satisfactory to Sears and containing provisions and being in amounts
satisfactory to Sears and adequate to fully protect Sears as well as Licensee
from and against any and all expenses, costs, demands, claims, actions,
liabilities, damages and losses arising out of the subjects covered by such
policies of insurance:
(i) Workers' Compensation and Employer's Liability Insurance
providing statutory benefits under Workers' Compensation portion and limits of
not less than $100,000 under the Employer's Liability portion.
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<PAGE>
(ii) General Liability Insurance, including but not limited to
Product Liability coverage, Completed Operations coverage, A CONTRACTUAL
LIABILITY ENFORCEMENT SPECIFICALLY COVERING LICENSEE'S INDEMNIFICATION OF SEARS
under this License Agreement, and Independent Contractors coverage where
subcontractors are used, with limits of liability of not less than $250,000 per
person and $500,000 per occurrence for bodily injury and $100,000 for property
damage or combined single limit not less than $500,000 per occurrence.
(iii) Motor Vehicle Liability Insurance with an Employer's
Nonownership Liability Endorsement in Licensee's name covering all vehicles used
in connection with Licensee's business hereunder with limits of not less than
$250,000 per person and $500,000 per accident for bodily injury and $100,000 for
property damage or combined single limit not less than $500,000 per occurrence.
(B) Each policy obtained by Licensee shall expressly provide that it
shall not be subject to change or cancellation without at least thirty (30) days
prior written notice to Sears. Licensee shall furnish Sears with copies of the
policies required to be maintained by Licensee by Paragraphs 28(A)(i), (ii) and
(iii) or certificates thereof concurrently with the execution and delivery of
this License Agreement. In order to avoid conflicts between insurance
companies, Licensee shall use its best efforts to have all policies of insurance
obtained by Licensee issued by one (1) insurance company.
(C) Any acceptance by Sears of any insurance policies shall not
relieve Licensee of any responsibility hereunder including, but not limited to,
claims in excess of limits described above.
29. (QUOTATIONS, ORDERS) - All quotations for Licensee's service made to
customer by Licensee shall be in writing, or by telephone authorization from the
customer where applicable, and such service shall be performed only upon receipt
of a written order signed by such customer. The content of the forms used for
making quotations and for taking orders shall be satisfactory to both parties.
Licensee shall not charge customer for estimates or proposals except for repair
estimates, which charges will be reimbursed to the customer upon purchase of the
service being estimated.
30. (REMEDIES CUMULATIVE) - It is agreed that the rights and remedies
herein provided in case of any default or breach by either party of this License
Agreement are cumulative and shall not affect in any manner any other remedies
that the other party nay have by reason of such default or breach by Licensee.
The
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<PAGE>
exercise of any right or remedy herein provided shall be without prejudice to
the right to exercise any other right or remedy provided herein by law, or by
equity.
31. (WAIVER) - No waiver of any right or remedy allowed hereunder shall be
implied by the failure to enforce any such right or remedy. No express waiver
shall affect any such right or remedy other than that to which the waiver is
applicable and only for that occurrence.
32. (PRICES) - Nothing contained in this License Agreement shall be
construed as giving Sears any right or power to effect or control the prices at
which services or products shall be offered hereunder, said right and power
being retained by Licensee.
33. (NOTICES) - All notices herein provided for or which may be given in
connection with this License Agreement shall be in writing and given by
certified or registered mail with postage prepaid and return receipt requested
or overnight courier or personal delivery. If any such notice be given by
Licensee to Sears, it shall be addressed to:
SEARS, ROEBUCK AND CO.
Attention: National Operations Manager
Department 610, D@ 181B
3333 Beverly Road
Hoffman Estate, Illinois 60179
and if given by Sears to Licensee, such notice shall be addressed to:
DIAMOND EXTERIORS, INC.
Donald Griffin
222 Church Street
Woodstock, Illinois 60098
and such notices if so sent by mail shall be deemed to have been given when
deposited in the mail.
34. (ILLEGAL PROVISION) - If any provision in this License Agreement shall
be held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of this
License Agreement and this License Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been included.
35. (REPRESENTATIONS TO LICENSEE) - It is understood that no promises or
representations whatsoever have been made as to the potential amount of business
Licensee can expect at any time
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<PAGE>
during the term of this License Agreement. Licensee represents and warrants
that Licensee is solely responsible for any expense(s) incurred related to this
License Agreement and agrees that Sears shall not be obligated for any
expense(s) incurred by Licensee in connection with any increase in the number of
Licensee's employees or expenditures made by Licensee for additional facilities
or equipment.
36. (A) (STRICT CONFIDENCE) - Licensee agrees to hold in strict confidence
and will not utilize otherwise than in connection with the performance of its
obligations under this License Agreement all information with respect to Sears
operations, plans and programs furnished by Sears or which become known to
Licensee because of products, materials and/or services rendered under this
License Agreement by Licensee. Sears agrees to hold in strict confidence and
shall not utilize, except with Licensee's written permission or in connection
with the performance of Sears' obligations under this License Agreement, any
information with respect to Licensee's operation, plans or programs furnished by
Licensee or which become known to Sears because of services rendered under this
License Agreement, including, but not limited to, Licensee's pitch books and
training materials, except as disclosure thereof is required by law or
regulation or otherwise permitted by this License Agreement.
(B) (INJUNCTIVE RELIEF) - Licensee expressly recognizes that
irreparable injury would be caused to Sears by any unauthorized use of
confidential information and agrees that preliminary or permanent injunctive
relief would be appropriate in the event of breach of this Paragraph. Sears
recognizes that irreparable injury could be caused to Licensee by any
unauthorized use of confidential information and agrees that preliminary or
permanent injunctive relief would be appropriate in the event of breach of this
Paragraph by Sears.
37. (COMPLETION OF OUTSTANDING ORDERS) - In the event this License
Agreement is terminated or expires and if request in writing by Sears, Licensee
shall faithfully and promptly fulfill all orders received from customers prior
to the effective date of such termination or expiration consistent with the
provisions of this License Agreement.
38. (PARAGRAPH TITLES) - The Paragraph titles in this License Agreement
have been placed thereon for the mere convenience of the parties, and shall not
be considered in any construction or interpretation of this License Agreement.
39. (A) (AGREEMENT SUPERSEDES) - This License Agreement supersedes the
License Agreement made and entered into as of
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<PAGE>
March 1, 1995, by and between Sears as Licensor and DIAMOND EXTERIORS, INC., as
Licensee, which said License Agreement as the same may have been supplemented
and/or amended from time to time, is herein called the "Superseded License
Agreement".
(B) Said Superseded License Agreement shall be deemed terminated as of
the close of business on December 31, 1995, provided, however, that Licensee
hereunder hereby assumes any and all obligations of Licensee under said
Superseded License Agreement arising out of the operation thereunder prior to
the termination of said Superseded License Agreement.
40. (GOVERNING LAW) - This License Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois without giving
effect to the principles of choice of laws of any state.
41. (ENTIRE AGREEMENT) - This License Agreement sets forth the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof. This License Agreement shall not be supplemented,
modified or amended except by a written instrument signed by Licensee (or by a
duly authorized officer if Licensee is a corporation) and by a duly authorized
officer or agent of Sears, and no person has or shall have the authority to
supplement, modify or amend this License Agreement in any other manner.
IN WITNESS WHEREOF, the parties hereto have caused this License Agreement
to be executed as of the day and year first above written by their proper
officers or agents duly authorized thereunto.
SEARS, ROEBUCK AND CO.
/s/ Don Stefanik /s/ Denise A. Woods
- ----------------------------------- ---------------------------------------
Don Stefanik Denise A. Woods
National Product Manager National Operations Manager
/s/ Patrick J. Cronin
- -----------------------------------
Patrick J. Cronin
National Product Manager
DIAMOND EXTERIORS, INC.
/s/ Rodger Ibach By /s/ Donald Griffin
- ----------------------------------- -------------------------------------
Rodger Ibach Donald Griffin
President C.E.O.
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<PAGE>
January 1, 1996
DIAMOND EXTERIORS, INC.
Exhibit A(i)
The products/services listed in Paragraph 3 of the Amendment Agreement are more
specifically designated on the following pages of this exhibit:
<TABLE>
<CAPTION>
ITEM NO. OF
PRODUCT/SERVICES NUMBER PAGES
<S> <C> <C>
ROOFING
Asphalt Shingles 30500 2
Red Cedar Shingle and Shake Roofing 30500 1
Aluminum/Metal Roofing 30500 3
Concrete Tile 30500 1
Single Ply Roofing 30500 2
Built-up Roofing 30500 1
TEAROFF ROOF 30999 None
ROOF VENTILATION ACCESSORIES None None
INSULATION 35701 2
SKYLIGHTS 30500 1
CONTINUOUS GUTTER 34511 2
Overhang and Trim (soffit and facia only) 18517 2
Siding of Dormers/Gable Ends 18517 2
Chimney Repair 30509 1
ROOF REPAIR
MOBILE HOME ROOFOVERS
Mobile Home Roofovers (Interlocking Panel) 30512 6
Mobile Home Roofovers (Continuous Coil) 30512 4
DOORS
Entry Wood/Steel Doors 50430 5
Patio/Patio Storm Doors 50430 3
Security Doors 50430 2
Storm Doors 50430 2
GARAGE DOOR REPAIR 51409 2
GARAGE DOORS 51420 2
Garage Door Openers 51425 None
FENCING 31121 7
</TABLE>
A(i)-1
<PAGE>
January 1, 1996
DIAMOND EXTERIORS, INC.
Exhibit A(i)
The Market Area referred to in paragraph 1 of the License Agreement is defined
as all states excluding Alaska, Montana, North Dakota, South Dakota, Wyoming and
Hawaii for all products and services. Fencing exceptions listed separately in
this Exhibit A(i), Roof Repair, Garage Door Repair and Tearoff Roofing
exceptions listed separately in Exhibit A(ii).
PRODUCT/SERVICES
Roof and Garage Door Repair
The following table identifies the EXCEPTIONS market areas, referenced in
Paragraph 1 of the License Agreement, in which Licensee MAY NOT OFFER the above
product in Sears name.
STATE MARKET AREA SCFs
CALIFORNIA except the following: 920,921, 922, 932, 933, 934
936, 937, 945 thru 949
954, 955, 960
ILLINOIS 600 thru 606
(Lake, Cook and DuPage only)
INDIANA 463, 464
KANSAS 660 thru 662
MISSOURI 630, 631, 640, 641
PENNSYLVANIA 189, 190, 191, 194
WISCONSIN 530 thru 534, 535, 537
A(i)-2
<PAGE>
January 1, 1996
DIAMOND EXTERIORS, INC.
Exhibit A(i)
PRODUCT/SERVICES
Tearoff Roofing
The following table identifies the Market Areas, referenced in Paragraph 1 of
the License Agreement, in which Licensee MAY OFFER the above product in Sears
name.
STATE MARKET AREA SCFs
ARIZONA All
CALIFORNIA All
IDAHO 836 thru 836 only
NEVADA All
NEW MEXICO All
OREGON All
TEXAS 798, 799 only
UTAH All
WASHINGTON All
PRODUCT/SERVICES
Fencing - Wood and Chain Link
The following table identifies the EXCEPTIONS in the market area, referenced in
Paragraph 1 of the License Agreement, in which Licensee MAY NOT OFFER the above
product in Sears name.
STATE MARKET AREA SCFs
GEORGIA 300 thru 303, 305, 306
HAWAII Entire State
MAINE Entire State
NEW HAMPSHIRE 038
A(i)-3
<PAGE>
EXHIBIT B
SEARS CREDIT ADDENDUM TO LICENSE AGREEMENT
THIS ADDENDUM is made and entered into as of the 1st day of January, 1996,
by and between SEARS, ROEBUCK AND CO., a New York Corporation (hereinafter
referred to as "Sears") and DIAMOND EXTERIORS, INC., a Delaware corporation
(hereinafter referred to as "Licensee"), which said parties in consideration of
the mutual covenants and promises contained herein, hereby mutually agree as
follows:
REFERENCE is made to the License Agreement made and entered into as of the
1st day of January, 1996, and any and all amendments, modifications and/or
supplements thereto, by and between Sears and Licensee (hereinafter referred to
as the "License Agreement"), whereby Sears granted to Licensee the privilege of
conducting and operating, and Licensee agreed to conduct and operate, pursuant
to the terms, provisions and conditions contained in the License Agreement, a
business of selling, furnishing and installing certain Sears approved products
and services in designated Sears Market Area.
