UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996 or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
to .
Commission file number: 0-20829
DIAMOND HOME SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3886872
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Church Street
Woodstock, Illinois 60098
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (815) 334-1414
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. / /
The registrant estimates that the aggregate market value of the registrant's
Common Stock held by non-affiliates on March 3, 1997 (based upon an estimate
that 56.0% of the shares are so owned by non-affiliates and upon the average of
the closing bid and asked prices for the Common Stock on the Nasdaq National
Market) on that date was approximately $90,000,000. Determination of stock
ownership by non-affiliates was made solely for the purpose of responding to
this requirement and registrant is not bound by this determination for any other
purpose.
As of March 3, 1997, 9,078,675 shares of the registrant's Common Stock were
outstanding.
The following documents are incorporated into this Form 10-K by reference:
Annual Report to Stockholders for fiscal year ended December 31, 1996
(Parts I and II).
Proxy Statement for Annual Meeting of Stockholders to be held on May 15,
1997 (Part III).
PART I
ITEM 1. 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, Roebuck & 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 750 sales associates. The Company has 75 sales offices located in
major cities across the U.S. The Company installs its products through a
network of over 1,300 qualified independent installers 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 $157.1
million for the year ended December 31, 1996.
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,
1994 1995 1996
Net Sales Percent of Total Net Sales Percent of Total Net Sales Percent of Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Roofing and Gutters . . . . . . . $74,015 78.6% $87,060 69.7% $102,818 65.4%
Fencing . . . . . . . . . . . . . 7,358 7.8 17,933 14.3 26,324 16.8
Garage, Entry and Security Doors 12,138 12.9 19,288 15.5 22,454 14.3
Fee and Finance Income . . . . . - - - - 4,209 2.7
Other . . . . . . . . . . . . . . 675 0.7 567 0.5 1,263 0.8
Total . . . . . . . . . . . $94,186 100.0% $124,848 100.0% $157,068 100.0%
</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.
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
Building Materials, Inc. ("Globe"), the Company's largest stockholder. The
Diamond Shield shingle has a 30-year warranty and is rapidly becoming the
Company's most popular shingle in the north central United States. Globe
licenses the name "Diamond Shield" to the Company pursuant to an exclusive,
royalty-free, perpetual license. 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 complex structures. The average price for a roof installed
by the Company is approximately $5,000. The Company also sells and installs
aluminum and steel gutters. The average price of installed gutters is
approximately $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, 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
approximately $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 approximately $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 approximately $1,200. 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 approximately
$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 approximately $1,100. In addition, the Company sells patio doors
and patio storm doors.
Fee and Finance Income. In 1996, the Company generated income from two
additional sources. Credit participation fee income, primarily from Sears and
its affiliates on installed sales financed by Sears and its affiliates, totalled
$2.3 million in 1996. Finance interest income on receivables financed by the
Company's wholly-owned consumer finance subsidiary, Marquise Financial Services,
Inc. ("Marquise"), totalled $1.9 million in 1996.
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 the Company's wholly-owned subsidiary Solitaire
Heating and Cooling, Inc. ("Solitaire"), cleaning, repair and replacement
products and services to the heating, ventilation, and air conditioning market,
which services are not marketed or sold pursuant to a Sears license agreement.
NATIONAL MARKETING AND SALES LEAD GENERATION
The Company's principal marketing activities are conducted by
participation in Sears' national advertising campaigns. In 1995 and 1996,
approximately 44% and 39%, respectively, 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. 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, in 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 contracted by 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 a call center operated by HI, Inc. ("HI"), a call
center staffed 24 hours a day and an affiliate of Mr. Clegg, Chairman of the
Board, Chief Executive Officer and President of the Company. This call center
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.
SALES
Potential customers who contact the Company are scheduled for an in-home
presentation from a sales associate, 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.
The Company attempts to limit, as the most effective level of appointments per
sales associates, each sales associate to two to three appointments each day,
Monday through Saturday; and each sales associate 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 associate'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
associates 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 associate will also determine the
specifications of the home improvement project and provide a written 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 associates receive a percentage of the revenue generated by a
sale, with the percentage varying, depending upon the line 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 associate'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 associates. The attraction and retention of qualified sales
associates is critical to the Company's goal of continued sales growth. The
Company attracts sales associates by general advertising and referrals. The
Company believes it is reducing the incidence of sales associate turnover.
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 are converted into sales. The Company
employs, and is in the process of implementing nationwide, a standardized one to
four 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.
Until February, 1997, the Company's sales and installation activities were
organized into four geographic regions (the East, Southeast, Central and West),
each of which was managed by a regional president and each of which had two or
three districts that reported to it. In February, 1997, the Company reorganized
its operations. It established a national head of sales and a national head of
installations to whom, among others, each district now reports. The Company
currently has 75 sales offices, including an office for its Solitaire
subsidiary. Each sales office is typically staffed with a sales manager, an
installation manager and a customer service project coordinator. The sales
office is responsible for assigning sales leads to the sales associates. The
sales manager is responsible for recruiting and training sales associates
and monitoring performance, including closing ratio performance with a view to
assuring maximum productivity for each lead. The installation manager is
responsible for scheduling and retaining independent installers for particular
jobs and recruiting independent installers. The customer service project
coordinator manages the job through completion and customer satisfaction.
INDEPENDENT INSTALLERS
The Company retains independent installers 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
and safety standards. Each of the Company's sales offices enters into
arrangements with multiple independent installers setting forth the
compensation structure for the independent installer for a specified
type and scope of installation. Independent installers 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 installers satisfy the Company's workers' compensation,
general liability and automotive insurance requirements. In certain
circumstances, independent installers have not carried or renewed their
workers' compensation and general liability insurance. To the extent that
independent installers do not carry the required insurance, the Company could
incur ultimate liability for any injury or damage claims. The Company is
implementing a captive insurance program to address this situation. The
Company has established relationships (i.e., independent installers who have
performed two or more installations for the Company) with over 1,300
independent installers. Many independent installers operate multiple
installation crews. Each independent installer provides the Company with a
one to two year warranty for its work which, in the case of roofing, is
significantly shorter in duration than the labor warranty provided by the
Company to its customers.
CUSTOMER FINANCING
The average sales price charged by the Company for its products and
services ranges between $1,100 and $5,000. During fiscal 1996, approximately 93%
of the Company's sales were financed, and, of the sales which were financed,
approximately 79% were financed through Sears and third party finance companies,
including Sears affiliates. A sales associate is generally able to determine
credit availability for a customer by calling one of the Company's finance
resources during the in-home presentation. In the Company's credit arrangements
with its third-party finance companies, the finance companies assume all credit
risk and the Company receives, upon completion of the installation, the full or
negotiated (in the case of non-prime credit) 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
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. The continued
availability of affordable financing for potential customers is necessary for
the Company to continue to sell its products.
In November 1995, Marquise, 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 third-party finance companies or, in some cases, if third-
party finance companies decline the customer's credit application, the customer
may finance the purchase through Marquise, so long as the customer satisfies
Marquise's credit criteria. The sales associate makes a phone call during the
in home presentation and is generally able to determine unsecured credit
availability for a customer with Marquise within 5 to 10 minutes. Unlike
financing through third-party finance companies, the Company bears the credit
risk on all financing provided by Marquise. As of December 31, 1996,
Marquise held $5.3 million in net consumer finance receivables.
During 1996 Marquise loaned approximately $23.6 million in unsecured
finance receivables and received approximately $5.4 million in finance
receivables repayment. In December 1996, Marquise sold approximately $12.7
million of the unsecured portfolio, at a premium to par value, to a third-party
finance company. During the fourth quarter of 1996, Marquise introduced a new
finance product - a fixed rate loan secured by real estate - available to all
creditworthy customers that cannot obtain unsecured consumer loans. At
December 31, 1996, Marquise had approximately $2.1 million in outstanding
commitments of the fixed rate, secured loans.
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 to the customer vary generally from two to 10 years. In
addition, the manufacturer provides a warranty to the customer on the product.
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 installers
(generally one to two years), especially in the case of roofing 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 installer performs its warranty obligations. In addition, pursuant
to the license agreement with Sears (i) Sears has the right to settle, at the
Company's expense and without the Company's consent, any customer complaints,
(ii) the Company has agreed to and supports Sears policy of "Satisfaction
Guaranteed or Your Money Back" as it relates to customer complaints and
adjustments and (iii) the Company's customers are third-party beneficiaries of
the one-year product and labor warranty given by the Company to Sears with
respect to each installation. The Company attempts to limit its potential
warranty exposure by pre-screening and certifying independent installers, using
quality, warranted products produced by nationally known manufacturers and
inspecting a portion of all installations.
To secure the performance of the independent installers under their
warranties, the Company requires most independent installers to deposit with the
Company between 1% and 2% of the payment such independent installers 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 installer 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 installer 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.
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, the agreement to back the Company's
warranty under specified circumstances, 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, with
operating distribution centers, and with delivering materials to job sites. 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.
In 1995 and 1996, approximately 20% and 23%, respectively, of the
Company's roofing 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% and 8% in dollar volume
of all roofing products purchased by the Company during 1995 and 1996,
respectively, were manufactured by Globe, the Company's largest stockholder.
SEARS LICENSE AGREEMENT
Currently, the Company conducts primarily all of its direct marketing and
installation activities under a license agreement between Diamond Exteriors,
Inc., a wholly-owned subsidiary of the Company ("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 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.
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. 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 Exteriors
during the term of the license agreement, as well as to all telephone numbers
used by Exteriors 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, 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 provides for the payment of a credit participation
fee as long as 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 received
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 1995 and 1996, the Company
incurred license fees to Sears in the aggregate amount of $13.0 million and
$16.4 million, respectively. In addition, Sears and its affiliates have
financed an aggregate in excess of $180 million since the Company's inception.
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. 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 the accuracy of any information set forth herein.
SEASONALITY AND BACKLOG
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. 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. Backlog, defined
as jobs sold but not installed, increased $5.6 million, or 60.9%, from $9.2
million at the end of December 1995 to $14.8 million at the end of December
1996.
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 installers in each of its markets, some of which also serve as
independent installers for the Company. The Company also competes against major
retailers which license and/or market and install products similar to the
Company's, including Home Depot, Inc., Montgomery Ward & Co., Inc., and Century
21. 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., Montgomery Ward & Co., Inc., and Century 21 each has a nationwide
chain of retail stores or outlets, 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,
insurance coverage, 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.
GOVERNMENT REGULATIONS
The Company's business and the activities of its independent installers
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 installers, 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 installer 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.
Marquise'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. Licenses are revocable for cause.
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 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 from
continuing to offer financing in that state.
EMPLOYEES AND INDEPENDENT INSTALLERS
At December 31, 1996, the Company employed 1,260 persons, including 678
sales associates and 190 part-time employees. In addition, the Company has
relationships (i.e., independent installers who have performed two or more
installations for the Company) with approximately 1,300 independent installers
which perform installation services. Many of the Company's independent
installers operate multiple installation crews. The Company considers its
relations with its employees and independent installers to be satisfactory.
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
As of March 26, 1997, the executive officers and key employees of the
Company were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
EXECUTIVE OFFICERS:
<S> <C> <C>
C. Stephen Clegg 46 Chairman of the Board, Chief Executive Officer and
President
James M. Gillespie 57 Vice President - Business Development and a Director
Frank Cianciosi 53 Vice President - National Sales
Jerome Cooper 56 Vice President - Installations
Richard G. Reece 48 Vice President, Chief Financial Officer and
Treasurer
Ann Crowley Patterson 37 Vice President - Administration
Joseph U. Schorer 43 Vice President, General Counsel and Secretary
KEY EMPLOYEES:
S. Austin Sawyer 63 President of Marquise
Marvin Lerman 54 Vice President - Purchasing
Kenneth H. Smith 54 Vice President - Sales and Marketing
Eugene J. O'Hern, Jr. 53 Controller
Wayne Tompkins 47 Vice President - Human Resources
Stuart Davidson 34 Vice President - MIS
</TABLE>
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. 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 largest stockholder. Mr. Clegg has served as the Chairman
of the Board and Chief Executive Officer of Mid-West Spring Manufacturing
Company, a company which manufactures specialty springs, wire forms and metal
stamping products ("Mid-West Spring"), and its predecessors 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 Holdings, Inc. ("Catalog"). Catalog is the parent company
of HI, which receives fees from the Company for providing call center services
and for processing sales leads. HI owns all the preferred stock, and a minority
of the common stock, of Handy Craftsmen which leases space from the Company.
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., a private investment firm.
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. JAMES M. (MILT) GILLESPIE has been a director of the Company since
May 1995 and in January, 1997, he was appointed Vice President - Business
Development for the Company. From April 1996 until January 1997, Mr. Gillespie
was Vice President - Southeastern Region of the Company. 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. 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 - National Sales for the
Company since February 1997. Prior to that time he was Vice President - Eastern
Region and National Sales Manager of the Company beginning in 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.
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. JEROME COOPER has been Vice President - Installations for the Company
since February, 1997. From April 1996 until February 1997, he was Vice
President - Central Region of the Company. He was President - Central Region of
the Company from May 1995 to April 1996 and was Central Region Manager from
February 1994 to May 1995. 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. RICHARD G. REECE has served as Vice President, 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 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 of
the Company since April 1996. From 1993 until March 1997 Ms. Patterson also
served as the Vice President, General Counsel and Secretary of the Company,
Globe and Mid-West Spring and as the Vice President and Secretary of Catalog.
Ms. Patterson was associated with Jones, Day, Reavis & Pogue in New York,
New York and Chicago, Illinois from February 1989 to November 1993.
MR. JOSEPH U. SCHORER has served as Vice President, General Counsel and
Secretary of the Company, Globe, Mid-West Spring and Catalog since March, 1997.
Mr. Schorer intends to continue in these positions. Mr. Schorer currently
devotes and intends to devote a majority of his time to the Company. From
January 1985 until he joined the Company, Mr. Schorer was a partner in the
Chicago, Illinois office of Mayer, Brown & Platt, an international corporate law
firm.
MR. S. AUSTIN SAWYER has been President of Marquise 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. Prior to joining the Company, Mr. Lerman held
various management positions at Sears from 1963 to May 1993.
MR. KENNETH H. SMITH joined the Company as Vice President - Sales and
Marketing in February 1997. Prior to joining the Company, Mr. Smith served for
eighteen years in various positions of marketing, product development, and
quality/customer support services at S.C. Johnson & Sons, Inc., a global
marketer of various home and commercial specialty products.
