<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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. / / _______
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE (1) PRICE (1) FEE
<S> <C> <C> <C> <C>
Common Stock (par value $.001
per share)................... 750,000 shares $26.75 $20,062,500 $6,919
</TABLE>
(1) Estimated solely for purposes of calculating the amount of the registration
fee pursuant to Rule 457(c) of the Securities Act of 1933, based on the
average of the high and low sales prices of a share of Common Stock of the
Registrant on the Nasdaq National Market on August 21, 1996.
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>
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 AUGUST 28, 1996
PROSPECTUS
750,000 SHARES
[DIAMOND HOME SERVICES LOGO]
COMMON STOCK
All of the 750,000 shares of Common Stock offered hereby 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 44.1% of
the Company's Common Stock, including 37.7% 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."
The Company's Common Stock is quoted on the Nasdaq National Market under the
trading symbol "DHMS." On August 27, 1996, the last reported sale price of the
Common Stock on the Nasdaq National Market was $28.50 per share. See "Price
Range of Common Stock."
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 SELLING
PUBLIC DISCOUNT (1) STOCKHOLDER
<S> <C> <C> <C>
Per Share................................ $ $ $
Total.................................... $ $ $
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
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. The map is dated June 1, 1996.
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:
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.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND SELLING GROUP MEMBERS
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE
COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
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
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"), EFFECTIVE JUNE 17, 1996. 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 76 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 Selling Stock-
holder....................................... 750,000 shares
Common Stock to be Outstanding After the
Offering..................................... 9,074,900 shares (1)
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
outstanding as of July 31, 1996. 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.
On June 17, 1996, the Company reclassified and split each outstanding share of
its Class A Voting Common Stock and Class B Nonvoting Common Stock into 50
shares of Common Stock in connection with the Company's initial public offering.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED
PERIOD FROM JUNE 1 31, JUNE 30,
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 $ 53,496 $ 68,482
Gross profit................................ 7,960 38,047 52,603 22,418 30,348
Operating income (loss)..................... (1,179) 2,951 6,795 1,936 3,947
Net income (loss)........................... (1,179) 1,995 3,735 893 2,268
Net income (loss) per share................. $ (0.12) $ 0.22 $ 0.60 $ 0.14 $ 0.36
Weighted average common shares and common
equivalents outstanding.................... 10,000 9,062 6,250 6,250 6,330
SELECTED OPERATING DATA:
Number of sales offices (2)................. 38 55 70 67 76
Number of Sales Associates (2).............. 260 496 631 644 722
Number of installed jobs.................... 7,294 37,510 55,261 23,470 29,305
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1996
---------
<S> <C>
BALANCE SHEET DATA (2):
Working capital...................................................................................... $ 18,021
Total assets......................................................................................... 56,148
Total debt........................................................................................... 1,829
Common stockholders' equity.......................................................................... 31,985
</TABLE>
- ------------------------
(1) Period from inception of the Company's operations to December 31, 1993.
(2) Calculated at the end of the period shown.
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 July 31, 1996,
the Company had 725 Sales Associates as compared to 621 as of July 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, the Company's principal stockholder, Globe,
will beneficially own 37.7% 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. On June 19, 1996, Globe, in connection with the
Company's initial public offering, sold 833,000 shares of the Company's Common
Stock. Additional 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 the directors and executive officers of
the Company as a group will be deemed to beneficially own approximately 44.1% of
the Company's Common Stock, including 37.7% 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 45.9% of the issued and
outstanding Common Stock of the Company. 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 had a management agreement and tax sharing agreement with Globe and
its affiliates which were both terminated in June 1996 in connection with the
Company's initial public offering. 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 June 19, 1996 the Company incurred to Globe
a management fee of $310,000. 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; Messrs. Clegg, Stinson and Pollock and
10
<PAGE>
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 Company's initial public offering in June 1996, the
Company paid an $8.6 million special, one-time dividend to its pre-initial
public offering stockholders with a portion of the net proceeds from the
Company's initial public offering. As an 80% stockholder of the Company
immediately prior to the Company's initial public offering, Globe received
approximately $6.9 million of this dividend. The balance of the dividend was
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 "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
11
<PAGE>
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.
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. The Company currently does not
have any borrowings under its bank line of credit. 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 9,074,900 shares of Common Stock. All of the 750,000 shares sold in
this offering, together with the 3,933,000 shares sold in the Company's initial
public offering, will be freely tradeable by persons other than affiliates of
the Company. The remaining 4,391,900 shares of Common Stock were issued by the
12
<PAGE>
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 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 and the Selling Stockholder and all
other directors and officers 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 outstanding options), until December 16, 1996, 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 has options outstanding to purchase 275,000
shares. 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."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has risen substantially since
the initial public offering in June 1996. The Common Stock is quoted on the
Nasdaq National Market, which market has experienced and is likely to experience
in the future significant price and volume fluctuations which could adversely
affect the market price of the Common Stock without regard to the operating
performance of the Company. In addition, the Company believes that factors such
as quarterly fluctuations in the financial results of the Company, the overall
economy, the financial markets and conditions in the Company's markets could
cause the price of Common Stock to fluctuate substantially. 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.
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
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<PAGE>
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."
PRICE RANGE OF COMMON STOCK
The Company completed its initial public offering on June 19, 1996 at a
price per share of $13.00. Since that date, the Company's Common Stock has
traded on the Nasdaq National Market under the symbol "DHMS." The following
table sets forth, for the periods indicated, the high and low reported sale
prices of shares of the Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
1996 HIGH LOW
- ----------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Second Quarter (from June 20, 1996)................................................ $ 18.25 $ 14.00
Third Quarter (through August 27, 1996)............................................ 28.50 14.75
</TABLE>
As of July 31, 1996 there were approximately 30 holders of record of the
Common Stock. On August 27, 1996, the last reported sale price on the Nasdaq
National Market for the Common Stock was $28.50 per share.
DIVIDEND POLICY
Other than the $8.6 million special, one-time dividend paid to the Company's
pre-initial public offering stockholders from a portion of the net proceeds of
the Company's initial public offering in June 1996, 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 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.
14
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and total capitalization
of the Company at June 30, 1996.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Short-term debt:
Due to stockholders, including interest................................................... $ 554
--------
Total short-term debt................................................................... $ 554
--------
--------
Long-term debt due to stockholders.......................................................... $ 1,275
Stockholders' equity:
Preferred Stock, $.001 par value; 4,000,000 shares authorized, none issued and
outstanding.............................................................................. --
Common Stock, $.001 par value; 25,000,000 shares authorized; 9,074,900 shares issued and
outstanding (1).......................................................................... 9
Additional paid-in capital................................................................ 34,464
Officer notes receivable.................................................................. (707)
Retained earnings (deficit)............................................................... (1,781)
--------
Total stockholders' equity.............................................................. 31,985
--------
Total capitalization.................................................................. $ 33,260
--------
--------
</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
outstanding at July 31, 1996. See "Management -- Stock Option Plans."
15
<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 six-month periods ended June 30, 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 six months
ended June 30, 1996 are not necessarily indicative of the results to be expected
for the fiscal year ending December 31, 1996.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED JUNE
PERIOD FROM JUNE 1 DECEMBER 31, 30,
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 $ 53,496 $ 68,482
Cost of sales..................................... 12,588 56,139 72,245 31,078 38,134
-------- --------- ----------- --------- ----------
Gross profit...................................... 7,960 38,047 52,603 22,418 30,348
Selling, general and administrative expenses...... 9,113 34,821 45,305 20,232 25,906
Operating interest expense........................ -- -- -- -- 234
Amortization of intangibles....................... 26 275 503 250 261
-------- --------- ----------- --------- ----------
Operating income (loss)........................... (1,179) 2,951 6,795 1,936 3,947
Interest expense, net............................. -- 39 410 338 96
-------- --------- ----------- --------- ----------
Income (loss) before income taxes................. (1,179) 2,912 6,385 1,598 3,851
Income tax provision.............................. -- 917 2,650 705 1,583
-------- --------- ----------- --------- ----------
Net income (loss)................................. $ (1,179) $ 1,995 $ 3,735 $ 893 $ 2,268
-------- --------- ----------- --------- ----------
-------- --------- ----------- --------- ----------
Net income (loss) per share....................... $ (0.12) $ 0.22 $ 0.60 $ 0.14 $ 0.36
Weighted average common shares and common
equivalents outstanding.......................... 10,000 9,062 6,250 6,250 6,330
SELECTED OPERATING DATA:
Number of sales offices (2)....................... 38 55 70 67 76
Number of Sales Associates (2).................... 260 496 631 644 722
Number of installed jobs.......................... 7,294 37,510 55,261 23,470 29,305
BALANCE SHEET DATA (2):
Working capital (deficit)......................... $ 42 $ (8,324) $ (4,814) $ (7,847) $ 18,021
Total assets...................................... 4,837 29,275 30,143 29,585 56,148
Total debt........................................ 1,187 15,553 6,216 7,964 1,829
Common stockholders' equity (deficit)............. (979) 936 4,833 2,950 31,985
</TABLE>
- ------------------------
(1) Period from inception of the Company's operations to December 31, 1993.
(2) Calculated at the end of the period shown.
16
<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 July 31, 1996,
the Company had 76 sales offices serving 77% of the owner-occupied households in
the U.S. and employed 725 Sales Associates. Since inception, the Company has
installed over 130,000 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 January 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 fees 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.
17
<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 and
for the first six months of 1996, 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 provided certain
management, treasury, legal, purchasing and other administrative services to the
Company. Under the management agreement, the Company paid Globe a management fee
based upon gross sales. Management fees were $464,000, $558,000 and $310,000 for
1994, 1995 and through June 19, 1996, respectively. The management agreement was
terminated on June 20, 1996 in connection with the Company's initial public
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.
From September 1994 through June 1996, the date the Company no longer
qualified to be included in Globe's consolidated tax return, the Company was
included in the consolidated federal income tax return of Globe. During that
period, a tax-sharing agreement between the Company and Globe specified the
allocation and payment of liabilities and benefits arising from the filing of a
consolidated tax return. The agreement required the Company to pay its share of
the consolidated federal tax liability as if it had taxable income, and to be
compensated if losses or credits generated benefits that were utilized to reduce
the consolidated tax liability. The tax sharing agreement was terminated in June
1996, simultaneously with the date the Company no longer qualified to be
included in Globe's consolidated tax return. See "Certain Transactions --
Transactions with Globe and Globe Affiliates."
18
<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 SIX MONTHS ENDED JUNE -------------
TO DECEMBER 31, 30,
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 58.1 55.7 28.7
----- ----- ----- ----- -----
Gross profit................. 38.7 40.4 42.1 41.9 44.3 38.3
Selling, general and
administrative expenses..... 44.3 37.0 36.3 37.8 37.8 30.1
Operating interest expense... -- -- -- -- 0.4 --
Amortization of
intangibles................. 0.1 0.3 0.4 0.5 0.4 82.9
----- ----- ----- ----- -----
Operating income (loss)...... (5.7) 3.1 5.4 3.6 5.7 130.3
Interest expense, net........ -- -- 0.3 0.6 0.1 951.3
----- ----- ----- ----- -----
Income (loss) before income
taxes....................... (5.7) 3.1 5.1 3.0 5.6 119.3
Income tax provision......... -- 1.0 2.1 1.3 2.3 189.0
----- ----- ----- ----- -----
Net income (loss)............ (5.7)% 2.1% 3.0% 1.7% 3.3% 87.2
----- ----- ----- ----- -----
----- ----- ----- ----- -----
<CAPTION>
FIRST SIX MONTHS
1995 TO FIRST
SIX MONTHS 1996
----------------
<S> <C>
Net sales..................... 28.0%
Cost of sales................ 22.7
Gross profit................. 35.4
Selling, general and
administrative expenses..... 28.0
Operating interest expense... *
Amortization of
intangibles................. 4.4
Operating income (loss)...... 103.9
Interest expense, net........ (71.6)
Income (loss) before income
taxes....................... 141.0
Income tax provision......... 124.5
Net income (loss)............ 154.0
</TABLE>
- ------------------------
* Not meaningful.
(1) Period from inception of the Company's operations to December 31, 1993.
FIRST SIX MONTHS 1996 COMPARED TO FIRST SIX MONTHS 1995
NET SALES
Net sales increased $15.0 million, or 28.0%, from $53.5 million for the
first six months of 1995 to $68.5 million for the first six months of 1996.
Approximately 57.8% of the increase in net sales was attributable to roofing,
gutter and other products and services, net sales of which increased $8.7
million to $44.7 million for the first six months of 1996. Approximately 28.8%
of the increase in net sales was attributable to fencing products and services,
net sales of which increased $4.3 million to $13.1 million for the first six
months of 1996. Approximately 3.8% of the increase in net sales was attributable
to garage door and entry door products and services, net sales of which
increased $558,000 to $9.3 million for the first six months of 1996. The
balance, 9.6% of the increase in net sales, was due to credit participation fee
income of $941,000 from Sears and its affiliates, which was payable beginning
January 1, 1996, on installed sales financed by Sears and its affiliates during
the first six months, and interest income of $493,000 on receivables financed by
the Company's newly-formed consumer finance subsidiary, Marquise Financial. The
increases in net sales were due primarily to an increase in the number of
installations as the Company increased the average number of its Sales
Associates during the comparative periods from 566 to 675 and increased selling
prices in the first three months of the year; and, new in 1996, credit
participation fee and finance income.
GROSS PROFIT
Gross profit increased $7.9 million, or 35.4%, from $22.4 million, or 41.9%
of net sales, for the first six months of 1995 to $30.3 million, or 44.3% of net
sales, for the first six months of 1996. The increased gross profit resulted
from an increased number of installations, increased selling prices in the first
three months of the year, increase in balance of sales to higher margin products
and services,
19
<PAGE>
primarily fencing, the credit participation fee from Sears and its affiliates
and interest income from Marquise Financial, partially offset by the increase,
in the first quarter 1996, in the Sears license fee. The license fee incurred to
Sears increased $1.6 million, or 29.6%, from $5.5 million, or 10.3% of net
installed sales, for the first six months 1995 to $7.1 million, or 10.6% of net
installed sales, for the first six months of 1996. The increase in the license
fee incurred to Sears for the first six months of 1996 was due to the increase
in sales volume and an increase in the composite license fee rates related to
the shift in balance of sales. 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, credit participation fee and interest income
increased $8.1 million, or 29.1%, from $27.9 million, or 52.2% of net sales, for
the first six months of 1995 to $36.1 million, or 53.8% of net installed sales,
for the first six months of 1996. The unit costs of materials, installation
labor and warranty expense remained relatively constant during the first six
month period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $5.7 million, or
28.0%, from $20.2 million in the first six months 1995 to $25.9 million in the
first six months 1996 and, as a percentage of net sales, remained constant at
37.8%. The dollar increase in selling, general and administrative expenses
resulted primarily from the expenses associated with the 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's core
sales and installation business including the expansion of Marquise Financial.
Direct advertising expense increased $556,000, or 17.6%, from $3.2 million for
the first six months 1995 to $3.7 million for the first six months 1996; as a
percentage of net sales, however, direct advertising expense decreased from 5.9%
for the first six months 1995 to 5.5% for the first six months 1996, reflecting
improved utilization of sales leads primarily due to the increase in the number
of Sales Associates. Selling commission expense increased $1.2 million, or
21.6%, from $5.5 million in the first six months 1995 to $6.7 million in the
first six months 1996; as a percentage of net installed sales, selling
commission expense decreased from 10.4% in the first six months 1995 to 9.9% in
the first six months 1996. Sales representatives are compensated on a variable
commission basis depending upon the type and gross profit of product sold.
Performance-based compensation paid to officers and regional, sales and
production managers increased $468,000, or 58.3%, from $803,000 in the first six
months 1995 to $1.3 million in the first six months 1996, primarily due to the
increase in operating income. Management fees incurred to Globe increased from
$256,000 in the first six months 1995 to $311,000 in the first six months 1996.
The management fee agreement between the Company and Globe was terminated June
20, 1996. The balance of selling, general and administrative expenses, primarily
sales lead-generation activities, administrative, field operations and Marquise
Financial payrolls and related costs and general expenses, increased $3.4
million, or 32.5%, from $10.5 million, or 19.6% of net sales, in the first six
months 1995 to $13.9 million, or 20.2% of net sales, in the first six months
1996. The increase was primarily due to increased expenses relating to support
personnel and services required to manage the Company's expanding infrastructure
and captive finance subsidiary, Marquise Financial.
OPERATING INTEREST EXPENSE
Operating interest expense was $234,000 for the first six months 1996.
Operating interest expense relates to bank borrowings required to finance a
portion of Marquise Financial's receivables.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased from $250,000 in the first six months
1995 to $261,000 in the first six months 1996. The amortization expense relates
primarily to goodwill incurred in connection with the September 1994 stock
repurchase from management.
NET INTEREST EXPENSE
Net interest expense decreased $242,000 from $338,000 in the first six
months 1995 to $96,000 in the first six months 1996, as interest income from
invested excess operating cash partially offset the
20
<PAGE>
interest expense related to notes payable to certain of the Company's senior
managers in connection with the September 1994 stock repurchase from management.
$4.0 million of notes payable to senior managers was repaid during the first six
months 1996.
INCOME TAX PROVISION
The Company's income tax provision increased from $705,000, or an effective
rate of 44.1%, for the first six months 1995, to $1.6 million, or an effective
rate of 41.1%, for the first six months 1996. The difference in the effective
income tax rate and 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.
NET INCOME
The Company's net income increased $1.4 million from $893,000 in the first
six months 1995 to $2.3 million in the first six months 1996.
SECOND QUARTER 1996 COMPARED TO SECOND QUARTER 1995
NET SALES
Net sales increased $10.3 million, or 32.9%, from $31.1 million for the
second quarter 1995 to $41.4 million for the second quarter 1996. Approximately
53.8% of the increase in net sales was attributable to roofing and gutter
products and services, net sales of which increased $5.5 million to $25.8
million for the second quarter 1996. Approximately 30.0% of the increase in net
sales was attributable to fencing products and services, net sales of which
increased $3.1 million to $9.5 million for the second quarter 1996.
Approximately 6.3% of the increase in net sales was attributable to garage door
and entry door products and services, net sales of which increased $640,000 to
$5.1 million for the second quarter of 1996. The balance, 9.9% of the increase
in net sales, was due to credit participation fee income of $559,000 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 of $454,000 on receivables financed by the Company's newly-formed
consumer finance subsidiary, Marquise Financial. The second quarter increases in
net sales were due primarily to an increase in the number of installations as
the Company increased the average number of its Sales Associates during the
comparative periods from 600 to 698 and, to a lesser extent, increased selling
prices; and, new in 1996, credit participation fee and finance income.