1. DEFINITIONS
A. "ACCOUNT" - means an account resulting from the issuance of Seas HIPS
Credit Account or a Sears Credit Card. Each Account shall be owned
by, and deemed to be the property of Sears.
B. "AFFILIATE" - means any entity that is owned by, owns or is under
common control with Sears or its ultimate pare.
C. "APPLICABLE LAW" - means collectively or individually any applicable
law, rule, regulation or judicial, governmental administrative order,
decree, ruling, opinion or interpretation.
D. "AUTHORIZATION" - means permission from Sears to make a Credit Sale.
E. "AUTHORIZATION CENTER" - means the facility designated by Sears as the
facility at which Credit Sales are authorized.
F. "CREDIT CARD" - means the private label credit card or other
proprietary credit device bearing Sears name and/or logo issued by
Sears or Sears National Bank.
B-1
<PAGE>
G. "CUSTOMER" - means (i) the individual in whose name an Account is
opened, and (ii) any other authorized users of an Account and/or
Credit Card.
H. "APPROVED PRODUCTS" - means the goods and services and related
services, described in Paragraph 2A below, sold by Licensee in the
ordinary course of Licensee's business pursuant to the License
Agreement.
I. "CREDIT SALE" - means any sale of Approved Products that Licensee
makes to a Customer pursuant to this Addendum and the License
Agreement that is charged to an Account.
J. "CREDIT SALES TICKET" - means evidence of a Credit Sale in a paper
form for Approved Products purchased from Licensee.
K. "CREDIT SLIP" - means evidence of a credit to an Account in a paper
form for Approved Products returned to Licensee or for any other
adjustment to an account.
L. "PROGRAM" - means the Sears Credit program associated with Licensee
whereby Accounts will be established and maintained by Sears, Credit
Cards will be used by Customers purchasing Approved Products from
Licensee and Credit Sales will be authorized and settled, all pursuant
to the terms of this Addendum.
M. "CHARGEBACK" - means the return to Licensee and reimbursement to Sears
of a Credit Sales Transaction for which Licensee was previously paid.
N. "TERMINAL" - means an electronic terminal or computer capable of
communicating by means of an on-line or dial electronic link with an
Authorization Center.
O. "NET SALES" - means gross Credit Sales less returns and/or
adjustments.
2. A. SCOPE AND PURPOSE. Licensee engages in the sale of Sears Approved
Products and services pursuant to the License Agreement and Licensee
and Sears desire to make credit available to Customers purchasing such
Approved Products from Licensee. Sears, a retailer in the business of
providing credit pursuant to a Credit Card or Account, has agreed to
provide such credit to qualified customers purchasing Licensee's
Approved Products pursuant to this Addendum and the License Agreement.
B-2
<PAGE>
B. CREDIT REVIEW; OWNERSHIP OF ACCOUNTS. All completed applications for
Accounts submitted by Licensee to Sears will be processed and approved
or decline within two (2) business days in accordance with Sears
credit criteria and procedures which may be modified from time to
time. Licensee shall submit to Sears a minimum of seventy-five
percent (75%) of Licensee's total dollar volume applications for
credit. Such applications shall be randomly selected and submitted to
Sears. Sears shall have and retain all rights to approve or decline
such applications. If Sears declines any application, such
application shall be returned to Licensee and Licensee at its own
discretion may provide credit to the applicant or seek a third party
provider to provide credit to the applicant. Sears shall have no
interest in any such credit accounts established by Licensee or a
third party credit provider. If Sears accepts such applications,
Sears shall own the Accounts and shall bear the credit risk for such
Accounts, except as otherwise provided by the License Agreement or
this Addendum. Licensee acknowledges and agrees that, Licensee shall
have no interest whatsoever in said Accounts.
3. FINANCE CHARGE.
A. FINANCE CHARGE. Sears shall establish the rate of finance charge on
the Accounts in accordance with federal and state laws. Sears may
from time to time modify those rates pursuant to Sears' discretion and
within the parameters of the applicable federal and state laws.
B. PARTICIPATION FEE. Sears has agreed to pay Licensee a "Participation
Fee" based upon Credit Card Sales obtained by Licensee pursuant to
this Addendum. The Participation Fee paid by Sears to Licensee during
the term of this Addendum, shall be paid in accordance with the terms
and conditions set forth in Schedule "A"-Rates (attached hereto and
incorporated herein). The Participation Fee shall be paid based upon
Net Sales. Any further Sears obligation under this Paragraph relating
to payment of said Participation Fees would terminate upon the
effective date of the expiration or termination of this Addendum or
the License Agreement.
C. TERMINATION OF PARTICIPATION FEES. Notwithstanding the above, in the
event this Addendum of the License Agreement is: (i) not renewed or
expires; (ii) terminated by Licensee for any reason; (iii) terminated
B-3
<PAGE>
by Sears for cause; Sears; obligation under this Paragraph to pay any
Participation fees to Licensee shall Automatically terminate upon the
effective date of expiration or termination of this Addendum or the
License Agreement is terminated by Sears without cause, Sears agrees
to pay Licensee a lump sum payment, within sixty (60) days of the
effective termination date pursuant to the following guidelines:
(i) If Licensee has at least one (1) full year but less than two
years continued participation in the Program, Licensee shall
receive forty percent (40%) of the Participation Fees that would
have been due Licensee for the next twelve (12) months
immediately succeeding Sears' effective termination date of the
License Agreement without cause; or
(ii) If Licensee has at least two (2) full years but less than three
years continued participation in the Program, Licensee shall
receive forty percent (40%) of the Participation Fee that would
have been due Licensee for the next twenty-four (24) months
immediately succeeding Sears' effective termination of the date
License Agreement without cause; or
(iii) If Licensee has three (3) full years or more of continued
participation in the Program, Licensee shall receive forty
percent (40%) of the Participation Fees that would have been due
Licensee for the next thirty-six (36) months immediately
succeeding Sears' effective termination date of the License
Agreement without cause.
4. LICENSEE RESPONSIBILITIES CONCERNING CONSUMER TRANSACTIONS. Licensee
covenants and agrees that Licensee shall:
A. Honor all valid Sears Credit Cards without discrimination, when
properly presented by Customers for payment of Approved Products.
B. Not require, through an increase in price or otherwise, any Customer
to pay any surcharge at the time of sale or any part of any charge
imposed by Sears on Licensee.
C. Not establish minimum or maximum charge amounts without Sears prior
written approval.
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D. With respect to applications for a Credit Card or an Account:
(i) make sure all information requested on the application is
complete and legible;
(ii) obtain the signature on the application of all persons whose
name will appear on the Account or will be responsible for the
Account;
(iii) give the applicant the initial disclosure and a copy of the
Account Agreement at the time of signing the
application/agreement prior to a Credit Sales Transaction
under the Account;
(iv) verify the identification of the individual(s) applying for the
Account, which verification may include driver's license and
social security numbers;
(v) provide all information required by Sears from time to time for
approval of applications by telephone or other electronic
transmission and legibly insert the Account number and Approval
number on the application in the designated area; and
(vi) send the actual original approved signed application to Sears at
Sears, Roebuck and co., HIPS Credit Center, P.O. Box 3700, Des
Moines, Iowa 50321.
E. With respect to Credit Sales Transactions:
(i) Enter legibly on a single Credit Sales tick prior to obtaining
the Customer's signature (1) a description of all Approved
Products purchased in the same transaction in default sufficient
to identify the transaction; (2) the date of the transaction; (3)
the Authorization number; and (4) the entire amount due for the
transaction (including applicable taxes);
(ii) REQUEST AUTHORIZATION FROM SEARS AUTHORIZATION CENTER UNDER ALL
CIRCUMSTANCES. Sears may refuse to accept or fund any Credit
Sale that is presented to Sears for payment more than one hundred
twenty (12) days after the date of Authorization of the Credit
Sale. Licensee agrees not to divide a single transaction between
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two or more Credit Sales or between a Sears Credit Sale and a
sales slip for other credit provider. If Authorization is
granted, legibly enter Authorization number in the designated
area on the Credit Sales Ticket. If Authorization is denied, do
not complete transaction and follow any instructions from the
Authorization Center.
(iii)Imprint legibly on the Credit Sales Ticket the embossed legends
from the Credit Card plate or if the transaction is to be
completed without a Card imprint, then enter legibly on the
Credit Sales Ticket sufficient information to identify the
Customer and Licensee, including at least, Licensee's name and
address, Customer's name, Account number, expiration date and any
effective date on the Credit Card.
(iv) Check the effective date, if any, and the expiration date on the
Credit Card.
(v) Obtain the signature of the Customer on the Credit Sales Ticket,
and compare the signature on the Credit Sales Ticket with
signature panel of the Credit Card and if identification is
uncertain or if Licensee otherwise questions the validity of the
Credit Card, contact Sears Authorization Center for instructions.
(vi) Not present the Credit Sales to Sears for funding until all
Approved Products are delivered and all the services performed to
the Customer's satisfaction. If the Credit Sale is canceled,
rescinded, or the Approved Products canceled or returned, then
the Credit Sale is subject to a Chargeback.
(vii)Deliver a true and complete copy of the Credit Sales Ticket to
the Customer at the time of sale or delivery of the Merchandise.
F. CREDIT SALES. If the Approved Products are returned or, any Credit
Sale is terminated or canceled, or Licensee allows any price
adjustments, then Licensee shall not make any cash refund directly to
the customer, but shall complete and deliver promptly to Sears a
Credit Slip evidencing the refund or adjustment and deliver to the
Customer a true and complete copy of the Credit Slip at the time the
refund or adjustment is made. Licensee shall sign and date each
Credit Slip
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and include thereon a brief description of the approved Products
returned, services terminated or canceled, refund or adjustment made,
the date of the original Credit Sales Ticket, Authorization number,
Customer's name, address and Account number, and the date and amount
of the credit, all in sufficient detail to identify the transaction.
Licensee shall imprint or legibly reproduce on each Credit Slip the
embossed legends from the Card. The amount of the Credit Slip cannot
exceed the amount of the original transaction as reflected on the
original Credit Sales Ticket. Licensee shall issue Credit Slips only
in connection with previous bona fide Credit Sales and only as
permitted hereunder.
G. Licensee shall neither receive any payments from a Customer for
charges included on any Credit Sale resulting from the use of any Card
nor receive any payments from a Customer to prepare and present a
Credit Sale for the purpose of effecting a deposit in the Customer's
Account.
H. RIGHT OF FIRST REFUSAL. Licensee shall actively promote the Program
and submit a minimum of seventy-five percent (75%) of Licensee's total
dollar volume of credit applications to Sears. All such applications
declined by Sears shall be returned to Licensee and Licensee at its
own discretion may provide credit to the applicant or seek a third
party provider to provide credit.
I. Satisfy all other requirements designated in the License Agreement or
as may be required from time to time by Sears. In the event there is
any inconsistency between the License Agreement and this Addendum,
this Addendum shall govern unless otherwise expressly indicated by
Sears in any License Agreement.
J. IN-HOME SALES. Licensee shall deliver to the consumers all
appropriate right of recision notices required by Applicable Law in
accordance with Applicable Laws. Sears has no obligation to fund any
Credit Sale until the applicable recision period has expired.
5. LICENSEE REPRESENTATIONS AND WARRANTIES. Licensee represents and warrants
to Sears as of the Effective Date and throughout the term of this Addendum
the following:
A. That each Credit Sale will arise out of a bona fide sale of Approved
Products by Licensee and will not
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involve the use of the Credit Card for any other purpose.
B. That each Credit Sale will be to a consumer for person, family, or
household purposes.
C. That Customer applications will be available to the public (i) without
regard to race, color, religion, national origin, sex, martial status,
or age (provided the applicant has the capacity to enter into binding
contract) and (ii) not in any manner which would discriminate against
an discourage an applicant from applying for the Credit Card.
D. That it has full corporate power and authority to enter into this
Addendum; that all corporate action required under any organization
documents to make this Addendum binding and valid upon Licensee
according to its terms has been taken.
