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, 1997 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, 1998 (based upon an estimate
that 56.4% 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 $28,800,000. 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, 1998, 8,507,375 shares of the registrant's Common Stock were
outstanding.
The following documents are incorporated into this Form 10-K by reference:
Proxy Statement for Annual Meeting of Stockholders to be held on May 14,
1998 (Part III).
PART I
ITEM 1. BUSINESS
GENERAL
The Company is one of the country's leading marketers and contractors of
installed home improvement products, including roofing, gutters, doors and
fencing. Through its subsidiary, Diamond Exteriors, Inc. ("Exteriors"), the
Company markets its home improvement products and services directly to consumers
primarily under the "Sears" name pursuant to a three-year non-exclusive license
agreement with Sears, Roebuck and Co. ("Sears") which expires December 31, 1998.
Sears has been in business for over 100 years and is a nationally recognized
name in the installed home improvement industry. The Company is one of the
largest, if not 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 sales associates. The Company has approximately 70 sales
offices located in major cities across the U.S. The Company installs its
products through a network of qualified independent installers and purchases its
products through local and regional independent distributors. Through its
finance subsidiary, Marquise Financial Services, Inc. ("Marquise"), the Company
provides financing to consumers of installed home improvement products and
services. Marquise also buys pools of secured consumer receivables.
The Company was incorporated 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
approximately $161.1 million for the year ended December 31, 1997.
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
1995 1996 1997
Net Sales Percent of Net Sales Percent of Net Sales Percent of
Total Total Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Roofing and Gutters. . . $87,060 69.7% $102,818 65.5% $102,228 63.5%
Fencing. . . . . . . . . . . 17,933 14.4 26,324 16.7 26,766 16.6
Garage, Entry and 19,855 15.9 23,717 15.1 29,154 18.1
Security Doors, and
Other
Fee and Finance Income - - 4,209 2.7 2,961 1.8
Total. . . . . . . . . . $124,848 100.0% $157,068 100.0% 100.0%
$161,109
</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 a 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, and 3-tab shingles, clay and
concrete tile and metal. The Company also sells and installs a premium shingle
which is manufactured by Globe Building Materials, Inc. ("Globe"), the Company's
largest stockholder. 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 pitched complex structures. The average price for a roof installed
by the Company is approximately $4,800. The Company also sells and installs
aluminum and steel gutters. The average price of installed gutters is
approximately $1,350. The Company repairs roofs as a Sears authorized
contractor and provides warranty service on Sears's behalf for exterior home
products sold, furnished and installed by Sears prior to Sears's exit in
December 1992 from the selling, furnishing and installing of roofing products.
Pursuant to the Sears license agreement, the Company also sells and installs
soffit/fascia and siding for dormers and gable ends and repairs chimneys 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 low slope 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 the Sears license agreement.
Fencing. The Company sells and installs a variety of fencing products
including galvanized, steel and aluminized chain link fences, vinyl and powder
coated steel fabric fences with matching color frameworks, wood fences in a
variety of styles, and PVC fences. The Company also sells a chain link fence
which features an extra-strong ribbed design and rust protection. The average
price of an installed fence is approximately $2,500. (See "Recent Developments"
below.)
Garage Doors. The Company sells and installs a complete line of wood and steel
garage doors. The average price of an installed garage door, including
custom-made garage doors, is approximately $1,400. The Company sells a
proprietary, high quality insulated and non-insulated steel garage door. In
connection with the sales of garage doors, the Company also sells and installs
the Sears Craftsman brand garage door openers. In certain limited markets, 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
$1,600. 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 and
storm doors.
Fee and Finance Income. In 1997, the Company generated fee and finance income
from two sources. Credit participation fee income, primarily from Sears and its
affiliates on installed sales financed by Sears and its affiliates, totalled
approximately $1.9 million in 1997. Finance interest income on receivables
financed by Marquise totalled approximately $1.1 million in 1997.
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. In 1997 the Company terminated its testing of a
heating, ventilation, and air conditioning ("HVAC") sales and installation
business and liquidated the assets of its wholly-owned subsidiary Solitaire
Heating and Cooling, Inc., which provided cleaning, repair and replacement
products and services to the HVAC market.
NATIONAL MARKETING AND SALES LEAD GENERATION
The Company's principal marketing activities are conducted by participation
in Sears's national preprints. In 1995, 1996, and 1997, approximately 44%, 39%,
and 59%, respectively, of the Company's marketing expense was related to Sears
preprints. 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 40% of the total
calls received by the Company, go through a Sears call center which is operated
24 hours a day. Calls relating to the Company's products are transferred to 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. HI
(which does business under the name "KanTel") verifies the products the customer
is interested in, schedules an appointment (except in the case of repairs) and
transmits the sales lead, via facsimile or computer, to the appropriate sales
office. The local sales office schedules appointments for repairs.
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 center to the various sales offices two to three times per day.
Each sales associate typically has two to three appointments each day and 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 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
and services to the potential customer with the assistance of brochures, product
samples, 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 type and gross profit of
product sold. In addition, in the event of improper estimating or other errors
which lead to a reduced gross profit on an installation, the sales 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 profits for their sales offices. The Company is testing alternative forms
of compensation for sales associates.
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 currently has approximately 70 sales offices. The manager of
each sales office reports to a district manager. Each sales office is typically
staffed with a sales manager, an installation manager and a customer service
project coordinator. The sales manager 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 and certifying independent
installers. The customer service project coordinator manages the job through
completion and deals with matters related to 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 works to ensure that the contractor meets the
Company's quality and safety standards. Each of the Company's sales offices
generally enters into annual 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 has implemented a captive insurance
program to address this situation. The Company has approximately 1600
independent installers (i.e., independent installers who have worked in the past
sixty days for the Company). 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 roofing customers.