GROSS PROFIT
Gross profit increased $5.4 million, or 41.0%, from $13.1 million, or 42.2%
of net sales, for the second quarter 1995 to $18.5 million, or 44.8% of net
sales, for the second quarter 1996. The increased gross profit resulted from an
increased number of installations, increase in balance of sales to higher margin
products and services, primarily fencing, the credit participation fee income
from Sears and its affiliates and interest income from Marquise Financial. The
license fee incurred to Sears increased $992,000, or 29.6%, from $3.4 million,
or 10.8% of net installed sales, for the second quarter 1995 to $4.4 million, or
10.8% of net installed sales, for the second quarter 1996. The dollar increase
in the license fee incurred to Sears for the second quarter 1996 was due to the
increase in sales volume. 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, credit participation fee and interest income increased $5.4
million, or 32.6%, from $16.5 million, or 53.0% of net sales, for the second
quarter 1995 to $21.9 million, or 54.2% of net installed sales, for the second
quarter 1996. The unit costs of materials, installation labor and warranty
expense remained relatively constant during the quarterly period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $3.7 million, or
31.9%, from $11.3 million in the second quarter 1995 to $15.0 million in the
second quarter 1996 and, as a percentage of net sales, decreased from 36.4% to
36.2%. The dollar increase in selling, general and administrative
21
<PAGE>
expenses resulted primarily from 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's core sales and installation business including the expansion of
Marquise Financial. Direct advertising expense increased $491,000, or 28.6%,
from $1.7 million for the second quarter 1995 to $2.2 million for the second
quarter 1996; as a percentage of net sales, however, direct advertising expense
decreased from 5.5% for the second quarter 1995 to 5.3% for the second quarter
1996, reflecting improved utilization of sales leads primarily due to the
increase in Sales Associates. Selling commission expense increased $892,000, or
27.8%, from $3.2 million in the second quarter 1995 to $4.1 million in the
second quarter 1996; as a percentage of net installed sales, however, selling
commission expense decreased from 10.3% in the second quarter 1995 to 9.9% in
the second quarter 1996. Sales representatives are compensated on a variable
commission basis depending upon the type and gross profit of product sold.
Performance-based compensation paid to officers and regional, sales and
production managers increased $342,000, or 59.4%, from $576,000 in the second
quarter 1995 to $918,000 in the second quarter 1996, primarily due to the
increase in operating income. Management fees incurred to Globe increased from
$146,000 in the second quarter 1995 to $180,000 in the second quarter 1996. The
management fee agreement between the Company and Globe was terminated June 20,
1996. The balance of selling, general and administrative expenses, primarily
sales lead-generation activities, administrative, field operations and Marquise
Financial payrolls and related costs and general expenses, increased $1.9
million, or 32.8%, from $5.7 million, or 18.3% of net sales, in the second
quarter 1995 to $7.6 million, or 18.3% of net sales, in the second quarter 1996.
The dollar increase was primarily due to increased expenses relating to support
personnel and services required to manage the Company's expanding infrastructure
and captive finance subsidiary, Marquise Financial.
OPERATING INTEREST EXPENSE
Operating interest expense was $212,000 for the second quarter 1996.
Operating interest expense relates to bank borrowings required to finance a
portion of Marquise Financial receivables.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased from $124,000 in the second quarter
1995 to $129,000 in the second quarter 1996. The amortization expense relates
primarily to goodwill incurred in connection with the September 1994 stock
repurchase from management.
NET INTEREST EXPENSE
Net interest expense decreased $122,000 from $152,000 in the second quarter
1995 to $30,000 in the second 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. $3.2 million of notes payable
to senior managers was repaid in June 1996.
INCOME TAX PROVISION
The Company's income tax provision increased from $634,000, or an effective
rate of 41.5%, for the second quarter 1995 to $1.3 million, or an effective rate
of 40.1%, for the second 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.
NET INCOME
The Company's net income increased $1.0 million from $894,000 in the second
quarter 1995 to $1.9 million in the second quarter 1996.
22
<PAGE>
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 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.
23
<PAGE>
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.
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
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
24
<PAGE>
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, the September 1994 stock repurchase from management, and, more
recently, to fund the operations of the Company's captive finance subsidiary,
Marquise Financial. See "Certain Transactions -- Transactions with Senior
Managers." The Company's primary sources of liquidity have been cash flow from
operations, borrowings under its bank credit facility, and, in June 1996, the
net proceeds of its initial public offering of Common Stock. The Company's core
sales and installation business is not capital intensive. Capital expenditures
for 1994, 1995 and the first six months 1996 were approximately $573,000,
$888,000 and $219,000, respectively. Capital expenditures for 1996 are expected
to approximate $1.2 million, primarily related to ongoing upgrading of computer
hardware and software. Future requirements for capital expenditures are expected
to be funded by cash flow from operations. The Company believes that it has
sufficient operating cash flow, working capital base and available bank credit
facility, together with additional financing currently being pursued by the
Company with respect to Marquise Financial, to meet all of its obligations for
the foreseeable future, including ongoing funding for Marquise Financial and for
the development and expansion of complementary product lines and services. See
"Risk Factors -- New Consumer Finance Subsidiary" and Notes to Unaudited
Condensed Consolidated Financial Statements.
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 operating cash flow and
borrowings under the Company's bank line of credit which is secured through
Exteriors. Amounts outstanding under the bank line of credit were repaid in June
1996 with a portion of the net proceeds from the Company's initial public
offering. At July 31, 1996, Marquise Financial had consumer finance receivables
of approximately $17.2 million. The Company anticipates that its existing cash
balances, 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
25
<PAGE>
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.
In June 1996, the Company issued 2,824,950 shares of Common Stock (including
underwriters' over-allotment option) at $13 per share in its initial public
offering. Proceeds to the Company from the offering, net of underwriting
commissions and related expenses totaling $3.3 million, were $33.5 million. A
portion of the offering proceeds was used to pay an $8.6 million special
dividend to pre-offering stockholders, repay all then outstanding borrowings
aggregating $11.9 million under the bank line of credit (used to finance
Marquise Financial receivables) and repay $3.2 million of notes to senior
managers related to the September 1994 stock repurchase. See "Certain
Transactions -- Transactions with Senior Managers."
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 June 30, 1996, the Company has
generated cash flow from operations of approximately $20.2 million. The Company
used $12.5 million of cash in connection with the repurchase of 40.2% of its
Common Stock from management stockholders, $4.5 million of cash to partially
finance Marquise Financial's consumer financing activities, and $1.9 million of
the cash for capital expenditures. See "Certain Transactions -- Transactions
with Senior Managers." At June 30, 1996, the Company had approximately $10.5
million in cash and cash equivalents and net working capital of $18.0 million.
At June 30, 1996, the Company had available $15.0 million in bank lines of
credit and a debt to equity ratio of 17.4: 1.
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 July 31,
1996, the Company had no amounts outstanding on its line of credit. 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.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth certain unaudited financial information for
each quarter during fiscal 1994 and 1995 and the first and second quarters 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,
1994 1994 1994 1994 1995
--------- -------- ------------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales....... $12,915 $23,576 $28,200 $29,495 $22,362
Gross profit.... 5,273 9,687 11,534 11,553 9,266
Operating income
(loss)......... (126) 1,323 75(a) 1,679 256
Net income
(loss)......... (122) 1,185(b) 87(b) 845 (1)
<CAPTION>
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1996 1996
-------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C>
Net sales....... $31,134 $36,459 $34,893 $27,093 $ 41,389
Gross profit.... 13,152 15,412 14,773 11,800 18,548
Operating income
(loss)......... 1,680 2,667 2,192 714 3,233
Net income
(loss)......... 894 1,532 1,310 349 1,919
</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.
26
<PAGE>
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 76 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 76 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 725 Sales Associates at July 31, 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, under the "Solitaire" name, the provision of heating and air
conditioning services, repair and installation. 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>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
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% $ 35,847 67.0%
Fencing................. 188 0.9 7,358 7.8 17,933 14.3 8,766 16.4
Garage, Entry and
Security Doors......... 1,742 8.5 12,138 12.9 19,288 15.5 8,700 16.3
Other................... 86 0.4 675 0.7 567 0.5 183 0.3
----------- ------------ ----------- ----- ----------- ----- ----------- -----
Total............... $ 20,548 100.0% $ 94,186 100.0% $ 124,848 100.0% $ 53,496 100.0%
----------- ------------ ----------- ----- ----------- ----- ----------- -----
----------- ------------ ----------- ----- ----------- ----- ----------- -----
<CAPTION>
1996
-------------------------
PERCENT OF
NET SALES TOTAL
----------- ------------
<S> <C> <C>
Roofing and Gutters..... $ 44,185 64.5%
Fencing................. 13,085 19.1
Garage, Entry and
Security Doors......... 9,259 13.5
Other................... 1,953 2.9
----------- -----
Total............... $ 68,482 100.0%
----------- -----
----------- -----
</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
$1,300. 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.
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 $2,300.
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 $1,150. 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.
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 in one market
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 and for the first six months of
1996, 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
32
<PAGE>
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 and gross profit
of product sold. In addition, in the event of improper estimating or other
errors which lead to a reduced gross profit on an installation, the sales
representative's commission is reduced by a portion of the reduced gross 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
<PAGE>
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 currently 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 76 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 and safety record 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
July 31, 1996, Marquise Financial had $17.2 million in consumer finance
receivables outstanding. 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 warranty obligations,
regardless of whether a manufacturer or independent contractor performs its
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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 and for the first six months of 1996, approximately 20% and 16%,
respectively, 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 six months ended June 30,
1995 and 1996, $5.5 million and $7.1 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 July 31, 1996, the Company employed 1,315 persons, including 725 Sales
Associates and 225 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 July 31, 1996, the Company leased 72 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) 46 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 72 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.
Marvin Lerman 54 Vice President -- Purchasing
Denis M. Haggerty 56 Vice President -- Sales and Marketing
Eugene J. O'Hern, Jr. 53 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 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
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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 was Vice President and Chief Financial Officer of Globe
from August 1994 to June 1996. 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. 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 served
as President and Chief Executive Officer from 1982 through 1990. From January
1993 to
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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. 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.
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. EUGENE J. O'HERN, JR. has been controller of the Company since July
1996. From January 1991 to June 1996, Mr. O'Hern was director of finance for the
Cinch Connector Division of L.C.S., Inc., a
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manufacturer and distributor of electrical connectors. From 1987 to January
1991, Mr. O'Hern was corporate controller for Woodstock Manufacturing
Corporation, a manufacturer of castings and forgings.
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.
Rodger 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, the former chief executive officer of the Company who terminated
service with the Company effective February 12, 1996 and a former vice president
of the Company who retired effective July 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. From April 1996
through July 1996, the date of his retirement, Mr. Ibach was a Vice
President of the Company and the President of Exteriors. Mr. Ibach has been
retained by the Company as a consultant through March 1997. Mr. Ibach will
receive $125,000 and the continuation of health, dental and life insurance
through March 1997 for his services as a consultant.
(6) Mr. Griffin resigned as the Chief Executive Officer, Chairman of the Board
and a director of the Company effective February 12, 1996.
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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 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 have been
granted to certain employees pursuant to the Stock Option Plan.
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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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: 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 Globe owned all of
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<PAGE>
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, had control over the Company. This agreement was
terminated June 20, 1996 in connection with the Company's initial public
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 June 30, 1996, an
aggregate of approximately $1.1 million of such security payments remained to be
paid with an aggregate of $190,000 to be paid to each of Messrs. Cianciosi,
Cooper, Ibach, Lerman and Schurter and an aggregate of $149,250 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 accrued at an annual rate
of 9% and was payable annually each year ending December 31, 1995 through
December 31, 1999, only if certain earnings targets were met for such year.
Likewise, principal payments on the Senior Manager Performance Notes were to be
paid each year only if either (i) that year's earnings target was met or (ii) a
cumulative earnings target equal to the sum of all previous years' earnings
targets was satisfied. Any principal amount of the Senior Manager Performance
Notes which had not been paid by December 31, 2000 was 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 were
at least $56.0 million. No payments were to be due or paid with respect to the
Senior Manager Performance Notes if the earnings targets had not been achieved
by December 31, 2009 and no interest payments were 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. In June 1996, the Company paid, using a portion of the net proceeds
from its initial public offering, the remaining
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principal on the Senior Manager Performance Notes aggregating $3.2 million, plus
accrued interest. (Mr. Griffin received $800,000, plus accrued interest and each
of Messrs. Cianciosi, Cooper, Gillespie, Ibach, Lerman and Schurter received
$400,000, plus accrued interest).
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 $1.0 million aggregate amount outstanding under the Senior Manager
Performance Note which was paid in full by the Company in March and June 1996.
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, all of which
were sold in June 1996 in connection with the Company's initial public offering;
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
terminated June 20, 1996.
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 June 30,
1996, approximately $2.7 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,
had control over the Company. This agreement was terminated on June 20, 1996.
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 provided 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 was based on a percentage of the Company's gross sales; provided,
however, that after December 31, 1997, such management fee could not 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 June 19, 1996, the date the management agreement was terminated in
connection with the Company's initial public offering, incurred management fees
to Globe of $310,000 for services in 1996.
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 specified the allocation and payment of liabilities and benefits
arising from the filing of a consolidated tax return. The tax sharing agreement
required the Company to pay its share of the consolidated federal tax liability,
as if it had taxable income, and to be compensated if losses or credits
generated benefits that were utilized to reduce the consolidated tax liability.
The tax sharing agreement was terminated in June 1996, simultaneously with the
date the Company no longer qualified to be included in Globe's consolidated tax
return.
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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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.
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" 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
51
<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 Company's initial public offering in June 1996, the
Company paid a special, one-time dividend of $8.6 million to its pre-initial
public offering stockholders, which included management and Globe, with a
portion of the net proceeds from the Company's initial public 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 of the Company immediately prior
to the Company's initial public offering, Globe received 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.
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.
52
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of July 31, 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>
SHARES NUMBER OF SHARES
BENEFICIALLY OWNED SHARES BEING BENEFICIALLY OWNED
PRIOR TO OFFERING OFFERED AFTER OFFERING
------------------ ------------ ------------------
NAME NUMBER PERCENT (1) NUMBER NUMBER PERCENT (1)
- ----------------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Globe Building Materials, Inc. (2)............. 4,167,000 45.9% 750,000 3,417,000 37.7%
C. Stephen Clegg (3)(4)........................ 4,176,763 46.0 750,000 3,426,763 37.7
James M. Gillespie (4)......................... 142,460 1.6 -- 142,460 1.6
Frank Cianciosi (4)............................ 139,750 1.5 -- 139,750 1.5
James F. Bere, Jr.............................. 5,000 * -- 5,000 *
Jacob Pollock (5).............................. 4,167,500 45.9 750,000 3,417,500 37.7
George A. Stinson (5).......................... 4,167,000 45.9 750,000 3,417,000 37.7
Jerome Cooper (4).............................. 137,575 1.5 -- 137,575 1.5
Rodger Ibach (6)............................... -- -- -- -- --
Donald Griffin (7)............................. -- -- -- -- --
All directors and executive officers as a group
(10 persons) (3)(4)(5)........................ 4,765,273 52.4 750,000 4,015,273 44.1
</TABLE>
- ------------------------
* Less than 1%.
(1) Percentage of beneficial ownership is based on 9,074,900 shares of Common
Stock outstanding as of July 31, 1996, including, in the case of Messrs.
Clegg, Gillespie, Cianciosi, Cooper and all directors and executive officers
as a group, the amount of shares of Common Stock which are subject to
presently exercisable options or options exercisable within 60 days of July
31, 1996 which are held by such individual or group.
(2) 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.
(3) 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.
(4) Includes 9,763 shares (Mr. Clegg), 1,806 shares (Mr. Gillespie), 2,400
shares (Mr. Cianciosi), 1,225 shares (Mr. Cooper) and 27,069 shares (all
directors and executive officers as a group) which are subject to presently
exercisable options or options exercisable within 60 days of July 31, 1996,
and excludes 29,287 shares (Mr. Clegg), 5,419 shares (Mr. Gillespie), 7,200
shares (Mr. Cianciosi), 3,675 shares (Mr. Cooper) and 81,207 shares (all
directors and executive officers as a group) subject to options which are
not presently exercisable or exercisable within 60 days of July 31, 1996.
53
<PAGE>
(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. Ibach is 14415 Westwood, Woodstock, IL 60098. Mr. Ibach
retired as a Vice President of the Company and President of Exteriors in
July, 1996.
(7) 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.
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 July 31,
1996, there were 9,074,900 shares of Common Stock outstanding and held of record
by 30 stockholders and no shares of Preferred Stock outstanding. In addition, at
July 31, 1996, options to purchase an aggregate of 275,000 shares of Common
Stock were outstanding.
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
54
<PAGE>
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 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 9,074,900
shares of Common Stock. All of the 750,000 shares sold in this offering,
together with the 3,933,000 shares sold in the Company's initial public
offering, will be freely tradeable by persons other than affiliates of the
Company. The remaining 4,391,900 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.
55
<PAGE>
The Company and the Selling Stockholder, holding in the aggregate 3,417,000
shares of Common Stock, or 37.7% 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) until December 16, 1996, without the prior written
consent of William Blair & Company, L.L.C., except for the Common Stock offered
hereby. See "Underwriting." After December 16, 1996, up to 4,391,900 shares may
be freely tradeable, subject to compliance with the terms and conditions of Rule
144.
The Company can make no predictions 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 approximately
4,167,000 shares of Common Stock (including the shares offered by Globe in this
offering) under the Securities Act. The registration of the shares offered
hereby has been requested by Globe in accordance with its registration rights.
The expenses associated with this offering will be paid by the Company pursuant
to the terms of the agreement. 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 one
occasion (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.
56
<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 Selling Stockholder has
agreed to sell to each of the Underwriters, and each of the Underwriters has
severally agreed to purchase from 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.................................................................. 750,000
--------
--------
</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. 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 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 Stockholder 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) until December 16,
1996, without the written consent of the Representative, except for the Common
Stock offered hereby. See "Shares Eligible For Future Sale -- Rule 144."
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 Stockholder 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.
In connection with this offering, the Underwriters and selling group
members, if any, may engage in passive market making transactions in the Common
Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Passive market
making consists of displaying bids on the Nasdaq National Market limited by the
prices of independent market makers and effecting purchases limited by such
prices and in response to order flow. Net purchases by a passive market maker on
each day are limited in amount to a specified percentage of the passive market
maker's average daily trading volume in the Common Stock during a specified
prior period and must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Common Stock at a level above that
which might otherwise prevail and, if commenced, may be discontinued at any
time.
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.
57
<PAGE>
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.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements, the
registration statement related to this offering and other information filed by
the Company may be inspected and copied at the public reference facilities of
the Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at Northwestern Atrium Center, 500
West Madison Street, Room 1400, Chicago, IL 60661, and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can also be
obtained at from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site that contains reports, proxy statements and other
information filed by the Company at (http://www.sec.gov).