E. Neither (i) the execution, delivery and performance of this Addendum,
nor (ii) the consummation of the transaction contemplated hereby will
constitute a violation of law or a violation or default by Licensee
under its articles or incorporation, bylaws or any organization
documents, or any material agreement or contract and no authorization
or any governmental authority is required in connection with the
performance by Licensee of its obligations hereunder.
F. Licensee has and will obtain all required licenses to perform it's
obligations under this Addendum.
G. Customer has not rescinded the Credit Sale.
6. CHARGEBACKS TO LICENSEE. Licensee agrees as follows:
A. CHARGEBACKS. Any Credit Sale is subject to Chargeback by Sears under
any one or more of the following circumstances, and thereupon the
provisions of Section 6.B. below shall apply:
(i) In the event Sears cannot collect on an account because the
application or any information on the application or the Credit
Sales Ticket or any required information on the Credit Slip (such
as the account number, expiration date of the Credit Card,
description of Approved Products purchased, transaction amount
and date) is illegible or incomplete, or the Credit Sale or
application is
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not executed by the Customer, or Authorization is not obtained
from Sears Authorization Center, or valid Authorization number is
not correctly and legibly entered on the Credit Sales Ticket, or
the Credit Sales Ticket is duplicate of an item previously paid,
or the price of the Approved Products shown on the Credit Sales
Ticket differs from the amount shown on the Customer's copy of
the Credit Sales Ticket;
(ii) Sears determines that (1) Licensee has breached or failed to
satisfy, any term, condition, covenant, warranty, or other
provision of this Addendum, including, without limitation,
Paragraphs 4 and 5 above, or of the License Agreement, in
connection with a Credit Sale or the transaction to which it
relates, or an application for a Credit Card or the opening of
any Account; or (2) the Credit Sale, application/agreement or
Credit Sale is fraudulent or is subject to any claim of
illegality, conciliation, rescission, avoidance or offset for any
reasons whatsoever, including, without limitation, negligence,
fraud, misrepresentation, or dishonesty on the part of the
customer or Licensee or its agents, employees, licensees, or
franchisees, or that the related transaction is not a bona fide
transaction in Licensee's ordinary course of business;
(iii)The Customer disputes or denies in writing the Credit Sale or the
Credit Card transaction, the execution of the Credit Sale or
application/agreement, or the delivery, quality, or performance
of the goods, services or warranties purchased, or the Customer
has not authorized the Credit Sale, or that a credit adjustment
was issued by Licensee but not posted to the Account; or
(iv) In the event Sears cannot collect on an Account because Licensee
fails to deliver to Sears the Credit Sales Ticket, application or
other records of the Credit Sales Transaction within the times
required in this Addendum.
B. RESOLUTION AND PAYMENT. Licensee is required to resolve any dispute
or other of the circumstances described above in (A) of this Paragraph
6 to Sears
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satisfaction within thirty (30) days (or written reasonable time
period based upon the facts) of notice of Chargeback or Licensee shall
pay to Sears the full amount of each such Credit Sale subject to
Chargeback or the portion thereof designated by Sears, as the case may
be, plus any related finance charges paid by Sears to customers, any
attorney fees incurred by Sears, and other fees and charges provided
for in the Customer agreement. Upon chargeback to Licensee of a
Credit Sale, Licensee shall bear all liability and risk of loss
associated with such Credit Sale or Account, or the applicable portion
thereof, without warranty by, or recourse, or liability to, Sears.
Sears may deduct amounts owed to Sears under this Paragraph from any
amount owed to Sears under this Addendum.
C. The terms and provisions of Paragraph 6 shall survive the termination
of this Addendum.
7. TAPE OR ELECTRONIC TRANSMISSION & RECORDS. Data, records and information
shall be transmitted and maintained as described below.
A. TRANSMISSION OF DATA. In addition to depositing paper Credit Sales
Tickets or document images with Sears, Licensee shall transmit to
Sears, by electronic transmission, document images or other form of
transmission designated by Sears all data required by this Addendum to
appear on Credit Sales Tickets. All data transmitted shall be in a
medium, form and format designated by Sears and shall be presorted
according to Sears instructions. Any errors in such data or in its
transmission shall be the sole responsibility of Licensee.
B. RECEIPT OF TRANSMISSION. Upon successful receipt of any transmission
of Credit Sales data, Sears shall accept such transmission and pay
Licensee in accordance with this Addendum, subject to subsequent
review and verification by Sears and to all other rights of Sears and
obligations of Licensee as set forth in this Addendum. If data
transmission is by tape, Licensee agrees to deliver upon demand by
Sears a duplicate tape of any prior tape transmission, if such demand
is made within forty-five (45) calendar days of the original
transmission.
C. RECORDS. Licensee shall maintain the actual paper or document images
of Credit Sales Ticket and other records pertaining to any transaction
covered by this
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Addendum for such time and in such manner as Sears or any law or
regulation may require, but in no event less than two (2) years after
the date Licensee transmits each Credit Sale transaction data to Sears
and Licensee shall make and retain for at least seven (7) years
legible documents, microfilm or other legally admissible images copies
of both sides of such actual paper Credit Sales Tickets or other
transaction records. Within fourteen (14) days, or such earlier time
as may be required by Sears, of receipt of Sears request, Licensee
shall provide to Sears the actual paper Credit Sales Ticket or other
transaction records, and any other documentary evidence available to
Licensee and reasonably requested by Sears to meet its obligations
under law (including its obligations under the Fair Credit Billing
Act) or otherwise to respond to questions, complaints, lawsuits,
counterclaims or claims concerning Accounts or request from Customers,
or to enforce any rights Sears may have against a Customer, including,
without limitation, litigation by or against Sears, collection efforts
and bankruptcy proceedings, or for any other reason.
Promptly upon termination of this Addendum or upon the request of
Sears, Licensee will provide Sears with all original and microfilm
copies of documents required to be retained under this Addendum.
8. PAYMENTS BY CUSTOMER AND ENDORSEMENT. Licensee agrees that Sears has the
sole right to receive payments on any Credit Sales funded by Sears. Unless
specifically authorized in writing by Sears, Licensee agrees not to make
any collections on any such Credit Sale. Licensee agrees to hold in trust
for Sears any payment received by Licensee of all or part of the amount of
any such Credit Sale and to deliver promptly the same in kind to Sears
together with the Customer's name, Account number, and any correspondence
accompanying the payment within five (5) days of receipt by Licensee.
Licensee agrees that Licensee shall be deemed to have endorsed any Credit
Sale, Customer payments by check, money order, or other instrument made
payable to Licensee that a Customer presents to Sears in Sears favor, and
Licensee hereby authorizes Sears to supply such necessary endorsements on
behalf of Licensee.
9. LICENSEE CREDIT INFORMATION. Licensee warrants and represents that its
credit application and financial statements submitted to Sears by or on
behalf of Licensee are true and accurate and Licensee agrees to supply such
additional credit information as Sears may reasonably
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request from time to time. Licensee understands that Sears may verify the
information on any financial statement or other information provided by
Licensee and, from time to time, may seek credit and other information
concerning Licensee from others and may provide financial and other
information to others for purposes of its asset securitization's and sales.
10. NOTICE OF CLAIM AND SURVIVAL. In the event that Sears or Licensee shall
receive any claim or demand or be subject to any suit or proceeding of
which a claim may be made against the other, the indemnified party shall
give prompt written notice thereof to the indemnifying party and the
indemnifying party will be entitled to participate in the settlement or
defense thereof with counsel satisfactory to indemnified party at the
indemnifying party's expense. In any case, the indemnifying party and the
indemnified party shall cooperate (at not cost to the indemnified party) in
the settlement or defense of any such claim, demand, suit, or proceeding.
The terms and provision of this Paragraph 10 shall survive the termination
of this Addendum.
11. NONWAIVER. Licensee's liability under this Addendum, including, without
limitation, its liability under Paragraph 10 above, shall not be affected by any
settlement, extension, forbearance, or variation in terms that Sears may grant
in connection with any Credit Sale or Account or by the discharge or release of
the obligations of any Customer(s) or any other person by operation of law or
otherwise.
12. TERM AND TERMINATION.
A. TERM. This Addendum shall be effective as of January 1, 1996, and
shall remain in effect until December 31, 1998 ("Initial Term"),
subject to earlier termination as set forth below. Thereafter, this
Addendum shall be automatically renewed for successive three (3) year
terms (the "Renewal Term(s)") unless and until termination as provided
herein. The termination of this Addendum shall not affect the right
and obligations of the parties with respect to transactions and
occurrences which take place prior to the effective date of
termination, except as otherwise provided herein.
B. TERMINATION. This Addendum may be terminated:
(i) by Sears or LICENSEE, upon not less than one (1) year's notice
to the other party prior to the end of the Initial Term or any
Renewal Term.
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(ii) by Sears, at its sole discretion, upon thirty (30) days prior
notice (a) if there occurs any material change in ownership of
Licensee or if an adverse change occurs in Licensee's financial
condition or if Licensee supersedes or goes out of business or
substantially reduces its business operations or sends a notice
of proposed bulk sale of all or party of its business; or (b) in
the event Licensee materially breaches its obligations or any
warranty or representation under this Addendum or in the License
Agreement; or (c) if Sears has reasonable cause to believe that
Licensee will not be able to perform its obligations under this
Addendum, or if Sears receives a disproportionate number of
Customer inquiries, disputes or complaints; or (d) if in Sears
judgment, any Applicable Law requires that this Addendum or
either party's rights or obligations hereunder be amended,
modified, waived or suspended in any respect, including, without
limitation, the amount of finance charges or fees that may be
charged on purchases of Approved Products hereunder.
(iii) by Sears or Licensee upon thirty (30) days written notice to
the other in the event the other party shall wind up or
dissolve its operation or is wound up and dissolved; becomes
insolvent or repeatedly fails to pay its debts as they
become due; makes an assignment for the benefit of
creditors; files a voluntary petition for bankruptcy; or for
reorganization or is adjudicated as bankruptcy or insolvent'
or has a liquidator or trustee appointed over its affairs;
C. TERMINATION OF CARD ACCEPTANCE. Sears upon notice to Licensee may
elect to terminate the acceptance of the Credit Card or approve a
Credit Account, if Licensee has high fraudulent activities or other
cause of business conduct that is injurious to the business
relationship between Sears and Licensee.
13. FORCE MAJEURE. Neither party to this Addendum shall be liable to the other
by reason of any failure of performance of this Addendum in accordance with
its terms if such failure arises out of a cause beyond the control and
without the fault or negligence of such party. Such causes may include but
are not limited to acts of God, or civil or military authority,
unavailability of energy resources, system or communication failure, delay
in transportation,
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riots or war. In the event of any force majeure occurrence, the disabled
party shall use its best efforts to meet the obligations as set forth in
this Addendum.
14. CONFIDENTIALLY. Licensee shall keep confidential and not disclose to any
person or entity (except to employees, officers, partners or directors of
Licensee who are engaged in the implementation and execution of the
Program), information, software, systems, and data, that Licensee receives
from Sears or from any other source, relating to the Program and matters
which are subject to the terms of this Addendum, including, but not limited
to, Customer names and addresses or other Credit Card or Account
Information, and shall use, or cause to be used, such information solely
for the purposes of the performance of Licensee's obligations under the
terms of this Addendum. Sears will keep confidential and notice disclose
to any person or entity (except employees, officers, agents or directors of
Sears, its subsidiaries or affiliates who are engaged in the implementation
and execution of the Program) any information that Sears receives from
Licensee which is designated confidential by Licensee. In the event Sears
sells or assigns the Accounts or a portion of the Accounts under the
Program, Sears may disclose any information under this provision reasonably
necessary or required to effectuate such sale or assignment. The terms and
provisions of this Paragraph 17 shall remain in effect for one (1) year
after the effective termination date of this Addendum.
15. ADDITIONAL PRODUCTS AND SERVICES. Sears, any of its Affiliates and/or any
third party authorized by Sears may at any time, whether during or after
the term of this Addendum and whether the Accounts are owned by Sears,
solicit Customers for any other credit cards or other types of accounts or
other merchandise, goods or products offered by Sears, any of its
Affiliates and/or any third party authorized by Sears.