MR. EUGENE J. O'HERN, JR., has been controller of the Company since
July 1996. From July 1993 through June 1996, Mr. O'Hern was the controller at
Briskin Manufacturing Company. From January 1991 through June 1993, Mr. O'Hern
was director of finance for the Cinch Connector Division of L.C.S., Inc., a
manufacturer and distributor of electrical connectors.
MR. WAYNE TOMPKINS, Vice President - Human Resources, joined the Company in
August 1996. From 1989 until he joined the Company, he was employed by the
Nutrasweet Company, a multinational producer of chemical formulations in the
food, chemical, pharmaceutical and beverage industries, where he was a manager
of human resources and, from 1991 until 1996, Director of Human Resources.
MR. STUART DAVIDSON joined the Company in November, 1996 as Vice President
- - MIS. Prior to joining the Company, he was employed for twelve years at
HarperCollins Publishers in various information technology positions. For the
last three years at HarperCollins Publishers, he was Director of Information
Systems with Scott Foresman, the educational publishing division of
HarperCollins, based in Glenview, Illinois.
ITEM 2. 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. As of December 31, 1996, the Company leased 75 sales/installation
offices. These offices occupy between 800 and 2,000 square feet and typically
have lease terms of up to three years.
ITEM 3. 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 and solicitations which IECGF has had with parties
unrelated to Globe in attempts to sell its position. 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
"Delaware Suit"). 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 The Handy Craftsmen, Inc. ("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 a $150,000 payment to Catalog 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. Mr. Clegg and Mr. Pollock
have filed a motion to dismiss the complaint, which IECGF opposes. The court
has not ruled on this motion.
The Company believes that the allegations of the Delaware Suit are without
merit. Mr. Clegg and Mr. Pollock strongly deny the breaches alleged in the
Delaware Suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Except as set forth below, the information required by this Item is set
forth in registrant's Annual Report to Stockholders for the fiscal year ended
December 31, 1996, under the caption "Corporate Data," which information is
hereby incorporated herein by reference.
Other than an $8.6 million special, one-time dividend paid to the
Company's pre-initial public offering stockholders in June 1996, the Company
has not declared or paid any cash dividends on its Common Stock since its
formation. The Company does not expect to declare cash dividends and
anticipates, for the foreseeable future, that earnings and cash resources
will be used to finance the growth and development of its businesses. In
addition, the Company's bank line of credit places limitations, under
certain conditions, on the payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is set forth in registrant's Annual
Report to Stockholders for the fiscal year ended December 31, 1996, under the
caption "Selected Financial Data," which information is hereby incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The information required by this Item is set forth in registrant's Annual
Report to Stockholders for the fiscal year ended December 31, 1996, under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations," which information is hereby incorporated herein by reference.
------------------------------------------------
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the foregoing "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this Report
which are not of a historical nature, including without limitation, statements
addressing the beliefs, plans, objectives, estimates or expectations of the
Company or future results or events constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, including,
but not limited to, general economic and business conditions, matters related
to the Sears license, warranty exposure, the Company's reliance on sales
associates and on the availability of qualified independent installers,
and conditions in the home improvement industry. There can be no assurance
that actual results, performance or achievements of the Company will not
differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statement
whether as a result of new information, future events or otherwise.
In addition to the risks and uncertainties of ordinary business operations,
the forward-looking statements of the Company contained in this Annual Report on
Form 10-K are subject to the following risks and uncertainties:
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 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.
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 and
Sears. 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. 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 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 sales and profitability
could be adversely affected.
Warranty Exposure
The Company provides each customer with a warranty on product and labor.
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 installers (generally one to two years) is significantly shorter
in duration than that provided by the Company to its customers. 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 all cases, the Company is liable to the customer to fulfill all
warranty obligations, regardless of whether a manufacturer or independent
installer performs its warranty obligations. In addition, pursuant to the
license agreement with Sears (i) Sears has the right to settle, at the Company's
expense and without the Company's consent, any customer complaints, (ii) the
Company has agreed to and supports Sears policy of "Satisfaction Guaranteed or
Your Money Back" as it relates to customer complaints and adjustments and (iii)
the Company's customers are third party beneficiaries of the one-year product
and labor warranty given by the Company to Sears with respect to each
installation. 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 installers are unable to
fulfill their warranty obligations, the Company's results of operations could be
materially adversely affected.
Reliance on Sales Associates
The Company's success depends upon its ability to identify, develop and
retain qualified employees, particularly sales associates. As a result, the
Company devotes significant 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.
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.
High Turnover of Sales Associates
The Company has experienced significant turnover with respect to its sales
associates in the past, because, among other reasons, the Company's sales
associates work on a commission-only basis and, in certain regions of the
country, the business is seasonal. In 1996, approximately 25% of the sales
associates generated 75% of net installed sales. Increased turnover and/or loss
of productive sales associates has a direct impact on net sales and
profitability. The turnover of sales associates 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 associates
continues or increases, or the Company loses a significant number of its most
productive sales associates, the net sales and profitability of the Company
could be adversely affected.
Dependence on Availability of Qualified Independent Installers
The Company's success depends upon its ability to continue to hire
independent installers 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
warrant for labor on certain of its products, hiring qualified independent
installers who will perform the work in accordance with the Company's
specifications and predetermined quality standards is extremely important. Most
of the Company's independent installers also compete directly with the Company
and the Company, to a lesser extent, competes with other home improvement
companies for the services of independent installers. The Company only retains
an independent installer at the time an installation is sold. As a result, no
independent installer is obligated to work for the Company until the independent
installer accepts an assignment. In the past, the Company has periodically had
difficulty retaining a sufficient number of qualified independent installers,
especially after periods of extreme weather in specific geographic areas due to
increased demand. There can be no assurance that qualified independent
installers 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 installers satisfy the Company's
workers' compensation, general liability and automotive insurance requirements.
In certain circumstances, independent installers have not carried or renewed
their workers' compensation and general liability insurance. To the extent
that independent installers 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 installer meets and continues to meet the Company's workers'
compensation and general liability insurance requirements.
Interest Rate and Inflation 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. 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 Third Party Credit
During fiscal 1996, approximately 93% of the Company's sales were financed,
and, of the sales which were financed, approximately 79% were financed through
Sears and third party finance companies, including Sears 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 or other third party finance companies, the Company's
results of operations could be adversely affected.
Consumer Finance Subsidiary
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 third party
finance companies. 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 third party finance companies. Marquise Financial
currently maintains a bad debt reserve for expected losses. Due to Marquise'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's systems and controls will be adequate, that losses will
be consistent with the expected bad debt experience or that Marquise will be
able to obtain financing sufficient to support its expanded operations.
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 or any one of Messrs.
Gillespie, Cianciosi, and Cooper 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.
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 installers for the Company. The Company also competes against major
retailers which market and install products similar to the Company's. 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.
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. 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.
Compliance with Government Regulations
The Company's business and the activities of its independent installers 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 installer 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 installers 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in registrant's Annual
Report to Stockholders for the fiscal year ended December 31, 1996, under the
captions "Consolidated Balance Sheets," "Consolidated Statements of Operations,"
"Consolidated Statements of Changes in Common Stockholders' Equity,"
"Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial
Statements," which information is hereby incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
a. Directors of the Company
The information required by this Item is set forth in
registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 15, 1997, under the captions
"Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance," which information is
hereby incorporated herein by reference.
b. Executive officers of the Company
Reference is made to "Executive Officers and Key Employees of the
Registrant" in Part I.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 15, 1997,
under the captions "Executive Compensation," "Compensation Committee Report on
Executive Compensation," "Compensation Committee Interlocks and Insider
Participation," and "Board of Directors" which information is hereby
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is set forth in registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 15, 1997,
under the caption "Securities Beneficially Owned by Principal Stockholders and
Management," which information is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 15, 1997,
under the caption "Certain Transactions," which information is hereby
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) Financial Statements
The following financial statements of Diamond Home
Services, Inc. are included in Part II, Item 8:
(i) Consolidated Balance Sheets - as of
December 31, 1996 and 1995;
(ii) Consolidated Statements of Operations - years ended
December 31, 1996, 1995 and 1994;
(iii) Consolidated Statements of Changes in Common
Stockholders' Equity as of December 31, 1996, 1995 and
1994;
(iv) Consolidated Statements of Cash Flows - years ended
December 31, 1996, 1995 and 1994;
(v) Notes to Consolidated Financial Statements; and
(vi) Report of Independent Auditors from Ernst & Young LLP.
(2) Financial Statement Schedules
No schedules related to this Item to which reference is made in
applicable regulations of the Securities and Exchange Commission
are required or are applicable, and therefor all such schedules
are omitted.
(3) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index hereto, which information is hereby incorporated by
reference.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
December 31, 1996.
(c) Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are as
specified in Item 14(a)(3) herein.
(d) Financial Statement Schedules
The financial statement schedules filed as part of this Annual Report
on Form 10-K are as specified in Item 14(a)(2) herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 27, 1997.
DIAMOND HOME SERVICES, INC.
By /s/ C. Stephen Clegg
C. Stephen Clegg, Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant as of March 27, 1997, in the capacities indicated:
Signature Title
Chairman of the Board, Chief
Executive Officer, President
/s/ C. Stephen Clegg and Director (Principal
C. Stephen Clegg Executive Officer)
Vice President, Chief
Financial Officer and
/s/ Richard G. Reece Treasurer (Principal Financial
Richard G. Reece Officer)
/s/ Eugene J. O'Hern, Jr. Controller (Principal
Eugene J. O'Hern, Jr. Accounting Officer)
/s/ James F. Bere', Jr.
James F. Bere', Jr. Director
/s/ Jacob Pollock
Jacob Pollock Director
/s/ George A. Stinson
George A. Stinson Director
/s/ James M. Gillespie
James M. Gillespie Director
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
NUMBER
3.1 Amended and Restated Certificate of Incorporation of Diamond
Home Services, Inc. (2)
3.2 Amended and Restated By-Laws of Diamond Home Services, Inc.
(2)
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. (2)
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)
10.9(e) Subordination Agreement among Diamond Home Services, Inc.,
Diamond Exteriors, Inc. and American National Bank and Trust
Company of Chicago. (1)
10.9(f) Third Amendment and Release to Loan and Security Agreement
between Diamond Exteriors, Inc. and American National Bank
and Trust Company of Chicago (filed herewith)
10.10* Settlement Agreement between Diamond Home Services, Inc. and
Donald Griffin. (1)
10.10(a)*Settlement Agreement between Diamond Home Services, Inc. and
Ronald Schurter (filed herewith)
10.11* License Agreement between Globe Building Materials, Inc. and
Diamond Home Services, Inc. (1)
13.1 Excerpts from 1996 Annual Report to Stockholders (filed
herewith)
21.2 Subsidiaries of Diamond Home Services, Inc. (1)
23.1 Consent of Ernst & Young LLP (filed herewith)
27 Financial Data Schedule (filed herewith)
___________
* Denotes each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report.
(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.
(2) Incorporated herein by reference to the exhibit of equivalent number to the
Company's Registration Statement on Form S-1, as amended, Registration No.
333-10973.
EXHIBIT 10.9(f)
THIRD AMENDMENT AND RELEASE TO LOAN AND SECURITY AGREEMENT
This Third Amendment and Release to Loan and Security Agreement, made
as of December 3, 1996 (this "Amendment"), is by and between Diamond Exteriors,
Inc. (f/k/a Diamond Home Services, Inc.) (the "Company") and American National
Bank and Trust Company of Chicago (the "Bank"). Capitalized terms used in this
Amendment and not otherwise defined have the meanings assigned to such terms in
the Loan Agreement (as defined below).
W I T N E S S E T H:
WHEREAS, Diamond Home Services, Inc. (f/k/a Diamond Exteriors, Inc.)
("DHS") and the Bank were parties to the Loan and Security Agreement dated as of
February 6, 1996 (as such Agreement may be amended, restated, supplemented or
otherwise modified from time to time, the" Loan Agreement");
WHEREAS, under the Assignment, Delegation and Assumption Agreement
dated as of May 24, 1996, by and among DHS, the Company (a wholly owned
subsidiary of DHS) and the Bank, the Company assumed all of the rights, duties,
obligations and liabilities of DHS under the Loan Agreement and other Related
Documents;
WHEREAS, the Bank has extended credit under the Loan Agreement to the
Company as evidenced by (i) the Revolving Note dated as of June 14, 1996 (the
"Existing Revolving Note"), made by the Company in favor of the Bank in the
original principal amount of $5,000,000, (ii) the Finance Company Loan Note
dated as of June 14, 1996 (the "Existing Finance Company Loan Note", made by the
Company in favor of the Bank in the original principal amount of $5,000,000 and
(iii) the Investment Loan Note dated as of June 14, 1996 (the "Existing
Investment Loan Note" and, together with the Existing Revolving Note and the
Existing Finance Company Loan Note, the "Existing Notes"), made by the Company
in favor of the Bank in the original principal amount of $5,000,000;
WHEREAS, the Company has requested that the Bank, among other things,
(i) modify the terms of the credit facility evidenced by the Loan Agreement and
the other Related Documents by, among other things, terminating the Finance
Company Line of Credit and the Investment Loan Credit Commitment and (ii)
release the security interests in and Liens on the Collateral securing the
Liabilities, and the Bank has agreed to such a request, subject to the terms and
conditions of this Amendment;
WHEREAS, in furtherance of such a request, the Company and the Bank
have agreed to amend and restate the Existing Revolving Note to (i) increase the
maximum commitment to $15,000,000 and (ii) change the maturity date to November
30, 1997;
WHEREAS, in furtherance of such a request, the Bank and the Company
have agreed to amend the Loan Agreement to, among other things, (i) reflect the
amendments to the Existing Revolving Note, (ii) provide for the issuance of
commercial and standby letters of credit, (iii) change the interest rate
applicable to Revolving Loans, (iv) terminate, effective as of December 1, 1996,
the Unused Facility Fee, (v) modify certain financial and other covenants, (vi)
modify certain terms and provisions of the Loan Agreement to reflect the
termination of the Finance Company Line of Credit and the Investment Loan Credit
Commitment and (vii) modify certain terms and provisions of the Loan Agreement
to reflect the release of security interests in and Liens on the Collateral
securing the Liabilities;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained in this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are acknowledged, the
Company and the Bank agree as follows:
SECTION 1. AMENDMENTS TO LOAN AGREEMENT
On the date this Amendment becomes effective, after satisfaction by
the Company of each of the conditions set forth in Section 7 of this Amendment
(the "Closing Date"), the Loan Agreement is amended, effective as of December 3,
1996 (except as otherwise specifically stated) as follows:
1.1. The Loan Agreement is amended by deleting the following sections
from the Loan Agreement in their entirety and replacing them with [intentionally
omitted]: Section 2.3; Section 3.2; Section 3.3; Section 5.1(b); Section 5.1(c);
Section 5.3(c); Section 9.1(k); Section 9.28; Section 9.30; Section 11.2; and
Section 12.1(o).