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 June 30, 1996............................................ F-14
Unaudited Condensed Consolidated Statements of Operations for the three months and six months ended June
30, 1995 and 1996......................................................................................... F-15
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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, EXCEPT PER SHARE
DATA)
<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
--------- --------- -----------
--------- --------- -----------
Net income (loss) per share.............................................. $ (.12) $ .22 $ .60
--------- --------- -----------
--------- --------- -----------
Weighted average number of common shares outstanding..................... 10,000 9,062 6,250
--------- --------- -----------
--------- --------- -----------
</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 effected
immediately prior to the Company's initial public 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 SHEETS
ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------
(IN THOUSANDS)
<S> <C>
Current assets:
Cash and cash equivalents....................................................................... $ 10,546
Accounts receivable............................................................................. 6,598
Finance company accounts receivable............................................................. 16,382
Prepaids and other current assets............................................................... 746
Deferred income taxes........................................................................... 1,059
--------------
Total current assets ............................................................................. 35,331
Net property and equipment........................................................................ 1,523
Intangible assets, net............................................................................ 17,178
Deferred income taxes............................................................................. 887
Other............................................................................................. 1,229
--------------
Total assets...................................................................................... $ 56,148
--------------
--------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........................................................ $ 16,550
Due to stockholders............................................................................. 554
Income taxes.................................................................................... 206
--------------
Total current liabilities......................................................................... 17,310
Long-term liabilities:
Warranty and retention.......................................................................... 5,578
Due to stockholders............................................................................. 1,275
--------------
Total long-term liabilities....................................................................... 6,853
Stockholders' equity.............................................................................. 31,985
--------------
Total liabilities and stockholders' equity........................................................ $ 56,148
--------------
--------------
</TABLE>
See accompanying notes.
F-14
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1995 1996 1995 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales.......................................................... $ 31,134 $ 41,389 $ 53,496 $ 68,482
Cost of sales...................................................... 17,982 22,841 31,078 38,134
--------- --------- --------- ---------
Gross profit....................................................... 13,152 18,548 22,418 30,348
Operating expenses:
Selling, general, and administrative expense....................... 11,348 14,974 20,232 25,906
Operating interest expense......................................... -- 212 -- 234
Amortization expense............................................... 124 129 250 261
--------- --------- --------- ---------
Operating income................................................... 1,680 3,233 1,936 3,947
Interest expense, net.............................................. 152 30 338 96
--------- --------- --------- ---------
Income before income taxes......................................... 1,528 3,203 1,598 3,851
Income tax provision............................................... 634 1,284 705 1,583
--------- --------- --------- ---------
Net income......................................................... $ 894 $ 1,919 $ 893 $ 2,268
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share............................................... $ .14 $ .30 $ .14 $ .36
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common shares and equivalent
outstanding....................................................... 6,250 6,408 6,250 6,330
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-15
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
---------------------
1995 1996
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net income................................................................................ $ 893 $ 2,268
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 349 350
Deferred income taxes................................................................. (128) (491)
Changes in operating assets and liabilities:
Accounts receivable and other assets................................................ (886) (3,974)
Accounts payable and accrued expenses............................................... 1,538 3,679
Warranty and retention.............................................................. 1,068 961
--------- ----------
Net cash provided by operating activities............................................. 2,834 2,793
Investing activities:
Loans originated...................................................................... -- (18,825)
Loans repaid.......................................................................... -- 2,985
Capital expenditures.................................................................. (525) (219)
--------- ----------
Net cash used in investing activities................................................. (525) (16,059)
Financing activities:
Issuance of Common Stock, net of offering expenses.................................... -- 33,484
Common Stock dividend................................................................. -- (8,600)
Preferred Stock redemption............................................................ -- (1,400)
Repayment of bank line of credit, net................................................. (2,883) --
Payments due to stockholders.......................................................... (306) (4,387)
--------- ----------
Net cash provided by (used in) financing activities................................... (3,189) 19,097
--------- ----------
Net increase (decrease) in cash and cash equivalents.................................. (880) 5,831
Cash and cash equivalents at beginning of period...................................... 5,048 4,715
--------- ----------
Cash and cash equivalents at end of period............................................ $ 4,168 $ 10,546
--------- ----------
--------- ----------
Supplemental cash flow disclosure:
Interest paid......................................................................... $ 94 $ 738
--------- ----------
--------- ----------
Income taxes paid..................................................................... $ 934 $ 1,883
--------- ----------
--------- ----------
</TABLE>
See accompanying notes.
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 and six-month periods ended June 30, 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.
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.
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.
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)
The following summarized condensed financial information for Marquise
Financial is before eliminations of intercompany transactions in consolidation:
<TABLE>
<CAPTION>
JUNE 30,
1996
-----------
<S> <C>
ASSETS:
Cash......................................................................................... $ 604
Financing receivables........................................................................ 16,382
Other current assets......................................................................... 589
Intangibles, net............................................................................. 142
-----------
$ 17,717
-----------
-----------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Due to Diamond............................................................................... $ 17,545
Other........................................................................................ 52
-----------
Total liabilities........................................................................ 17,597
Total stockholder's equity................................................................... 120
-----------
Total liabilities and stockholder's equity............................................... $ 17,717
-----------
-----------
</TABLE>
Results of operations for the three months and six months ended June 30,
1996, respectively:
<TABLE>
<S> <C> <C>
Financing income................................................... $ 454 $ 493
Operating interest, general and administrative expenses............ 490 667
--------- ---------
Loss before tax benefit.......................................... (36) (174)
Income tax benefit................................................. 15 70
--------- ---------
Net loss......................................................... $ 21 $ 104
--------- ---------
--------- ---------
Cash flow data for the six months ended June 30, 1996:
Net cash used in operating activities.............................. $ (104)
Net cash used in investing activities.............................. (16,444)
Net cash provided by financing activities.......................... 17,152
---------
Cash at June 30, 1996............................................ $ 604
---------
---------
</TABLE>
4. STOCK OPTIONS
The Company has reserved 620,000 shares of Common Stock in respect to the
1996 Incentive Stock Option Plan. On June 19, 1996, the Company issued 275,000
options to purchase Common Stock at an exercise price of $13 per share. At June
30, 1996, 68,750 options to purchase Common Stock were exercisable. At June 30,
1996, no options to purchase Common Stock were exercised or cancelled.
5. COMMON STOCK OFFERING
In June 1996, the Company issued 2,824,950 shares of common stock (including
underwriters' over-allotment option) at $13 per share in its initial public
offering. Proceeds from the offering, net of underwriting commissions and
related expenses totaling $3.3 million, were $33.5 million. Following the
offering, the Company had 9,074,900 common shares issued and outstanding.
A portion of the offering proceeds were used to pay a $8.6 million special
dividend to pre-offering stockholders.
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
Price Range of Common Stock............................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Selected Consolidated Financial and Operating Data........................ 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
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............................................................. 57
Experts................................................................... 58
Additional Information.................................................... 58
Available Information..................................................... 58
Index to Consolidated Financial Statements................................ F-1
</TABLE>
750,000 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>
<S> <C>
SEC registration fee............................................. $ 6,919
NASD filing fee.................................................. 2,507
Printing expenses................................................ 75,000
Fees and expenses of counsel..................................... 50,000
Fees and expenses of accountants................................. 15,000
Transfer agent and registrar fees................................ 500
Blue sky fees and expenses....................................... 5,000
Miscellaneous.................................................... 20,074
---------
Total........................................................ $ 175,000
</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.
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 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.
II-1
<PAGE>
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.
5. On June 17, 1996, in connection with the Company's initial public
offering and, pursuant to Section 3(a)(9) of the Securities Act, the Company
reclassified 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.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of Diamond Home Services, Inc.
3.2 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. (1)
10.1(a) Amendment to Registration Rights Agreement between Diamond Home Service Inc. and Globe
Building Materials, Inc. (1)
10.2 Form of Indemnity Agreement between Diamond Home Services, Inc. and its directors and
certain officers. (1)
10.3(a) Amendment Agreement between Sears, Roebuck & Co. and Diamond Exteriors, Inc., dated July 1,
1996.
10.3 License Agreement between Sears, Roebuck and Co. and Diamond Exteriors, Inc., dated January
1, 1996. (1)
10.4 Lease between Diamond Home Services, Inc. and Haldun Square Partners dated May 3, 1995. (1)
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. (1)
10.6 Form of Agreement between Diamond Home Services, Inc. and certain of its managers. (1)
10.7 Diamond Home Services, Inc. Incentive Stock Option Plan. (1)
10.8 Diamond Home Services, Inc. 1996 Nonemployee Director Stock Option Plan. (1)
10.9 Credit Agreement between American National Bank and Trust Company of Chicago and Diamond
Home Services, Inc. (1)
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. (1)
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. (1)
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. (1)
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. (1)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
<S> <C>
10.9(e) Subordination Agreement among Diamond Home Services, Inc., Diamond Exteriors, Inc. and
American National Bank and Trust Company of Chicago. (1)
10.10 Settlement Agreement between Diamond Home Services, Inc. and Donald Griffin. (1)
10.11 License Agreement between Globe Building Materials, Inc. and Diamond Home Services, Inc.
(1)
10.12 Summary of Consultant Arrangement between Diamond Home Services, Inc. and Rodger Ibach
21.2 Subsidiaries of Diamond Home Services, Inc. (1)
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>
- ------------------------
(1) Incorporated herein by reference to the exhibit of equivalent number to the
Company's Registration Statement on Form S-1, as amended, Registration No.
333-3822.
(b) Financial Statement Schedules:
None.
ITEM 17. UNDERTAKINGS.
(a) 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.
(b) 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
August 27, 1996.
DIAMOND HOME SERVICES, INC.
By: /s/ C. STEPHEN CLEGG
-------------------------------------
CHAIRMAN OF THE BOARD, CHIEF
EXECUTIVE OFFICER
AND PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints C. Stephen Clegg, Richard G. Reece and Ann
Crowley Patterson and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities (including his capacity as a
director and/or officer of Diamond Home Services, Inc.) to sign any or all
amendments (including post-effective amendments) to this Registration Statement
and to sign a Registration Statement pursuant to Section 462(b) of the
Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney have been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- --------------------------------------------------- ----------------------------------------------- -----------------------
/s/ C. STEPHEN CLEGG
---------------------------------------- Chairman of the Board, Chief Executive Officer August 27, 1996
C. Stephen Clegg and President (Principal Executive Officer)
/S/ RICHARD G. REECE
---------------------------------------- Chief Financial Officer and Treasurer August 27, 1996
Richard G. Reece (Principal Financial and Accounting Officer)
/s/ JAMES BERE
---------------------------------------- Director August 27, 1996
James Bere
/s/ JACOB POLLOCK
---------------------------------------- Director August 27, 1996
Jacob Pollock
/s/ GEORGE A. STINSON
---------------------------------------- Director August 27, 1996
George A. Stinson
/s/ JAMES M. GILLESPIE
---------------------------------------- Director August 27, 1996
James M. Gillespie
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of Diamond Home Services, Inc.
3.2 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. (1)
10.1(a) Amendment to Registration Rights Agreement between Diamond Home Service Inc. and Globe
Building Materials, Inc. (1)
10.2 Form of Indemnity Agreement between Diamond Home Services, Inc. and its directors and
certain officers. (1)
10.3 License Agreement between Sears, Roebuck and Co. and Diamond Exteriors, Inc., dated January
1, 1996. (1)
10.3(a) Amendment Agreement between Sears, Roebuck & Co. and Diamond Exteriors, Inc., dated July 1,
1996.
10.4 Lease between Diamond Home Services, Inc. and Haldun Square Partners dated May 3, 1995. (1)
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. (1)
10.6 Form of Agreement between Diamond Home Services, Inc. and certain of its managers. (1)
10.7 Diamond Home Services, Inc. Incentive Stock Option Plan. (1)
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. (1)
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. (1)
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. (1)
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. (1)
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. (1)
10.9(e) Subordination Agreement among Diamond Home Services, Inc., Diamond Exteriors, Inc. and
American National Bank and Trust Company of Chicago. (1)
10.10 Settlement Agreement between Diamond Home Services, Inc. and Donald Griffin. (1)
10.11 License Agreement between Globe Building Materials, Inc. and Diamond Home Services, Inc. (1)
10.12 Summary of Consultant Arrangement between Diamond Home Services, Inc. and Rodger Ibach
21.2 Subsidiaries of Diamond Home Services, Inc. (1)
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>
- ------------------------
(1) Incorporated herein by reference to the exhibit of equivalent number to the
Company's Registration Statement on Form S-1, as amended, Registration No.
333-3822.
<PAGE>
Draft 8/27/96
DIAMOND HOME SERVICES, INC.
750,000 Shares Common Stock
UNDERWRITING AGREEMENT
________ ___, 1996
WILLIAM BLAIR & COMPANY, L.L.C.
As Representative of the Several
Underwriters Named in Schedule A
c/o William Blair & Company, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
SECTION 1. INTRODUCTORY. Diamond Home Services, Inc. ("COMPANY") a
Delaware corporation, has an authorized capital stock consisting of 4,000,000
shares of Preferred Stock, $.001 par value, of which no shares were
outstanding as of ________________, 1996 and 25,000,000 shares, $.001 par
value, of Common Stock ("COMMON STOCK"), of which ____________ shares were
outstanding as of such date. GBM, Inc. ("GBM"), a Delaware corporation and
wholly-owned subsidiary of Globe Building Materials, Inc., a Delaware
corporation, proposes to sell 750,000 shares of the Company's issued and
outstanding Common Stock to the several underwriters named in Schedule A as
it may be amended by the Pricing Agreement hereinafter defined
("UNDERWRITERS"), who are acting severally and not jointly. Globe Building
Materials, Inc. and its subsidiaries, including GBM, are herein collectively
referred to as "Globe" or the "Selling Stockholder." Such total of 750,000
shares of Common Stock proposed to be sold by GBM is hereinafter referred to
as the "SHARES."
You have advised the Company and the Selling Stockholder that the
Underwriters propose to make a public offering of the Shares as soon as you deem
advisable after the registration statement hereinafter referred to becomes
effective, if it has not yet become effective, and the Pricing Agreement
hereinafter defined has been executed and delivered.
Prior to the purchase and public offering of the Shares by the several
Underwriters, the Selling Stockholder and the Representative, acting on behalf
of the several Underwriters, shall enter into an agreement substantially in the
form of Exhibit A hereto (the "PRICING AGREEMENT"). The Pricing Agreement may
take the form of an exchange of any standard form of written telecommunication
between the Selling Stockholder and the Representative and shall specify such
applicable information as is indicated in Exhibit A hereto. The offering of the
Shares will be governed by this Agreement, as supplemented by the Pricing
Agreement. From and after the date of the execution and delivery of the Pricing
Agreement, this Agreement shall be deemed to incorporate the Pricing Agreement.
<PAGE>
The Company and the Selling Stockholder hereby confirm their agreements
with the Underwriters as follows:
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-____) and a
related preliminary prospectus with respect to the Shares have been
prepared and filed with the Securities and Exchange Commission
("COMMISSION") by the Company in conformity with the requirements of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "1933 ACT;" all references herein
to specific rules are rules promulgated under the 1933 Act); the Company
has so prepared and has filed such amendments thereto, if any, and such
amended preliminary prospectuses as may have been required to the date
hereof and will file such additional amendments thereto and such amended
prospectuses as may hereafter be required. There have been or will
promptly be delivered to you two signed copies of such registration
statement and amendments, two copies of each exhibit filed therewith, and
conformed copies of such registration statement and amendments (but without
exhibits) and of the related preliminary prospectus or prospectuses and
final forms of prospectus for each of the Underwriters.
Such registration statement (as amended, if applicable) at the time it
becomes effective and the prospectus constituting a part thereof (including
the information, if any, deemed to be part of the registration statement at
the time of effectiveness pursuant to Rule 430A(b) and/or Rule 434(d)), as
from time to time amended or supplemented, are hereinafter referred to as
the "REGISTRATION STATEMENT" and the "PROSPECTUS," respectively, except
that if any revised prospectus shall be provided to the Underwriters by the
Company for use in connection with the offering of the Shares which differs
from the Prospectus on file at the Commission at the time the Registration
Statement became or becomes effective (whether or not such revised
prospectus is required to be filed by the Company pursuant to Rule 424(b)),
the term "Prospectus" shall refer to such revised prospectus from and after
the time it was provided to the Underwriters for such use. If the Company
elects to rely on Rule 434 of the 1933 Act, all references to "Prospectus"
shall be deemed to include, without limitation, the form of prospectus and
the term sheet, taken together, provided to the Underwriters by the Company
in accordance with Rule 434 of the 1933 Act (the "RULE 434 PROSPECTUS").
Any registration statement (including any amendment or supplement thereto
or information which is deemed to be a part thereof) filed by the Company
under Rule 462(b) (the "RULE 462(b) REGISTRATION STATEMENT") shall be
deemed to be part of the "Registration Statement" as defined herein, and
any prospectus (including any amendment or supplement thereto or
information which is deemed a part thereof) included in such registration
statement shall be deemed to be a part of the "Prospectus" as defined
herein, as appropriate. The Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission thereunder are hereinafter
collectively referred to as the "EXCHANGE ACT."
(b) The Commission has not issued any order preventing or suspending
the use of any preliminary prospectus, and each preliminary prospectus has
conformed in all material respects with the requirements of the 1933 Act
and, as of its date, has not included any untrue statement of a material
fact or omitted to state a material fact necessary to make the statements
therein not misleading; and when the Registration Statement became or
becomes effective, and at all times subsequent thereto, up to the Closing
Date hereinafter defined, the Registration Statement, including the
information deemed to be part of the Registration Statement at the time of
effectiveness pursuant to Rule
(2)
<PAGE>
430A(b) or Rule 434(d), if applicable, and the Prospectus and any
amendments or supplements thereto, contained or will contain all statements
that are required to be stated therein in accordance with the 1933 Act and
in all material respects conformed or will in all material respects conform
to the requirements of the 1933 Act, and neither the Registration Statement
nor the Prospectus, nor any amendment or supplement thereto, included or
will include any untrue statement of a material fact or omitted or will
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, that the
Company makes no representation or warranty as to information contained in
or omitted from any preliminary prospectus, the Registration Statement, the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on
behalf of any Underwriter through the Representative specifically for use
in the preparation thereof.
(c) The Company and its subsidiaries have been duly incorporated and
are validly existing as corporations in good standing under the laws of
their respective places of incorporation, with corporate power and
authority to own their properties and conduct their business as described
in the Prospectus; the Company and each of its subsidiaries are duly
qualified to do business as foreign corporations under the corporation law
of, and are in good standing as such in, each jurisdiction in which they
own or lease substantial properties, have an office, or in which
substantial business is conducted and such qualification is required except
in any such case where the failure to so qualify or be in good standing
would not have a material adverse effect upon the Company and its
subsidiaries taken as a whole; and no proceeding of which the Company has
knowledge has been instituted in any such jurisdiction, revoking, limiting
or curtailing, or seeking to revoke, limit or curtail, such power and
authority or qualification.
(d) Except as disclosed in the Registration Statement, the Company
owns directly or indirectly 100 percent of the issued and outstanding
capital stock of each of its subsidiaries, free and clear of any claims,
liens, encumbrances or security interests and all of such capital stock has
been duly authorized and validly issued and is fully paid and
nonassessable.
(e) The issued and outstanding shares of capital stock of the Company
as set forth in the Prospectus have been duly authorized and validly
issued, are fully paid and nonassessable, and conform to the description
thereof contained in the Prospectus.