16. NOTICES. All notices provided for or which may be given in connection with
this Addendum shall be in writing and given by certified or registered mail
with postage prepaid and return receipt requested and overnight courier or
personal delivery. If any such notice be given by Licensee to Sears, it
shall be addressed to:
SEARS, ROEBUCK AND CO.
Attn: National Operations Manager
3333 Beverly Road, D2-181B
Hoffman Estates, IL 60179
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and if given by Sears to Licensee, such notice shall be addressed to:
DIAMOND EXTERIORS, INC.
Attn: Donald Griffin
222 Church Street
Woodstock, IL 60098
and such notices if so sent by mail shall be deemed to have been given when
deposited in the mail.
17. AMENDMENTS AND SUPPLEMENTARY DOCUMENTS. The parties may from time to time
amend this Addendum. Reference herein to "this Addendum" shall include any
schedules, appendices, exhibits, and amendments hereto. Any amendment or
modification to this Addendum must be in writing and signed by a duly
authorized officer or both parties to be effective and binding upon said
parties; no other amendments or modifications shall be binding upon the
parties.
18. ASSIGNMENT. This Addendum is binding upon the parties and their successors
and assigns. Licensee may not assign this Addendum without the prior
written consent of Sears and any purported assignment without such consent
shall be void. Sears may without Licensee's consent assign this Addendum
or any of the rights or obligations hereunder to any Affiliate of Sears at
any time. In the event of such assignment, the assignee shall have the
same rights and remedies as Sears under this Addendum.
19. NONWAIVER AND EXTENSION. Sears shall not by any act, delay, omission, or
otherwise be deemed to have waived any rights or remedies hereunder.
Licensee agrees that Sears failure to enforce any of its rights under this
Addendum shall not affect any other right of Sears or the same right in any
other instance.
20. RIGHTS OF PERSONS NOT A PARTY. This Addendum shall not create any rights
on the part of any person or entity not a party hereto, whether as a third
party beneficiary or otherwise.
21. PARAGRAPH HEADINGS. The headings of the paragraphs of this Addendum are
for reference only, are not a substantial part of this Addendum and are not
to be used to affect the validity, construction or interpretation of this
Addendum or any of its provisions.
22. INTEGRATIONS. This Addendum contains the entire agreement between the
parties. There are merged herein prior oral or
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written agreement, amendments, representations, promises and conditions in
connection with the subject matter hereof. Any representations,
warranties, promises or conditions not expressly incorporated herein shall
not be binding to Sears.
23. GOVERNING LAW/SEVERABILITY. This Addendum shall be governed by and
construed in accordance with the laws of the State of Illinois. If any
provision of this Addendum is contrary to Applicable Law, such provision
shall be deemed ineffective without invalidating the remaining provisions
hereof.
24. JURISDICTION. ANY SUIT, COUNTERCLAIM, ACTION OR PROCEEDING ARISING OUT OF
OR RELATING TO THIS ADDENDUM MUST BE BROUGHT SOLELY IN THE COURTS OF THE
STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN
DISTRICT OF ILLINOIS; AND LICENSEE HEREBY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF SUCH COURTS AND ANY APPELLATE COURTS THEREOF FOR
THE PURPOSE OF ANY SUCH SUIT, COUNTERCLAIM, ACTION, PROCEEDING OR JUDGMENT
(IT BEING UNDERSTOOD THAT SUCH CONSENT TO THE EXCLUSIVE JURISDICTION OF
SUCH COURT WAIVES ANY RIGHT TO SUBMIT ANY DISPUTES HEREUNDER TO ANY COURTS
OTHER THAN THE ABOVE).
25. WAIVER OF JURY TRIAL. SEARS AND LICENSEE HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION, SUIT,
PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS ADDENDUM, ANY
RELATED DOCUMENT OR UNDER ANY OTHER DOCUMENT OR AGREEMENT DELIVERED OR
WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH,
OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS ADDENDUM,
AND AGREE THAT ANY SUCH ACTION, SUIT, PROCEEDING OR COUNTERCLAIM SHALL BE
TRIED BEFORE A COURT AND NOT BEFORE A JURY; THIS PROVISION IS A MATERIAL
INDUCEMENT FOR SEARS AND LICENSEE ENTERING INTO THIS ADDENDUM.
IN WITNESS WHEREOF, Sears and Licensee have caused their duly authorized
representatives to execute this Addendum as of the date set forth above.
DIAMOND EXTERIORS, INC. SEARS, ROEBUCK AND CO.
By: /s/ Donald Griffin By: /s/ Denise A. Woods
------------------------------- ------------------------------------
Donald Griffin Denise A. Woods
C.E.O. National Operations Manager
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EXHIBIT C
ADDENDUM
THIS ADDENDUM is made and entered into this 17th day of June, 1996, by and
between Sears, Roebuck and Co., a New York corporation ("SEARS"), Diamond
Exteriors, Inc., a Delaware corporation ("LICENSEE") and Diamond Home Services,
Inc., a Delaware corporation ("HOME SERVICES").
WHEREAS, Sears and Licensee are bound by a License Agreement dated as of
January 1, 1996 (the "LICENSE AGREEMENT") and the Sears Credit Addendum to the
License Agreement dated as of January 1, 1996 (the "CREDIT ADDENDUM");
WHEREAS, Home Services has filed a registration statement on Form S-1 with
the Securities and Exchange Commission on April 19, 1996, as amended with
respect to the initial public offering of common stock (the "COMMON STOCK") of
Home Services (the "PUBLIC OFFERING"); and
WHEREAS, Licensee and Home Services have requested that the License
Agreement and Credit Addendum be amended and supplemented in contemplation of
the Public Offering and the public reporting requirements resulting therefrom;
NOW, THEREFORE, in consideration of the premises and promises herein
contained, the parties agree as follows:
1. The License Agreement shall be amended by adding the
following new Section 12B:
(a) Notwithstanding anything contained herein to the contrary,
Diamond Home Services, Inc., the parent of Licensee ("HOME
SERVICES") shall have the right to disclose information regarding
Licensee's contractual relationship with Sears hereunder and
Licensee's activities contemplated hereby and to use the "Sears"
name in connection therewith without obtaining Sears prior
written approval and consent in (i) the Registration Statement on
Form S-1, as amended (No. 333-3822) (the "REGISTRATION
STATEMENT"); (ii) any and all filings required to be made by Home
Services with the Securities and Exchange Commission, the
National Association of Securities Dealers, Inc. and The Nasdaq
Stock Market and any other disclosures pursuant to federal or
state securities laws or rules regarding the market for and
trading of the Common Stock of Home Services (including, but not
limited to, reports on Form 8-A, 10-Q, 10-K and 8-K, annual and
quarterly reports to stockholders and proxy statements) provided,
that in each of the foregoing instances, the subject matter of
such disclosure is substantially similar to the disclosures made
in the Registration Statement; (iii) any press release that
announces a change in the terms of this License Agreement or
otherwise relates in any material respect to the relationship
with Sears (other than as part of the "Standard Closing
<PAGE>
Paragraph" as defined below) on the condition that such press release
is provided to Sears on the second business day before public release,
unless, as a result of the obligations of Home Services under
applicable law, Home Services is advised by legal counsel that an
earlier public disclosure is advisable, in which case Home Services
shall use all reasonable efforts to provide Sears with as much advance
notice, if any, as is practicable under the circumstances; and (iv)
any other press releases, provided that such press releases are
provided to Sears simultaneously with public distribution and further
provided that the standard closing paragraph of each such press
release (the "STANDARD CLOSING PARAGRAPH"), as it relates to the
Company's relationship with Sears, is consistent with the statements
contained in the Registration Statement.
2. Section 12.B(ii) of the Credit Addendum is hereby amended by
adding the following to the end of that Section:
"; provided, that the transaction contemplated by the Registration
Statement (as defined in the License Agreement) shall not be deemed to
be a material change in ownership of Licensee."
3. With respect to Section 18 of the Credit Addendum, Sears consents
to the assignment of the License Agreement and the related Addendum from
Licensee to its wholly owned subsidiary, now known as Diamond Exteriors,
Inc.
4. (a) Home Services and Licensee hereby agree to jointly and
severally indemnify, defend and hold harmless Sears and its affiliates,
directors and officers (collectively, as used in this Section 4, "SEARS"),
from and against any and all loss, damage, claim, liability, cost or
expense (including reasonable attorneys' fees and expenses, and costs of
investigation and preparation whether performed by employees of Sears or by
outside firms, but only if Diamond fails to "Assume the Defense" (as
hereinafter defined)), insofar as such losses, damages, liabilities, costs
or expenses result from actions which arise out of or are based upon any
untrue or alleged untrue statement of any material fact contained in the
Registration Statement or any form, filing or report filed by Home Services
under the Securities Exchange Act of 1934, as amended (COLLECTIVELY, THE
"1934 ACT REPORTS") or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading (a
"THIRD PARTY CLAIM"); provided, however, that neither Home Services nor
Licensee shall be liable in any such case to the extent that any such loss,
damage, liability, cost or expense arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement or the 1934 Act Reports in
reliance upon and in conformity with written information furnished to Home
Services or Licensee or its affiliates or agents by or on behalf of Sears
with respect to the status of matters arising under the License Agreement
(and any Addendum thereto). The indemnification provided in this Section
shall be the sole and
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<PAGE>
exclusive remedy of Sears with respect to the subject matter of this
Section and shall be in lieu of all other indemnification or other rights
to damages which may be available under common law or otherwise. In no
event shall Home Services or Licensee be obligated to indemnify Sears for
consequential, special or incidental damages incurred by Sears, other than
to the extent such damages are a component of amounts as to which Sears
incurs liability to third parties and for which it is indemnified
hereunder.
(b) If Sears is entitled to indemnification hereunder, Sears
shall promptly notify Home Services and Licensee in writing of any
claim for indemnification as soon as reasonably possible (an
"INDEMNIFICATION NOTICE") and shall allow Home Services and/or
Licensee to take all reasonable steps to mitigate all indemnifiable
amounts upon and after becoming aware of any event which could
reasonably be expected to give rise to any liabilities, damages and
other amounts that are indemnifiable hereunder; provided, however,
that (i) the failure to give such prompt notice shall not relieve Home
Services or Licensee of their obligations hereunder except to the
extent such delay has prejudiced Home Services or Licensee, and (ii)
no actions taken by Home Services or Licensee or any of their
affiliates in mitigation hereunder shall relieve either of them from
their obligations under this Section 4.
(c) With respect to each Third Party Claim, Licensee and/or Home
Services shall, at its own expense, assume control of the defense of
the Third Party Claim ("ASSUME THE DEFENSE") with counsel selected by
Home Services and/or Licensee. Such counsel may be the same counsel
as that defending Home Services and/or Licensee, unless such counsel
advises Home Services and/or Licensee and Sears that, pursuant to the
applicable canons of ethics and rules of professional responsibility
(collectively the "APPLICABLE RULES"), such joint representation
presents a conflict of interest which, notwithstanding a waiver by all
parties, prohibits such joint representation. Sears agrees to execute
and deliver a waiver of any conflict of interest if counsel requests
such a waiver to enable it, in accordance with the Applicable Rules,
to undertake such joint representation. If such counsel is precluded
from the joint representation by the Applicable Rules, Diamond and/or
Licensee shall designate (after consultation with Sears) and pay for
separate counsel for Sears. Licensee and Home Services shall
thereafter be entitled to settle and compromise any such Third Party
Claim with the consent of Sears (which shall not be unreasonably
withheld), unless such settlement and compromise unconditionally
releases Sears, and Home Services and Licensee indemnify Sears as
provided herein, in which case no such consent is needed. Sears shall
be entitled to participate in the defense of (but not control) any
Third Party Claim, the defense of which is assumed by Licensee, with
counsel which it designates and at its own expense. Sears shall also
have the right to control the defense of any Third Party Claim if it
notifies Licensee in writing that it is
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<PAGE>
assuming the defense of such claim at its own expense and that Licensee is
relieved of its obligations (including indemnification obligations) to
Sears with respect to such Third Party Claim. The parties shall cooperate
in the defense of any Third Party Claim and the relevant records of each
party shall be made available to the other on a timely basis.
(d) The parties obligations under this Section 4 shall survive
the termination of this Addendum and the License Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of the
date first written above.
DIAMOND HOME SERVICES, INC. SEARS, ROEBUCK AND CO.