1.2. Section 1 of the Loan Agreement is amended by deleting the
following definitions from such section in their entirety: "Finance Company Line
Limit"; "Finance Company Line of Credit"; "Finance Company Line Repayment Date";
"Finance Company Line Termination Date"; "Finance Company Loans"; "Finance
Company Loan Note"; "Investment Loan Credit Commitment"; "Investment Loan Credit
Limit"; "Investment Loan Credit Repayment Date". "Investment Loan Credit
Termination Date"; "Investment Loans"; "Investment Loan Note"; "Securitization
Documentation"; "Special Purpose Note"; "Special Purpose Note Agreement";
"Trademark Security Agreement"; "Unused Facility Feel"; "Working Capital Note";
and "Working Capital Note Agreement."
1.3. Section 1 of the Loan Agreement is further amended by deleting
the definition of "Cash Flow Coverage Ratio" from such section in its entirety
and replacing it as follows:
"Cash Flow Coverage Ratio" means the ratio of (i) Earnings Before
Interest and Taxes, plus (A) any unused reserves established for
warranty claims, plus (B) all noncash expenses incurred by a Person
during such period, minus (C) capital expenditures that are not funded
by Capital Leases incurred during such period or by Loan or loan
proceeds to (ii) total interest paid on Indebtedness in such period,
plus (A) taxes actually paid by such Person (or, in the case of the
Company, paid to Globe by the Company under the Tax Sharing Agreement
effective as of September 15, 1994, between the Company and Globe) for
such period, plus (B) total principal paid on Indebtedness (including,
in the case of the Company, all principal payments to Diamond Home
Services, Inc. with respect to the subordinated debt) in such period
(but, in the case of the Company, not including (x) any payments of
principal on the Revolving Loan unless made to reduce the Revolving
Credit Limit under Section 5.1(a) or (y) any principal prepayments
made in connection with the initial public offering of the common
stock of Diamond Home Services, Inc.), plus (C) all cash dividends on
capital stock paid by such Person during such period (but, in the case
of the Company, not including the dividend of approximately $8,600,000
occurring in connection with the initial public offering of the common
stock of Diamond Home Services, Inc.).
1.4. Section 1 of the Loan Agreement is further amended by deleting
the definition of "Credit Commitment" from such section in its entirety and
replacing it as follows:
"Credit Commitment" means the Revolving Loan Commitment.
1.5. Section 1 of the Loan Agreement is further amended by deleting
the definition of "Credit Facility" from such section in its entirety and
replacing it as follows:
"Credit Facility" means the Revolving Credit Limit.
1.6. Section 1 of the Loan Agreement is further amended by deleting
the definition of "Credit Termination Date" from such section in its entirety
and replacing it as follows:
"Credit Termination Date" means the Revolving Credit Termination Date.
1.7. Section 1 of the Loan Agreement is further amended by deleting
the definition of "Current Ratio" from such section in its entirety and
replacing it as follows:
"Current Ratio" means the ratio of a Person's (a) current assets
(disregarding any of such Person's non-liquid assets (to the extent such
assets are current assets), including, without limitation, covenants not to
compete, prepaid expenses, deferred charges, goodwill, franchises,
licenses, patents, trademarks, trade names, copyrights, service marks and
brand names and, in the case of the Company, including any advances to the
Finance Company permitted under this Agreement and, in the case of the
Finance Company, all accounts receivable, notwithstanding the fact that
such accounts receivable may be classified as long-term assets in
accordance with GAAP) to (b) current liabilities.
1.8. Section 1 of the Loan Agreement is further amended by deleting
the definition of "Earnings Before Interest and Taxes" from such section in its
entirety and replacing it as follows:
"Earnings Before Interest and Taxes" means, for each preceding 12
month period, a Person's earnings before nonrecurring items, amortization,
interest expense, depreciation and taxes as set forth in such Person's
statements of income and retained earnings for such period.
1.9. Section 1 of the Loan Agreement is further amended by adding the
following definition alphabetically to such section as follows:
"L/C Cash Collateral Account" means a deposit account opened by the
Bank in the Company's name in which the Company will deposit amounts to
cash collateralize Letters of Credit under this Agreement.
1.10. Section 1 of the Loan Agreement is further amended by adding
the following definition alphabetically to such section as follows:
"Letters of Credit" means any commercial or standby letters of credit
that are now or at any time hereafter issued by the Bank at the request and
for the account of the Company and that have not expired or been revoked or
terminated.
1.11. Section 1 of the Loan Agreement is further amended by deleting
the definition of "Liabilities" from such section in its entirety and replacing
it as follows:
"Liabilities" means any and all of the Company's obligations to the
Bank, howsoever created, arising or evidenced, whether direct or indirect,
absolute or contingent, now or hereafter existing, or due or to become due,
which arise out of or in connection with this Agreement, the Related
Documents or the Company's reimbursement obligations, whether contingent or
liquidated, with respect to any Letter of Credit.
1.12. Section 1 of the Loan Agreement is further amended by deleting
the definition of "Loans" from such section in its entirety and replacing it as
follows:
"Loans" means the Revolving Loans.
1.13. Section 1 of the Loan Agreement is further amended by deleting
the definition of "Notes" from such section in its entirety and replacing it as
follows:
"Notes" means the Revolving Note.
1.14. Section 1 of the Loan Agreement is further amended by adding
the definition of "Related Companies" to such section as follows:
"Related Companies" means, collectively, Diamond Home Services, Inc.,
a Delaware corporation, and each of its wholly owned subsidiaries: the
Company; the Finance Company; and Solitaire Heating and Cooling, Inc., a
Delaware corporation.
1.15. Section 1 of the Loan Agreement is further amended by deleting
the definition of "Related Documents" from such section in its entirety and
replacing it as follows:
"Related Documents" means, collectively, the Notes, the Subordination
Agreement dated as of June 14, 1996, among Diamond Home Services, Inc., the
Company and the Bank and all other documents, instruments, agreements and
certifi-cates executed by the Company pursuant to or in connection with
this Agreement.
1.16. Section 1 of the Loan Agreement is further amended by deleting
the definition of "Revolving Credit Limit" from such section in its entirety and
replacing it as follows:
"Revolving Credit Limit" means an amount equal to $15,000,000 LESS any
permanent reductions pursuant to Section 5.1(a).
1.17. Section 1 of the Loan Agreement is further amended by deleting
the definition of "Tangible Net Worth" in its entirety and replacing it as
follows:
"Tangible Net Worth" means, with respect to any Person at any time,
such Person's net worth (determined in accordance with GAAP, which includes
account receivables) after subtracting therefrom the aggregate amount of
any intangible assets of such Person as determined in accordance with GAAP.
In the case of the Company, any subordinated debt from Diamond Home
Services, Inc. will also be included in the calculation of "Tangible Net
Worth."
1.18. Section 2.1 of the Loan Agreement is amended by deleting the
first sentence of such section in its entirety and replacing it as follows:
On the terms and subject to the conditions set forth in this Agreement, the
Bank agrees to make revolving loans (collectively, "Revolving Loans") to
the Company from time to time before the Revolving Credit Termination Date
in such aggregate amounts as the Company may from time to time request but
not exceeding at any one time outstanding the Revolving Credit Limit minus
the aggregate stated amount of all outstanding Letters of Credit.
1.19. Section 2.2 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
2.2 Letters of Credit.
(a) On the terms and subject to the conditions set forth in this
Agreement, the Bank shall issue for the account of the Company Letters of
Credit during the period commencing on December 3, 1996, and continuing
through the date 30 days prior to the Maturity Date (or such other date as
the Bank gives its prior written consent) at such stated amounts as the
Company may from time to time request but not exceeding at any one time
outstanding in the aggregate an amount equal to the lesser of (i)
$1,000,000 and (ii) the difference between the Revolving Credit Limit minus
the outstanding aggregate principal amount of Loans. The Letters of Credit
shall be in form and substance reasonably acceptable to the Bank. The
expiration date on any Letter of Credit shall not be later than 30 Business
Days prior to the Maturity Date (or such other date as the Bank gives its
prior written consent). The Company shall reimburse the Bank, immediately
upon demand, for any payments made by the Bank to any Person with respect
to any Letter of Credit and, until the Bank shall be so reimbursed by the
Company, such payments by the Bank shall be deemed to be Revolving Loans.
without limiting the generality of the foregoing, the Bank at its sole
discretion, may deduct any such amounts due and owing from any account of
the Company with the Bank.
(b) The Bank shall, promptly following its receipt thereof, examine
all documents purporting to represent a demand for payment by the
beneficiary under any Letter of Credit issued by the Bank to ascertain that
the same appear on their face to be in conformity with the terms and
conditions of such Letter of Credit. If, after examination, the Bank shall
have determined that a demand for payment under such Letter of Credit does
not conform to the terms and conditions of such Letter of Credit, then the
Bank shall, as soon as reasonably practicable, give notice to the
beneficiary and the Company that negotiation was not in accordance with the
terms and conditions of such Letter of Credit, stating the reasons therefor
and that the relevant document is being held at the disposal of such
beneficiary or is being returned to such beneficiary, as the Bank may
elect. The beneficiary may attempt to correct any such nonconforming
demand for payment under such Letter of Credit if, and to the extent that,
such beneficiary is entitled (without regard to the provisions of this
sentence) and able to do so. If the Bank determines that a demand for
payment under such Letter of Credit conforms to the terms and conditions of
such Letter of Credit, then the Bank shall make payment to the beneficiary
in accordance with the terms of such Letter of Credit. The Bank shall have
the right to require the beneficiary to surrender such Letter of Credit to
the Bank on the stated expiration date of such Letter of Credit.
(c) As between the Company and the Bank, the Company assumes all
risks of the acts and omissions of, or misuse of Letters of Credit by, the
respective beneficiaries of the Letters of Credit. In furtherance and not
in limitation of the foregoing, subject to the provisions of the Letter of
Credit applications, the Bank shall not be responsible: (i) for the form,
validity, sufficiency, accuracy, genuineness or legal effect of any
document submitted by any party in connection with the application for and
issuance of the Letters of Credit, even if it should in fact prove to be in
any or all respects invalid, insufficient, inaccurate, fraudulent or
forged; (ii) for the validity or sufficiency of any instrument transferring
or assigning or purporting to transfer or assign a Letter of Credit or the
rights or benefits thereunder or proceeds thereof, in whole or in part,
which may prove to be invalid or ineffective for any reason; (iii) for
failure of the beneficiary of a Letter of Credit to comply fully with
conditions required in order to draw upon such Letter of Credit; (iv) for
errors, omissions, interruptions or delays in transmission or delivery of
any messages, by mail, cable, telegraph, telecopy or otherwise, whether or
not they be in cipher; (v) for errors in interpretation of technical terms;
(vi) for any loss or delay in the transmission or otherwise of any document
required in order to make a drawing under any Letter of Credit or of the
proceeds thereof; (vii) for the misapplication by the beneficiary of a
Letter of Credit of the proceeds of any drawing under such Letter of
Credit; or (viii) for any consequences arising from causes beyond the
control of the Bank, including, without limitation, any governmental acts.
In furtherance of the foregoing, and without limiting the generality
thereof, the Company agrees to indemnify and hold harmless the Bank from
and against each and every claim which might arise against the Bank by
reason of any transfer, sale, delivery, surrender or endorsement of any
bill of lading, warehouse receipt or other document held by the Bank or for
its account, other than claims arising from the Bank's gross negligence or
willful misconduct. None of the above shall affect, impair, or prevent the
vesting of any of the Bank's rights or powers hereunder or the Company's
obligation to make reimbursement.
(d) The Company shall promptly examine (i) the copy of any Letter of
Credit, including any amendments thereto, sent to it by or on behalf of the
Bank and (ii) all documents and instruments delivered to it by or on behalf
of the Bank in connection with such Letters of Credit. In the event of any
claim of noncompliance with the Company's instructions or other
irregularity, the Company shall promptly, but no later than two Business
Days notify the Bank thereof in writing. The Company shall be conclusively
deemed to have waived any such claim against the Bank unless such notice is
given as aforesaid.
(e) on the Credit Termination Date, the Company will pay to the Bank
in same day funds at the Bank's office, for deposit in the L/C Cash
Collateral Account, an amount equal to 105% of the aggregate undrawn amount
of all outstanding Letters of Credit. The Bank may at any time apply any
or all of such cash and cash collateral to the payment of any or all of the
Liabilities, including, without limitation, to the payment of any or all of
the Company's reimbursement obligations with respect to any Letter of
Credit. Interest payable on the L/C Cash Collateral Account will be
collected by the Bank and will be paid to the Company as it is received by
the Bank less any fees or other amounts owing by the Company to the Bank
with respect to any Letter of Credit and less any amounts necessary to pay
any of the Liabilities which may be due and payable at such time. The Bank
has no obligation to pay interest on any credit balances in the L/C Cash
Collateral Account. If at any time the Bank determines that any funds held
in the L/C Cash Collateral Account are subject to any right or claim of any
Person other than the Bank or that the total amount of such funds is less
than 105% of the aggregate stated amount of all outstanding Letters of
Credit, the Company will pay to the Bank, as additional funds to be
deposited and held in the L/C Cash Collateral Account, an amount equal to
(i) 105% of the aggregate stated amount of all outstanding Letters of
Credit minus (ii) the total amount of funds, if any, then held in the L/C
Cash Collateral Account that the Bank determines to be free and clear of
any such right and claim.
1.20. Section 2.4 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
2.4 Loan Borrowing Procedures. The Bank will have received, (1) by
1:00 p.m. (Chicago time) on the Business Day on which an advance is to be
made for Base Rate Loans, (2) by 11:00 a.m. (Chicago time) on the third
Business Day prior to the Business Day on which the advance is to be made
for LIBOR Loans or (3) by 11:00 a.m (Chicago time) on the second Business
Day prior to the date a Letter of Credit is to be issued under this
Agreement (i) irrevocable telephonic notice of each proposed Loan borrowing
or Letter of Credit issuance, specifying the amount of such advance or
issuance and (ii) in the case of a request for a LIBOR Loan, the date of
such LIBOR Loan and the duration of the Interest Period for such LIBOR
Loan; provided, however, that only four LIBOR Loans may be outstanding at
any time. Each request for a Loan or Letter of Credit automatically
constitutes a representation and warranty by the Company that, as of the
date of such requested Loan or Letter of Credit, all conditions precedent
to the making of such Loan or issuance of such Letter of Credit set forth
in Section 11 are satisfied. Each borrowing of a Loan or issuance of a
Letter of Credit must be on a Business Day.