(f) The making and performance by the Company of this Agreement and
the Pricing Agreement have been duly authorized by all necessary corporate
action and will not violate any provision of the Company's charter or
bylaws and will not result in the breach, or be in contravention, of any
provision of any material agreement, franchise, license, indenture,
mortgage, deed of trust, or other material instrument to which the Company
or any subsidiary is a party or by which the Company, any subsidiary or the
property of any of them may be bound or affected, or any order, rule or
regulation applicable to the Company or any subsidiary of any court or
regulatory body, administrative agency or other governmental body having
jurisdiction over the Company or any subsidiary or any of their respective
properties, or any order of any court or governmental agency or authority
entered in any proceeding to which the Company or any subsidiary was or is
now a party or by which it is bound. No consent, approval, authorization
or other order of any court, regulatory body, administrative agency or
other governmental body is required for the execution and delivery of this
Agreement or the Pricing Agreement or the consummation of the transactions
contemplated herein or therein, except for compliance with the 1933 Act and
blue sky laws applicable to the public offering of the Shares
(3)
<PAGE>
by the several Underwriters and clearance of such offering with the
National Association of Securities Dealers, Inc. ("NASD"). This Agreement
has been duly executed and delivered by the Company.
(g) The accountants who have expressed their opinions with respect to
certain of the financial statements and schedules included in the
Registration Statement are independent accountants as required by the 1933
Act.
(h) The consolidated financial statements and schedules of the
Company included in the Registration Statement present fairly the
consolidated financial position of the Company as of the respective dates
of such financial statements, and the consolidated results of operations
and cash flows of the Company for the respective periods covered thereby,
all in conformity with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
in the Prospectus; and the supporting schedules included in the
Registration Statement present fairly the information required to be stated
therein. The financial information set forth in the Prospectus under
"Selected Consolidated Financial and Operating Data" presents fairly, on
the basis stated in the Prospectus, the information set forth therein.
(i) Neither the Company nor any subsidiary is in violation of its
charter or in default under any consent decree, or in default with respect
to any material provision of any lease, loan agreement, franchise, license,
permit or other contract obligation to which it is a party; and, to the
Company's knowledge, there does not exist any state of facts which
constitutes an event of default as defined in such documents or which, with
notice or lapse of time or both, would constitute such an event of default,
in each case, except for defaults which neither singly nor in the aggregate
are material to the Company and its subsidiaries taken as a whole.
(j) There are no material legal or governmental proceedings pending,
or to the Company's knowledge, threatened to which the Company or any
subsidiary is or may be a party or of which material property owned or
leased by the Company or any subsidiary is or may be the subject, or
related to environmental or discrimination matters which are not disclosed
in the Prospectus, or which question the validity of this Agreement or the
Pricing Agreement or any action taken or to be taken pursuant hereto or
thereto.
(k) There are no holders of securities of the Company having rights
to registration thereof or preemptive rights to purchase Common Stock
except as disclosed in the Prospectus. Holders of registration rights who
are not the Selling Stockholder have waived such rights with respect to the
offering being made by the Prospectus.
(l) The Company and each of its subsidiaries have good and marketable
title to all the properties and assets reflected as owned in the financial
statements hereinabove described (or elsewhere in the Prospectus), subject
to no lien, mortgage, pledge, charge or encumbrance of any kind except
those, if any, reflected in such financial statements (or elsewhere in the
Prospectus) or which are not material to the Company and its subsidiaries
taken as a whole. The Company
(4)
<PAGE>
and each of its subsidiaries hold their respective leased properties which
are material to the Company and its subsidiaries taken as a whole under
valid and binding leases.
(m) The Company has not taken and will not take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result, under the Exchange Act or
otherwise, in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares.
(n) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as
contemplated by the Prospectus, the Company and its subsidiaries, taken as
a whole, have not incurred any material liabilities or obligations, direct
or contingent, nor entered into any material transactions not in the
ordinary course of business and there has not been any material adverse
change in their condition (financial or otherwise) or results of operations
nor any material change in their capital stock, short-term debt or
long-term debt.
(o) The Company agrees not to sell, contract to sell or otherwise
dispose of any Common Stock or securities convertible into Common Stock
(except Common Stock issued pursuant to currently outstanding options,
warrants or convertible securities and stock options issued as of the
effective date of the Registration Statement) until December 16, 1996
without the prior written consent of the Representative. The Company has
obtained similar agreements from each of its officers and directors.
(p) There is no material document of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement which is not described or filed as
required.
(q) The Company together with its subsidiaries owns and possesses all
right, title and interest in and to, or has duly licensed or otherwise
lawfully acquired from third parties, all trademarks, copyrights and other
proprietary rights ("TRADE RIGHTS") material to the business of the Company
and each of its subsidiaries taken as a whole. Neither the Company nor any
of its subsidiaries has received any notice of infringement,
misappropriation or conflict from any third party as to such material Trade
Rights which has not been resolved or disposed of and neither the Company
nor any of its subsidiaries has infringed, misappropriated or otherwise
conflicted with material Trade Rights of any third parties, which
infringement, misappropriation or conflict would have a material adverse
effect upon the condition (financial or otherwise) or results of operations
of the Company and its subsidiaries taken as a whole.
(r) The conduct of the business of the Company and each of its
subsidiaries is in compliance in all respects with applicable federal,
state, local and foreign laws and regulations, except where the failure to
be in compliance would not have a material adverse effect upon the
condition (financial or otherwise) or results of operations of the Company
and its subsidiaries taken as a whole.
(s) All offers and sales of the Company's capital stock prior to the
date hereof were either registered under the 1933 Act or were at all
relevant times exempt from the registration requirements of the 1933 Act
and were duly registered with or the subject of an available exemption from
the registration requirements of the applicable state securities or blue
sky laws.
(5)
<PAGE>
(t) The Company has filed all necessary federal and state income and
franchise tax returns and has paid all taxes shown as due thereon, and
there is no tax deficiency that has been, or to the knowledge of the
Company might be, asserted against the Company or any of its properties or
assets that would or could be expected to have a material adverse affect
upon the condition (financial or otherwise) or results of operations of the
Company and its subsidiaries taken as a whole, other than any such taxes as
are being contested in good faith.
(u) A registration statement relating to the Common Stock has been
declared effective by the Commission pursuant to the Exchange Act and the
Common Stock is duly registered thereunder. The Shares have been listed on
the Nasdaq National Market, subject to notice of issuance or sale of the
Shares, as the case may be.
(v) The Company is not, and does not intend to conduct its business
in a manner in which it would become, an "investment company" as defined in
Section 3(a) of the Investment Company Act of 1940, as amended ("INVESTMENT
COMPANY ACT").
(w) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and the
Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after
the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported in
the Prospectus, if any, concerning the Company's business with Cuba or with
any person or affiliate located in Cuba changes in any material way, the
Company will provide the Department notice of such business or change, as
appropriate, in a form acceptable to the Department.
(x) The Company has filed all documents and reports required to be
filed with the Commission under the Exchange Act. Such documents or
reports, when they were filed with the Commission, conformed in all
material respects to the requirements of the Exchange Act and none of such
documents or reports contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading.
SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLING
STOCKHOLDER.
(a) The Selling Stockholder represents and warrants to, and agrees
with, the Company and the Underwriters that:
(i) GBM has, and on the Closing Date as hereinafter defined,
will have, valid marketable title to the Shares proposed to be sold
by GBM hereunder on such date and each of Globe and GBM have full
right, power (corporate and other) and authority to enter into this
Agreement and the Pricing Agreement and to sell, assign, transfer and
deliver such Shares hereunder, free and clear of all voting trust
arrangements, liens, encumbrances, equities, claims and community
property rights; the execution and delivery of this Agreement and the
Pricing Agreement have been duly authorized by all necessary corporate
action of Globe and GBM; this Agreement and the Pricing Agreement have
been duly executed and delivered by or on behalf of Globe and GBM; and
upon delivery of and payment for such Shares hereunder,
(6)
<PAGE>
the Underwriters will acquire valid marketable title thereto, free and
clear of all voting trust arrangements, liens, encumbrances, equities,
claims and community property rights.
(ii) GBM and Globe have not taken and will not take, directly or
indirectly, any action designed to or which might be reasonably
expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares.
(iii) GBM and Globe agree with the Company and the Underwriters
not to sell, contract to sell or otherwise dispose of any Common Stock
until December 16, 1996 without the prior written consent of the
Representative.
(b) GBM and Globe represent and warrant to, and agree with, the
Underwriters to the same effect as the representations and warranties of
the Company set forth in Section 2 of this Agreement.
(c) In order to document the Underwriter's compliance with the
reporting and withholding provisions of the Internal Revenue Code of 1986,
as amended, with respect to the transactions herein contemplated, GBM
agrees to deliver to you prior to or on the Closing Date, as hereinafter
defined, a properly completed and executed United States Treasury
Department Form W-8 or W-9 (or other applicable form of statement specified
by Treasury Department regulations in lieu thereof).
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITERS. The
Representative, on behalf of the several Underwriters, represents and warrants
to the Company and the Selling Stockholder that the information set forth (a) on
the cover page of the Prospectus with respect to price, underwriting discount
and terms of the offering and (b) under "Underwriting" in the Prospectus was
furnished to the Company by and on behalf of the Underwriters for use in
connection with the preparation of the Registration Statement and is correct and
complete in all material respects. The Representative represents and warrants
that it has been authorized by each of the other Underwriters as the
Representative to enter into this Agreement on its behalf and to act for it in
the manner herein provided.
SECTION 5. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, GBM agrees to sell to the Underwriters
named in Schedule A hereto, and the Underwriters agree, severally and not
jointly, to purchase from GBM 750,000 Shares hereto at the price per share set
forth in the Pricing Agreement. The obligation of each Underwriter to GBM
shall be to purchase from GBM the number of shares set forth opposite the name
of such Underwriter in Schedule A to this Agreement. The initial public
offering price and the purchase price shall be set forth in the Pricing
Agreement.
At 9:00 A.M., Chicago Time, on the fourth business day, if permitted under
Rule 15c6-1 under the Exchange Act (or the third business day if required under
Rule 15c6-1 under the Exchange Act or unless postponed in accordance with the
provisions of Section 11 hereof) following the date the Registration Statement
becomes effective (or, if the Company has elected to rely upon Rule 430A, the
fourth business day, if permitted under Rule 15c6-1 under the Exchange Act (or
the third business day if required under Rule 15c6-1 under the Exchange Act)
after execution of the Pricing Agreement), or such other time not later than ten
business days after such date as you and the Selling Stockholder may agree, the
Selling Stockholder will deliver to you at the offices of counsel for the
Company or through the
(7)
<PAGE>
facilities of The Depository Trust Company for the accounts of the several
Underwriters, certificates representing the Shares to be sold against payment
of the purchase price therefor, at the direction of GBM by wire transfer of
same-day funds or certified or bank cashier's checks in Federal funds
(same-day funds) payable to the order of GBM. Such time of delivery and
payment is herein referred to as the "CLOSING DATE." The certificates for the
Shares so to be delivered will be in such denominations and registered in
such names as you request by notice to the Selling Stockholder prior to 10:00
A.M., Chicago Time, on the third full business day preceding the Closing
Date, and will be made available at the Company's expense for checking and
packaging by the Representative at 10:00 A.M., Chicago Time, on the first
full business day preceding the Closing Date. Payment for the Shares so to
be delivered shall be made at the time and in the manner described above at
the offices of counsel for the Company.
You have advised the Selling Stockholder that each Underwriter has
authorized you to accept delivery of its Shares, to make payment and to receipt
therefor. You, individually and not as the Representative of the Underwriters,
may make payment for any Shares to be purchased by any Underwriter whose funds
shall not have been received by you by the Closing Date for the account of such
Underwriter, but any such payment shall not relieve such Underwriter from any
obligation hereunder.
(8)
<PAGE>
SECTION 6. COVENANTS OF THE COMPANY. The Company covenants and agrees
that:
(a) The Company will advise you and the Selling Stockholder promptly
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the institution of any
proceedings for that purpose, or of any notification of the suspension of
qualification of the Shares for sale in any jurisdiction or the initiation
or threatening of any proceedings for that purpose, and will also advise
you and the Selling Stockholder promptly of any request of the Commission
for amendment or supplement of the Registration Statement, of any
preliminary prospectus or of the Prospectus, or for additional information,
and will not file any amendment or supplement to the Registration
Statement, to any preliminary prospectus or to the Prospectus of which you
and the Selling Stockholder have not been furnished with a copy prior to
such filing or to which you reasonably object.
(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the 1933 Act any event occurs as a result of
which the Prospectus, including any amendments or supplements, would
include an untrue statement of a material fact, or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the
Prospectus, including any amendments or supplements thereto and including
any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Shares which differs
from the prospectus on file with the Commission at the time of
effectiveness of the Registration Statement, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) to comply with
the 1933 Act, the Company promptly will advise you thereof and will
promptly prepare and file with the Commission an amendment or supplement
which will correct such statement or omission or an amendment which will
effect such compliance; and, in case any Underwriter is required to deliver
a prospectus nine months or more after the effective date of the
Registration Statement, the Company upon request, but at the expense of
such Underwriter, will prepare promptly such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section
10(a)(3) of the 1933 Act.
(c) Neither the Company nor any of its subsidiaries will, prior to
the Closing Date, incur any liability or obligation, direct or
contingent, or enter into any material transaction, other than in the
ordinary course of business, except as contemplated by the Prospectus.
(d) Neither the Company nor any of its subsidiaries will acquire any
capital stock of the Company prior to the Closing Date nor will the Company
declare or pay any dividend or make any other distribution upon the Common
Stock payable to stockholders of record on a date prior to the Closing
Date, except in either case as contemplated by the Prospectus.
(e) Not later than 45 days after the end of the first quarter ending
more than one year from the effective date of the Registration Statement,
the Company will make generally available to its security holders an
earnings statement (which need not be audited) covering a period of at
least 12 months beginning after the effective date of the Registration
Statement, which will satisfy the provisions of the last paragraph of
Section 11(a) of the 1933 Act.
(9)
<PAGE>
(f) During such period as a prospectus is required by law to be
delivered in connection with offers and sales of the Shares by an
Underwriter or dealer, the Company will furnish to you at its expense,
subject to the provisions of subsection (b) hereof, copies of the
Registration Statement, the Prospectus, each preliminary prospectus and all
amendments and supplements to any such documents in each case as soon as
available and in such quantities as you may reasonably request, for the
purposes contemplated by the 1933 Act.
(g) The Company will cooperate with the Underwriters in qualifying or
registering the Shares for sale under the blue sky laws of such
jurisdictions as you designate, and will continue such qualifications in
effect so long as reasonably required for the distribution of the Shares.
The Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any such jurisdiction where
it is not currently qualified or where it would be subject to taxation as a
foreign corporation.
(h) During the period of five years hereafter, the Company will
furnish you and, upon your request, each of the other Underwriters with a
copy (i) as soon as practicable after the filing thereof, of each report
filed by the Company with the Commission, any securities exchange or the
NASD; (ii) as soon as practicable after the release thereof, of each
material press release in respect of the Company; and (iii) as soon as
available, of each report of the Company mailed to stockholders.
(i) If, at the time of effectiveness of the Registration Statement,
any information shall have been omitted therefrom in reliance upon Rule
430A and/or Rule 434, then immediately following the execution and delivery
of the Pricing Agreement, the Company will prepare, and file or transmit
for filing with the Commission in accordance with such Rule 430A, Rule
424(b) and/or Rule 434, as the case may be, copies of an amended prospectus
or term sheet, as the case may be, or, if required by such Rule 430A, or
Rule 434, as the case may be, a post-effective amendment to the
Registration Statement (including an amended prospectus), containing all
information so omitted. If required, the Company will prepare and file, or
transmit for filing, a Rule 462(b) Registration Statement immediately
following the execution and delivery of the Pricing Agreement. If a 462(b)
Registration Statement is filed, the Company shall make payment of, or
arrange for payment of, the additional registration fee owing to the
Commission required by Rule 111.
(j) The Company will comply with all registration, filing and
reporting requirements of the Exchange Act and the Nasdaq National Market.
SECTION 7. PAYMENT OF EXPENSES. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective as to
all of its provisions or is terminated, the Company agrees to pay (i) all costs,
fees and expenses (other than legal fees and disbursements of counsel for the
Underwriters and the expenses incurred by the Underwriters) incurred in
connection with the performance of the Company's obligations hereunder,
including without limiting the generality of the foregoing, all fees and
expenses of legal counsel for the Company and of the Company's independent
accountants, all costs and expenses incurred in connection with the preparation,
printing, filing and distribution of the Registration Statement, each
preliminary prospectus and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided for herein, this
Agreement, the Pricing Agreement and the Blue Sky Memorandum, (ii) all costs,
fees and expenses (including legal fees not to exceed $15,000 and disbursements
of counsel for the Underwriters) incurred by the Underwriters in connection with
qualifying or registering all or any part of the Shares for offer and sale under
blue sky laws, including the preparation of a blue sky memorandum relating to
the Shares
(10)
<PAGE>
and clearance of such offering with the NASD; and (iii) all fees and expenses of
the Company's transfer agent, printing of the certificates for the Shares and
all transfer taxes, if any, with respect to the sale and delivery of the Shares
to the several Underwriters. Except as provided in this Section 7, Section 9,
Section 11 and Section 14 hereof, the Underwriters shall pay all of their own
expenses, including the fees and disbursements of their counsel (excluding those
relating to qualification, registration or exemption under the Blue Sky laws,
the Blue Sky Memorandum referred to above and clearance of the offering with the
NASD).
The provisions of this Section shall not affect any agreement which the
Company and the Selling Stockholder may make for the allocation or sharing of
such expenses and costs.
SECTION 8. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Shares on
the Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholder herein set
forth as of the date hereof and as of the Closing Date to the accuracy of the
statements of officers of the Company made pursuant to the provisions hereof,
to the performance by the Company and the Selling Stockholder of their
respective obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective either
prior to the execution of this Agreement or not later than 1:00 P.M.,
Chicago Time, on the first full business day after the date of this
Agreement, or such later time as shall have been consented to by you but in
no event later than 1:00 P.M., Chicago Time, on the third full business day
following the date hereof; and prior to the Closing Date, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or
shall be pending or, to the knowledge of the Company, the Selling
Stockholder or you, shall be contemplated by the Commission. If the
Company has elected to rely upon Rule 430A and/or Rule 434, the information
concerning the initial public offering price of the Shares and
price-related information shall have been transmitted to the Commission for
filing pursuant to Rule 424(b) within the prescribed period and the Company
will provide evidence satisfactory to the Representative of such timely
filing (or a post-effective amendment providing such information shall have
been filed and declared effective in accordance with the requirements of
Rules 430A and 424(b)). If a Rule 462(b) Registration Statement is
required, such Registration Statement shall have been transmitted to the
Commission for filing and become effective within the prescribed time
period and, prior to the Closing Date, the Company shall provide evidence
of such filing and effectiveness in accordance with Rule 462(b).
(b) The Shares shall have been qualified for sale under the blue sky
laws of such states as shall have been specified by the Representative.
(c) The legality and sufficiency of the authorization, issuance and
sale or transfer and sale of the Shares hereunder, the validity and form of
the certificates representing the Shares, the execution and delivery of
this Agreement and the Pricing Agreement, and all corporate proceedings and
other legal matters incident thereto, and the form of the Registration
Statement and the Prospectus (except financial statements) shall have been
approved by counsel for the Underwriters exercising reasonable judgment.