By: /s/ Ann Crowley Patterson By: /s/ Charles Berk
------------------------------- -----------------------------------
Title: Title: Vice President
---------------------------- ---------------------------------
DIAMOND EXTERIORS, INC.
By: /s/ Ann Crowley Patterson
------------------------------------
Title:
--------------------------------
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<PAGE>
Exhibit 10.9(d)
SECOND AMENDMENT AND CONSENT TO LOAN AND SECURITY AGREEMENT
This Second Amendment and Consent to Loan and Security Agreement, made
as of June 13, 1996 (this "AMENDMENT"), is by and between Diamond Exteriors,
Inc. (f/k/a Diamond Home Services, Inc.) (the "COMPANY") and American National
Bank and Trust Company of Chicago (the "BANK"). Capitalized terms used in this
Amendment and not otherwise defined have the meanings assigned to such terms in
the Loan Agreement (as defined below).
W I T N E S S E T H:
WHEREAS, Diamond Home Services, Inc. (f/k/a Diamond Exteriors, Inc.)
("DHS") and the Bank were parties to the Loan and Security Agreement dated as of
February 6, 1996 (as such agreement may be amended, restated, supplemented or
otherwise modified from time to time, the "LOAN AGREEMENT");
WHEREAS, under the Assignment, Delegation and Assumption Agreement
dated as of May 24, 1996 (the "ASSIGNMENT AGREEMENT"), by and among DHS, the
Company (a wholly owned subsidiary of DHS) and the Bank, the Company assumed all
of the rights, duties, obligations and liabilities of DHS under the Loan
Agreement and other Related Documents;
WHEREAS, to evidence its assumption of DHS' duties, obligations and
liabilities under the Loan Agreement and other Related Documents, the Company
has agreed to amend and restate the Notes (as amended and restated, the "AMENDED
NOTES") to reflect such assumption;
WHEREAS, DHS is undertaking an initial public offering of its common
stock (the "IPO") and, in connection with the IPO, the Company will prepay the
Management Notes and incur certain indebtedness and has requested the Bank
consent to such prepayment and indebtedness; and
WHEREAS, the Bank and the Company have agreed to amend the Loan
Agreement to, among other things, (i) modify certain financial covenants (as
agreed by the Company and the Bank under Section 13.19 of the Loan Agreement),
(ii) permit the declaration and payment of dividends and (iii) modify certain
terms and provisions to conform with the transactions contemplated by the
Assignment Agreement and the IPO;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained in this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are acknowledged, the
Company and the Bank agree as follows:
<PAGE>
SECTION 1. AMENDMENTS TO LOAN AGREEMENT
On the date this Amendment becomes effective, after satisfaction by
the Company of each of the conditions set forth in SECTION 5 of this Amendment
(the "CLOSING DATE"), the Loan Agreement is amended as follows:
1.1 After May 24, 1996, all references in the Loan Agreement to the
"Company" or to "Diamond Exteriors, Inc." mean and are a reference to the
Company.
1.2 SECTION 1 of the Loan Agreement is amended by deleting the
following definitions from such section: (i) "GLOBE DEMAND NOTES"; (ii)
"EMPLOYMENT AGREEMENTS"; (iii) "MANAGEMENT AGREEMENT"; (iv) "MANAGEMENT NOTES";
(v) "REDEEMABLE STOCK"; (vi) "STOCKHOLDER AGREEMENT"; (vii) "SUBORDINATION
AGREEMENT"; and (viii) "TAX SHARING AGREEMENT."
1.3 SECTION 1 of the Loan Agreement is further amended by deleting
the definition of "Cash Flow Coverage Ratio" in its entirety and replacing it as
follows:
"CASH FLOW COVERAGE RATIO" means the ratio of (i) Earnings Before
Interest and Taxes, plus (A) any unused reserves established for warranty
claims, plus (B) all non-cash expenses incurred by the Company during such
period, minus (C) capital expenditures that are not funded by Capital
Leases incurred during such period or by Loan proceeds to (ii) total
interest paid on Indebtedness in such period, PLUS (A) taxes actually paid
by the Company (or paid to Globe by the Company under the Tax Sharing
Agreement effective as of September 15, 1994, between the Company and
Globe) for such period, PLUS (B) total principal paid on Indebtedness
(including all principal payments to Diamond Home Services, Inc. (f/k/a
Diamond Exteriors, Inc.) with respect to the subordinated debt) in such
period (but not including (x) any payments of principal on the Revolving
Loan unless made to reduce the Revolving Credit Limit under SECTION 5.1(a)
or (y) any principal prepayments made in connection with the initial public
offering of the common stock of Diamond Home Services, Inc. (f/k/a Diamond
Exteriors, Inc.)), PLUS (C) all cash dividends on capital stock paid by the
Company during such period (but not including the dividend of approximately
$8,600,000 occurring in connection with the initial public offering of the
common stock of Diamond Home Services, Inc. (f/k/a Diamond Exteriors,
Inc.)).
1.4 SECTION 1 of the Loan Agreement is further amended by deleting
the definition of "Current Ratio" in its entirety and replacing it as follows:
"CURRENT RATIO" means the ratio of (a) the Company's current assets
(disregarding any of the Company's intangible
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<PAGE>
assets as described in the definition of "TANGIBLE NET WORTH" and including
any advances to the Finance Company permitted under this Agreement) to
(b) the Company's current liabilities.
1.5 SECTION 1 of the Loan Agreement is further amended by deleting
the definition of "Excess Cash Flow" from such section in its entirety.
1.6 SECTION 1 of the Loan Agreement is further amended by deleting
the definition of "Indebtedness" in its entirety and replacing it as follows:
"INDEBTEDNESS" with respect to any Person means, as of the date of
determination thereof, (a) all of such Person's indebtedness for borrowed money
or for the deferred purchase price of property or services (except indebtedness
owing to trade creditors in the ordinary course of business and which is due
within 75 days after original invoice date), (b) all indebtedness of such Person
or any other Person secured by any Lien with respect to any property or asset
owned or held by such Person, regardless whether the indebtedness secured
thereby shall have been assumed by such Person, (c) all indebtedness of other
Persons which such Person has directly or indirectly guaranteed (whether by
discount or otherwise), endorsed (otherwise than for collection or deposit in
the ordinary course of business), discounted with recourse to such Person or
with respect to which such Person is otherwise directly or indirectly liable,
including, without limitation, indebtedness in effect guaranteed by such Person
through any agreement (contingent or otherwise) to (i) purchase, repurchase or
otherwise acquire such Indebtedness or any security therefor, (ii) provide funds
for the payment or discharge of such indebtedness or any other liability of the
obligor of such indebtedness (whether in the form of loans, advances, stock
purchases, capital contribution or otherwise), (iii) maintain the solvency of
any balance sheet or other financial condition of the obligor of such
indebtedness, or (iv) make payment for any products, materials or supplies or
for any transportation or services regardless of the nondelivery or
nonfurnishing thereof, if in any such case the purpose or intent of such
agreement is to provide assurance that such indebtedness will be paid or
discharged or that any agreements relating thereto will be complied with or that
the holders of such indebtedness will be protected against loss in respect
thereof, (d) all of such Person's Capitalized Lease Obligations, (e) all actual
or contingent reimbursement obligations with respect to letters of credit issued
for such Person's account, (f) all of such Person's obligations under interest
rate hedging agreements, (g) all of such Person's Redeemable Stock, as measured
by the maximum fixed repurchase price thereof which has a mandatory redemption
date prior to the Credit Termination Date and (h) all of such Person's
obligations under the promissory note made by the Company payable to DHS in an
amount equal $29,000,000. For purposes of determining Indebtedness for the
financial covenants
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<PAGE>
set forth in SECTIONS 9.7, 9.9, 9.10, 9.11 and 9.17, any contingent obligations
will be determined in accordance with GAAP.
1.7 SECTION 1 of the Loan Agreement is further amended by deleting
the definition of "Related Documents" in its entirety and replacing it as
follows:
"RELATED DOCUMENTS" means, collectively, the Notes, the Trademark
Security Agreement and all other documents, instruments, agreements and
certificates executed by the Company pursuant to or in connection with this
Agreement.
1.8 SECTION 1 of the Loan Agreement is further amended by deleting
the definition of "Tangible Net Worth" in its entirety and replacing it as
follows:
"TANGIBLE NET WORTH" means, with respect to any Person at any time,
such Person's net worth (determined in accordance with GAAP, which includes
account receivables) after subtracting therefrom the aggregate amount of
any intangible assets of the Company, including, without limitation,
covenants not to compete, prepayments, deferred charges, goodwill,
franchises, licenses, patents, trademarks, trade names, copyrights, service
marks, brand names. In addition, any subordinated debt from Diamond Home
Services, Inc. (f/k/a Diamond Exteriors, Inc.) will be included in the
calculation of "TANGIBLE NET WORTH."
1.9 SECTION 1 of the Loan Agreement is further amended by deleting
the definition of "Working Capital" in its entirety and replacing it as follows:
"WORKING CAPITAL" means the excess of (a) the Company's current assets
(disregarding any of the Company's intangible assets as described in the
definition of "TANGIBLE NET WORTH" and including any advances to the
Finance Company permitted under this Agreement) MINUS (b) the difference of
the Company's current liabilities minus any reserves established for
warranty claims.
1.10 SECTION 7.2 of the Loan Agreement is amended by deleting clause
(iii) from such section in its entirety and replacing it as follows:
(iii) all of the notes described in SCHEDULE 7.2 hereto, if any,
including any amendment, modification, renewal or replacement of any such
notes, and including, without limitation, the Special Purpose Note and the
Working Capital Note (collectively, the "PLEDGED NOTES"), and
1.11 SECTION 8.4 of the Loan Agreement is amended by adding the
following subsection (c) to such section as follows:
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<PAGE>
(c) The Company has furnished to the Bank the Pro Forma Balance Sheet
(the "PRO FORMA") of the Company dated as of May __, 1996 and attached
hereto as SCHEDULE 8.4. As of June __, 1996, the Pro Forma fairly
represents the Company's assets, liabilities and financial condition; there
are no omissions from the Pro Forma or other facts and circumstances not
reflected in the Pro Forma which, as of June __, 1996, are or may be
material, according to GAAP.
1.12 SECTION 8.21 of the Loan Agreement is amended by deleting the
first two sentences from section in their entirety and replacing them as
follows:
The cover page to this Agreement lists the legal name by which the
Company is now known. The Company has not been known by any legal name
different from the one set forth on the cover page of this Agreement other
than Diamond Home Services, Inc.
1.13 SECTION 9.7 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
9.7 TANGIBLE NET WORTH. Not permit Tangible Net Worth to be less
than the stated amount for each corresponding period listed below,
calculated at the end of each month during such period:
<TABLE>
<CAPTION>
DATE TANGIBLE NET WORTH
---- ------------------
<S> <C>
April 1, 1996 to June 30, 1996 ($10,000,000)
July 1, 1996 to August 31, 1996 $6,250,000
September 1, 1996 to November 30, 1996 $7,250,000
December 1, 1996 to February 28, 1997 $7,750,000
March 1, 1997 to May 31, 1997 $7,750,000
June 1, 1997 to August 31, 1997 $8,500,000
September 1, 1997 to Credit Termination $9,000,000
Date
</TABLE>
1.14 SECTION 9.8 of the Loan Agreement is amended by deleting clause
(iii) and (iv) from such section in their entirety and replacing them as
follows:
(iii) current accounts payable arising in the ordinary course of
business, (iv) [INTENTIONALLY OMITTED],
1.15 SECTION 9.8 of the Loan Agreement is further amended by deleting
clause (vii) from such section in its entirety and replacing it as follows:
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<PAGE>
(vii) [INTENTIONALLY OMITTED].
1.16 SECTION 9.9 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
9.9 WORKING CAPITAL. Not permit the Company's Working Capital to be
less than the stated amount for each corresponding period listed below,
calculated at the end of each month during such period:
<TABLE>
<CAPTION>
DATE WORKING CAPITAL
---- ---------------
<S> <C>
April 1, 1996 to June 30, 1996 ($8,000,000)
July 1, 1996 to August 31, 1996 $9,000,000
September 1, 1996 to November 30, 1996 $10,000,000
December 1, 1996 to February 28, 1997 $10,500,000
March 1, 1997 to May 31, 1997 $10,500,000
June 1, 1997 to August 31, 1997 $12,500,000
September 1, 1997 to Credit Termination Date $12,500,000
</TABLE>
1.17 SECTION 9.10 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
9.10 CURRENT RATIO. Not permit the Current Ratio to be less than
1.1:1 calculated the end of each month through the Credit Termination Date.