1.21. Section 4.1 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
4.1 Interest Rates on Loans. The Company shall pay to the Bank
interest on the outstanding principal balance of each Revolving Loan at a
rate per annum equal to (i) during such periods as such Revolving Loan is a
Base Rate Loan, the Base Rate and (ii) during such periods as such
Revolving Loan is a LIBOR Loan, the sum of LIBOR applicable to such periods
plus 1.35%; provided, however, that, if any principal of any Revolving Loan
is not paid when due (whether by acceleration or otherwise), the unpaid
principal amount of such Revolving Loan shall bear interest after such due
date until paid at a rate per annum equal to the applicable interest rate
in effect from time to time for such Revolving Loan plus 3.50%
1.22. Section 4.2 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
4.2 Interest Payment Dates. Accrued interest on each Base Rate Loan
is payable on the last Business Day of each calendar month and at maturity,
whether by acceleration or otherwise, commencing on the last day of the
month in which such Base Rate Loan is made. Accrued interest on each LIBOR
Loan is payable at the end of the applicable Interest Period and, if the
applicable Interest Period is greater than three months, at the end of each
three-month period following commencement of such Interest Period and at
maturity, whether by acceleration or otherwise. After maturity, whether by
acceleration or otherwise, on the stated maturity date or otherwise,
accrued interest on all Loans shall be payable on demand.
1.23. Section 4.4 of the Loan Agreement is amended, effective as of
December 1, 1996, by deleting such section in its entirety and replacing it
as follows:
4.4 Letter of Credit Fees. For each Letter of Credit, the Company
will pay to the Bank a fee (the "L/C Fee") equal to (i) 1.50% per annum of
the undrawn face amount of each standby Letter of Credit and (ii) 0.25% per
issuance of the face amount of each commercial Letter of Credit. The L/C
Fee for standby Letters of Credit is payable quarterly in advance, on the
first day of each calendar quarter during which each such standby Letter of
Credit remains outstanding and will be computed on the basis of a 360-day
year for the actual number of days elapsed. The L/C Fee for commercial
Letters of Credit is payable upon the issuance of each such commercial
Letter of Credit. The L/C Fee is the Bank's standard fee for letters of
credit and may change as the Bank announces new letter of credit fees in
Chicago, Illinois. Any change in such fees is effective as of the
effective date stated in the announcement by the Bank of such change and
the Bank has no obligation to notify the Borrower of such change. In
addition, the Borrower will pay to the Bank all customary charges and out-
of-pocket and additional expenses in connection with the issuance and
administration of any Letters of Credit issued under this Agreement.
1.24. Section 5.3 of the Loan Agreement is amended by deleting
subsection (a) from such section in its entirety and replacing it as follows:
(a) The Company agrees that, if at any time the aggregate unpaid
principal amount of the Revolving Loans plus the aggregate stated amount of
all outstanding Letters of Credit exceeds the Revolving Credit Limit, the
Company will forthwith make a mandatory prepayment of principal of the
Revolving Loans in an amount equal to such excess. Each such mandatory
prepayment shall be without premium or penalty.
1.25. Section 7.10 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
7.10 Termination of Security Interest and Liens. The Bank's security
interest and other Liens in, on and to the Collateral shall terminate when
all the Liabilities have been finally and fully paid and performed and all
Letters of Credit have expired or been revoked or terminated, at which time
the Bank shall reassign and redeliver (or cause to be reassigned and
redelivered) to the Company, or to such Person as the Company shall
designate, against receipt, such of the Collateral (if any) assigned by the
Company to the Bank as shall not have been sold or otherwise applied by the
Bank pursuant to the terms hereof and shall still be held by it hereunder,
together with appropriate instruments of reassignment and release. Any
such reassignment shall be without recourse upon or representation or
warranty by the Bank and shall be at the Company's cost and expense.
1.26. Section 9.1 of the Loan Agreement is amended by deleting
sections (b) and (c) from such section in their entirety and replacing them as
follows:
(b) Interim Reports. On or before the 45th day after the end of each
of the Company's fiscal quarters, a copy of the quarterly report on Form
10-Q filed by Diamond Home Services, Inc. with the Securities Exchange
Commission for such fiscal quarter and unaudited financial statements of
the Related Companies prepared in a manner consistent with the financial
statements referred to in Section 9.1(a), signed by an Authorized Officer
or a counterpart at another Related Company and consisting of at least
consolidating balance sheets as at the close of such fiscal quarter and
statements of earnings for such fiscal quarter and for the period from the
beginning of such fiscal year to the close of such fiscal quarter.
(c) Certificates. At the Bank's option, contemporaneously with the
furnishing of each annual financial statement and each quarterly statement
provided for in this Section 9.1, a duly completed certificate in the form
of ' Exhibit P with appropriate insertions (each such certificate herein
called a "Compliance Certificate") dated the date of such annual financial
statement or such quarterly statement and signed by an Authorized Officer,
which Compliance Certificate shall state that no Event of Default or
Unmatured Event of Default has occurred and is continuing, or, if there is
any such event, shall describe it and the steps, if any, being taken to
cure it. In addition, except in the case of a Compliance Certificate dated
the date of such annual financial statement, the Compliance Certificate
shall contain a computation of, and show compliance with, each of the
financial ratios and restrictions contained in this Section 9.
1.27. Section 9.6 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
9.6 Limits on Credit Commitments. Not permit the aggregate
outstanding principal amount of the Revolving Loans plus the aggregate
amount of all outstanding Letters of Credit to exceed the then-current
Revolving Credit Limit.
1.28. Section 9.7 of the Loan Agreement is amended by deleting
such section in its entirety and replacing it as follows:
9.7 Tangible Net Worth. Commencing January 1, 1997, not permit the
Related Companies' Tangible Net Worth (as measured on a consolidated basis)
to be less than $18,000,000 plus 50% of the Related Companies' net income
(as determined in accordance with GAAP), calculated at the end of each of
the Company's fiscal quarters through the Credit Termination Date.
1.29. Section 9.9 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it with "[INTENTIONALLY OMITTED]."
1.30. Section 9.10 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
9.10 Current Ratio. Not permit the Related Companies' Current Ratio
(as measured on a consolidated basis) to be less than 1.5:1, calculated the
at the end of each of the Company's fiscal quarters through the Credit
Termination Date.
1.31. Section 9.11 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
9.11 Cash Flow Coverage. Not permit the Related Companies' Cash Flow
Coverage Ratio (as measured on a consolidated basis) to be less than 1.3:1,
calculated as of the end of each of the Company's fiscal quarters through
the Credit Termination Date and measured over the immediately preceding
twelve-month period ending on such calculation date.
1.32. Section 9.14 of the Loan Agreement is amended by deleting
clauses (j), (k) and (1) from such section in its entirety and replacing them as
follows:
(j) [INTENTIONALLY OMITTED]; (k) [INTENTIONALLY OMITTED]; or (1)
[INTENTIONALLY OMITTED];
1.33. Section 9.19 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
9.19 Use of Proceeds.
(a) Not use or permit the use of any proceeds of any Revolving
Loan other than (i) to support the Company's working capital and (ii)
for advances, not exceeding $5,000,000 in the aggregate, to the
Finance Company to be used by the Finance Company solely to support
the Finance Company's working capital.
(b) Not use or permit the use of any proceeds of any Loan other than
solely for the purposes specified in 815 ILCS 205/4; and not use or permit
the direct or indirect use of any proceeds of or with respect to the Loans
for the purpose, whether immediate, incidental or ultimate, of "purchasing
or carrying" (within the meaning of Regulation U) Margin Stock.
1.34. Section 9.20 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
9.20 Transactions with Affiliates. Not enter into any transaction
with any Affiliate except (a) transactions in the ordinary course of
business and on terms and conditions at least as favorable to the Company
as the terms and conditions that would apply in a similar transaction with
a Person who is not an Affiliate (including, without limitation,
administrative contracts with HI, Inc. to provide telephone services), (b)
an agreement with The Handy Craftsman, Inc. pursuant to which the Company
leases space and prepays payroll in an outstanding amount at any time not
exceeding $100,000 and (c) the subordinated promissory note made by the
Company to Diamond Home Services, Inc. in connection with the initial
public offering of the common stock of Diamond Home Services, Inc.
1.35. Section 11 of the Loan Agreement is amended by deleting the
introduction to such section in its entirety and replacing it as follows:
The Bank's obligation to make any Loan or issue any Letter of Credit
is subject to the following conditions precedent:
1.36. Section 11.1 of the Loan Agreement is amended by deleting such
section (up to subsection (a)) in its entirety and replacing it as follows:
11.1 Initial Loans; Initial Letters of Credit. The Bank's obligation
to make any initial Revolving Loan or issue any initial Letter of Credit
is, in addition to the conditions precedent specified in Section 11.3,
subject to the satisfaction of each of the following conditions precedent:
1.37. Section 11.3 of the Loan Agreement is amended by deleting such
section (up to subsection (a)) in its entirety and replacing it as follows:
11.3 All Loans; All Letters of Credit. The Bank's obligation to make
any initial Loans or issue any initial Letter of Credit, and each
subsequent Loan and Letter of Credit, is subject to the following
conditions precedent:
1.38. Section 11.3(d) of the Loan Agreement is amended by deleting
such section in its entirety and replacing it as follows:
(d) No Letter of Credit Prohibition. As to requested Letters of
Credit, no order, judgment or decree of any Governmental Authority will, or
will purport to, enjoin or restrain the Bank from issuing the requested
Letter of Credit nor will any law or governmental rule, regulation, policy,
guideline or directive (whether or not having the force of law) from any
Governmental Authority with jurisdiction over the Bank prohibit or request
that the Bank refrain from the issuance of Letters of Credit in particular
or impose upon the Bank with respect to any Letter of Credit any
restrictive or reserve requirement (for which the Bank is not otherwise
compensated) or any uncumbered loss, cost or expense which was not in
effect as of December 3, 1996.
1.39. Section 12.1 of the Loan Agreement is amended by deleting
subsection (p) from such section in its entirety and replacing it as follows:
(p) Finance Company Advances. The Finance Company uses the proceeds
of any advance from the Company other than for general corporate purposes
and to support the Finance Company's working capital.
1.40. Section 12.2.1 of the Loan Agreement is amended by deleting
such section in its entirety and replacing it as follows:
12.2.1 Acceleration.
(a) If any Event of Default described in Section 12.1(d) shall occur,
the Credit Commitment (if it has not theretofore terminated) shall
immediately terminate and all Loans, Notes and all other Liabilities,
including, without limitation, all of the Company's contingent liabilities
with respect to any Letters of Credit, shall become immediately due and
payable, all without presentment, demand or notice of any kind.
(b) If any other Event of Default shall occur, the Bank may declare
the Credit Commitment (if it has not theretofore terminated) to be
terminated and all Loans, Notes and all other Liabilities, including,
without limitation, all of the Company's contingent liabilities with
respect to any Letters of Credit, to be due and payable, whereupon the
Credit Commitment shall immediately terminate and all Loans, Notes and all
other Liabilities, including, without limitation, all of the Company's
contingent liabilities with respect to any Letters of Credit, shall become
immediately due and payable, all without presentment, demand or notice of
any kind.
(c) If an Event of Default shall occur, the Bank may, regardless of
whether the Bank is taking any of the actions described in this Section
12.2.1 or otherwise, make demand upon the Company to, and immediately upon
such demand the Company shall, pay to the Bank in immediately available
funds at the Bank's office, for deposit in the L/C Cash Collateral Account,
an amount equal to 105% of the aggregate undrawn amount of all outstanding
Letters of Credit. All such amounts will be treated as described in
Section 2.2(e).
1.41. Section 13.2 of the Loan Agreement is amended by deleting
subsection (a) from such section in its entirety and replacing it as follows:
(a) if to the Company, addressed to the Company at its address shown
below its signature hereto, with a copy to Ann Crowley Patterson, Esq. at
the same address; or
SECTION 2. AMENDMENTS TO EXHIBITS AND RELATED
DOCUMENTS
2.1. Amendment to Exhibits to Loan Agreement. On the Closing Date,
(i) Exhibit A to the Loan Agreement will be replaced with Exhibit A to this
Amendment and (ii) Exhibits B, C, J, K, L, M and N to the Loan Agreement will be
deleted in their entirety.
2.2. Amendment to Related Documents. On the Closing Date, the
Existing Revolving Note will be amended, restated and replaced in its entirety
by the Amended and Restated Revolving Note of even date with this Amendment (the
"Amended Note"), made by the Company in favor of the Bank in the original
principal amount of the Revolving Credit Limit.
2.3. Return of the Existing Notes. On the Closing Date and after
receipt of the Amended Note, the Bank will (i) mark the Existing Revolving Note
"superseded" and return it to the Company and (ii) mark both the Existing
Finance Company Loan Note and the Existing Investment Loan Note "cancelled" and
return them to the Company.
SECTION 3. EXISTING LOANS
The Company acknowledges that it has no indebtedness to the Bank on
the Finance Company Loans and the Investment Loans, including any accrued and
unpaid interest and fees on the principal amount of such loans. On the Closing
Date, the Finance Company Loans, evidenced by the Existing Finance Company Loan
Note, and the Investment Loans, evidenced by the Existing Investment Loan Note,
will automatically, without further action on the part of the Company or the
Bank, become evidenced by the Amended Note and, to that extent, the Amended Note
is issued in renewal of, and evidences the same indebtedness formerly evidenced
by, the Existing Finance Company Loan Note and the Existing Investment Loan Note
as well as evidencing the Revolving Loans made pursuant to the Existing
Revolving Note and the additional Revolving Loans made under the Loan Agreement,
as amended by this Amendment. Except as set forth in the last sentence of this
Section 3, after the Closing Date the Finance Company Loans and the Investment
Loans will be treated as though they constituted Revolving Loans under the Loan
Agreement, as amended by this Amendment, in an amount equal to the aggregate
unpaid principal balance of such Finance Company Loans or the Investment Loans
on the Closing Date. If any accrued and unpaid interest or fees are outstanding
in respect of any of the Finance Company Loans or the Investment Loans as of the
date that such Finance Company Loans and the Investment Loans become evidence by
the Amended Note, such accrued interest or fees will be evidenced by the Amended
Note and will be due and payable on the first interest payment date under the
Amended Note. On the Closing Date, both the Finance Company Line of Credit and
the Investment Loan Credit Commitment under the Loan Agreement will terminate.