(11)
<PAGE>
(d) You shall not have advised the Company that the Registration
Statement or the Prospectus or any amendment or supplement thereto,
contains an untrue statement of fact, which, in the opinion of counsel for
the Underwriters, is material or omits to state a fact which, in the
opinion of such counsel, is material and is required to be stated therein
or necessary to make the statements therein not misleading.
(e) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred any change, or any development involving a
prospective change, in or affecting particularly the business or properties
of the Company or its subsidiaries, whether or not arising in the ordinary
course of business, which, in the reasonable judgment of the
Representative, makes it impractical or inadvisable to proceed with the
public offering or purchase of the Shares as contemplated hereby.
(f) There shall have been furnished to you, as Representative of the
Underwriters, on the Closing Date, except as otherwise expressly provided
below:
(i) An opinion of McDermott, Will & Emery, counsel for the
Company and for the Selling Stockholder, addressed to the
Underwriters and dated the Closing Date, to the effect that:
(1) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Delaware with corporate power and corporate authority to
own its properties and conduct its business as described in the
Prospectus; and the Company has been duly qualified to do
business as a foreign corporation under the corporation law of,
and is in good standing as such in, every jurisdiction where the
ownership or leasing of property, or the conduct of its business
requires such qualification except where the failure so to
qualify would not have a material adverse effect upon the
condition (financial or otherwise) or results of operations of
the Company and its subsidiaries taken as a whole;
(2) an opinion to the same general effect as clause (1) of
this subparagraph (i) in respect of each subsidiary of the
Company;
(3) all of the issued and outstanding capital stock of each
subsidiary of the Company has been duly authorized, validly
issued and is fully paid and nonassessable, and, except as
disclosed in the Registration Statement, the Company owns
directly or indirectly 100 percent of the outstanding capital
stock of each subsidiary, and to the knowledge of such counsel,
such stock is owned free and clear of any claims, liens,
encumbrances or security interests;
(4) the authorized capital stock of the Company, of which
there is outstanding the amount set forth in the Registration
Statement and Prospectus (except for subsequent issuances, if
any, pursuant to stock options or other rights referred to in the
Prospectus), conforms as to legal matters in all material
respects to the description thereof in the Registration Statement
and Prospectus;
(5) the issued and outstanding capital stock of the Company
has been duly authorized and validly issued and is fully paid and
nonassessable;
(12)
<PAGE>
(6) the certificates for the Shares to be delivered
hereunder are in due and proper form, and when duly countersigned
by the Company's transfer agent and delivered to you or upon your
order against payment of the agreed consideration therefor in
accordance with the provisions of this Agreement and the Pricing
Agreement, the Shares represented thereby will be duly authorized
and validly issued, fully paid and nonassessable;
(7) the Registration Statement has become effective under
the 1933 Act, and, to the knowledge of such counsel, no stop
order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the 1933 Act, and
the Registration Statement (including the information deemed to
be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b) and/or Rule 434(d), if
applicable), the Prospectus and each amendment or supplement
thereto (except for the financial statements and other
statistical or financial data included therein as to which such
counsel need express no opinion) comply as to form in all
material respects with the requirements of the 1933 Act; nothing
has come to the attention of such counsel that would cause them
to believe that either the Registration Statement (including the
information deemed to be part of the Registration Statement at
the time of effectiveness pursuant to Rule 430A(b) and/or Rule
434(d), if applicable) or the Prospectus, or the Registration
Statement or the Prospectus as amended or supplemented (except as
aforesaid), as of their respective effective or issue dates,
contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that the
Prospectus as amended or supplemented, if applicable, as of the
Closing Date contained any untrue statement of a material fact
or omitted to state any material fact necessary to make the
statements therein not misleading in light of the circumstances
under which they were made; the statements in the Registration
Statement and the Prospectus summarizing statutes, rules and
regulations are accurate and fairly and correctly present the
information required to be presented by the 1933 Act or the rules
and regulations thereunder, in all material respects and such
counsel does not know of any statutes, rules and regulations
required to be described or referred to in the Registration
Statement or the Prospectus that are not described or referred
to therein as required; and such counsel does not know of any
legal or governmental proceedings pending or threatened against
the Company required to be described in the Prospectus which are
not described as required, nor of any contracts or documents of a
character required to be described in the Registration Statement
or Prospectus or to be filed as exhibits to the Registration
Statement which are not described or filed, as required;
(8) the statements under the captions "Business - Sears
License Agreement," "Management - Stock Option Plans," "Certain
Transactions," "Description of Capital Stock" and "Shares
Eligible for Future Sale" in the Prospectus, insofar as such
statements constitute a summary of documents referred to therein
or matters of law, are accurate summaries and fairly and
correctly present, in all material respects, the information
called for with respect to such documents and matters;
(13)
<PAGE>
(9) this Agreement and the Pricing Agreement and the
performance of the Company's obligations hereunder have been duly
authorized by all necessary corporate action and this Agreement
and the Pricing Agreement have been duly executed and delivered
by and on behalf of the Company, and are legal, valid and binding
agreements of the Company, except as enforceability of the same
may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights and
by the exercise of judicial discretion in accordance with general
principles applicable to equitable and similar remedies and
except as to those provisions relating to indemnities and
contribution for liabilities arising under the 1933 Act as to
which no opinion need be expressed; and no approval,
authorization or consent of any public board, agency, or
instrumentality of the United States or of any state or other
jurisdiction is necessary in connection with the issue or sale of
the Shares pursuant to this Agreement (other than under the 1933
Act, applicable blue sky laws and the rules of the NASD) or the
consummation of any other transactions contemplated hereby;
(10) the execution and performance of this Agreement will
not contravene any of the provisions of, or result in a default
under, any agreement, franchise, license, indenture, mortgage,
deed of trust, or other instrument known to such counsel, of the
Company or any of its subsidiaries or by which the property of
any of them is bound and which contravention or default would be
material to the Company and its subsidiaries taken as a whole; or
violate any of the provisions of the charter or bylaws of the
Company or any of its subsidiaries or, so far as is known to such
counsel, violate any statute, order, rule or regulation of any
regulatory or governmental body having jurisdiction over the
Company or any of its subsidiaries;
(11) with respect to Globe and GBM, this Agreement and the
Pricing Agreement have been duly authorized by all necessary
corporate action and this Agreement and the Pricing Agreement
have been duly executed and delivered by or on behalf of Globe
and GBM; and the performance of this Agreement and the Pricing
Agreement and the consummation of the transactions herein
contemplated by Globe and GBM will not violate any provision of
Globe's or GBM's charter or by-laws and will not result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any indenture, mortgage,
deed of trust, note agreement or other agreement or instrument
known to such counsel to which Globe or GBM is a party or by
which it is bound or to which any of the property of Globe or GBM
is subject, or any order, rule or regulation known to such
counsel of any court or governmental agency or body having
jurisdiction over Globe or GBM or any of its properties; and no
consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of
the transactions contemplated by this Agreement and the Pricing
Agreement in connection with the sale of Shares to be sold by GBM
hereunder, except such as have been obtained under the 1933 Act
and such as may be required under applicable blue sky laws in
connection with the purchase and distribution of such Shares by
the Underwriters and the clearance of such offering with the
NASD;
(14)
<PAGE>
(12) Globe and GBM have full right, power and authority to
enter into this Agreement and the Pricing Agreement and to sell,
transfer and deliver the Shares to be sold on the Closing Date
by GBM hereunder and hold such Shares, free and clear of all
voting trust arrangements, liens, encumbrances, equities, claims
and community property rights whatsoever, and upon payment for,
and delivery of certificates representing, the Shares, and
assuming the Underwriters acquire the Shares in good faith
without notice of any adverse claim, the Underwriters who have
purchased the Shares will hold the Shares free of any adverse
claims;
(13) this Agreement and the Pricing Agreement are legal,
valid and binding agreements of Globe and GBM except as
enforceability of the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights and by the exercise of judicial
discretion in accordance with general principles applicable to
equitable and similar remedies and except with respect to those
provisions relating to indemnities or contribution for
liabilities arising under the 1933 Act, as to which no opinion
need be expressed; and
(14) the Company is not an "investment company" or a person
"controlled by" an "investment company" within the meaning of the
Investment Company Act.
In rendering such opinion, such counsel may state that they
are relying upon the certificate of Harris Trust and Savings Bank, the
transfer agent for the Common Stock, as to the number of shares of
Common Stock at any time or times outstanding, and that insofar as
their opinion under clause (7) above relates to the accuracy and
completeness of the Prospectus and Registration Statement, it is based
upon a general review with the Company's representatives and
independent accountants of the information contained therein, without
independent verification by such counsel of the accuracy or
completeness of such information. Such counsel may also rely upon the
opinions of other competent counsel and, as to factual matters, on
certificates of Globe and of officers of the Company and of state
officials, in which case their opinion is to state that they are so
doing and copies of said opinions or certificates are to be attached
to the opinion unless said opinions or certificates (or, in the case
of certificates, the information therein) have been furnished to the
Representative in other form.
(ii) A certificate of the chief executive officer and the
principal financial officer of the Company, dated the Closing Date,
to the effect that:
(1) the representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of
the date of this Agreement and as of the Closing Date, and the
Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or
prior to such Closing Date; and
(2) the Commission has not issued an order preventing or
suspending the use of the Prospectus or any preliminary
prospectus filed as a part of the
(15)
<PAGE>
Registration Statement or any amendment thereto; no stop order
suspending the effectiveness of the Registration Statement has
been issued; and to the best knowledge of the respective signers,
no proceedings for that purpose have been instituted or are
pending or contemplated under the 1933 Act.
The delivery of the certificate provided for in this
subparagraph shall be and constitutes a representation and warranty of
the Company as to the facts required in the immediately foregoing
clauses (1) and (2) of this subparagraph to be set forth in said
certificate.
(iii) A certificate of the chief executive officer of the
Selling Stockholder dated the Closing Date, to the effect that the
representations and warranties of the Selling Stockholder set forth
in Section 3 of this Agreement are true and correct as of such date
and such Selling Stockholder has complied with all the agreements and
satisfied all the conditions on its respective part to be performed
or satisfied at or prior to such date.
(iv) At the time the Pricing Agreement is executed and also
on the Closing Date, there shall be delivered to you a letter
addressed to you, as Representative of the Underwriters, from Ernst
& Young LLP, independent accountants, the first one to be dated the
date of the Pricing Agreement, and the second one to be dated the
Closing Date, to the effect set forth in Schedule C. There shall
not have been any change or decrease specified in the letters
referred to in this subparagraph which makes it impractical or
inadvisable in the judgment of the Representative to proceed with
the public offering or purchase of the Shares as contemplated hereby.
(v) At the time the Pricing Agreement is executed, there
shall be delivered to you a letter from each director and executive
officer of the Company in which each such person agrees not to sell,
contract to sell or otherwise dispose of any Common Stock or
securities convertible into Common Stock (except Common Stock issued
pursuant to currently outstanding options) until December 16, 1996
without the prior written consent of the Representative.
(vi) Such opinion or opinions of Gardner, Carton & Douglas,
counsel for the Underwriters, dated the Closing Date, with respect to
the incorporation of the Company, the validity of the Shares to be
sold, the Registration Statement and the Prospectus and other related
matters as you may reasonably require, and the Company shall have
furnished to such counsel such documents and shall have exhibited to
them such papers and records as they reasonably request for the
purpose of enabling them to pass upon such matters.
(vii) Such further certificates and documents as you may
reasonably request.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Gardner, Carton & Douglas, counsel for the Underwriters, which approval shall
not be unreasonably withheld. The Company shall furnish you with such manually
signed or conformed copies of such opinions, certificates, letters and documents
as you request.
(16)
<PAGE>
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the Closing Date is not so satisfied, this Agreement
at your election will terminate upon notification to the Company and the
Selling Stockholder without liability on the part of any Underwriter or the
Company or the Selling Stockholder, except for the expenses to be paid or
reimbursed by the Company pursuant to Sections 7 and 9 hereof and except to
the extent provided in Section 11 hereof.
SECTION 9. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale to the
Underwriters of the Shares on the First Closing Date is not consummated because
any condition of the Underwriters' obligations hereunder is not satisfied or
because of any refusal, inability or failure on the part of the Company or the
Selling Stockholder to perform any agreement herein or to comply with any
provision hereof, unless such failure to satisfy such condition or to comply
with any provision hereof is due to the default or omission of any Underwriter,
the Company agrees to reimburse you and the other Underwriters upon demand for
all out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been reasonably incurred by you and them in connection
with the proposed purchase and the sale of the Shares. Any such termination
shall be without liability of any party to any other party except that the
provisions of this Section, Section 7 and Section 11 shall at all times be
effective and shall apply.
SECTION 10. EFFECTIVENESS OF REGISTRATION STATEMENT. You, the Company
and the Selling Stockholder will use your and its best efforts to cause the
Registration Statement to become effective, if it has not yet become effective,
and to prevent the issuance of any stop order suspending the effectiveness of
the Registration Statement and, if such stop order be issued, to obtain as soon
as possible the lifting thereof.
SECTION 11. INDEMNIFICATION. (a) The Company and Globe, jointly and
severally, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the 1933 Act
or the Exchange Act against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter or such controlling person may become subject
under the 1933 Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise (including in settlement of any
litigation if such settlement is effected with the written consent of the
Company and/or Globe, as the case may be), insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, including the information deemed to be
part of the Registration Statement at the time of effectiveness pursuant to Rule
430A and/or Rule 434(d), if applicable, any preliminary prospectus, the
Prospectus, or any amendment or supplement thereto, 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;
and will reimburse each Underwriter and each such controlling person for any
legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that neither the Company
nor Globe will be liable in any such case to the extent that (i) any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
the Representative, specifically for use therein; or (ii) if such statement or
omission was contained or made in any preliminary prospectus and corrected in
the Prospectus and (1) any such loss, claim, damage or liability suffered or
incurred by any Underwriter (or any person who controls any Underwriter)
resulted from an action, claim or suit by any person who purchased Shares which
are the subject thereof from such Underwriter in the offering and
(17)
<PAGE>
(2) such Underwriter failed to deliver or provide a copy of the Prospectus to
such person at or prior to the confirmation of the sale of such Shares in any
case where such delivery is required by the 1933 Act. In addition to their
other obligations under this Section 11(a), the Company and Globe agree that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in this Section 11(a),
they will reimburse the Underwriters on a quarterly basis for all reasonable
legal and other expenses incurred in connection with investigating or defending
any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's and Globe's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. This
indemnity agreement will be in addition to any liability which the Company and
Globe may otherwise have.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, and the Selling Stockholder and each person, if any, who controls the
Company or the Selling Stockholder within the meaning of the 1933 Act or the
Exchange Act, against any losses, claims, damages or liabilities to which the
Company, or any such director, officer, Selling Stockholder or controlling
person may become subject under the 1933 Act, the Exchange Act or other federal
or state statutory law or regulation, at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue or alleged untrue statement of any material fact contained in the
Registration Statement, any preliminary prospectus, the Prospectus, or any
amendment or supplement thereto, 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, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus, or any amendment or
supplement thereto in reliance upon and in conformity with Section 4 of this
Agreement or any other written information furnished to the Company by such
Underwriter through the Representative specifically for use in the preparation
thereof; and will reimburse any legal or other expenses reasonably incurred by
the Company, or any such director, officer, Selling Stockholder or controlling
person in connection with investigating or defending any such loss, claim,
damage, liability or action. In addition to their other obligations under this
Section 11(b), the Underwriters agree that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in this Section 11(b), they will reimburse the Company
and the Selling Stockholder on a quarterly basis for all reasonable legal and
other expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Underwriters' obligation to reimburse the Company and the Selling
Stockholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party except to the extent that
the indemnifying party was prejudiced by such failure to notify. In case any
such action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate
(18)
<PAGE>
in, and, to the extent that it may wish, jointly with all other indemnifying
parties similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party; provided, however, if the defendants in
any such action include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that there may be
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, or
the indemnified and indemnifying parties may have conflicting interests which
would make it inappropriate for the same counsel to represent both of them, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defense and otherwise to participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of its election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defense in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party shall not be
liable for the expenses of more than one separate counsel, approved by the
Representative in the case of paragraph (a) representing all indemnified parties
not having different or additional defenses or potential conflicting interest
among themselves who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability arising out of such proceeding.
(d) If the indemnification provided for in this Section is unavailable to
an indemnified party under paragraphs (a) or (b) hereof in respect of any
losses, claims, damages or liabilities referred to therein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, the
Selling Stockholder and the Underwriters from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company, the Selling Stockholder and the Underwriters in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Underwriters shall be deemed to be in the same
proportion as the underwriting discount received by them bears to the total of
such amounts paid to the Selling Stockholder and received by the Underwriters as
underwriting discount in each case as contemplated by the Prospectus. The
relative fault of the Company and the Selling Stockholder and the Underwriters
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission to state a material
fact relates to information supplied by the Company or by the Selling
Stockholder or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
claims, damages and liabilities referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim.
(19)
<PAGE>
The Company, the Selling Stockholder and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of this
Section, no Underwriter shall be required to contribute any amount in excess of
the amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters' obligations
to contribute pursuant to this Section are several in proportion to their
respective underwriting commitments and not joint.
(e) The provisions of this Section shall survive any termination of this
Agreement.
(f) The Company and the Selling Stockholder may agree, as among themselves
and without limiting the rights of the Underwriters under this Agreement, as to
their respective amounts of such liability for which they each shall be
responsible.
(g) The Selling Stockholder will not be liable in any such case in respect
of any such losses, claims, damages, liabilities or expenses unless the
Underwriter or controlling person seeking indemnification from the Selling
Stockholder hereunder shall have previously or contemporaneously sought
indemnification from the Company in respect thereof (except that the foregoing
condition precedent requiring an Underwriter or a controlling person to so seek
indemnification from the Company shall not be applicable if such Underwriter or
controlling person is prohibited from being indemnified by the Company (or from
seeking such indemnification) by the effect of any order, decree, stay,
injunction, statute, legal process or other matter of law).
(h) In no event shall the aggregate liability of the Selling
Stockholder under this Agreement for indemnification, contribution and
reimbursement of expenses and/or breach of any representation or warranty
contained in Section 3 exceed an amount equal to the proceeds received by GBM
with respect to the shares sold to the Underwriters hereunder.