1.18 SECTION 9.11 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
9.11 CASH FLOW COVERAGE. Not permit the Cash Flow Coverage Ratio to
be less than 1.3:1 calculated as of the end of each month through the
Credit Termination Date measured over the immediately preceding twelve-
month period ending on such calculation date.
1.19 SECTION 9.12 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
9.12 DIVIDEND RESTRICTIONS. Not make any payment in cash, property or
other assets upon or in respect of any shares of any class of its capital
stock including, without limiting the foregoing, payments as dividends and
payments for the purpose of redeeming, purchasing or otherwise acquiring
any shares of any class of its capital stock,
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<PAGE>
including in the term "stock" any warrant or option or other right to
purchase such stock, or making any other distribution in respect as any
such shares of stock or set aside any funds for any such purpose; PROVIDED,
HOWEVER, the Company may repurchase its capital stock held by employees of
the Company upon their retirement, termination, disability or death so long
as such repurchase does not violate any of the financial covenants
contained in SECTION 9 and could not reasonably be expected to result in a
Material Adverse Effect; PROVIDED, FURTHER, HOWEVER, that the Company may
make cash dividends so long as if immediately after making such dividend,
the Company would be in compliance with each of the financial covenants
contained in SECTION 9.
1.20 SECTION 9.14 of the Loan Agreement is amended by deleting clause
(l) from such section in its entirety and replacing it as follows:
(l) loans to the Finance Company (in addition to those set forth in CLAUSES
(j) and (k) above) in excess of $9,500,000 so long as (i) the ratio of (a)
all amounts advanced from the Company to the Finance Company immediately
following such an advance (including, without limitation, all amounts
outstanding under the Working Capital Note and the Special Purpose Note) to
(b) all amounts outstanding under the Notes would be 1.35:1 or greater and
(ii) immediately prior to such an advance, $9,500,000 has been advanced to
the Finance Company under the Working Capital Note and the Special Purpose
Note;
1.21 SECTION 9.16 of the Loan Agreement is amended by deleting the
PROVISO from such section in its entirety.
1.22 SECTION 9.19 of the Loan Agreement is amended by deleting
subsection (a) from such section in its entirety and replacing it as follows:
(a) Not use or permit the use of any proceeds of any Revolving Loan
other than for the Company's general corporate purposes and to support the
Company's working capital.
1.23 SECTION 9.20 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
9.20 TRANSACTIONS WITH AFFILIATES. Not enter into any transaction
with any Affiliate except (a) transactions in the ordinary course of
business and on terms and conditions at least as favorable to the Company
as the terms and conditions that would apply in a similar transaction with
a Person who is not an Affiliate, (b) an agreement with The Handy
Craftsman, Inc. pursuant to which the Company leases
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<PAGE>
space and prepays payroll in an amount not exceeding $25,000 in the
aggregate, (c) the Working Capital Note Agreement and the Working Capital
Note and (d) the Securitization Documentation.
1.24 SECTION 9.25 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
9.25 [INTENTIONALLY OMITTED].
1.25 SECTION 9.26 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
9.26 [INTENTIONALLY OMITTED].
1.26 SECTION 9.30 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
9.30 OTHER DOCUMENTS. Not amend, change or modify either the Working
Capital Note Agreement or the Working Capital Note without the prior
written consent of the Bank.
1.27 SECTION 9.31 of the Loan Agreement is amended by deleting such
section in its entirety.
1.28 SECTION 12.1(l) of the Loan Agreement is amended by deleting the
phrase "fifty-five percent (55%)" from such section in its entirety and
replacing it with the phrase "thirty-five percent (35%)."
1.29 SECTION 12.1(n) of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
(n) FINANCE COMPANY. Diamond Home Services, Inc. (f/k/a Diamond
Exteriors, Inc.) shall fail to directly control 100% of the Finance
Company.
1.30 SECTION 13.19 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
13.19 MODIFICATION OF FINANCIAL COVENANTS. The Company agrees that
should the actual assets, liabilities and financial condition of the
Company at any time be materially different than as reflected on the Pro
Forma, the Bank may make reasonable modifications to the financial
covenants contained in SECTIONS 9.7, 9.9, 9.10, 9.11 and 9.17.
-8-
<PAGE>
SECTION 2. AMENDMENTS TO EXHIBITS, SCHEDULES AND
RELATED DOCUMENTS
2.1 AMENDMENT TO EXHIBITS TO LOAN AGREEMENT. On the Closing Date,
(i) Exhibits A, B and C to the Loan Agreement will be replaced with EXHIBITS A,
B and C to this Amendment and (ii) Exhibit I to the Loan Agreement will be
deleted in its entirety.
2.2 AMENDMENT TO SCHEDULES TO LOAN AGREEMENT. On the Closing Date,
(i) SCHEDULE 1 to this Amendment will be added as Schedule 8.4 to the Loan
Agreement and (ii) Schedule 8.5 to the Loan Agreement will be amended by adding
to such schedule the information contained on SCHEDULE 2 to this Amendment.
2.3 AMENDMENT TO RELATED DOCUMENTS. On the Closing Date, the Notes
will be amended, restated and replaced in their entirety by the Amended Notes.
Upon receipt of the Amended Notes, the Bank will mark the Notes "superseded" and
return them to the Company.
SECTION 3. CONSENT
3.1 On the Closing Date, the Bank consents to the incurrence by the
Company of approximately $29,000,000 of subordinated indebtedness from Diamond
Home Services, Inc. (f/k/a Diamond Exteriors, Inc.) and agrees that such
subordinated indebtedness will not constitute an Event of Default under the Loan
Agreement.
3.2 On the Closing Date, the Bank consents to the Company's voluntary
prepayment of the Management Notes.
3.3 Nothing in this Amendment in any way is deemed to be a consent or
waiver of any Event of Default or an agreement to forbear from exercising any
remedies with respect to any Event of Default.
SECTION 4. REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Amendment and to extend future
credit under the Loan Agreement, as amended by this Amendment, the Company
represents and warrants to the Bank that:
4.1 DUE AUTHORIZATION; NO CONFLICT; NO LIEN; ENFORCEABLE OBLIGATION.
The execution, delivery and performance by the Company of this Amendment and the
Amended Notes are within its corporate powers, have been duly authorized by all
necessary corporate action, have received all necessary governmental, regulatory
or other approvals (if any is required), and do not and will not contravene or
conflict with any provision of (i) any law, (ii) any judgment, decree or order
or (iii) its articles or certificate of incorporation or by-laws, and do not and
will not contravene or conflict with, or cause any lien to arise under, any
provision of any agreement or instrument binding upon the
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<PAGE>
Company or upon any of its property. This Amendment, the Loan Agreement, as
amended by this Amendment, and the Amended Notes are the legal, valid and
binding obligations of the Company, enforceable against it in accordance with
their respective terms.
4.2 NO DEFAULT; REPRESENTATIONS AND WARRANTIES. As of the Closing
Date, (i) no Event of Default or Unmatured Event of Default under the Loan
Agreement, as amended by this Amendment, has occurred and is continuing or will
result from the amendments set forth in this Amendment and (ii) the
representations and warranties of the Company contained in the Loan Agreement,
as amended by this Amendment, are true and correct.
4.3 NO GLOBE DEMAND NOTES; NO REDEEMABLE STOCK. As of the Closing
Date, there is no principal or interest outstanding under any Globe Demand Note.
The Redeemable Stock was redeemed prior to the Closing Date and, as of the
Closing Date, the Company has no Redeemable Stock issued and outstanding.
SECTION 5. CONDITIONS TO EFFECTIVENESS
The obligation of the Bank to make the amendments, waivers and
consents contemplated by this Amendment, and the effectiveness thereof, are
subject to the following:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in this Amendment are true and correct as of
the Closing Date.
5.2 CONSUMMATION OF THE IPO. The offering of the DHS's common stock
pursuant to an effective registration statement under the Securities Act of
1933, as amended.
5.3 TERMINATION OF CERTAIN AGREEMENTS. The Tax Sharing Agreement,
the Management Agreement, the Management Notes and the Subordination Agreement
have been paid and/or terminated, as applicable.
5.4 ADVANCE FROM DHS. DHS has advanced approximately $29,000,000 to
the Company from the proceeds of the IPO.
5.5 DOCUMENTS. The Bank has received all of the following, each duly
executed and dated as of the Closing Date (or such other date as is satisfactory
to the Bank) in form and substance satisfactory to the Bank:
(A) SECOND AMENDMENT AND CONSENT. This Amendment.
(B) AMENDED NOTES. (i) The Amended and Restated Revolving Note
substantially in the form of EXHIBIT A to this Amendment, (ii) The Amended
and Restated Investment Loan Note substantially in the form of EXHIBIT B to
this Amendment and (iii) The Amended and Restated Finance Company
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<PAGE>
Loan Note substantially in the form of EXHIBIT C to this Amendment.
(C) OMNIBUS AMENDMENT TO INTERCOMPANY AGREEMENTS. An executed copy
of an omnibus amendment to intercompany agreements substantially in the
form of EXHIBIT D to this Amendment.
(D) SUBORDINATED NOTE. A copy of the promissory note made by the
Company payable to DHS in an amount equal to the amount received by the
Company from DHS under SECTION 5.4 of this Amendment.
(E) SUBORDINATION AGREEMENT. A subordination agreement between the
Bank and DHS substantially in the form of EXHIBIT E to this Amendment.
(F) SCHEDULES TO AMENDMENT. (i) The pro forma balance sheet of the
Company dated as of May __, 1996, and attached to this Amendment as
SCHEDULE 1 and (ii) a description of the pending litigation titled
International Equity Capital Growth Fund, L.P. v. C. Stephen Clegg, Globe
Building Materials, Inc. and Diamond Home Services, Inc., attached to this
Amendment as SCHEDULE 2.
(G) SECRETARY'S CERTIFICATE. A certificate of the Secretary of the
Company as to (i) no amendments or modifications to the Company's articles
or certificate of incorporation or by-laws since May 24, 1996, and
(ii) resolutions of the board of directors of the Company authorizing or
ratifying the execution, delivery and performance of this Amendment and the
Amended Notes.
(H) CONSENTS Certified copies of all documents evidencing any
necessary corporate action, consents and governmental approvals, if
any, with respect to this Amendment, the Amended Notes or any other
document provided for under this Amendment.
(E) OTHER. Such other documents as the Bank may reasonably
request.
SECTION 6. MISCELLANEOUS
6.1 CAPTIONS. The recitals to this Amendment (except for
definitions) and the section captions used in this Amendment are for convenience
only and do not affect the construction of this Amendment.
6.2 GOVERNING LAW; SEVERABILITY. THIS AMENDMENT IS A CONTRACT MADE
UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. Wherever
possible, each provision of this Amendment must be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of this
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<PAGE>
Amendment is prohibited by or invalid under such law, such provision is
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Amendment.
6.3 COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by the different parties on separate counterparts, and each
such counterpart is deemed to be an original, but all such counterparts together
constitute but one and the same Amendment. The Company and the Bank agree to
accept facsimile counterparts.
6.4 SUCCESSORS AND ASSIGNS. This Amendment is binding upon the
Company, the Bank and their respective successors and assigns, and inures to the
sole benefit of the Company, the Bank and their successors and assigns. The
Company cannot assign its rights or delegate its duties under this Amendment.
6.5 REFERENCES. From and after the Closing Date, each reference in
the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein," or
words of like import, and each reference in the Loan Agreement or any other
Related Document to the Loan Agreement, the Notes or to any term, condition or
provision contained "thereunder," "thereof," "therein," or words of like import,
mean and are a reference to the Loan Agreement or the Notes (or such term,
condition or provision, as applicable) as amended, supplemented, restated or
otherwise modified by this Amendment or the Amended Notes, as applicable.