SECTION 4. RELEASE
4.1. Release of Security Interests and Liens. In addition to the
Loan Agreement, the following Related Documents were executed by the Company to
grant the Bank a security interest in and Lien upon the Collateral, each dated
as of February 6, 1996: (i) a Trademark Security Agreement made by the Company
in favor of the Bank; (ii) a Blocked Deposit Account Agreement among the
Company, the Bank and Amcore Bank N.A. Northwest; and (iii) a Declaration and
Agreement among the Company, the Bank and the owner of the Company's
headquarters. On the Closing Date, the Bank acknowledges and agrees that all of
the security interests and Liens granted to the Bank by the Company under the
Loan Agreement and other Related Documents (including, without limitation, the
other Related Documents listed above) will terminate and be released.
4.2. Termination of Certain Provisions of the Loan Agreement. In
order to effect the releases set forth in Section 4.1 of this Amendment,
commencing on the Closing Date and continuing until the Company and the Bank
expressly agree otherwise, the following provisions of the Loan Agreement will
be of no further force and effect: Section 5.3(b); Section 7; Section 8.6;
Section 8.20; Section 8.21; the second sentence of Section 9.4(b); Section
9.19(b); Section 10; Section 12.1(m); Section 12.2.2; Section 12.2.4; Section
12.2.5; Section 13.1(c)(iv); Section 13.1(d); Section 13.13; Section 13.17; and
Section 13.18.
4.3. Termination Agreements; Further Assurances. On or after the
Closing Date, the Bank will execute and deliver (i) UCC-3 termination
statements, (ii) a Release of Security Interest in Trademarks, (iii) a letter to
Amcore Bank N.A. Northwest informing such bank of the termination of the Blocked
Deposit Account Agreement and (iv) a letter to the owner of the Company's
headquarters informing such owner of the termination of the Declaration and
Agreement, each to evidence the termination and release of the security
interests and Liens granted under the terms and conditions of Section 4.1 of
this Amendment. After the Closing Date, the Bank will deliver such further
termination statements and releases reasonably requested by Company to
effectuate the release of all of the Bank's security interests and liens in the
Collateral.
SECTION 5. CONSENT
5.1. Finance Company Documents. On the Closing Date, the Bank
consents to (i) the cancellation of the Special Purpose Note Agreement, the
Special Purpose Note, the Working Capital Note Agreement, the Working Capital
Note and the Security Agreement dated as of February 6, 1996, made by the
Finance Company in favor of the Company and (ii) the termination of all security
interests and Liens granted by the Finance Company to the Company.
5.2. No Waiver. Nothing in this Amendment in any way is deemed to be
a consent or waiver of any Event of Default or an agreement to forbear from
exercising any remedies with respect to any Event of Default.
SECTION 6. REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Amendment and to extend further
credit under the Loan Agreement, as amended by this Amendment, the Company
represents and warrants to the Bank that:
6.1. Due Authorization; No Conflict; No Lien; Enforceable Obligation. The
execution, delivery and performance by the Company of this Amendment and the
Amended Note are within its corporate powers, have been duly authorized by all
necessary corporate action, have received all necessary governmental, regulatory
or other approvals (if any is required), do not and will not contravene or
conflict with any provision of (i) any law, (ii) any judgment, decree or order
or (iii) its articles or certificate of incorporation or by-laws and do not and
will not contravene or conflict with, or cause any lien to arise under, any
provision of any agreement or instrument binding upon the Company or upon any of
its property. This Amendment, the Loan Agreement, as amended by this Amendment,
and the Amended Note are the legal, valid and binding obligations of the
Company, enforceable against it in accordance with their respective terms.
6.2. No Default; Representations and Warranties. As of the Closing
Date, (i) no Event of Default or Unmatured Event of Default under the Loan
Agreement, as amended by this Amendment, has occurred and is continuing or will
result from the amendments set forth in this Amendment and (ii) the
representations and warranties of the Company contained in the Loan Agreement,
as amended by this Amendment, are true and correct.
SECTION 7. CONDITIONS TO EFFECTIVENESS
The obligation of the Bank to make the amendments, releases and
consents contemplated by this Amendment, and the effectiveness thereof, are
subject to the following:
7.1. Representations and Warranties. The representations and
warranties of the Company contained in this Amendment are true and correct as of
the Closing Date.
7.2. Documents. The Bank has received all of the following, each
duly executed and dated as of the Closing Date (or such other date as is
satisfactory to the Bank) in form and substance satisfactory to the Bank:
(A) Third Amendment and Release. This Amendment.
(B) Amended Note. The Amended Note substantially in the form of
Exhibit A to this Amendment.
(C) Guaranty. A guaranty made by DHS in favor of the Bank
substantially in the form of Exhibit B to this Amendment (the "Guaranty").
(D) Legal Opinion. An opinion of the Company's legal counsel to the
effect that (i) the Company has the power and authority to execute, deliver
and perform this Amendment and the Amended Note and that this Amendment and
the Amended Note have been duly authorized and (ii) this Amendment and the
Amended Note are the legal, valid and binding obligations of the Company.
(E) Company's Secretary's Certificate. A certificate of the
Secretary of the Company as to (i) no amendments or modifications to the
Company's articles or certificate of incorporation or by-laws since May 24,
1996, and (ii) resolutions of the board of directors of the Company
authorizing or ratifying the execution, delivery and performance of this
Amendment and the Amended Note.
(F) DHS' Secretary's Certificate. A certificate of the Secretary of
DHS as to (i) no amendments or modifications to DHS' articles or
certificate of incorporation or by-laws since May 24, 1996, and (ii)
resolutions of the board of directors of DHS authorizing or ratifying the
execution, delivery and performance of the Guaranty.
(G) Consents. Certified copies of all documents evidencing any
necessary corporate action, consents and governmental approvals, if any,
with respect to this Amendment, the Amended Notes, any other document
provided for under this Amendment or the Guaranty.
(H) Good Standing Certificates. Good standing certificates for the
Company from the States of Delaware and Illinois and for DHS from the State
of Delaware.
(I) Reaffirmation by DHS. A reaffirmation by DHS as to the
Subordinated Debt under, and as defined in, the Subordination Agreement
dated as of June 14, 1996, among DHS, the Company and the Bank.
(J) Other. Such other documents as the Bank may reasonably request.
SECTION 8. MISCELLANEOUS
8.1. Captions. The recitals to this Amendment (except for
definitions) and the section captions used in this Amendment are for convenience
only and do not affect the construction of this Amendment.
8.2. Governing Law; Severability. THIS AMENDMENT IS A CONTRACT MADE
UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. Wherever
possible, each provision of this Amendment must be interpreted in such a manner
as to be effective and valid under applicable law, but if any provision of this
Amendment is prohibited by or invalid under such law, such provision is
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Amendment.
8.3. Counterparts. This Amendment may be executed in any number of
counterparts and by the different parties on separate counterparts, and each
such counterpart is deemed to be an original, but all such counterparts together
constitute but one and the same Amendment. The Company and the Bank agree to
accept facsimile counterparts.
8.4. Successors and Assigns. This Amendment is binding upon the
Company, the Bank and their respective successors and assigns, and inures to the
sole benefit of the Company, the Bank and their successors and assigns. The
Company cannot assign its rights or delegate its duties under this Amendment.
8.5. References. From and after the Closing Date, each reference in
the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein," or
words of like import, and each reference in the Loan Agreement or any other
Related Document to the Loan Agreement, the Existing Revolving Note or to any
term, condition or provision contained "thereunder," "thereof," "therein," or
words of like import, mean and are a reference to the Loan Agreement or the
Existing Revolving Note (or such term, condition or provision, as applicable) as
amended, supplemented, restated or otherwise modified by this Amendment or the
Amended Note, as applicable.
8.6. Continued Effectiveness. Except as set forth in Section 3 of
this Amendment, notwithstanding anything contained in this Amendment to the
contrary, the terms of this Amendment and the Amended Note are not intended to
and do not serve to effect a novation as to the Loan Agreement or the Existing
Notes, as applicable. Except as set forth in Section 3 of this Amendment, the
Company and the Bank expressly do not intend to extinguish the Loan Agreement or
the Existing Notes. Instead, it is the express intention of the Company and the
Bank to reaffirm the indebtedness created under the Loan Agreement, which is
evidenced by the Existing Notes. The Loan Agreement, as amended by this
Amendment, and the Existing Revolving Note, as amended and restated by the
Amended Note, remain in full force and effect and the terms and provisions of
the Loan Agreement and the Existing Revolving Note are ratified and confirmed.
8.7. Costs, Expenses and Taxes. The Company affirms and acknowledges
that Section 13.5 of the Loan Agreement applies to this Amendment and the
transactions and agreements and documents contemplated under this Amendment.
Delivered at Chicago, Illinois, as of the day and year first above
written.
DIAMOND EXTERIORS, INC.
By:
Name:
Title:
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By:
Laurie B. Tanselle
Assistant Vice President
Delivered at Chicago, Illinois, as of the day and year first above
written.
DIAMOND EXTERIORS, INC.
By:
Name:
Title:
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By:
Laurie B. Tanselle
Assistant Vice President
Exhibit 10.10(a)
SETTLEMENT AGREEMENT
This Settlement Agreement and Full and Final Release of Claims
("Settlement Agreement") is made as of the 20th day of February, 1997, by and
between Ronald D. Schurter ("Employee") and Diamond Home Services, Inc.
("Diamond Homes"). In this Settlement Agreement, Diamond Homes and its
successors, predecessors, subsidiaries, affiliates and related companies
(including but not limited to Globe Building Materials, Inc., Diamond Exteriors
Inc., Solitaire Heating and Air Conditioning, Inc., and Marquise Financial
Services, Inc.) and their respective present and former employees, officials,
directors, officers, agents and attorneys are sometimes referred to as a
"Diamond Entity" and collectively referred to as "Diamond" or the "Company".
WHEREAS, Employee desires to settle fully and finally all actual and
potential differences and disputes, if any, between Diamond and Employee
including, but in no way limited to, any differences that arose out of
Employee's employment with Diamond Homes, and the termination thereof;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Employee and his successors, assigns, relatives, related entities
and affiliates, release and forever discharge Diamond of and from all manner of
civil actions, causes, causes of action, suits, debts, sums of money, accounts,
reckonings, bonds, bills, covenants, controversies, agreements, promises,
damages, judgments, claims and demands whatsoever, in law or in equity, which
Employee has or may claim to have against any Diamond, prior to the date first
written above on account of, or arising out of, any acts or omissions by any
Diamond Entity whatsoever.
2. Diamond Homes and Employee each represents, warrants and
acknowledges to the other that the person signing below on its or his behalf is
authorized to make and deliver this Settlement Agreement. Diamond Homes and
Employee each represents, warrants and acknowledges to the other that each
intends to be bound by this Settlement Agreement. Employee represents and
warrants that he is the only person entitled to assert any claim on behalf of
himself.
3. Diamond Homes and Employee each recognizes that this Settlement
Agreement does not constitute an admission of liability or fault by either
party.
4. The receipt of the following consideration is in full and final
accord, satisfaction and final compromise and settlement of any and all claims
of Employee against any Diamond Entity for liquidated damages, compensatory
damages, punitive damages, backpay, front pay, lost benefits, lost wages,
attorneys' fees, interest, court costs and all other monetary and equitable
relief: (i) the Salary Payments; (ii) payment on March 31, 1997 (or as soon
thereafter as other final 1996 incentive compensation payments are made), of any
remaining 1996 incentive compensation payable to Employee under Diamond Homes's
incentive compensation payment program ("1996 Incentive Compensation Payment");
(iii) payment on May 15, 1997 (or as soon thereafter as practicable) of
incentive compensation, based on Diamond Homes's 1997 first quarter incentive
program as of March 31, 1997, of any bonus attributable to the region of the
United States for which Employee had responsibility, for the period from January
1, 1997, through the Termination Date, as determined from a pro forma
calculation of that region's financial results for that period (such
determination to be made by Diamond Homes and to be conclusively deemed correct
except in the case of manifest error and it being understood that Employee's
right to any such payment is dependent on those financial results) (the "1997
Incentive Compensation Payment"); and (iv) the Security Payments.
5. Settlement Election.
a. For purposes of this Settlement Agreement, "Salary Payments"
means either the Lump Sum Payment or the Continuation Payments.
b. Unless and until Employee elects to receive the Lump Sum
Payment in the manner specified herein, Employee shall be entitled to receive
every two weeks a payment in the amount of $5961.54 (each such payment being a
"Regular Continuation Payment" and all such payments being "Regular Continuation
Payments"). The first Regular Continuation Payment shall be reduced to reflect
compensation Employee has received through February 20, 1997, and shall be
payable to Employee on February 28, 1997, and the last Regular Continuation
Payment shall be payable to Employee on February 27, 1998. In addition, the
Company shall continue to pay for Employee's medical benefits through February
20, 1998, as if Employee continued to be an Employee of the Company ("Medical
Payments"). For the purpose of this Settlement Agreement, each of the Regular
Continuation Payments and the Medical Payments individually may be referred to
as a "Continuation Payment" and collectively as "Continuation Payments." Such
Continuation Payments shall be made in the same manner as if Employee continued
to be an employee of Diamond Homes.
c. On or before February 24, 1997 (the "Election Date"),
Employee may elect to receive, in lieu of the Continuation Payments, a lump sum
payment of $155,000.00 ("Lump Sum Payment"). To elect the Lump Sum Payment,
Employee must cause Diamond Homes actually to receive, no later than the close
of business, Woodstock, Illinois time, on the Election Date, at Diamond Homes's
corporate office in Woodstock, Illinois, a fully executed and signed notice of
election ("Notice") in the form of Exhibit A hereto. If the Employee elects to
receive the Lump Sum Payment, Diamond Homes shall deliver to Employee's
attention, at Diamond Homes's offices in Anaheim, California, on February 28,
1997 (or if Employee elects by marking the Notice, shall directly deposit at
Employee's bank account), payment in the amount of the Lump Sum Payment as
reduced for certain amounts that are withheld for payment of federal, state, and
local taxes.
d. Election of the Lump Sum Payment by Employee in the manner
specified herein shall release and discharge Diamond from any obligation to pay
any Continuation Payments or any other payments other than the Lump Sum Payment,
the 1996 Incentive Compensation Payment, the 1997 Incentive Compensation
Payment, the Vacation Payment, and the Security Payments. Failure of the
Employee to elect the Lump Sum Payment in the manner specified herein shall
forever preclude the Employee from the right to make such election and shall
forever release and discharge Diamond from any obligation to make the Lump Sum
Payment or any other payments other than the Continuation Payments, the 1996
Incentive Compensation Payment, the 1997 Incentive Compensation Payment, the
Vacation Payment, and the Security Payments.