SECTION 12. DEFAULT OF UNDERWRITERS. It shall be a condition to the
agreement and obligation of the Selling Stockholder to sell and deliver the
Shares hereunder, and of each Underwriter to purchase the Shares hereunder,
that, except as hereinafter in this paragraph provided, each of the
Underwriters shall purchase and pay for all Shares agreed to be purchased by
such Underwriter hereunder upon tender to the Representative of all such
Shares in accordance with the terms hereof. If any Underwriter or
Underwriters default in their obligations to purchase Shares hereunder on the
Closing Date and the aggregate number of Shares which such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed 10
percent of the total number of Shares which the Underwriters are obligated to
purchase on the Closing Date, the Representative may make arrangements
satisfactory to the Selling Stockholder for the purchase of such Shares by
other persons, including any of the Underwriters, but if no such arrangements
are made by such date the nondefaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to
purchase the Shares which such defaulting Underwriters agreed but failed to
purchase on such date. If any Underwriter or Underwriters so default and the
aggregate number of Shares with respect to which such default or defaults
occur is more than the above percentage and arrangements satisfactory to the
Representative and the Selling Stockholder for the purchase of such Shares by
other persons are not made within 36 hours after such default, this Agreement
will terminate without liability on the part of any nondefaulting Underwriter
or the Company or the Selling Stockholder, except for the expenses to be paid
by the Company pursuant to Section 7 hereof and except to the extent provided
in Section 11 hereof.
In the event that Shares to which a default relates are to be purchased by
the nondefaulting Underwriters or by another party or parties, the
Representative or the Company shall have the right to
(20)
<PAGE>
postpone the Closing Date for not more than seven business days in order that
the necessary changes in the Registration Statement, Prospectus and any other
documents, as well as any other arrangements, may be effected. As used in
this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 13. EFFECTIVE DATE. This Agreement shall become effective
immediately as to Sections 7, 9, 11 and 14 and as to all other provisions at
10:00 a.m., Chicago Time, on the day following the date upon which the Pricing
Agreement is executed and delivered, unless such a day is a Saturday, Sunday or
holiday (and in that event this Agreement shall become effective at such hour on
the business day next succeeding such Saturday, Sunday or holiday); but this
Agreement shall nevertheless become effective at such earlier time after the
Pricing Agreement is executed and delivered as you may determine on and by
notice to the Company and the Selling Stockholder or by release of any Shares
for sale to the public. For the purposes of this Section, the Shares shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Shares or upon the release by you of
telegrams (i) advising Underwriters that the Shares are released for public
offering, or (ii) offering the Shares for sale to securities dealers, whichever
may occur first.
SECTION 14. TERMINATION. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
and the Selling Stockholder or by you by notice to the Company and the
Selling Stockholder at any time prior to the time this Agreement shall
become effective as to all its provisions, and any such termination shall
be without liability on the part of the Company or the Selling Stockholder
to any Underwriter (except for the expenses to be paid or reimbursed
pursuant to Section 7 hereof and except to the extent provided in Section
11 hereof) or of any Underwriter to the Company or the Selling Stockholder
(except to the extent provided in Section 11 hereof).
(b) This Agreement may also be terminated by you prior to the
Closing Date, by notice to the Company if (i) trading in securities on the
New York Stock Exchange shall have been suspended or minimum prices shall
have been established on such exchange, or (ii) a banking moratorium shall
have been declared by Illinois, New York, or United States authorities, or
(iii) there shall have been any change in financial markets or in
political, economic or financial conditions which, in the opinion of the
Representative, either renders it impracticable or inadvisable to proceed
with the offering and sale of the Shares on the terms set forth in the
Prospectus or materially and adversely affects the market for the Shares,
or (iv) there shall have been an outbreak of major armed hostilities
between the United States and any foreign power which in the opinion of
the Representative makes it impractical or inadvisable to offer or sell
the Shares. Any termination pursuant to this paragraph (b) shall be
without liability on the part of any Underwriter to the Company or the
Selling Stockholder (except to the extent provided in Section 11 hereof)
or on the part of the Company to any Underwriter or the Selling Stockholder
(except for expenses to be paid or reimbursed pursuant to Section 7 hereof
and except to the extent provided in Section 11 hereof).
SECTION 15. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Stockholder and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter
(21)
<PAGE>
or the Company or any of its or their partners, officers or directors or any
controlling person, or the Selling Stockholder as the case may be, and will
survive delivery of and payment for the Shares sold hereunder.
SECTION 16. NOTICES. All communications hereunder will be in writing
and, if sent to the Underwriters will be mailed, delivered or telegraphed and
confirmed to you c/o William Blair & Company, L.L.C., 222 West Adams,
Chicago, Illinois 60606, with a copy to Glenn W. Reed, Gardner, Carton &
Douglas, 321 North Clark Street, Chicago, Illinois 60610; if sent to the
Company will be mailed, delivered or telegraphed and confirmed to the
Company, c/o Ann Crowley Patterson, at its corporate headquarters with a copy
to Grant A. Bagan, P.C., McDermott, Will & Emery, 227 West Monroe Street,
Chicago, Illinois 60606; and if sent to the Selling Stockholder will be
mailed, delivered or telegraphed and confirmed to the Selling Stockholder,
c/o Ann Crowley Patterson, at 2230 Indianapolis Blvd., Whiting, Indiana
46394, with a copy to Grant A. Bagan, P.C., McDermott, Will & Emery, 227 West
Monroe, Chicago, Illinois 60606.
SECTION 17. SUCCESSORS. This Agreement and the Pricing Agreement will
inure to the benefit of and be binding upon the parties hereto and their
respective successors, personal representatives and assigns, and to the benefit
of the officers and directors and controlling persons referred to in Section 11,
and no other person will have any right or obligation hereunder. The term
"successors" shall not include any purchaser of the Shares as such from any of
the Underwriters merely by reason of such purchase.
SECTION 18. REPRESENTATION OF UNDERWRITERS. You will act as
Representative for the several Underwriters in connection with this financing,
and any action under or in respect of this Agreement taken by you will be
binding upon all the Underwriters.
SECTION 19. PARTIAL UNENFORCEABILITY. If any section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph or provision hereof.
SECTION 20. APPLICABLE LAW. This Agreement and the Pricing Agreement
shall be governed by and construed in accordance with the laws of the State of
Illinois.
(22)
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company, the Selling Stockholder and the
several Underwriters including you, all in accordance with its terms.
Very truly yours,
DIAMOND HOME SERVICES, INC.
By: ______________________________
GBM, INC.
By: ______________________________
______________________________
GLOBE BUILDING MATERIALS, INC.
By: ______________________________
The foregoing Agreement is hereby
confirmed and accepted as of
the date first above written.
WILLIAM BLAIR & COMPANY, L.L.C.
Acting as Representative of the
several Underwriters named in
Schedule A.
By: William Blair & Company, L.L.C.
By: ________________________________
(23)
<PAGE>
SCHEDULE A
Number of Firm
Shares to be
Underwriter Purchased
- ----------- ---------
William Blair & Company, L.L.C. ...............
Total ............................... 750,000
(24)
<PAGE>
SCHEDULE C
Comfort Letter of Ernst & Young LLP
(1) They are independent public accountants with respect to the Company
and its subsidiaries within the meaning of the 1933 Act.
(2) In their opinion the consolidated financial statements and
schedules of the Company and its subsidiaries included in the Registration
Statement and the consolidated financial statements of the Company from which
the information presented under the caption "Selected Consolidated Financial and
Operating Data" has been derived which are stated therein to have been examined
by them comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act.
(3) On the basis of specified procedures (but not an examination in
accordance with generally accepted auditing standards), including inquiries of
certain officers of the Company and its subsidiaries responsible for financial
and accounting matters as to transactions and events subsequent to December 31,
1995, a reading of minutes of meetings of the stockholders and directors of the
Company and its subsidiaries since December 31, 1995, a reading of the latest
available interim unaudited consolidated financial statements of the Company and
its subsidiaries (with an indication of the date thereof) and other procedures
as specified in such letter, nothing came to their attention which caused them
to believe that (i) the unaudited consolidated financial statements of the
Company and its subsidiaries included in the Registration Statement do not
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act or that such unaudited financial statements are not
fairly presented in accordance with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited financial
statements included in the Registration Statement, and (ii) at a specified date
not more than five days prior to the date thereof in the case of the first
letter and not more than two business days prior to the date thereof in the
case of the second letter, there was any change in the capital stock or long-
term debt or short-term debt (other than normal payments) of the Company and
its subsidiaries on a consolidated basis or any decrease in consolidated net
current assets or consolidated stockholders' equity as compared with amounts
shown on the latest unaudited balance sheet of the Company included in the
Registration Statement or for the period from the date of such balance sheet
to a date not more than five days prior to the date thereof in the case of
the first letter and not more than two business days prior to the date thereof
in the case of the second letter, there were any decreases, as compared with
the corresponding period of the prior year, in consolidated net sales,
consolidated income before income taxes or in the total or per share amounts
of consolidated net income except, in all instances, for changes or decreases
which the Prospectus discloses have occurred or may occur or which are set
forth in such letter.
(4) They have carried out specified procedures, which have been agreed
to by the Representative, with respect to certain information in the Prospectus
specified by the Representative, and on the basis of such procedures, they have
found such information to be in agreement with the general accounting records of
the Company and its subsidiaries.
(25)
<PAGE>
EXHIBIT A
DIAMOND HOME SERVICES, INC.
750,000 Shares Common Stock
PRICING AGREEMENT
_____________, 1996
WILLIAM BLAIR & COMPANY, L.L.C.
As Representative of the Several
Underwriters
c/o William Blair & Company, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement dated ____________, 1996
(the "UNDERWRITING AGREEMENT") relating to the sale by the Selling Stockholder
and the purchase by the several Underwriters for whom William Blair & Company,
L.L.C. is acting as representative (the "REPRESENTATIVE"), of the above Shares.
All terms herein shall have the definitions contained in the Underwriting
Agreement except as otherwise defined herein.
Pursuant to Section 5 of the Underwriting Agreement, the Selling
Stockholder agrees with the Representative as follows:
1. The initial public offering price per share for the Shares shall be
$__________.
2. The purchase price per share for the Shares to be paid by the several
Underwriters shall be $_____________, being an amount equal to the initial
public offering price set forth above less $____________ per share.
Schedule A is amended as follows:
(26)
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Selling Stockholder and the several
Underwriters, including you, all in accordance with its terms.
Very truly yours,
GBM, INC.
By: _______________________________
GLOBE BUILDING MATERIALS, INC.
By: ______________________________
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
WILLIAM BLAIR & COMPANY, L.L.C.
Acting as Representative of the
several Underwriters
By: William Blair & Company, L.L.C.
By: ________________________________
(27)
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
DIAMOND HOME SERVICES, INC.
The original Certificate of Incorporation of the corporation was filed
with the Secretary of State of Delaware on May 13, 1993. The name of the
corporation under which it was originally incorporated was Diamond Exteriors,
Inc. By Certificate of Amendment to Certificate of Incorporation filed April
10, 1996, the corporation's name was changed to Diamond Home Services, Inc.
This Amended and Restated Certificate of Incorporation not only
restates and integrates the original Certificate of Incorporation and all
amendments thereto, but also includes amendments adopted by the stockholders of
the corporation. As described in Article Fourth herein, in connection with the
amendment being made to Article Fourth of the corporation's Certificate of
Incorporation hereby, the corporation shall be recapitalized such that: each
outstanding share of Class A Voting Common Stock, $1.00 par value, be
recapitalized into fifty (50) shares of Common Stock, $.001 par value, and each
share of Class B Nonvoting Common Stock, $1.00 par value, be recapitalized into
fifty (50) shares of Common Stock, $.001 par value.
This Amended and Restated Certificate of Incorporation was duly
adopted in accordance with the applicable provisions of Sections 228, 242 and
245 of the General Corporation Law of Delaware and shall become effective upon
filing with the Secretary of State of the State of Delaware.
FIRST: The name of the corporation is Diamond Home Services, Inc.
SECOND: The corporation's registered office in the State of Delaware
is located at 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of the corporation's registered agent at such address is The
Corporation Trust Company.
THIRD: The nature of the business and the objects and purposes to be
transacted, promoted and carried on are to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
corporation shall have the authority to issue is 29,000,000 shares, consisting
of (i) 25,000,000 shares of common stock, $.001 par value per share ("Common
Stock"), and (ii) 4,000,000 shares of preferred stock, $.001 par value per share
("Preferred Stock").
The designations, powers, preferences and relative participating,
optional or other special rights and the qualifications, limitations and
restrictions thereof in respect of each class of capital stock of the
corporation are as follows:
<PAGE>
A. COMMON STOCK
1. VOTING. Except as otherwise provided by law, each share of Common
Stock shall entitle the holder thereof to one vote in any matter which is
submitted to a vote of stockholders of the corporation.
2. DIVIDENDS. Subject to the express terms of the Preferred Stock
outstanding from time to time, such dividend or distribution as may be
determined by the Board of Directors of the corporation may from time to time be
declared and paid or made upon the Common Stock out of any source at the time
lawfully available for the payment of dividends.
3. LIQUIDATION. The holders of Common Stock shall be entitled to
share ratably upon any liquidation, dissolution or winding up of the affairs of
the corporation (voluntary of involuntary) of all assets of the corporation
which are legally available for distribution, if any, remaining after payment of
all debts and other liabilities and subject to the prior rights of any holders
of Preferred Stock of the preferential amounts, if any, to which they are
entitled.
4. PURCHASES. Subject to any applicable provisions of this Article
Fourth, the corporation may at any time or from time to time purchase or
otherwise acquire shares of its Common Stock in any manner now or hereafter
permitted by law, publicly or privately, or pursuant to any agreement.
B. PREFERRED STOCK
Subject to the terms contained in any designation of a series of
Preferred Stock, the Board of Directors is expressly authorized, at any time and
from time to time, to fix, by resolution or resolutions, the following
provisions for shares of any class or classes of Preferred Stock of the
corporation or any series of any class of Preferred Stock:
1. the designation of such class or series, the number of shares to
constitute such class or series which may be increased or decreased (but not
below the number of shares of that class or series then outstanding) by
resolution of the Board of Directors, and the stated value thereof if different
from the par value thereof;
2. whether the shares of such class or series shall have voting
rights, in addition to any voting rights provided by law, and, if so, the terms
of such voting rights;
3. the dividends, if any, payable on such class or series, whether any
such dividends shall be cumulative, and, if so, from what dates, the conditions
and dates upon which such dividends shall be payable, and the preference or
relation which such dividends shall bear to the dividends payable on any shares
of stock of any other class or any other series of the same class;
-2-
<PAGE>
4. whether the shares of such class or series shall be subject to
redemption by the corporation, and, if so, the times, prices and other
conditions of such redemption;
5. the amount or amounts payable upon shares of such series upon, and
the rights of the holders of such class or series in, the voluntary or
involuntary liquidation, dissolution or winding up, or upon any distribution of
the assets, of the corporation;
6. whether the shares of such class or series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and manner
in which any such retirement or sinking fund shall be applied to the purchase or
redemption of the shares of such class or series for retirement or other
corporate purposes and the terms and provisions relative to the operation
thereof;
7. whether the shares of such class or series shall be convertible
into, or exchangeable for, shares of stock of any other class or any other
series of the same class or any other securities and, if so, the price or prices
or the rate or rates of conversion or exchange and the method, if any, of
adjusting the same, and any other terms and conditions of conversion or
exchange;
8. the limitations and restrictions, if any, to be effective while any
shares of such class or series are outstanding upon the payment of dividends or
the making of other distributions on, and upon the purchase, redemption or other
acquisition by the corporation of the Common Stock or shares of stock of any
other class or any other series of the same class;
9. the conditions or restrictions, if any, upon the creation of
indebtedness of the corporation or upon the issue of any additional stock,
including additional shares of such class or series or of any other series of
the same class or of any other class;
10. the ranking (be it PARI PASSU, junior or senior) of each class or
series vis-a-vis any other class or series of any class of Preferred Stock as to
the payment of dividends, the distribution of assets and all other matters; and
11. any other powers, preferences and relative, participating,
optional and other special rights, and any qualifications, limitations and
restrictions thereof, insofar as they are not inconsistent with the provisions
of this Amended and Restated Certificate of Incorporation, to the full extent
permitted in accordance with the laws of the State of Delaware.
The powers, preferences and relative, participating, optional and
other special rights of each class or series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other series at any time outstanding.
-3-
<PAGE>
C. MISCELLANEOUS
1. PREEMPTIVE RIGHTS. No holder of any share of any class of stock of
the corporation shall have any preemptive right to subscribe for or acquire
additional shares of stock of any class of the corporation or warrants or
options to purchase, or securities convertible into, shares of any class of
stock of the corporation.
2. ISSUANCE OF STOCK. Shares of capital stock of the corporation may
be issued by the corporation from time to time in such amounts and proportions
and for such consideration (not less than the par value thereof in the case of
capital stock having par value) as may be fixed and determined from time to time
by the Board of Directors and as shall be permitted by law.
3. UNCLAIMED DIVIDENDS. Any and all right, title, interest and claim
in or to any dividends declared by the corporation, whether in cash, stock or
otherwise, which are unclaimed by the stockholder entitled thereto for a period
of five years after the close of business on the payment date, shall be and
shall be deemed to be extinguished and abandoned; and such unclaimed dividends
in the possession of the corporation, its transfer agents or other agents or
depositories, shall at such time become the absolute property of the
corporation, free and clear of any and all claims of any persons whatsoever.
D. RECAPITALIZATION
Notwithstanding anything in this Amended and Restated Certificate of
Incorporation to the contrary, on the effective date of this Amended and
Restated Certificate of Incorporation the corporation shall be automatically
recapitalized as follows: each share of Class A Voting Common Stock, $1.00 par
value, outstanding immediately prior to the effective date of this Amended and
Restated Certificate of Incorporation, be and hereby is recapitalized into fifty
(50) shares of Common Stock, $.001 par value, and each share of Class B
Nonvoting Common Stock, $1.00 par value, outstanding immediately prior to the
effective date of this Amended and Restated Certificate of Incorporation be and
hereby is recapitalized into fifty (50) shares of Common Stock, $.001 par value.
On such effective date, outstanding certificates representing shares of Class A
Voting Common Stock and Class B Nonvoting Common Stock shall thereafter
automatically be deemed to represent certificates for the number of shares of
Common Stock determined as set forth in the preceding sentence; provided,
however, that the holders thereof shall be entitled to present such certificates
to the corporation for replacement with certificates reflecting such number of
shares of Common Stock.
FIFTH: SPECIAL MEETINGS OF STOCKHOLDERS. Special meetings of the
stockholders, for any purpose or purposes (except to the extent otherwise
provided by law or this Amended and Restated Certificate of Incorporation), may
only be called by the Chairman of the Board, the President or a majority of the
Board of Directors then in office.
-4-
<PAGE>
SIXTH: A. AMENDMENT OF BY-LAWS. The Board of Directors of the
corporation is authorized to adopt, amend or repeal the By-laws of the
corporation, subject to applicable law and any applicable provisions in any
resolution of the Board of Directors.
B. ELECTION OF DIRECTORS. Elections of Directors need not be by
written ballot unless the By-laws of the corporation shall so provide.
C. MEETINGS OF STOCKHOLDERS. Meetings of stockholders may be held
within or without the State of Delaware, as the by-laws of the corporation may
provide.
D. BOOKS OF CORPORATION. The books of the corporation may be kept at
such place within or without the State of Delaware as the By-laws of the
corporation may provide or as may be designated from time to time by the Board
of Directors of the corporation.
SEVENTH: Whenever a compromise or arrangement is proposed between the
corporation and its creditors or any class of them and/or between the
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
corporation under the provisions of Section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or the stockholders or class of stockholders of the corporation, as the case
may be, agree to any compromise or arrangement and to any reorganization of the
corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the corporation, as the case may be, and also on the
corporation.