6.6 CONTINUED EFFECTIVENESS. Notwithstanding anything contained in
this Amendment to the contrary, the terms of this Amendment and the Amended
Notes are not intended to and do not serve to effect a novation as to the Loan
Agreement or the Notes, as applicable. The Company and the Bank expressly do
not intend to extinguish the Loan Agreement or the Notes. Instead, it is the
express intention of the Company and the Bank to reaffirm the indebtedness
created under the Loan Agreement, which is evidenced by the Notes. The Loan
Agreement, as amended by this Amendment, and the Notes, as amended and restated
by the Amended Notes, remain in full force and effect and the terms and
provisions of the Loan Agreement and the Notes are ratified and confirmed.
6.7 COSTS, EXPENSES AND TAXES. The Company affirms and acknowledges
that Section 13.5 of the Loan Agreement applies to this Amendment and the
transactions and agreements and documents contemplated under this Amendment.
* * *
-12-
<PAGE>
Delivered at Chicago, Illinois, as of the day and year first above
written.
DIAMOND EXTERIORS, INC.
By: /s/ Ann Crowley Patterson
---------------------------------------
Name:
Title:
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO
By: /s/ John W. Patterson
---------------------------------------
John W. Patterson
Second Vice President
<PAGE>
Exhibit 10.9(e)
SUBORDINATION AGREEMENT
This Subordination Agreement, made as of June 13, 1996 (this
"AGREEMENT"), is by and among Diamond Home Services, Inc. (f/k/a Diamond
Exteriors, Inc.) (the "SUBORDINATED CREDITOR"), Diamond Exteriors, Inc. (f/k/a
Diamond Home Services, Inc.), a wholly owned subsidiary of the Subordinated
Creditor (the "COMPANY"), and American National Bank and Trust Company of
Chicago (the "SENIOR CREDITOR"). Capitalized terms used in this Agreement and
not otherwise defined have the meanings assigned to such terms in the Loan
Agreement (as defined below).
W I T N E S S E T H:
WHEREAS, in connection with the initial public offering of the common
stock of the Subordinated Creditor, the Subordinated Creditor will advance funds
on an unsecured basis to the Company, which advances will be evidenced by a
promissory note made by the Company in favor of the Subordinated Creditor in the
original principal amount of approximately $29,000,000 (together with the other
documents entered into in connection with such an advance, the "SUBORDINATED
LOAN DOCUMENTATION");
WHEREAS, the whole or part of any amounts which may now or in the
future be owing by the Company, or any successor or assignee of the Company,
including, without limitation, a receiver or debtor in possession (the term
"COMPANY" in this Agreement includes any such successor or assign of the
Company) to the Subordinated Creditor under the Subordinated Loan Documentation
(whether such amounts represent principal or interest or obligations which are
due or not due, direct or indirect, absolute or contingent or guaranteed) are
referred to in this Agreement as the "SUBORDINATED DEBT";
WHEREAS, the Company is indebted to the Senior Creditor as a result of
the advance of monies and other extensions of credit by the Senior Creditor to
the Company, under the Loan and Security Agreement dated as of February 6, 1996
(as amended, restated, supplemented or otherwise modified from time to time, the
"LOAN AGREEMENT"), between the Company and the Senior Creditor;
WHEREAS, the Loan Agreement contains provisions prohibiting the
Company from incurring any further Indebtedness, including, without limitation,
the Subordinated Debt, and in exchange for waiving such prohibitions and
consenting to the Subordinated Debt, the Senior Creditor has required that the
Subordinated Creditor enter into this Agreement with the Senior Creditor; and
<PAGE>
WHEREAS, the Subordinated Creditor acknowledges that the loans,
advances of monies and other extensions of any financial accommodation and
credit to the Company by the Senior Creditor is of value to the Subordinated
Creditor;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained in this Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are acknowledged, the
Subordinated Creditor, the Company and the Senior Creditor agree as follows:
1. AGREEMENT TO SUBORDINATE. (A) The Subordinated Creditor and the
Company agree that the payment and performance of the Subordinated Debt is
subordinate, to the extent and in the manner set forth in this Agreement, in
right of payment to the prior payment in full of all obligations, Liabilities
and indebtedness of the Company to the Senior Creditor whether now existing or
in the future arising under the Loan Agreement, the notes issued under the Loan
Agreement (collectively the "NOTES"), or the other Financing Agreements
(including, without limitation, any Refinancing (as defined below) of the
Liabilities), whether for principal, interest (including, without limitation,
interest after the filing of a petition initiating any proceeding referred to in
SUBSECTION 4(A), whether or not allowed), fees, expenses, indemnities or
otherwise, together with all extensions, renewals, modifications or amendments
thereof or any part thereof (such obligations along with the Liabilities being
the "SENIOR OBLIGATIONS").
(B) For the purposes of this Agreement, the Senior Obligations are
not deemed to have been paid in full until the Senior Creditor has received
irrevocable payment of the Senior Obligations in cash and all financing
arrangements between the Senior Creditor and the Company have been terminated.
(C) For purposes of this Agreement, a "REFINANCING" means the
incurrence of indebtedness in any amount to refinance, extend or add to the
indebtedness and liabilities of the Company to the Senior Creditor under the
Loan Agreement and the other Financing Agreements, including, without
limitation, additional, new or replacement indebtedness and liabilities from the
Senior Creditor and/or other lenders.
2. ACKNOWLEDGMENT OF SECURITY INTEREST AND LIEN; PRIORITY OF LIENS.
(A) The Subordinated Creditor acknowledges that, under the Loan Agreement and
the other Financing Agreements, the Company has granted the Senior Creditor a
valid, perfected and first priority Lien (subject only to Permitted Liens) in
and against the Collateral, which Lien secures the full, prompt and complete
payment of the Senior Obligations. The Subordinated Creditor further
acknowledges that the Company has not granted, and the Subordinated Creditor
does not hold, any Lien on the Collateral or any other assets of the Company
securing payment of the Subordinated Debt.
<PAGE>
(B) Notwithstanding the order or time of creation, acquisition,
attachment, or the order, time or manner of perfection, or the order or time of
filing or recordation of any document or instrument, or other method of
perfecting a security interest or Lien on and against any of the Collateral or
other assets of the Company, the Lien of the Senior Creditor on and against any
of the Collateral or other assets of the Company has priority over any and all
Liens securing the Subordinated Debt that may in the future be granted to or
held by the Subordinated Creditor on or against any of the Collateral (it being
understood that the foregoing does not imply the Company has any right under the
Loan Agreement to grant any such Lien) or other assets of the Company.
(C) The Subordinated Creditor has no right in connection with its
Subordinated Debt to possession of any Collateral or any other assets of the
Company or to foreclose upon any Collateral or other assets of the Company,
whether by judicial action or otherwise, unless and until all of the Senior
Obligations have been paid in full.
(D) The Subordinated Creditor will not contest the validity,
perfection, priority or enforceability of the Lien of the Senior Creditor on the
Collateral or any other assets of the Company nor the validity, priority,
enforceability or amount of the Senior Obligations, in each case as it relates
to the Subordinated Debt.
3. RESTRICTIONS ON PAYMENT OF THE SUBORDINATED DEBT. Until the
Senior Creditor has received payment of the Senior Obligations in full and all
financing arrangements between the Senior Creditor and the Company have been
terminated, the Company will not make, and the Subordinated Creditor will not
accept, payments (of any nature whatsoever whether for principal, interest, fees
or expenses) or optional redemptions of principal under the Subordinated Debt
Documentation; PROVIDED, HOWEVER, that the Company may make principal
prepayments and interest payments under the Subordinated Debt so long as (i) no
Default or Event of Default has occurred and is continuing and (ii) immediately
after giving effect to such prepayment, the Company would be in compliance with
each of the financial covenants contained in Section 9 of the Loan Agreement.
The Subordinated Loan Documentation may not be modified or amended without the
prior written consent of the Senior Creditor which consent shall not be
unreasonably withheld or delayed.
4. IN FURTHERANCE OF SUBORDINATION. (A) Upon any distribution of
all or any of the assets of the Company to creditors of the Company upon the
dissolution, winding up, liquidation, arrangement or reorganization of the
Company, whether in any bankruptcy, insolvency, arrangement, reorganization or
receivership proceedings or upon an assignment for the benefit of creditors or
any other marshalling of the assets and liabilities of the Company or otherwise,
any payment
<PAGE>
or distribution of any kind (whether in cash, property or securities) which
otherwise would be payable or deliverable upon or with respect to the
Subordinated Debt will be paid or delivered directly to the Senior Creditor for
application (in the case of cash) to or as collateral (in the case of noncash
property or securities) for the payment or prepayment of the Senior Obligations
until the Senior Obligations have been paid in full.
(B) If any proceeding referred to in SUBSECTION 4(A) is commenced by
or against the Company:
(i) to the extent the Subordinated Creditor fails to comply with any
request of the Senior Creditor under SUBSECTION 4(B)(ii), the Senior
Creditor is irrevocably authorized and empowered (in its own name or in the
name of the Subordinated Creditor or otherwise), but has no obligation, to
demand, sue for, collect and receive every payment or distribution referred
to in SUBSECTION 4(A) and give acquittance therefor and to file claims and
proofs of claim and take such other action (including, without limitation,
voting and proving the Subordinated Debt or enforcing any security interest
or other lien securing payment of the Subordinated Debt) as it may deem
necessary or advisable for the exercise or enforcement of any of the rights
or interests of the Senior Creditor under this Agreement; and
(ii) the Subordinated Creditor will duly and promptly take such
reasonable actions as the Senior Creditor may request (a) to collect the
Subordinated Debt for the account of the Senior Creditor and to file and
prove appropriate claims or proofs of claim in respect of the Subordinated
Debt, (b) to execute and deliver to the Senior Creditor such powers of
attorney, assignments or other instruments as it may request in order to
enable it to enforce any and all claims with respect to, and any security
interests and other liens securing payment of, the Subordinated Debt and
(c) to collect and receive any and all payments or distributions which may
be payable or deliverable upon or with respect to the Subordinated Debt.
(C) All payments or distributions upon or with respect to the
Subordinated Debt which are received by the Subordinated Creditor contrary to
the provisions of this Agreement are received in trust for the benefit of the
Senior Creditor, will be segregated from other funds and property held by the
Subordinated Creditor and will be immediately paid over to the Senior Creditor
in the same form as so received (with any necessary indorsement) to be applied
(in the case of cash) to or held as collateral (in the case of noncash property
or securities) for the payment or prepayment of the Senior Obligations in
accordance with the terms of the Loan Agreement.
<PAGE>
(D) The Senior Creditor is authorized to demand specific performance
of this Agreement, whether or not the Company has complied with any of the
provisions of this Agreement applicable to it, at any time when the Subordinated
Creditor has failed to comply with any provision of this Agreement applicable to
it.
(E) The Subordinated Creditor consents and agrees that the Senior
Creditor is under no obligation to marshal any assets in favor of the
Subordinated Creditor or otherwise in connection with obtaining payment of any
or all of the Senior Obligations from any Person or source and hereby waives any
right that it may now or in the future have to the fullest extent permitted by
applicable law to any such marshalling of assets or similar relief.
5. NO COMMENCEMENT OF ANY PROCEEDING. The Subordinated Creditor
agrees that, so long as any of the Senior Obligations have not been paid in
full, (i) it will not commence, or join with any creditor other than the Senior
Creditor in commencing, any proceeding referred to in SUBSECTION 4(A) or take
any other action, judicial or otherwise, to enforce the Subordinated Debt and
(ii) it will refrain from exercising any and all remedies available to it under
the Subordination Loan Documentation and any and all remedies otherwise
permitted by applicable law upon a default under any Subordinated Debt.
6. RIGHTS OF SUBROGATION. The Subordinated Creditor agrees that no
payment or distribution to the Senior Creditor under the provisions of this
Agreement entitle the Subordinated Creditor to exercise any rights of
subrogation in respect of such payments or distributions until the Senior
Obligations have been paid in full.
7. SUBORDINATION LEGEND; FURTHER ASSURANCES. (A) The Subordinated
Creditor and the Company will cause each instrument evidencing Subordinated Debt
to be endorsed with the following legend:
"The indebtedness evidenced by this instrument is subordinated to
the prior payment in full of the Senior Obligations as defined in, and
to the extent provided in, the Subordination Agreement dated as of
June 13, 1996, by the maker of this instrument and payee named in this
instrument in favor of American National Bank and Trust Company of
Chicago."