6. Security Payment. Diamond Homes shall make thirty-five (35)
payments, one for each of the months in the period from February 1, 1997,
through December 31, 1999, in the amount of $5,000 on behalf of Employee (the
"Security Payments"). Each Security Payment will be made on the last day of the
month, with the first Security Payment being made on February 28, 1997.
7. Employee acknowledges that from time to time he has received
salary, medical benefits, a travel allowance, vacation pay, security payments
pursuant to an agreement dated April 1, 1996, and other compensation from
Diamond for the period through February 20, 1997. Employee agrees that, upon
his execution and delivery of this Settlement Agreement, his right to receive,
and Diamond's obligation to pay, any further salary, medical benefits, travel
allowances, security payments, and other compensation shall terminate and shall
be replaced by the obligations set forth in this Settlement Agreement.
8. In consideration of the payments made to and to be made to
Employee under this Settlement Agreement, Employee agrees as follows:
(i) In the course of Employee's employment with the Company, and
because of the nature of Employee's responsibilities, Employee has had
access to valuable trade secrets, proprietary data and other confidential
information of one or more Diamond Entities (collectively, "Confidential
Information"). With respect to the customers, suppliers, competitors and
business, such trade secrets, proprietary data and other Confidential
Information include but are not limited to the following: the Company's
existing and contemplated services, products, business and financial
methods and practices, plans, pricing, selling techniques, business
systems, product technologies and formulae, and special methods and
processes involved in providing services, lists of the Company's existing
and prospective suppliers, subcontractors and/or customers, methods of
obtaining suppliers and customers, credit and financial data of the
Company's present and prospective suppliers and/or customers, particular
business requirements of the Company's present and prospective customers.
In addition, Employee, on behalf of the Company, has developed personal
acquaintances and relationships with the Company's present and prospective
suppliers, subcontractor and customers, which acquaintances and
relationships may constitute the Company's only contact with such persons
or entities. As a consequence thereof, the parties agree that Employee
occupied a position of trust and confidence with respect to the Company's
affairs and its products and services. In view of the foregoing and in
consideration of the payments made pursuant to this Settlement Agreement,
Employee acknowledges and agrees that it is reasonable and necessary for
the protection of the goodwill and business of the Company that Employee
make the covenants contained in subparagraphs (ii) through (vi) below
regarding the conduct of Employee following the date of this Settlement
Agreement, and that the Company will suffer irreparable injury if Employee
engages in conduct prohibited thereby. Employee represents that observance
of the aforementioned covenants will not cause Employee any undue hardship
nor will it unreasonably interfere with Employee's ability to earn a
livelihood. The covenants contained in subparagraphs (ii) through (vi)
below shall each be construed as a separate agreement independent of any
other provision of this Settlement Agreement, and the existence of any
claim or cause of action of Employee against the Company, whether
predicated on this Settlement Agreement or otherwise, shall not constitute
a defense to the enforcement by the Company of any of those covenants.
(ii) Non-Disclosure. Employee will not, without the express
written consent of the Company, directly or indirectly communicate or
divulge to, or use for his own benefit or for the benefit of any other
person, firm, association or corporation, any Confidential Information;
provided, however, Employee may disclose or use such information under any
of the following circumstances: (a) disclosure which Employee is advised
by counsel is required by a court or other governmental agency of competent
jurisdiction, (b) disclosure or use by Employee of any such information or
data which is generally known within the industry or is otherwise available
through independent sources and (c) disclosure or use by Employee after the
expiration of three years following the date of this Settlement Agreement -
(or, if this period shall be unenforceable by law, then for such lesser
period as shall be required by law to make the provisions of this
subparagraph enforceable), of any such information in connection with
Employee's subsequent employment or business endeavors undertaken in good
faith and without the specific intent of unreasonably depriving any Diamond
Entity of the value and benefit of such proprietary data. In the event
that any Confidential Information is communicated as permitted by the
provisions of this subparagraph (ii), Employee shall notify the Chief
Executive Officer of Diamond Homes in writing at least ten calendar days
prior to such communication.
(iii) Return of Information and Equipment. Promptly after
executing this Settlement Agreement, Employee will deliver to Diamond Homes
all originals and copies of memoranda, customer lists, samples, records,
documents, computers, computer programs, computer disks and software,
product information, hardware, equipment (e.g., computers, fax machines)
and other materials and equipment requested by any Diamond Entity which he
has obtained from any Diamond Entity.
(iv) Non-Competition. For a period of three years following the
date of this Settlement Agreement (or, if this period shall be
unenforceable by law, then for such lesser period as shall be required by
law to make the provisions of this subparagraph enforceable), Employee
shall not, without the express written consent of Diamond Homes or approval
of the board of directors of Diamond Homes, directly or indirectly, own,
manage, participate in or otherwise engage in or have any connection with
(as an employee, representative, agent or otherwise) any business in the
United States which provides any product or service provided by any Diamond
Entity or actively contemplated to be provided by a Diamond Entity on the
date of this Settlement Agreement except that Employee shall not be
precluded hereby from (i) owning stock or any other securities in a
publicly traded company where such investment entitles Employee to less
than 5% of the voting control over such company, or (ii) working as an
employee, after the termination of Employee's employment with the Company,
for any entity in which Employee has no ownership interest, or option or
other right to acquire an ownership interest, in any capacity where the
likelihood of Employee's breach or violation of the provisions of subpara-
graphs (ii) and (vi) is demonstrated to the reasonable satisfaction of
Diamond Homes to be remote.
(v) Non-Solicitation of Customers, Subcontractors and Suppliers.
For a period of three years following the date of this Settlement Agreement
(or if this period shall be unenforceable by law, then for such lesser
period as shall be required by law to make the provisions of this
subparagraph enforceable), and except in the good faith furtherance of the
interests of the Company, Employee will not, without the express written
consent of the Company or the approval of the Board of Directors of Diamond
Homes, contact (whether or not initiated by Employee), with a view toward
selling any product or service competitive with any product or service, to
Employee's knowledge, sold or proposed to be sold by Diamond Homes or any
subsidiary of the Diamond Homes at the time of such contact, any person,
firm, association or corporation: (i) to which any Diamond Entity was
known by Employee to have sold any product or service during the preceding
year, (ii) which Employee solicited, contacted or otherwise dealt with on
behalf of any Diamond Entity during the preceding year, or (iii) which
Employee was otherwise aware was a customer or prospective customer, or
supplier subcontractor or prospective supplier subcontractor, of any
Diamond Entity during the preceding year. Employee will not directly or
indirectly make any such contact, either for his benefit or for the benefit
of any person, firm, association or corporation, and Employee will not in
any manner assist any such person, firm, association or corporation to make
any such contact.
(vi) Non-Interference. For a period of three years following the
date of this Settlement Agreement (or if this period shall be unenforceable
by law, then for such lesser period as shall be required by law to make the
provisions of this subparagraph enforceable), Employee shall not induce or
encourage, directly or indirectly, (a) any employee of any Diamond Entity
to leave his or her employment, or to seek employment with anyone other
than the Company, unless it has been determined by Employee in good faith,
with approval by the Board of Directors of Diamond Homes or the Chief
Executive Officer of Diamond Homes, that such employee's performance or
other characteristics or circumstances are such that employee's leaving the
relevant Diamond Entity is in the best interests of the Company, or (b) any
customer, subcontractor, or supplier (including without limitation, Sears,
Roebuck & Co., ABC Supply Co., Inc., and independent contractors engaged by
Diamond Homes to provide or deliver products to, or perform services for,
customers of Diamond Homes) of any Diamond Entity to modify or terminate
any relationship, whether or not evidenced by a written contract, with such
Diamond Entity unless it has been determined by Employee in good faith,
with approval by the Board of Directors of Diamond Homes or the Chief
Executive Officer of Diamond Homes, that such modification or termination
is in the best interests of the Company.
9. Employee acknowledges and agrees that his employment relationship
with Diamond terminated as of February 20, 1997 (the "Termination Date").
Employee agrees that he will not, to any one or in any manner, portray himself
as an officer or an employee of Diamond Homes or any affiliate of Diamond Homes
for any time after the Termination Date.
10. Diamond Homes confirms that, upon the effectiveness of this
Settlement Agreement, Employee shall be deemed to have retired for purposes of
the Diamond Home Services, Inc. Incentive Stock Option dated June 19, 1996,
between Diamond Homes and Employee.
11. Employee and Diamond hereby acknowledge and agree that any breach
by Employee or his affiliates, individually or collectively, of the foregoing
restrictive covenants may cause Diamond irreparable injury for which there is no
adequate remedy at law. Therefore, Employee expressly agrees that in the event
of any breach by Employee or his affiliates of the foregoing, Diamond shall be
entitled, in addition to any remedies available at law, to injunctive and/or
other equitable relief, to require specific performance or prevent a breach
under the provisions of this Settlement Agreement. In addition, as partial
consideration for any damages to Diamond, if Employee or his affiliates shall
breach any provisions of this Settlement Agreement or if any representation by
Employee herein is incorrect in any material respect, Diamond Homes, at its
option, may discontinue making any payments to Employee otherwise due pursuant
to this Settlement Agreement.
12. Employee agrees that he may have certain property in his
possession which is the property of one or more Diamond Entities, including, but
not limited to, the following: (i) keys to certain buildings; (ii) credit
cards; (iii) documentation concerning other Diamond corporate charge privileges;
(iv) computer hardware and software; and (v) airplane tickets which have been
ordered in connection with Employee's employment. As a part of this Settlement
Agreement, Employee agrees to return all of Diamond's property promptly upon his
execution of this Settlement Agreement, including but not limited to the
property specifically listed in this paragraph 12, to Diamond, c/o Eugene
O'Hern, 222 Church Street, Woodstock, Illinois.
13. Each party to this Settlement Agreement hereby affirms that it/he
has had the opportunity to consult with counsel with respect to the terms and
conditions of this Settlement Agreement, and each party hereto waives the right
to assert that any claim, demand or provision has been, through oversight or
error, omitted from the covenants set forth in this Settlement Agreement. The
parties understand that this Settlement Agreement and the releases it contains
may be pled by any Diamond Entity as a complete defense to any claim or
entitlement which Employee may hereafter assert in any suit or claim for or on
account of any matter or thing whatsoever occurring up to and including the date
of this Settlement Agreement.
14. The provisions of this Settlement Agreement are severable, and if
any part of it is found to be unenforceable, the other provisions shall remain
fully valid and enforceable.
15. The undersigned Employee affirms that the only consideration for
his signing this Settlement Agreement are the terms stated above; that no other
promise or Settlement Agreement of any kind has been made to or with him by any
person or entity whomsoever to cause him to execute this instrument and that he
fully understands the meaning and intent of this release, including, but not
limited to, its final and binding effect, and that he is voluntarily entering
into this Settlement Agreement.
16. Employee agrees to keep the terms, amount and fact of this
Settlement Agreement completely confidential and not to disclose any information
concerning this Settlement Agreement to anyone except pursuant to the provisions
of subparagraph 8(ii) hereof.
17. This Settlement Agreement shall be governed by, construed and
interpreted in accordance with the laws of the State of Illinois and may be
executed in separate counterparts that together constitute one instrument. This
Settlement Agreement shall be binding upon and shall inure to the benefit of
Diamond, its successors and assigns and shall be binding upon and inure to the
benefit of Employee, his successors, assigns, relatives, related entities and
affiliates.
18. This Settlement Agreement shall become effective only if (a) on
or before the close of business at its Woodstock, Illinois corporate offices, on
February 24, 1997, Diamond Homes executes this Settlement Agreement and (b) on
or before the close of business at its Woodstock, Illinois corporate offices, on
February 24, 1997, Diamond Homes actually receives, at its Woodstock, Illinois
corporate offices, a copy of this Settlement Agreement executed by Employee.
19. If the date on which any payment due hereunder is not a business
day of Diamond Homes, such payment shall be due and payable, without interest,
on the next business day thereafter.
20. This Settlement Agreement may only be changed or modified in
writing signed by both of the parties hereto.
21. WHEREFORE, the parties have executed this Settlement
Agreement as of the date first written above.
DIAMOND HOME SERVICES, INC.
________________________
By: C. Stephen Clegg
Its: Chief Executive Officer
_________________________
Ronald D. Schurter
EXHIBIT A
To: Diamond Home Services, Inc.
Attn: Eugene O'Hern
From: Ronald D. Schurter ("Employee")
Employee hereby elects the option of a Lump Sum Payment pursuant to that
certain Settlement Agreement dated as of February 20, 1997.
_____________________
Ronald D. Schurter
_________ Please direct deposit the Lump Sum Payment. [Please initial if direct
deposit election is taken.]
EXHIBIT 13.1
Selected Financial Data
(Unaudited)
For the years ended December 31
(In $ thousands, except earnings per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993*
<S> <C> <C> <C> <C>
Net Sales $ 157,068 $ 124,848 $ 94,186 $ 20,548
Operating Income 10,989 6,795 2,951 (1,179)
Net Income 6,815 3,735 1,995 (1,179)
Net Income per Share 0.88 0.60 0.22 (0.12)
At year end:
Working Capital (Deficit) 22,490 (4,814) (8,324) 42
Total Assets 58,793 30,143 29,275 4,837
Debt 1,662 6,216 15,553 1,187
Stockholders' Equity 36,236 4,833 936 (979)
Number of Sales Associates 678 631 496 260
Number of Independent Installers 1,300 1,315 1,003 389
Number of Employees 1,260 1,109 857 458
Number of Jobs Sold 64,338 55,261 37,510 7,294
Net Sales per Employee $ 124,657 $ 112,577 $ 109,902 $ 44,865
* Period from June 1, 1993, inception of the Company's operations, to
December 31, 1993
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Unaudited)
Overview
The Company has achieved record net sales and earnings in each of the past
three years. Net sales increased $62.9 million, from $94.2 million in 1994
to $157.1 million in 1996. Operating income increased $8.0 million, from
$3.0 million in 1994 to $11.0 million in 1996. Net income increased
$4.8 million, from $2.0 million in 1994 to $6.8 million in 1996. The
growth in net sales and income was attributable to increases in sales lead
generation, number of sales associates, number of independent installers and,
new in 1996, credit participation fee income negotiated with third-party finance
companies and finance interest income from the Company's recently-formed
consumer finance subsidiary, Marquise Financial - all aimed at executing
on the Company's strategy to participate in the consolidation of the
large installed home improvement industry.