EIGHTH: No Director of the corporation shall be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, provided that this Article EIGHTH shall not eliminate or
limit the liability of a Director: (i) for any breach of the Director's duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the General Corporation Law of the State of
Delaware (or the corresponding provision of any successor act or law); or (iv)
for any transaction from which the Director derived an improper personal
benefit. Neither the amendment nor repeal of this Article EIGHTH, nor the
adoption of any provision of this Amended and Restated Certificate of
Incorporation inconsistent with this Article EIGHTH, shall eliminate or reduce
the effect of this Article EIGHTH in respect of any matter occurring, or any
cause of action, suit or claim that, but for this Article EIGHTH, would
-5-
<PAGE>
accrue or arise, prior to such amendment, repeal or adoption of an inconsistent
provision. If the Delaware General Corporation Law is amended after the
effective date of this Article to further eliminate or limit, or to authorize
further elimination or limitation of, the personal liability of directors for
breach of fiduciary duty as a director, then the personal liability of a
director to the corporation or its stockholders shall be eliminated or limited
to the full extent permitted by the Delaware General Corporation Law, as
amended. For purposes of this Article, "fiduciary duty as a director" shall
include any fiduciary duty arising out of serving at the request of the
corporation as a director of another corporation, partnership, joint venture,
trust or other enterprise, and "personally liable to the corporation" shall
include any liability to such other corporation, partnership, joint venture,
trust or other enterprise, and any liability to the corporation in its capacity
as security holder, joint venturer, partner, beneficiary, creditor or investor
of or in any such other corporation, partnership, joint venture, trust or other
enterprise. Any repeal or modification of the foregoing paragraph by the
stockholders of the corporation shall not adversely affect the elimination or
limitation of the personal liability of a director for any act or omission
occurring prior to the effective date of such repeal or modification.
NINTH: The corporation is to have perpetual existence.
TENTH: Article Tenth of the corporation's original Certificate of
Incorporation is hereby deleted in its entirety and the corporation expressly
elects to be governed by Section 203 of the Delaware General Corporation Law.
ELEVENTH: The corporation reserves the right to amend or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon a stockholder herein are granted subject to this reservation.
IN WITNESS WHEREOF, the corporation has caused this Amended and
Restated Certificate to be signed by its duly authorized officers this 17th day
of June, 1996.
DIAMOND HOME SERVICES, INC.
By: /s/ C. Stephen Clegg
---------------------------------
C. Stephen Clegg, Chairman, Chief
Executive Officer and President
Attest:
/s/ Ann Crowley Patterson
- --------------------------------
Ann Crowley Patterson, Secretary
-6-
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
DIAMOND HOME SERVICES, INC.
(A DELAWARE CORPORATION)
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE 1 - CERTIFICATE OF INCORPORATION
Section 1.1. Contents.................................................. 1
Section 1.2. Certificate in Effect..................................... 1
ARTICLE 2 - MEETINGS OF STOCKHOLDERS
Section 2.1. Place..................................................... 1
Section 2.2. Annual Meeting............................................ 1
Section 2.3. Special Meetings.......................................... 1
Section 2.4. Notice of Meetings........................................ 1
Section 2.5. Affidavit of Notice....................................... 2
Section 2.6. Quorum.................................................... 2
Section 2.7. Voting Requirements....................................... 2
Section 2.8. Proxies and Voting........................................ 2
Section 2.9. Director Nominations...................................... 3
Section 2.10. New Business.............................................. 3
Section 2.11. Stockholder List.......................................... 4
Section 2.12. Record Date............................................... 4
ARTICLE 3 - DIRECTORS
Section 3.1. Duties.................................................... 5
Section 3.2. Number; Election and Term of Office....................... 5
Section 3.3. Compensation.............................................. 5
Section 3.4. Reliance on Books......................................... 5
ARTICLE 4 - MEETINGS OF THE BOARD OF DIRECTORS
Section 4.1. Place..................................................... 6
Section 4.2. Annual Meeting............................................ 6
Section 4.3. Regular Meetings.......................................... 6
Section 4.4. Special Meetings.......................................... 6
Section 4.5. Quorum.................................................... 6
Section 4.6. Action Without Meeting.................................... 6
Section 4.7. Telephone Meetings........................................ 7
Section 4.8. Interested Directors...................................... 7
ARTICLE 5 - COMMITTEES OF DIRECTORS
Section 5.1. Designation............................................... 8
Section 5.2. Records of Meetings....................................... 8
<PAGE>
ARTICLE 6 - NOTICES
Section 6.1. Method of Giving Notice................................... 8
Section 6.2. Waiver.................................................... 9
ARTICLE 7 - OFFICERS
Section 7.1. In General................................................ 9
Section 7.2. Election of Chairman of the Board, President,
Chief Financial Officer, Secretary and Treasurer......... 9
Section 7.3. Election of Other Officers................................ 9
Section 7.4. Salaries.................................................. 9
Section 7.5. Term of Office............................................ 9
Section 7.6. Duties of Chairman of the Board........................... 9
Section 7.7. Duties of President....................................... 10
Section 7.8. Duties of Chief Financial Officer......................... 10
Section 7.9. Duties of Vice President.................................. 10
Section 7.10. Duties of Secretary....................................... 10
Section 7.11. Duties of Assistant Secretary............................. 10
Section 7.12. Duties of Treasurer....................................... 11
Section 7.13. Duties of Assistant Treasurer............................. 11
ARTICLE 8 - RESIGNATIONS, REMOVALS AND VACANCIES
Section 8.1. Directors................................................. 11
Section 8.2. Officers.................................................. 12
ARTICLE 9 - CERTIFICATE OF STOCK
Section 9.1. Issuance of Stock......................................... 13
Section 9.2. Right to Certificate; Form................................ 13
Section 9.3. Facsimile Signature....................................... 13
Section 9.4. Lost Certificates......................................... 13
Section 9.5. Transfer of Stock......................................... 13
Section 9.6. Registered Stockholders................................... 14
ARTICLE 10 - INDEMNIFICATION
Section 10.1. Third Party Actions....................................... 14
Section 10.2. Derivative Actions........................................ 14
Section 10.3. Expenses.................................................. 15
Section 10.4. Authorization............................................. 15
Section 10.5. Advance Payment of Expenses............................... 15
Section 10.6. Non-Exclusiveness......................................... 15
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Section 10.7. Insurance................................................. 15
Section 10.8. Constituent Corporations.................................. 16
Section 10.9. Additional Indemnification................................ 16
ARTICLE 11 - EXECUTION OF PAPERS
ARTICLE 12 - FISCAL YEAR
ARTICLE 13 - DEPOSITORIES
ARTICLE 14 - SEAL
ARTICLE 15 - OFFICES
Section 15.1. Registered Office......................................... 17
Section 15.2. Principal Office.......................................... 17
ARTICLE 16 - AMENDMENTS
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DIAMOND HOME SERVICES, INC.
AMENDED AND RESTATED BY-LAWS
ARTICLE 1
CERTIFICATE OF INCORPORATION
SECTION 1.1. CONTENTS. These By-laws, the powers of the corporation
and of its Directors and stockholders, and all matters concerning the conduct
and regulation of the business of the corporation shall be subject to such
provisions in regard thereto, if any, as are set forth in said Certificate of
Incorporation.
SECTION 1.2. CERTIFICATE IN EFFECT. All references in these By-laws
to the Certificate of Incorporation shall be construed to mean the Certificate
of Incorporation of the corporation as from time to time amended and restated,
including (unless the context shall otherwise require) all certificates and any
agreement of consolidation or merger filed pursuant to the Delaware General
Corporation Law, as amended.
ARTICLE 2
MEETINGS OF STOCKHOLDERS
SECTION 2.1. PLACE. All meetings of the stockholders may be held at
such place either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors, the Chairman of the Board or the
President and stated in the notice of the meeting or in any duly executed waiver
of notice thereof.
SECTION 2.2. ANNUAL MEETING. The annual meeting of the stockholders,
commencing in 1997, shall be held each year within 180 days after the close of
the immediately preceding fiscal year of the corporation, at such date and time
as shall be designated from time to time by the Board of Directors, and stated
in the notice or waiver of notice of the meeting.
SECTION 2.3. SPECIAL MEETINGS. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by the General
Corporation Law of the State of Delaware, the Certificate of Incorporation or
these By-laws, may only be called by the President, the Chairman of the Board or
a majority of the Board of Directors then in office. Such request shall state
the purpose or purposes of the proposed meeting.
SECTION 2.4. NOTICE OF MEETINGS. A written notice of all meetings of
stockholders stating the place, date and hour of the meeting and, in the case of
a special
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meeting, the purpose or purposes for which the special meeting is called, shall
be given to each stockholder entitled to vote at such meeting. Except as
otherwise provided by law, such notice shall be given not less than ten nor more
than sixty (60) days before the date of the meeting. If mailed, notice is given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation.
Business transacted at any special meeting of stockholders shall be limited to
the purposes stated in the notice.
SECTION 2.5. AFFIDAVIT OF NOTICE. An affidavit of the Secretary or
an Assistant Secretary or the transfer agent of the corporation that notice of a
stockholders meeting has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein.
SECTION 2.6. QUORUM. The holders of a majority of the stock issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
Certificate of Incorporation or by these By-laws. If, however, such quorum
shall not be present or represented by proxy at any meeting of the stockholders,
the stockholders entitled to vote thereat, present in person or represented by
proxy, the Chairman of the Board or the President, shall have power to adjourn
the meeting from time to time, without notice other than announcement at the
meeting, except as hereinafter provided, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted which might have been transacted at
the original meeting. If the adjournment is for more than thirty (30) days, or
if after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
SECTION 2.7. VOTING REQUIREMENTS. When a quorum is present at any
meeting, the vote of the holders of a majority of the stock having voting power
present in person or represented by proxy shall decide any question brought
before such meeting, unless the question is one upon which by express provision
of any applicable statute, the Certificate of Incorporation or these By-laws, a
different vote is required, in which case such express provision shall govern
and control the decision of such question.
SECTION 2.8. PROXIES AND VOTING. Unless otherwise provided by the
General Corporation Law of the State of Delaware, the Certificate of
Incorporation or these By-laws, each stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share of the
capital stock having voting power held by such stockholder, but no proxy shall
be voted on after three years from its date, unless the proxy provides for a
longer period. Persons holding stock in a fiduciary capacity shall be entitled
to vote the shares so held. Shares of the capital stock of the corporation
owned by the corporation shall not be voted, directly or indirectly.
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If shares or other securities having voting power stand of record in
the names of two or more persons, whether fiduciaries, members of a partnership,
joint tenants, tenants in common, tenants by the entirety or otherwise, or if
two or more persons have the same fiduciary relationship respecting the same
shares, unless the Secretary of the corporation is given written notice to the
contrary and is furnished with a copy of the instrument or order appointing them
or creating the relationship wherein it is so provided, their acts with respect
to voting shall have the following effect;
(a) If only one votes, his act binds all;
(b) If more than one vote, the act of the majority so voting binds
all;
(c) If more than one vote, but the vote is evenly split on any
particular matter, each faction may vote the securities in question
proportionally, or any person voting the shares, or a beneficiary, if any,
may apply to the Court of Chancery or such other court as may have
jurisdiction to appoint an additional person to act with the persons so
voting the shares, which shall then be voted as determined by a majority of
such persons and the person appointed by the Court. If the instrument so
filed shows that any such tenancy is held in unequal interests, a majority
or even split for the purpose of this subsection shall be a majority or
even split in interest.
SECTION 2.9. DIRECTOR NOMINATIONS. Nominations for the election of
Directors may be made by the Board of Directors or by any stockholder entitled
to vote for the election of Directors. Nominations by stockholders shall be
made in writing and delivered or mailed by first class United States mail,
postage prepaid, to the Secretary of the corporation not less than sixty (60)
nor more than ninety (90) days prior to the date of the annual meeting or if the
corporation mails its notice and proxy to the stockholders less than sixty (60)
days prior to the annual meeting, within ten (10) days after the notice and
proxy is mailed. Each stockholder nomination shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed in
such nomination, (ii) the principal occupation or employment of each such
nominee, and (iii) the number of shares of capital stock of the corporation
which are beneficially owned by each nominee; and in addition, evidence of the
nominee's willingness to serve as a Director shall also be provided. Upon
delivery, such nominations shall be posted in a conspicuous place in the
principal office of the corporation. Ballots bearing the names of all persons
nominated by the stockholders shall be provided for use at the annual meeting.
The chairman of the meeting of stockholders at which any election of
Directors is to occur may, if the facts warrant, determine and declare to the
meeting that a nomination was not made in accordance with the foregoing
procedure, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
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SECTION 2.10. NEW BUSINESS. Any new business to be taken up at any
meeting of the stockholders, other than such new business to be taken up at the
request of the Chairman of the Board or the Board of Directors, shall be stated
in writing and delivered or mailed by first class United States mail, postage
prepaid, to the Secretary of the corporation not less than sixty (60) nor more
than ninety (90) days before the date of the annual meeting, or if the
corporation mails its notice and proxy to the stockholders less than sixty (60)
days prior to the annual meeting, within ten (10) days after the notice and
proxy is mailed (the "New Business Due Date"), and all business so stated,
proposed, and delivered or mailed shall be considered at the annual meeting; but
no other proposal shall be acted upon at the annual meeting. This provision
shall not prevent the consideration and approval or disapproval at the annual
meeting of reports of officers, Directors, and committees; but in connection
with such reports, no new business shall be acted upon at such annual meeting
unless stated and filed as herein provided. If the chairman of the annual
meeting determines that business was not properly brought before the annual
meeting in accordance with the foregoing procedures, the chairman shall declare
to the meeting that the business was not properly brought before the meeting and
such business shall not be transacted.
SECTION 2.11. STOCKHOLDER LIST. The officer who has charge of the
stock ledger of the corporation shall prepare and make, at least ten (10) days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present. The original or duplicate stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine such list, the stock ledger or the books of the corporation, or to vote
in person or by proxy at any meeting of stockholders.
SECTION 2.12. RECORD DATE. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) nor less than
ten (10) days before the date of such meeting, nor more than sixty (60) days
prior to any other action. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
If no record date is fixed by the Board of Directors:
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(a) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the
day on which the meeting is held.
(b) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
ARTICLE 3
DIRECTORS
SECTION 3.1. DUTIES. The business and affairs of the corporation
shall be managed by or under the direction of its Board of Directors which may
exercise all such powers of the corporation and do all such lawful acts and
things as are not by the General Corporation Law of the State of Delaware, nor
by the Certificate of Incorporation nor by these By-laws directed or required to
be exercised or done by the stockholders.
SECTION 3.2. NUMBER; ELECTION AND TERM OF OFFICE. The number of
Directors which shall constitute the whole Board of the corporation shall be as
determined from time to time exclusively by the Board of Directors and set forth
in a resolution of the Board of Directors. Directors shall be elected by the
Corporation's stockholders at the annual meeting of the stockholders, except as
provided in Section 8.1 of Article 8, and each Director elected shall hold
office until the next annual meeting of stockholders and until a successor is
duly elected and qualified or until his or her earlier death, resignation or
removal. Directors need not be stockholders.
SECTION 3.3. COMPENSATION. Unless otherwise restricted by the
Certificate of Incorporation or these By-laws, the Board of Directors shall have
the authority to fix the compensation of Directors. The Directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as Directors. No such payment shall preclude any
Director from serving the corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
SECTION 3.4. RELIANCE ON BOOKS. A member of the Board of Directors
or a member of any committee designated by the Board of Directors shall, in the
performance of his duties, be fully protected in relying in good faith upon the
books of account or reports made to the corporation by any of its officers, or
by an independent certified public
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accountant, or by an appraiser selected with reasonable care by the Board of
Directors or by any committee, or in relying in good faith upon other records of
the corporation.
ARTICLE 4
MEETINGS OF THE BOARD OF DIRECTORS
SECTION 4.1. PLACE. The Board of Directors of the corporation may
hold meetings, both regular and special, at such place or places within or
without the State of Delaware as the Board of Directors may from time to time
determine, or as may be specified or fixed in the respective notices or waivers
of notice of such meeting.
SECTION 4.2. ANNUAL MEETING. The annual meeting of the Board of
Directors shall be held immediately following the annual meeting of stockholders
each year or any special meeting held in lieu thereof, or at such other time as
the Board of Directors may from time to time determine or as may be specified or
fixed in the notices or waivers of notice of such meeting.
SECTION 4.3. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice at such time and at such place as shall
from time to time be determined by the Board.
SECTION 4.4. SPECIAL MEETINGS. Special meetings of the Board may be
called by the Chairman of the Board or the President on two (2) days' notice to
each Director either personally, by mail, by telegram or by facsimile. Special
meetings shall be called by the Chairman of the Board, the President or the
Secretary in like manner and on like notice on the written request of any two
Directors unless the Board consists of only one Director, in which case special
meetings shall be called by the Chairman of the Board, the President or the
Secretary in like manner and on like notice on the written request of the sole
Director.
SECTION 4.5. QUORUM. At all meetings of the Board, a majority of the
Directors then in office shall constitute a quorum for the transaction of
business and the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the Certificate of
Incorporation or by these By-laws. Common or interested Directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors. If a quorum shall not be present at any meeting of the Board of
Directors, the Directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
SECTION 4.6. ACTION WITHOUT MEETING. Unless otherwise restricted by
the Certificate of Incorporation or these By-laws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a
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meeting, if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
SECTION 4.7. TELEPHONE MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation or these By-laws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or any committee, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at the meeting.
SECTION 4.8. INTERESTED DIRECTORS.
(a) No contract or transaction between a corporation and one or more
of its Directors or officers, or between a corporation and any other
corporation, partnership, association, or other organization in which one or
more of its Directors or officers are Directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the Director or officer is present at or participates in the meeting of the
Board or committee which authorizes the contract or transaction, or solely
because his or their votes are counted for such purpose, if:
(i) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative vote of a
majority of the disinterested Directors, even though the disinterested
Directors be less than a quorum; or
(ii) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(iii) the contract or transaction is fair as to the corporation as of
the time it is authorized, approved or ratified by the Board of Directors,
a committee or the stockholders.
(b) Common or interested Directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
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ARTICLE 5
COMMITTEES OF DIRECTORS
SECTION 5.1. DESIGNATION.
(a) The Board of Directors may by resolution passed by a majority of
the whole Board, designate one or more committees, each committee to consist of
one or more of the Directors of the corporation. The Board may designate one or
more Directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee.
(b) In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
(c) Any such committee, to the extent provided in the resolution of
the Board of Directors designating the committee, shall have and may exercise
all the powers and authority of the Board of Directors in the management of the
business and affairs of the corporation, to the extent such powers and authority
are permitted by the Delaware General Corporation Law as such may be amended
from time to time. Such committee or committees shall have such name or names
as may be determined from time to time by resolution adopted by the Board of
Directors.
SECTION 5.2. RECORDS OF MEETINGS. Each committee shall keep regular
minutes of its meetings and report the same to the Board of Directors when
required.