The Subordinated Creditor and the Company will further mark its books of account
in such manner as is effective to give proper notice of the effect of this
Agreement and will, in the case of any Subordinated Debt which is not evidenced
by any instrument, upon the Senior Creditor's request cause such Subordinated
Debt to be evidenced by an appropriate instrument or instruments endorsed with
the above legend.
<PAGE>
(B) The Subordinated Creditor and the Company will, at the Company's
expense and at any time and from time to time, promptly execute and deliver all
further instruments and documents, and take all further action, that may be
necessary, or that the Senior Creditor may reasonably request, in order to
protect any right or interest granted or purported to be granted by this
Agreement or to enable the Senior Creditor to exercise and enforce its rights
and remedies under this Agreement.
8. NO CHANGE IN OR DISPOSITION OF SUBORDINATED DEBT. (A) The
Subordinated Creditor agrees that it will not (i) cancel or otherwise discharge
any of the Subordinated Debt (except upon payment in full to the Senior Creditor
as contemplated by SUBSECTION 4(A)); provided that the Subordinated Creditor may
convert or contribute the Subordinated Debt to the common equity of the Company
or (ii) subordinate any of the Subordinated Debt to any other indebtedness of
the Company other than the Senior Obligations.
(B) The Subordinated Creditor further agrees that it will not sell,
assign, pledge, encumber or otherwise dispose of any of the Subordinated Debt
except as set forth in SUBSECTION 8(A).
9. AGREEMENT BY THE COMPANY. The Company agrees that it will not
make any payment of any of the Subordinated Debt, or take any other action, in
contravention of the provisions of this Agreement.
10. OBLIGATIONS UNDER THIS AGREEMENT NOT AFFECTED. (A) All rights
and interests of the Senior Creditor under this Agreement, and all agreements
and obligations of the Subordinated Creditor and the Company under this
Agreement, remain in full force and effect irrespective of:
(i) any lack of validity or enforceability of the Loan Agreement, the
Notes or the other Financing Agreements;
(ii) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Senior Obligations, or any other amendment
or waiver of or any consent to or departure from the Loan Agreement, the
Notes or the other Financing Agreements;
(iii) any exchange, release or nonperfection of any Collateral, or
any release or amendment or wavier of or consent to or departure from any
guaranty, for all or any of the Senior Obligations; or
(iv) any other circumstance which might otherwise constitute a
defense available to, or a discharge of, the Company in respect of the
Senior Obligations or the Subordinated Creditor in respect of this
Agreement.
<PAGE>
(B) This Agreement continues to be effective or reinstated, as the
case may be, if at any time any payment of any of the Senior Obligations is
rescinded or must otherwise be returned by the Senior Creditor upon the
insolvency, bankruptcy or reorganization of the Company or otherwise, all as
though such payment had not been made.
(C) Except as specifically described in this Agreement, nothing
contained in this Agreement or in any instrument evidencing any Subordinated
Debt is intended to or impairs, as between the Company, its creditors other than
the Senior Creditor, and the Subordinated Creditor, the obligations of the
Company, which are absolute and unconditional, to pay to the Subordinated
Creditor the Subordinated Debt as and when it becomes due and payable in
accordance with its terms, subject, however, to the terms of this Agreement.
Except as specifically described in this Agreement, nothing contained in this
Agreement or in any instrument evidencing any Subordinated Debt is intended to
or affects the relative rights of the Subordinated Creditor and creditors of the
Company other than the Senior Creditor. As between the Company, its creditors
other than the Senior Creditor and the Subordinated Creditor, no payments or
distributions otherwise payable or deliverable in respect of the Subordinated
Debt, which are paid or delivered to the Senior Creditor under this Agreement,
are deemed to be a payment by the Company on account of the Subordinated Debt.
11. COVENANTS. The Subordinated Creditor covenants that (i) it will
not grant any party any lien, security interest, charge or encumbrance with
respect to the Subordinated Debt and (ii) the Subordinated Debt will not be
represented by any instrument or document other than the Subordinated Debt
Documentation.
12. INFORMATION CONCERNING FINANCIAL CONDITION OF THE COMPANY. The
Subordinated Creditor assumes responsibility for keeping itself informed of the
financial condition of the Company and of all other circumstances bearing upon
the risk of nonpayment of the Subordinated Debt or any part of the Subordinated
Debt, that diligent inquiry would reveal. The Subordinated Creditor agrees that
the Senior Creditor has no duty to advise it of information known to the Senior
Creditor regarding such condition or any such circumstance. In the event that
the Senior Creditor in its sole discretion undertakes at any time or from time
to time to provide any such information to the Subordinated Creditor the Senior
Creditor is under no obligation (i) to undertake any investigation not a part of
its regular business routine, (ii) to disclose any information which it wishes
to maintain confidential or (iii) to make any other or future disclosures of
such information or any other information to the Subordinated Creditor.
13. SUBORDINATED CREDITOR'S WAIVERS. (A) The Subordinated Creditor
and the Company expressly waive all notice
<PAGE>
of the acceptance by the Senior Creditor of the subordination and other
provisions of this Agreement and all other notices not specifically required
under the terms of this Agreement whatsoever, and the Subordinated Creditor and
the Company expressly consent to reliance by the Senior Creditor upon the
subordination and other agreements as provided in this Agreement.
(B) The Subordinated Creditor agrees that the Senior Creditor:
(i) has made no warranties or representations with respect to the due
execution, legality, validity, completeness or enforceability of the Loan
Agreement or the other Financing Agreements or the collectibility of the
Liabilities;
(ii) is entitled to manage and supervise its loans to the Company in
accordance with applicable law and the terms of the Loan Agreement and the
other Financing Agreements and without regard to the existence of any
rights that the Subordinated Creditor may now or in the future have in or
to any of the assets of the Company,
(iii) has no liability to the Subordinated Creditor for, and the
Subordinated Creditor waives and releases the Senior Creditor from any and
all liability with respect to, any claim which the Subordinated Creditor
may now or in the future have against the Senior Creditor arising out of
(a) any and all actions which the Senior Creditor takes or omits to take in
connection with the Senior Obligations (including, without limitation,
actions with respect to the creation, perfection or continuation of liens
or security interests in the Collateral and other security for the
Liabilities), (b) any and all actions with respect to the occurrence of an
Event of Default, actions with respect to the foreclosure upon, sale,
release or depreciation of, or failure to realize upon, any of the
Collateral, (c) any and all actions with respect to the collection of any
claim securing all or any part of the Liabilities from any account debtor,
guarantor or any other party with respect to the Loan Agreement or the
other Financing Agreements or the collection of the Liabilities or the
valuation, use, protection or release of the Collateral and/or other
security for the Liabilities and (iv) the Senior Creditor's election, in
any bankruptcy proceeding, of the application of section 1111(b)(2) of the
United States Bankruptcy Code, 11 U.S.C. Section 1111(b)(2).
14. AMENDMENT; WAIVER This Agreement may be amended only by a
writing executed by the Subordinated Creditor, the Company and the Senior
Creditor. No waiver of any provision of this Agreement is effective unless it
is in writing and signed by the Subordinated Creditor, the Company and the
Senior Creditor.
<PAGE>
15. EXPENSES. The Company and the Subordinated Creditor jointly and
severally agree to pay, upon demand, to the Senior Creditor the amount of any
and all reasonable expenses, including the reasonable fees and expenses of its
attorneys and paralegals, which the Senior Creditor may incur in connection with
the exercise or enforcement of its rights or interests under SUBSECTION 4(B)(i).
16. ADDRESSES FOR NOTICES. All demands, notices and other
communications provided for under this Agreement must be in writing (including
telegraphic or facsimile communication) and mailed, sent by facsimile
transmission or delivered to such party at the address specified on the
signature page of this Agreement or at such other address as is designated by
such party in a written notice to each other party complying as to delivery with
the terms of this SECTION 16. All such demands, notices and other
communications are effective (a) three business days after deposited in the U.S.
mails, postage prepaid, (b) upon receipt of confirmation of transmission when
sent by telecopy and (c) upon delivery when delivered, as the case may be.
17. NO WAIVER; REMEDIES. No failure on the part of the Senior
Creditor to exercise, and no delay in exercising, any right under this Agreement
operates as a waiver of such right, nor does any single or partial exercise of
any right under this Agreement preclude any other or further exercise of such
right or the exercise of any other right. The remedies provided in this
Agreement are cumulative and not exclusive of any remedies provided by law.
18. CONTINUING AGREEMENT; TRANSFER OF NOTES. This Agreement is a
continuing agreement and (a) remains in full force and effect until the Senior
Obligations have been paid in full, (b) is binding upon the Subordinated
Creditor, the Company, the Senior Creditor and their respective successors,
transferees, participants and assigns and (c) inures to the benefit of and is
enforceable by the Senior Creditor and the Subordinated Creditor and their
successors, transferees, participants and assigns. Without limiting the
generality of the foregoing CLAUSE (c), the Senior Creditor may, in accordance
with the Loan Agreement, assign, participate or otherwise transfer the Senior
Obligations to any other person or entity, which person or entity upon such
transfer becomes vested with all the rights in respect of such Senior
Obligations granted to the Senior Creditor in this Agreement or otherwise.
19. BANKRUPTCY. The Subordinated Creditor agrees that in the event
bankruptcy proceedings are instituted by or against the Company, the Senior
Creditor may consent to the use of cash collateral or provide postpetition
financing under section 364 of the United States Bankruptcy Code, 11 U.S.C.
Section 364, to the Company on such terms and conditions and in such amounts as
the Senior Creditor, in its sole discretion, may decide.
<PAGE>
20. GOVERNING LAW; SEVERABILITY. This Agreement is governed by, and
construed in accordance with, the internal laws of the State of Illinois. If
any portion or provision of this Agreement is determined to be invalid or
unenforceable, all other provisions of this Agreement remain in full force and
effect and this Agreement remains binding between the parties to this Agreement
with respect to such remaining provisions.
21. HEADINGS AND CAPTIONS. Headings and captions used in this
Agreement are for convenience only and do not affect the construction of this
Agreement.
22. CONSENT TO JURISDICTION; WAIVERS. THE SUBORDINATED CREDITOR, IN
CONNECTION WITH ANY LITIGATION ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED BY THIS AGREEMENT, CONSENTS TO THE JURISDICTION OF THE FEDERAL
COURT OF THE NORTHERN DISTRICT OF ILLINOIS, OR, IF SUCH COURT LACKS
JURISDICTION, THEN TO THE JURISDICTION OF THE CIRCUIT COURT OF COOK COUNTY,
ILLINOIS, AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND
CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY CERTIFIED MAIL DIRECTED TO
THE SUBORDINATED CREDITOR AT THE ADDRESS STATED IN THIS AGREEMENT. THE
SUBORDINATED CREDITOR WAIVES TRIAL BY JURY, ANY OBJECTION BASED UPON FORUM NON
CONVENIENS AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED UNDER THIS
AGREEMENT.
* * *
<PAGE>
Delivered at Chicago, Illinois, as of the day and year first above
written.
DIAMOND HOME SERVICES, INC.
By: /s/ Ann Crowley Patterson
------------------------------------------
Name:
Title:
Address:
DIAMOND EXTERIORS, INC.
By: /s/ Ann Crowley Patterson
-----------------------------------------
Name:
Title:
222 East Church Street
Diamond Plaza
Woodstock, Illinois 60098
Attention: Donald G. Griffin
Telephone: (815) 334-1414
Telecopy: (815) 334-1421
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/ John W. Patterson
-----------------------------------------
John W. Patterson
Second Vice President
33 North LaSalle Street
Chicago, Illinois 60690
Attention: Lori H. Igleski
Telephone: (312) 661-5000
Telecopy: (312) 661-0290
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial and Operating Data" and "Experts" and to the use of our
report dated February 23, 1996, except as to the first paragraph of Note 1 for
which the date is April 18, 1996 and Note 14 for which the date is April 8,
1996, in Amendment No. 3 to the Registration Statement (Form S-1) and related
Prospectus of Diamond Home Services, Inc. and Subsidiaries for the registration
of up to 3,933,000 shares of its common stock.
Chicago, Illinois
June 14, 1996
Ernst & Young LLP