Stockholders' equity has increased $35.3 million, from $936 thousand at December
31, 1994, to $36.2 million at December 31, 1996. During this three-year period,
the Company 1) successfully completed, in June 1996, its initial public
offering resulting in an infusion of cash of $33.0 million, 2) repurchased, in
September 1994, 42.2% of its common stock and, 3) launched and funded its
own consumer finance subsidiary. Cash flow from operating activities during the
period aggregated $19.9 million.
Results of Operations
Fiscal 1996 Compared to Fiscal 1995
Net Sales
Net sales increased $32.2 million, or 25.8%, from $124.8 million in 1995 to
$157.1 million in 1996. Approximately 48.5% of the increase in net sales was
attributable to roofing and gutter products and services, net sales of which
increased $15.7 million to $102.8 million in 1996. Approximately 26.0% of the
increase in net sales was attributable to fencing products and services, net
sales of which increased $8.4 million to $26.3 million in 1996. Approximately
12.4% of the increase in net sales was attributable to garage door and entry
door and other products and services, net sales of which increased $3.9 million
to $23.8 million in 1996. The balance, 13.1% of the increase in net sales was
due to credit participation fee income of $2.3 million primarily from Sears and
its affiliates, which was payable beginning January 1, 1996, on installed sales
financed by Sears and its affiliates and other third-party finance companies
during 1996, and finance interest income of $1.9 million on receivables financed
by the Company's newly-formed consumer finance subsidiary, Marquise Financial.
The increase in net sales were due primarily to (a) an increase in the number of
installations as the Company increased the number of installation crews operated
by the increasing number of independent installers, (b) increased the average
number of its sales associates during the comparative years from 599 to 707,
(c) increased prices in the first quarter 1996, and (d) new in 1996, credit
participation fee and finance interest income. Backlog, defined as jobs sold
but not installed, increased $5.6 million, or 60.9%, from $9.2 million at the
end of December 1995 to $14.8 million at the end of December 1996.
Gross Profit
Gross profit increased $16.7 million, or 31.8%, from $52.6 million or 42.1% of
net sales, in 1995 to $69.3 million, or 44.1% of net sales, in 1996. The
increase in gross profit resulted from an increased number of installations,
increased selling prices in the first quarter of 1996, increased balance of
sales to higher margin products and services primarily fencing, credit
participation fees and finance interest income, partially offset by the increase
in the Sears license fee. The license fee incurred to Sears increased $3.4
million, or 26.1%, from $13.0 million, or 10.4% of net installed sales, in 1995
to $16.4 million, or 10.7% of net installed sales, in 1996. The increase in the
license fee incurred to Sears for 1996 was due to the increase in installed
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 rates,
to be charged during the term of the license agreement. Gross profit before
Sears license fee, credit participation fee and finance interest income
increased $15.9 million, or 24.2%, from $65.6 million, or 52.5% of net installed
sales, in 1995 to $81.5 million, or 53.3% of net installed sales, in 1996. The
unit costs of materials, installation labor and warranty expense remained
relatively constant during the year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $12.5 million, or 27.6%,
from $45.3 million in 1995 to $57.8 million and, as a percentage of net sales,
remained relatively constant at 36.3% in 1995 as compared to 36.8% in 1996. The
increase in selling, general and administrative expenses resulted primarily from
expenses associated with the increased sales volume, the increased number of
Sales Associates, expenses associated with hiring of field operation personnel
to support the expansion of the Company's core sales and installation business,
the start-up and expansion of Marquise Financial and, in the fourth quarter,
expenses related to hiring of senior personnel to direct and support the
anticipated growth in 1997 and beyond. Direct advertising expenses increased
$1.5 million from $6.3 million in 1995 to $7.8 million in 1996; and, as a
percentage of net sales, however, direct advertising expense decreased
from 5.0% in 1995 to 4.9% in 1996. Selling commission expense, including
attendant payroll-related benefits, increased $3.1 million, or 24.1%, from
$12.7 million in 1995 to $15.8 million in 1996; and, as a percentage of net
installed sales, selling commission expense increased from 10.2% in 1995 to
10.3% in 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 field operation managers increased
$156 thousand from $3.9 million in 1995 to $4.1 million in 1996 primarily due
to increased operating income and sales. Management fees incurred to Globe
decreased $247 thousand from $558 thousand in 1995 to $311 thousand for the
first six months in 1996. The management fee agreement between Globe and the
Company was terminated June 20, 1996. The balance of selling, general and
administrative expenses, primarily sales lead-generation activities,
administrative and operation payrolls and related costs and general expenses,
increased $8.0 million, or 36.7%, from $21.8 million, or 17.5% of net sales, in
1995 to $29.8 million, or 18.9% of net sales, in 1996. This increase was
primarily due to support personnel and services required to manage the Company's
expanding infrastructure and start-up operations of the Company's captive
finance subsidiary, Marquise Financial.
Amortization of Intangibles
Amortization of intangibles increased from $503 thousand in 1995 to $534
thousand in 1996. The amortization expense relates primarily to goodwill
incurred in connection with the September 1994 stock repurchase from
management.
Interest Income, net
Net interest income increased $593 thousand from $410 thousand net interest
expense to $183 thousand in net interest income in 1996, primarily due to
increased interest income from invested cash balances and the reduction of
interest expense related to notes payable to certain of the Company's senior
management in connection with the September 1994 stock repurchase from
management. $4 million of notes payable to senior managers was repaid during
the first six months of 1996.
Income Tax Provision
The Company's income tax provision increased from $2.7 million , or an effective
rate of 41.5%, in 1995, to $4.4 million, or an effective tax rate of 39.0%, in
1996. The decrease in the effective income tax rate was primarily due to the
reduction in amortization of intangibles, which are not deductible for income
tax purposes, as a percentage of taxable income and, in the fourth quarter of
1996, in the effective state income tax rates paid to 44 states resulting from
the change in income among states.
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. Management fees incurred to
Globe increased, commensurate with the gross sales increase, from $464,000 in
1994 to $558,000 in 1995. 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.
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 related to the
September 1994 stock repurchase from management.
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.
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.
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, funding
the start-up operations of the Company's captive finance subsidiary, Marquise
Financial. The Company's primary sources of liquidity have been cash flow from
operations, borrowings under its bank line of credit, and, in June 1996, from
the net proceeds of its initial public offering. The Company's core sales and
installation business is not capital intensive other than the need to
periodically upgrade and maintain its information technology systems. Capital
expenditures for 1996, 1995 and 1994 were approximately $ 461 thousand, $888
thousand and $ 573 thousand, respectively. Capital expenditures for 1997 are
expected to approximate $3 million and, $2 million in each of 1998 and 1999,
primarily related to the planned upgrading and maintenance of the Company's
information technology systems. 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, available bank
line of credit as well as additional financing alternatives for Marquise
Financial, to meet all of its reasonable obligations for the foreseeable future,
including the ongoing funding for Marquise Financial and for the development and
expansion of complementary new products and markets.
In November 1995, the Company commenced the operations of Marquise Financial,
its consumer finance subsidiary. Marquise's current primary objective is to
support, along with other designated third-party finance companies, the
Company's requirement for providing financing to its core installation
business's customers. The Company is continually mindful of the attendant
risk in consumer financing; and, plans to increase its consumer finance
receivable portfolio at a measured pace commensurate with its available
resources and acceptable levels for losses on finance receivables. Marquise
Financial has been capitalized and funded with the Company's excess operating
cash flow and secured borrowings under the Company's $15 million bank of line
of credit, which were subsequently paid down with a portion of the proceeds
from the Company's June 1996 initial public offering. At December 31, 1996,
Marquise Financial had approximately $5.3 million in net finance receivables.
During 1996 Marquise Financial loaned approximately $23.6 million in unsecured
finance receivables and received approximately $5.3 million in finance
receivables repayment and, in December 1996, sold approximately $12.7 million
of the unsecured portfolio, at a modest premium to par value, to a third-party
finance company. During the fourth quarter 1996, Marquise Financial introduced
a new finance product -- fixed rate loan secured by real estate -- to a
segment of its creditworthy customers that cannot obtain unsecured consumer
loans. At December 31, 1996, Marquise had approximately $2.1 million in
outstanding commitments of the fixed rate, secured loans. The Company
anticipates that its existing cash balances, the bank line of credit, the
sale of Marquise Financial's consumer finance receivables as market conditions
may warrant from time to time and excess cash flow from its core installation
operations will be sufficient to satisfy the Company's financing cash
requirements in the foreseeable future.
In late December 1996 with an initial investment of approximately $450 thousand,
the Company completed agreements with insurance companies with the effect
of establishing a captive insurance company. The primary objective of this
captive insurance business is to provide the means for offering workmen's
compensation and general liability insurance coverage, solely for Company
installations, to qualified independent installers as the Company seeks to
maintain and expand its core complement of independent installers. Premiums
are immediately collected through deductions to payments to installers; and
the excess cash balances, after administrative expenses, are invested,
pursuant to agreement, with the insurance companies. Losses are comprised
of actual claims paid, reserves for open claims and allowance for incurred
but not reported claims. The Company maintains individual and aggregate
stop-loss reinsurance coverage at levels deemed to be adequate by management
of the Company. The first insurance policies were written in January 1997.
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 $3.8 million, were $33.0 million. A portion of the
offering proceeds was used to pay a $8.6 million special dividend to pre-
offering stockholders, repay all borrowings aggregating $11.9 million under the
bank line of credit (used to fund Marquise Financial receivables) and repay $3.2
million of notes to senior managers related to the September 1994 stock
purchase.
From its inception in June 1993, the Company has generated cash flow from
operations of approximately $19.5 million. The Company used $12.5 million of
cash in connection with the repurchase of 42.2% of its Common Stock in September
1994, $2.2 million for capital expenditures and approximately $5.0 million for
the initial funding of Marquise Financial's consumer financing receivables and
start-up operations. At December 31, 1996, the Company had approximately $27.6
million in cash, cash equivalents and trade receivables; and, net working
capital of $22.5 million and a current ratio of 2.6 : 1. At December 31, 1996,
the Company had available $15 million in unused bank line of credit and $1.7
million total debt.
The Company's results of operations may fluctuate from year to year or quarter
to quarter due to a variety of factors. The Company historically has
experienced lower levels of sales and profitability during the period from mid-
November through mid-March, impacting the first and fourth quarters of each
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 by rainy weather, each of which limits the Company's ability to install
exterior home improvement products.
Inflation has not had a material impact upon the 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 assurances, however, that the Company's business will not be affected in the
future by inflation or that it can continue in the future to increase its
selling prices to offset increased costs.
This Annual Report contains forward-looking statements that involve risks and
uncertainties regarding the Company's operations and future results. In
accordance with the "safe-harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company provides cautionary statements,
detailed in the Company's Securities and Exchange Commission filings including,
without limitation, the Company's Form 10-K and Form 10-Q, which identify
specific factors which could cause results or events to differ materially
from those described in the forward-looking statements.
Diamond Home Services, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE> DECEMBER 31
<CAPTION>
1996 1995
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,982 $ 4,715
Accounts receivable 8,621 3,389
Finance receivables 5,312 542
Refundable income taxes 1,725 --
Prepaids and other current assets 1,377 567
Deferred income taxes 794 404
Total current assets 36,811 9,617
Property and equipment 2,193 1,732
Less: Accumulated depreciation (586) (295)
Net property and equipment 1,607 1,437
Intangible assets, net 16,961 17,395
Deferred income taxes 1,313 1,051
Other 2,101 643
Total assets $58,793 $30,143
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
1996
1995
(In Thousands)
<S> <C> <C>
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,995 $ 7,643
Accrued liabilities 4,772 5,434
Due to stockholders 554 1,354
Total current liabilities 14,321 14,431
Long-term liabilities:
Warranty 5,702 3,652
Retention 1,426 965
Due to stockholders 1,108 4,862
Total long-term liabilities 8,236 9,479
Commitments and contingencies (Notes 10 and 11) -- --
Preferred stock, at redemption price -- 1,400
Common 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 6
9,075,425 and 6,249,950 shares issued and outstanding
Additional paid-in capital 33,971 983
Officer notes receivable (510) (707)
Retained earnings 2,766 4,551
Total common stockholders' equity 36,236 4,833
Total liabilities and common stockholders' equity $58,793 $30,143
See accompanying notes.
</TABLE>
Diamond Home Services, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1996
1995
1994
(In Thousands, except per share)
<S> <C> <C> <C>
Net sales $157,068 $124,848 $94,186
Cost of sales 87,739 72,245 56,139
Gross profit 69,329 52,603 38,047
Operating expenses:
Selling, general, and administrative expenses
57,806 45,305 34,821
Amortization expense 534 503 275
Operating profit 10,989 6,795 2,951
Interest income (expense), net 183 (410) (39)
Income before income taxes 11,172 6,385 2,912
Income tax provision 4,357 2,650 917
Net income
$ 6,815 $ 3,735 $ 1,995
Net income per share $.88 $.60 $.32
Weighted average number of common
shares outstanding 7,778 6,250 6,250
See accompanying notes.
</TABLE>
Diamond Home Services, Inc. and Subsidiaries
Consolidated Statements of Changes in Common Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
<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>
December 31, 1993 $10 $190 $- $- $(1,179) $(979)
Purchase and retire Common Stock (4) (71) - - - (75)
Purchase of Common 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
Issuance of Common Stock 3 32,948 32,951
Common Stock special dividend - - - - (8,600) (8,600)
Repayment of officer notes - - 197 - - 197
Exercise of Common Stock options and other - 40 - - - 40
Net income -- 1996 - - - - 6,815 6,815
December 31, 1996 $9 $ 33,971 $(510) $- $2,766 $36,236
See accompanying notes.