ARTICLE 6
NOTICES
SECTION 6.1. METHOD OF GIVING NOTICE. Whenever, under any provision
of the General Corporation Law of the State of Delaware or of the Certificate of
Incorporation or of these By-laws, notice is required to be given to any
Director or stockholder, such notice shall be given in writing by the Secretary
or the person or persons calling the meeting by leaving such notice with such
Director or stockholder at his residence or usual place of business or by
mailing it addressed to such Director or stockholder, at his address as it
appears on the records of the corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
personally delivered or deposited in the United States mail. Notice to
Directors may also be given by telegram or facsimile.
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SECTION 6.2. WAIVER. Whenever any notice is required to be given
under any provision of the General Corporation Law of the State of Delaware or
of the Certificate of Incorporation or of these By-laws, a waiver thereof in
writing, signed by the person or persons entitled to said notice, whether before
or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends the meeting for the express purpose of
objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders, Directors or members of a committee of Directors need be specified
in any written waiver of notice.
ARTICLE 7
OFFICERS
SECTION 7.1. IN GENERAL. The officers of the corporation shall be
chosen by the Board of Directors and shall include a Chairman of the Board, a
President, a Chief Financial Officer, a Secretary and a Treasurer. The Board of
Directors may also choose one or more Vice Presidents, Assistant Secretaries and
Assistant Treasurers. Any number of offices may be held by the same person,
unless the Certificate of Incorporation or these By-laws otherwise provide.
SECTION 7.2. ELECTION OF CHAIRMAN OF THE BOARD, PRESIDENT, CHIEF
FINANCIAL OFFICER, SECRETARY AND TREASURER. The Board of Directors at its first
meeting after each annual meeting of stockholders shall choose a Chairman of the
Board, a President, a Chief Financial Officer, a Secretary and a Treasurer.
SECTION 7.3. ELECTION OF OTHER OFFICERS. The Board of Directors may
appoint such other officers and agents as it shall deem appropriate who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the Board.
SECTION 7.4. SALARIES. The salaries of all officers and agents of
the corporation may be fixed by the Board of Directors.
SECTION 7.5. TERM OF OFFICE. The officers of the corporation shall
hold office until their successors are elected and qualified or until their
earlier resignation or removal. Any officer elected or appointed by the Board
of Directors may be removed at any time in the manner specified in Section 8.2.
SECTION 7.6. DUTIES OF CHAIRMAN OF THE BOARD. The Chairman of the
Board shall preside at all meetings of the stockholders and of the Board of
Directors, shall advise
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and counsel with the President shall assume such other duties as from time to
time may be assigned to him by the Board of Directors.
SECTION 7.7. DUTIES OF PRESIDENT. The President shall be the chief
executive officer of the corporation. He shall have executive authority to see
that all orders and resolutions of the Board of Directors are carried into
effect, and, subject to the control vested in the Board of Directors by statute,
by the Certificate of Incorporation or by these By-laws, shall administer and be
responsible for the overall management of the business and affairs of the
corporation. In general, he and shall perform all duties incident to the office
of the President and such other duties as may from time to time be assigned by
the Board of Directors or the Chairman of the Board. In the absence or
disability of the Chairman of the Board, he shall perform the duties of the
Chairman of the Board.
SECTION 7.8. DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial
Officer shall perform such duties and have such other powers as the Board of
Directors, the Chairman of the Board or the President may from time to time
prescribe.
SECTION 7.9. DUTIES OF VICE PRESIDENT. In the absence of the
Chairman of the Board, the President or in the event of their inability or
refusal to act, the Vice President (or in the event there be more than one Vice
President, the Vice Presidents in the order designated by the Directors, or in
the absence of any designation, then in the order of their election) shall
perform the duties of the President, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the President. The Vice
President shall perform such other duties and have such other powers as the
Board of Directors, the Chairman of the Board or the President may from time to
time prescribe.
SECTION 7.10. DUTIES OF SECRETARY. The Secretary shall attend all
meetings of the Board of Directors and all meetings of the stockholders and
record all the proceedings of the meetings of the corporation and of the Board
of Directors in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. He shall give, or cause to be given,
notice of all meetings of the stockholders and special meetings of the Board of
Directors, except as otherwise provided in these By-laws, and shall perform such
other duties as may be prescribed by the Board of Directors, the Chairman of the
Board or the President, under whose supervision he shall be. He shall have
charge of the stock ledger (which may, however, be kept by any transfer agent or
agents of the corporation under his direction) and of the corporate seal of the
corporation.
SECTION 7.11. DUTIES OF ASSISTANT SECRETARY. The Assistant
Secretary, or if there be more than one, the Assistant Secretaries in the order
determined by the Board of Directors (or if there be no such determination, then
in the order of their election) shall, in the absence of the Secretary or in the
event of his inability or refusal to act, perform the duties and exercise the
powers of the Secretary and shall perform such other duties and have such other
powers as the Board of Directors or the Chairman of the Board may from time to
time prescribe.
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SECTION 7.12. DUTIES OF TREASURER. The Treasurer shall have the
custody of the corporate funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the corporation in such depositories as may be designated by the Board
of Directors. The Treasurer shall disburse or supervise the disbursement of the
funds of the corporation as may be ordered by the Board of Directors, taking
proper vouchers for such disbursements, and shall render to the Board of
Directors, at its regular meetings, or when the Board of Directors so requires,
an account of all of his transactions as Treasurer and of the financial
condition of the corporation. If required by the Board of Directors, he shall
give the corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance of
the duties of this office and for the restoration to the corporation, in case of
his death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the corporation.
SECTION 7.13. DUTIES OF ASSISTANT TREASURER. The Assistant
Treasurer, or if there shall be more than one, the Assistant Treasurers in the
order determined by the Board of Directors (or if there be no such
determination, then in the order of their election), shall, in the absence of
the Treasurer or in the event of his inability or refusal to act, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers as the Board of Directors or the Chairman of
the Board may from time to time prescribe.
ARTICLE 8
RESIGNATIONS, REMOVALS AND VACANCIES
SECTION 8.1. DIRECTORS.
(a) RESIGNATIONS. Any Director may resign at any time by giving
written notice to the Board of Directors, the Chairman of the Board, the
President or the Secretary. Such resignation shall take effect at the time
specified therein; and unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
(b) REMOVALS. Subject to any provisions of the Certificate of
Incorporation, the holders of stock entitled to vote for the election of
Directors may, at any meeting called for that purpose, by the affirmative vote
of a majority of the shares of such stock outstanding and entitled to vote
thereat, remove any Director or the entire Board of Directors, with or without
cause.
Whenever the holders of any class or series are entitled to elect one
or more Directors by the Certificate of Incorporation, this subsection shall
apply, in respect to the
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removal of a Director or Directors so elected, to the vote of the holders of the
outstanding shares of that class or series and not to the vote of the
outstanding shares as a whole.
(c) VACANCIES. Vacancies occurring in the office of Director and
newly created Directorships resulting from any increase in the authorized number
of Directors shall be filled by a majority of the Directors then in office,
though less than a quorum, and the Directors so chosen shall hold office,
subject to the By-laws, until the next election of the class for which such
Directors shall have been chosen, and until their successors are duly elected
and qualified or until their earlier resignation or removal. Whenever the
holders of any class or classes of stock or series thereof are entitled to elect
one or more Directors by the Certificate of Incorporation, vacancies and newly
created Directorships of such class or classes or series may be filled by a
majority of the Directors elected by such class or classes or series thereof
then in office, or by a sole remaining Director so elected.
If there are no Directors in office, then an election of Directors may
be held in the manner provided by statute.
Unless otherwise provided in the Certificate of Incorporation or these
By-laws, when one or more Directors shall resign from the Board, effective at a
future date, a majority of the Directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office as provided in this
section in the filling of other vacancies.
SECTION 8.2. OFFICERS. Any officer may resign at any time by giving
written notice to the Board of Directors, the Chairman of the Board, the
President or the Secretary. Such resignation shall take effect at the time
specified therein; and unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective. The Board of
Directors may, at any meeting called for that purpose, by vote of a majority of
their entire number, remove from office any officer of the corporation or any
member of a committee, with or without cause. Any vacancy occurring in the
office of Chairman of the Board, President, Secretary or Treasurer shall be
filled by the Board of Directors and the officers so chosen shall hold office
subject to the By-laws for the unexpired term in respect of which the vacancy
occurred and until their successors shall be elected and qualify or until their
earlier resignation or removal.
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<PAGE>
ARTICLE 9
CERTIFICATE OF STOCK
SECTION 9.1. ISSUANCE OF STOCK. The Directors may, at any time and
from time to time, if all of the shares of capital stock which the corporation
is authorized by its Certificate of Incorporation to issue have not been issued,
subscribed for, or otherwise committed to be issued, issue or take subscriptions
for additional shares of its capital stock up to the amount authorized in its
Certificate of Incorporation. Such stock shall be issued and the consideration
paid therefor in the manner prescribed by law. Shares of stock with par value
may be issued for such consideration, having a value not less than par value
thereof.
SECTION 9.2. RIGHT TO CERTIFICATE; FORM. Every holder of stock in
the corporation shall be entitled to have a certificate, signed by, or in the
name of the corporation by, the Chairman of the Board, the President or a Vice
President and the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the corporation, certifying the number of shares owned by
him in the corporation; provided that the Directors may provide by one or more
resolutions that some or all of any or all classes or series of the
corporation's stock shall be uncertificated shares. Certificates may be issued
for partly paid shares and in such case upon the face or back of the
certificates issued to represent any such partly paid shares, the total amount
of the consideration to be paid therefor, and the amount paid thereon, shall be
specified.
SECTION 9.3. FACSIMILE SIGNATURE. Any of or all the signatures on
the certificate may be facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.
SECTION 9.4. LOST CERTIFICATES. The Board of Directors may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
SECTION 9.5. TRANSFER OF STOCK. Upon surrender to the corporation or
the transfer agent of the corporation of a certificate for shares duly endorsed
or accompanied by
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<PAGE>
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
SECTION 9.6. REGISTERED STOCKHOLDERS. The corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the General
Corporation Law of the State of Delaware.
ARTICLE 10
INDEMNIFICATION
SECTION 10.1. THIRD PARTY ACTIONS. The corporation shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a Director or
officer of the corporation, or is or was serving at the request of the
corporation as a Director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
SECTION 10.2. DERIVATIVE ACTIONS. The corporation shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a Director or officer of the corporation, or is or was serving at the
request of the corporation as a Director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which
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<PAGE>
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.
SECTION 10.3. EXPENSES. To the extent that a Director or officer of
the corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 10.1 and 10.2, or in defense
of any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
SECTION 10.4. AUTHORIZATION. Any indemnification under Sections 10.1
and 10.2 (unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
Director or officer is proper in the circumstances because he has met the
applicable standard of conduct set forth in Sections 10.1 and 10.2. Such
determination shall be made by (a) the Board of Directors by a majority vote of
a quorum consisting of Directors who were not parties to such action, suit or
proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable, a
quorum of disinterested Directors so directs, by independent legal counsel in a
written opinion, or (c) by the stockholders.
SECTION 10.5. ADVANCE PAYMENT OF EXPENSES. Expenses (including
attorneys' fees) incurred by an officer or Director in defending any civil,
criminal, administrative or investigative action, suit or proceeding shall be
paid by the corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such officer or
Director to repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the corporation as authorized in this Article
10.
SECTION 10.6. NON-EXCLUSIVENESS. The indemnification and advancement
of expenses provided by this Article 10 shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any By-Law, agreement, vote of stockholders or
disinterested Directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article 10 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a Director
or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
SECTION 10.7. INSURANCE. The corporation shall have power to
purchase and maintain insurance on behalf of any person who is or was a Director
or officer of the corporation, or is or was serving at the request of the
corporation as a Director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise
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<PAGE>
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of this Article 10.
For purposes of this Article 10, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a Director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such Director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
SECTION 10.8. CONSTITUENT CORPORATIONS. The corporation shall have
power to indemnify any person who is or was a Director, officer, employee or
agent of a constituent corporation absorbed in a consolidation or merger with
this corporation or who is or was serving at the request of such constituent
corporation as a Director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, in the same manner as
hereinabove provided so that such persons will stand in the same position under
this Article with respect to this corporation as he would have stood with
respect to such constituent corporation if its separate existence had continued.
SECTION 10.9. ADDITIONAL INDEMNIFICATION. In addition to the
foregoing provisions of this Article 10, the corporation shall have the power,
to the full extent provided by law, to indemnify any person for any act or
omission of such person against all loss, cost, damage and expense (including
attorneys' fees) if such person is determined (in the manner prescribed in
Section 10.4 hereof) to have acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interest of the corporation.
ARTICLE 11
EXECUTION OF PAPERS
Except as otherwise provided in these By-laws or as the Board of
Directors may generally or in particular cases otherwise determine, all deeds,
leases, transfers, contracts, bonds, notes, checks, drafts and other instruments
authorized to be executed on behalf of the corporation shall be executed by any
officer, agent or agents as may be authorized by the Board of Directors from
time to time.
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<PAGE>
ARTICLE 12
FISCAL YEAR
The fiscal year of the corporation shall end on the 31st day of
December of each year.
ARTICLE 13
DEPOSITORIES
The Board of Directors or an officer designated by the Board shall
appoint banks, trust companies, or other depositories in which shall be
deposited from time to time the money or securities of the corporation.
ARTICLE 14
SEAL
The Corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the word "Delaware." The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
ARTICLE 15
OFFICES
SECTION 15.1. REGISTERED OFFICE. The registered office in the State
of Delaware shall be located at 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of the corporation's registered agent at such
address shall be The Corporation Trust Corporation.
SECTION 15.2. PRINCIPAL OFFICE. The corporation may also have
offices within and without the State of Delaware as the Board of Directors may
from time to time determine or the business of the corporation may require.
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<PAGE>
ARTICLE 16
AMENDMENTS
These By-laws may be amended or repealed by the vote of a majority of
the directors present at any meeting at which a quorum is present or by the vote
of the holders of a majority of the total outstanding voting stock of the
corporation, present in person or represented by proxy, at any meeting of
stockholders at which a quorum is present.
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<PAGE>
EXHIBIT 5.1
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606-5094
August 27, 1996
Diamond Home Services, Inc.
222 Church Street
Diamond Plaza
Woodstock, IL 60098
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
You have requested our opinion in connection with the above-referenced
registration statement (the "Registration Statement"), under which a certain
stockholder of the Company intends to sell in such offering 750,000 shares of
Common Stock, par value $.001 per share, of the Company (the aggregate of such
shares being referred to as the "Secondary Shares").
In arriving at the opinion expressed below, we have examined the
Registration Statement and such other documents as we have deemed necessary to
enable us to express the opinion hereinafter set forth. In addition, we have
examined and relied, to the extent we deem proper, on certificates of officers
of the Company as to factual matters, and on the originals or copies certified
or otherwise identified to our satisfaction, of all such corporate records of
the Company and such other instruments and certificates of public officials and
other persons as we have deemed appropriate. In our examination, we have
assumed the authenticity of all documents submitted to us as originals, the
conformity to the original documents of all documents submitted to us as copies,
the genuineness of all signatures on documents reviewed by us and the legal
capacity of natural persons.
Based upon and subject to the foregoing, we are of the opinion that the
Secondary Shares have been duly authorized and validly issued and are fully paid
and non-assessable.
<PAGE>
Diamond Home Services, Inc.
August 27, 1996
Page 2
We hereby consent to the references to our firm under the caption "Legal
Matters" in the Registration Statement and to the use of this opinion as an
exhibit to the Registration Statement. In giving this consent, we do not hereby
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ McDermott, Will & Emery
<PAGE>
Exhibit 10.3(a)
AMENDMENT AGREEMENT
THIS AMENDMENT AGREEMENT is made and entered into as of the 1st day of
July, 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:
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 "Agreement"), whereby Sears granted to Licensee the privilege of
conducting and operating, and Licensee hereby agreed to conduct and operate,
pursuant to the terms, provisions and conditions contained in the License
Agreement, a business for the selling, furnishing and installing of certain
Sears approved products in the Sears Market Area(s) designated in Exhibit A.
WHEREAS; Sears and Licensee now wish to amend the Agreement to provide for
a change in the specified Market Area(s) listed in Exhibit A.
NOW, THEREFORE, the parties agree that effective as of the 1st day of July,
1996, Exhibit A, dated July 1, 1996, attached hereto, is substituted for the
original Exhibit A.
The aforementioned Agreement as herein modified is fully ratified and
affirmed.
IN WITNESS WHEREOF, Sears and Licensee have caused this Amendment Agreement
to be executed as of the day and year first above stated, by their duly
authorized officers and agents.
SEARS, ROEBUCK AND CO.
/s/ Terry Lenkey By /s/ Denise A. Woods
- ------------------------------ ---------------------------
Terry Lenkey Denise A. Woods
Director of Sales National Operations Manager
DIAMOND EXTERIORS, INC.
By /s/ C. Stephen Clegg
---------------------------
C. Stephen Clegg
C.E.O.
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<PAGE>
DIAMOND EXTERIORS, INC.
JULY 1, 1996
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.
PRODUCT/SERVICES ITEM NUMBER NUMBER OF PAGES
---------------- ----------- ---------------
ROOFING
Asphalt Shingles 30500 2
Iced 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
Overhand & Trim (soffit and fascia
only) 18517 2
Siding of Dormers/Gable Ends 18517 2
Chimney Repair 28551 2
ROOF REPAIR 30509 1
MOBIL 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 60430 2
GARAGE DOOR REPAIR 51409 2
GARAGE DOORS 51420 2
Garage Door Openers 51425 None
FENCING 31121 7
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).
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<PAGE>
DIAMOND EXTERIORS, INC.
JULY 1, 1996
Exhibit A(i)
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 and 306
HAWAII Entire State
MAINE Entire State
NEW HAMPSHIRE 038
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<PAGE>
DIAMOND EXTERIORS, INC.
JULY 1, 1996
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
- -------------------------------- ------------------------------
ILLINOIS 600 thru 606 (Lake, Cook
and DuPage Only)
INDIANA 463, 463
KANSAS 660 thru 662
MISSOURI 630, 631, 640, 641
PENNSYLVANIA 189, 190, 191, 194
WISCONSIN 530 thru 534, 535, 537
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 838 only
NEVADA All
NEW MEXICO All
OREGON All
TEXAS 798, 799 only
UTAH All
WASHINGTON All
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Exhibit 10.12
Summary of Consultant Arrangement Between Diamond Home Services, Inc. and Rodger
Ibach
In exchange for the provision of consulting services by Mr. Ibach to
Diamond Home Services, Inc. (the "Company") from July 1996 through March 31,
1997, Mr. Ibach will receive the following compensation from the Company:
- - $125,000 cash compensation
- - continued health, dental and life insurance coverage through March 31, 1997
- - continued participation in the Company's split dollar insurance program
<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 the Registration Statement (Form S-1) and related Prospectus of Diamond
Home Services, Inc. and Subsidiaries for the registration of up to 750,000
shares of its common stock.
Chicago, Illinois
August 27, 1996
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