</TABLE>
Diamond Home Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,815 $ 3,735 $ 1,995
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 825 706 393
Deferred income taxes (652) (468) (987)
Provision for credit losses 767 4 --
Other (78) 37 (225)
Changes in operating assets and liabilities:
Accounts receivable (5,232) 163 (1,718)
Refundable income taxes (1,725) -- --
Prepaids and other assets (1,762) (37) (335)
Accounts payable 1,352 2,746 2,832
Accrued expenses (853) 2,120 2,035
Income taxes payable -- (904) 904
Warranty 2,241 1,957 1,893
Retention 461 389 463
Net cash provided by operating activities 2,159 10,448 7,250
INVESTING ACTIVITIES
Capital expenditures (461) (888) (573)
Loans originated (23,606) (550)
Loans repaid 5,362 -- --
Proceeds from sale of finance receivables 12,707 -- --
Organizational costs (22) (107)
Advances to captive insurance company (448) -- --
Acquisition spending and other (58) (61) (257)
Net cash used in investing activities (6,526) (1,606) (830)
FINANCING ACTIVITIES
Issuance of Common Stock, net of offering expenses 32,951 -- --
Payments on notes receivable from officers for treasury
stock and other 237 162
Common Stock special dividend (prior to IPO) (8,600) -- --
Borrowings (repayment) of bank line of credit -- (7,283) 6,096
Borrowings from (payments to) stockholders (4,554) (2,054) 8,270
Preferred Stock redemption (1,400) - -
Payments for purchase of common stock - - (17,711)
Net cash provided by (used in) financing activities 18,634 (9,175) (3,345)
Net increase (decrease) in cash and cash equivalents 14,267 (333) 3,075
Cash and cash equivalents at beginning of period 4,715 5,048 1,973
Cash and cash equivalents at end of period $ 18,982 $ 4,715 $ 5,048
Supplemental cash flow disclosure:
Interest paid $ 377 $ 233 $ 78
Income taxes paid $ 6,734 $ 4,082 $ 1,000
See accompanying notes.
</TABLE>
1. BUSINESS AND ORGANIZATION
Diamond Home Services, Inc., formerly Diamond Exteriors, Inc., (Diamond Home
Services or the Company) 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 December 31, 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 pertaining to the formation and start-up
of operations of 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 $16,400,000, $13,000,000, and $7,400,000 in 1996,
1995, and 1994.
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 were fully paid in June 1996.
The stock acquisitions described above have been reflected in the accompanying
financial statements using the purchase method of accounting as if Globe
Building Materials, Inc.( Globe ), the former majority holder of the Company's
common stock, made the acquisitions and pushed-down its basis to the Company.
The cost of the shares purchased in excess of their par value and the direct
costs incurred by the Company were assigned to goodwill which is classified on
the balance sheet as intangible assets. The Company retired 3,750,050 of the
acquired shares of 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.
At December 31, 1996 and 1995, approximately 37.7% and 80%, respectively, of the
Company's outstanding common stock was owned by a wholly-owned subsidiary of
Globe. The preferred stock of the Company, which was redeemed in June 1996, was
owned by Globe.
In June 1996, the Company issued 2,824,950 shares of common stock (including
underwriters' over-allotment) at $13 per share in its initial public offering.
Proceeds from the offering, net of underwriting commission and related expenses
totaling $3.8 million, were $33.0 million. Following the offering, the Company
had 9,074,900 common shares issued and outstanding.
In September 1996, Globe sold 750,000 shares of the Company's common stock at
$29 per share in a public offering. The Company did not receive any proceeds
from the public offering.
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 short-term investments. 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. The Company receives
credit participation fee income on receivables financed by third-party finance
companies. Credit participation fees are earned, following contractual
agreement, generally, commensurate with the income stream implicit in the
receivable. For the year 1996, the Company earned $2,268,000 in credit
participation fee income. At December 31, 1996, $543 thousand and $795 thousand
of credit participation fee income is included in the balance sheet under the
captions prepaids and other current assets and other assets, respectively.
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.
ALLOWANCE FOR LOSS ON FINANCE RECEIVABLES
Marquise Financial maintains an allowance for losses on finance receivables at
an amount sufficient to protect for estimated losses of principal and interest
in the current portfolio. Additions to the allowance are charged to the
provision for credit losses on finance receivables. Finance receivables are
charged to the allowance for credit losses when they are deemed uncollectible.
Additionally, Marquise Financial provides for the full charge-off of finance
receivables when the receivable becomes 180 days contractually delinquent.
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, 1996 and December 31, 1995, was $ 16,706,000 and
$17,157,000, respectivley, net of accumulated amortization of $1,125,000 and
$674,000, respectively.
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 generally 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 and proper
maintenance. 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.
3. PROPERTY AND EQUIPMENT
The cost of property and equipment at December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Equipment $1,548,000 $1,182,000
Leasehold improvements 379,000 341,000
Furniture and fixtures 266,000 209,000
$2,193,000 $1,732,000
</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 benefits. 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-
response 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, 1996 and 1995, $839,000 and $500,000, respectively, of deferred
direct-response advertising costs was reported as noncurrent assets. Net
advertising expense was $7,772,000, $6,239,000, and $6,132,000 in 1996, 1995,
and 1994, respectively.
5. ACCRUED LIABILITIES
The components of accrued liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Payroll and payroll-related $3,922,000 $3,979,000
Warranty 800,000 609,000
Interest payable to stockholders - 360,000
Other 50,000 486,000
$4,772,000 $5,434,000
</TABLE>
6. DEBT
At December 31, 1996, the Company had a $15,000,000 bank line of credit with no
related borrowings outstanding. Interest on bank borrowings is payable monthly
at the bank's prime rate or at LIBOR plus 1.35%. 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.
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 in each of 1996 and 1995
related to the non-interest-bearing agreements. Also included in amounts due to
stockholders, in 1995, were performance notes totaling $4,000,000 and bearing
interest at 9% per annum effective January 1, 1995 which were repaid in full in
1996 (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, 1996.
7. INCOME TAXES
For the period January 1, 1996, through June 30, 1996, and for the year ended
December 31, 1995, the Company was included in the consolidated U.S. federal
income tax return of Globe. For the period indicated, a tax-sharing agreement
existed between the Company and Globe specifying the allocation and payment of
liabilities and benefits arising from the filing of a consolidated tax return.
The operation of the tax allocation method required the Company to pay its share
of the consolidated U.S. federal tax liability if it had taxable income, and to
be compensated for losses or credits for benefits which were utilized to reduce
the consolidated tax liability. There would be no difference, in the indicated
period, in the Company's tax liability if a tax-sharing agreement did not exist.
For the period subsequent to June 30, 1996, the Company was no longer included
in Globe's consolidated U.S. federal income tax return.
The provision (benefit) for the year ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $4,324,000 $2,567,000 $1,519,000
State 685,000 551,000 385,000
Deferred:
Federal (567,000) (385,000) (813,000)
State (85,000) (83,000) (174,000)
$4,357,000 $2,650,000 $917,000
</TABLE>
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>
1996 1995 1994
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State income tax, net of federal tax
benefit 3.5 4.8 4.8
Goodwill amortization 1.1 2.0 2.6
Utilization of federal tax loss carryfoward -- -- (12.9)
Other, net .4 0.7 3.0
Effective tax rate 39.0% 41.5% 31.5%
</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.
The significant components of deferred tax assets and liabilities at December 31
are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Warranty $2,511,000 $1,640,000
Allowance for loss on finance receivables 155,000 --
Other 504,000 473,000
Total deferred tax assets
3,170,000 2,113,000
Deferred tax liabilities:
Advertising (397,000) (235,000)
Depreciation (153,000) (120,000)
Other (513,000) (303,000)
Total deferred tax liabilities (1,063,000) (658,000)
Net deferred tax assets $2,107,000 $1,455,000
</TABLE>
8. EMPLOYEE BENEFITS
DEFINED CONTRIBUTION 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.
INCENTIVE STOCK OPTION PLAN
In connection with the Diamond Home Services, Inc. 1996 Incentive Stock Option
Plan (the Employee Stock Option Plan ), 620,000 shares of the Company's Common
Stock were reserved for issuance. At December 31, 1996, 346,950 shares were
available for future grant. The Employee Stock Option Plan provides for
issuance of incentive stock options, non-qualified stock options, stock
appreciation rights and stock awards to key associates. All options granted
have ten year terms and vest and become fully exercisable at the end of three
years of continued employment. At December 31, 1996, there were no stock
appreciation rights or awards attached to stock options. Stock options
outstanding at December 31, 1996, are excercisable over the next 9 1/2 years and
vest over three years. Also, in 1996, the Company adopted the 1996 Nonemployee
Director Stock Option Plan and has reserved 50,000 shares for future issuance.
At December 31, 1996, 50,000 shares were available for future grant. The
Nonemployee Stock Option Plan provides for the automatic annual issuance, at the
time of the annual meeting of shareholders following one year of service as a
director, of non-qualified stock options and are exercisable over a 10 year
term.
A summary of the Company's stock option activity, and related information for
the year ended December 31, 1996, is set forth below. The Company did not have
Incentive Stock Option Plans prior to 1996.
<TABLE>
<CAPTION>
Weighted-Average
Options Option Price
<S> <C> <C>
Granted 275,000 $13.00
Exercised 525 13.00
Forfeited 1,950 13.00
Outstanding, end of year 272,525 $13.00
Exercisable, at end of year 68,131 $13.00
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Options Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board No. 123, Accounting for Stock-Based
Compensation (Statement No. 123), requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions for 1996: 1) risk free interest rate of 6.22%; 2) dividend yield of
0%; 3) volatility factor of the expected market price of the Company's of .588;
and, 5) weighted-average expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions, periods of
restricted trading and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, it seems to management of the Company, the existing model
cannot necessarily provide a definitive measure of the fair value of its
employee stock options.
Accordingly, for purposes of pro forma disclosures only, the estimated fair
value of the options is amortized to compensation expense over the options'
vesting period with the following results:
1996
Pro forma net income $6,535,000
Pro forma net income per share $.84
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. No interest income was recorded during 1995.
The following summarized financial information for Marquise is before
elimination of intercompany transactions in consolidation.
Financial position at December 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
Cash $ 50,000 $--
Finance receivables, net of allowances of $404,000 and
$4,000 in 1996 and 1995 5,312,000 542,000
Other assets 349,000 127,000
Total assets $5,711,000 $669,000
LIABILITIES AND STOCKHOLDER'S EQUITY
Due to Diamond Exteriors, Inc. $5,623,000 $442,000
Other liabilities 50,000 3,000
Total liabilities 5,673,000 445,000
Stockholder's equity 38,000 224,000
Total liabilities and stockholder's equity $5,711,000 $669,000
</TABLE>
<TABLE>
<CAPTION>
Operations for the period ended December 31:
1996 1995
<S> <C> <C>
Total finance income $1,811,000 $ -
Interest expense paid to Diamond Exteriors, Inc. 668,000 --
Provision for credit losses 767,000 4,000
Net interest income (loss) 376,000 (4,000)
Other income 130,000 --
Other expenses (807,000) (39,000)
Loss before income tax benefit (301,000) (43,000)
Income tax benefit 115,000 17,0000
Net loss $ (186,000) $ (26,000)
</TABLE>
<TABLE>
<CAPTION>
Cash flows for the period ended December 31:
1996 1995
<S> <C> <C>
Cash, at beginning of year $ -- $ --
Net cash used in operating activities (115,000) (36,000)
Net cash used in investing activities (5,016,000) (656,000)
Net cash provided by financing activities 5,181,000 692,000
Cash, at end of year $ 50,000 $--
</TABLE>
At December 31, 1996, Marquise Financial had approximately $2.1 million in
approved but not funded loan commitments.
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, 1996:
<TABLE>
<CAPTION>
<S> <C>
1997 $997,000
1998 628,000
1999 287,000
2000 165,000
2001 113,000
Thereafter -
Total minimum lease payments $2,190,000
</TABLE>
Rent expense was $1,127,000, $850,000, and $685,000 in 1996, 1995, and 1994,
respectively.
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 in January 1995, contingent on the continued employment of each
employee. During 1996, payments of $769,000 were made to the related employee
group and $614,000 were forfeited due to change in employment status of
respective employees. During 1995, payments of $769,000 were made to the
related employee group and $308,000 were forfeited due to change in employment
status of respective employees. The remaining liability of $1,770,000 for such
contingent payments is not reflected in the consolidated financial statements at
December 31, 1996.
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. RELATED PARTY TRANSACTIONS
It is the Company's practice to have all related party transactions and
arrangements
discussed and reviewed by the Company's Board of Directors.
For the period January 1, 1996 through June 23, 1996, and for the years 1995 and
1994, the Company had an agreement with Globe for the performance of various
administrative services. In consideration for such services, the Company paid
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 during the indicated period. The
Company incurred management fees of $ 311,000, $558,000 and $464,000 for the
indicated period in 1996, and for the years 1995 and 1994, respectively. No
amounts were due to Globe at December 31, 1996.
During 1996, the Company, in an informal arrangement, leased a portion of its
headquarters' office space and services to a division of H I, Inc., at cost, in
the aggregate amount of $ 126,000. In addition, in 1996, the Company began a
program to systematically centralize and outsource its four regional lead-taking
activities to H I, Inc.'s Lawrence, KS, facility. The aggregate amount of lead-
taking activities expenses incurred to H I, Inc. in 1996 approximated $302,000.
The quoted rates for the various activities performed by H I, Inc., in the
opinion of management of the Company, have been obtained at a cost and on terms
no more favorable than if it were to obtain them from a non-related party. At
December 31, 1996, approximately $66,000 was due to H I, Inc.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Net Sales Gross Profit Net Income Net Income per Share
(In thousands)
<S> <C> <C> <C> <C>
1996
First quarter $27,093 $11,800 $ 349 $.06
Second quarter 41,389 18,548 1,919 .30
Third quarter 46,492 20,530 2,591 .28
Fourth quarter 42,094 18,451 1,956 .21
1995
First quarter 22,362 9,266 ( 1) .00
Second quarter 31,134 13,152 894 .14
Third quarter 36,459 15,412 1,532 .25
Fourth quarter 34,893 14,773 1,310 .21
(*) The total quarterly amounts in 1996 do not add to the year amount due to
rounding.
</TABLE>
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, 1996 and 1995, and the
related consolidated statements of operations, changes in common stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, IL
February 21, 1997
EXHIBIT 23.1
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Diamond Home Services, Inc. of our report dated February 21, 1997, included
in the 1996 Annual Report to Shareholders of Diamond Home Services, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-13381) pertaining to the Diamond Home Services, Inc. Incentive
Option Plan and the Diamond Home Services, Inc. 1996 Nonemployee Director Stock
Option Plan of Diamond Home Services, Inc. of our report dated February 21,
1997, with respect to the consolidated financial statements of Diamond Home
Services, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1996.
Ernst & Young LLP
/s/ Ernst & Young LLP
Chicago, Illinois
March 31, 1997
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