CUSTOMER FINANCING
The average sales price charged by the Company for its products and
services ranges between approximately $1,100 and $4,800. During fiscal 1997,
approximately 88% of the Company's sales were financed, and, of the sales which
were financed, approximately 85% 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 finance subsidiary, commenced
operations to provide an additional financing alternative for purchasers of the
Company's products. The Company's customers had the option of financing their
purchase through Sears, Marquise, or any other approved third-party financing
source. Unlike financing through third-party finance companies, the Company
bears the credit risk on all financing provided by Marquise.
During the first year of its operation, Marquise only provided unsecured
financing. During the fourth quarter of 1996, Marquise ceased providing
unsecured financing and introduced a new finance product - a fixed rate, fixed-
term, retail installment product secured by non-commercial real estate -
available to all creditworthy customers that cannot obtain unsecured financing.
If the customer applies for this type of secured financing through Marquise, it
typically takes approximately one business day to determine if a conditional
approval will be provided and approximately two weeks to complete the processing
of loan documents and to get the loan documents signed. The Company may resume
the provision of unsecured financing in 1998. At December 31, 1997, Marquise
had approximately $8.8 million in net consumer finance receivables, including
approximately $5.6 million in fixed rate, secured loans. At December 31, 1997,
Marquise had reserved approximately $600,000 for uncollectible finance
receivables.
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 manufacturers' product warranties
often provide a declining amount of coverage over time, while the Company's
warranty coverage does not decline during the warranty period. In the case of
roofing, 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. 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 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, by emphasizing workmanship and customer service, by using quality,
warranted products produced by nationally known manufacturers, by inspecting a
portion of all installations and by requiring installers to indemnify the
Company for claims of defective installation (which indemnity is secured by a
cash collateral account deposited by each installer).
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 accrues a
reserve for warranty claims, which ranges from 1.5% to 2% of net sales.
PURCHASING
The Company purchases roofing materials, gutters, doors, fencing and
related products primarily from a variety of local, regional, and national
independent distributors and/or manufacturers. Each independent distributor
provides a variety of services to the Company, including the maintenance of
adequate inventories to support the Company's prompt need for materials, the
delivery of requisite materials to each job site, and the provision of extended
payment terms for the products purchased. Some manufacturers also back the
Company's warranty under specified circumstances. 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, 1996, and 1997, approximately 20%, 23%, and 24%, 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%, 8%, and 8% in dollar
volume of all roofing products purchased by the Company during 1995, 1996, and
1997, 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 Exteriors and Sears.
Exteriors entered into a three-year license agreement with Sears effective
January 1, 1996. The license agreement authorizes the Company to sell, furnish
and install roofing, gutters, doors, fences, and certain other products under
the "Sears" name as a Sears authorized contractor to residential customers in 44
states. During the term of the license agreement, Exteriors may not sell,
furnish or install similar products to consumers under any other retailer's name
without Sears's 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;
Exteriors'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 Exteriors and Exteriors's failure to
timely provide Sears with adequate assurances, as determined by Sears, that
issues involving such complaints have been resolved to Sears's satisfaction. In
addition, Sears has the right, at any time, upon 12 months' notice to Exteriors
to discontinue Exteriors's right to sell, furnish and install certain products
in certain markets under the "Sears" name if the sales volume or if scores
relative to the Sears "Quality Every Day!" standards or "Service Quality Index,"
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 because Sears wishes 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 Exteriors to a third party other than
an affiliate without Sears's consent.
The license agreement provides for Exteriors to pay Sears a license fee
based on Exteriors'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
Exteriors as to 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 certain rights regarding customer information generated by
Exteriors during the term of the license agreement, as well as regarding
telephone numbers used by Exteriors in connection with its operations under the
license agreement and limits the rights of Exteriors in such customer
information or goodwill. Exteriors cannot use such information other than in
connection with the license agreement. The license agreement also provides Sears
the right to settle, at Exteriors's expense and without Exteriors's consent, any
customer complaints. The Company is not aware of any material claims made
against Sears by customers of Exteriors which Exteriors has not directly
resolved or is in the process of resolving 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's
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 is 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's 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, 1996, and 1997, the
Company incurred license fees to Sears in the aggregate amount of approximately
$13.0 million, $16.4 million, and $16.9 million, respectively. In addition,
Sears and its affiliates have financed in excess of $450 million of the
Company's sales 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's exercise of its right to discontinue the Company's license in any market
or for any product or a decline in Sears's reputation or an increase in adverse
publicity about Sears 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. 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. Backlog, defined as jobs sold but not installed,
decreased approximately $3.9 million, from approximately $14.8 million at
December 31, 1996, to approximately $10.9 million at December 31, 1997.
COMPETITION
The industry in which the Company competes is large, 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 and regional 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 and manufacturers which may license and/or market and
arrange for the installation of products similar to the Company's, including
Home Depot, Inc., Builders Square, and GAF. To date, none of the retailer- or
manufacturer-sponsored programs has provided significant competition to the
Company. However, there can be 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, these major retailers
or manufacturers each has a nationwide chain of retail stores or access to
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 offers and sells its products and services at prices that may be
significantly higher than those of most of its 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,
environmental laws and regulations relating to the disposal of demolition debris
and other solid wastes, and building and zoning regulations. 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. Compliance with federal, state and local provisions
that have been enacted or adopted regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment, is not
expected to have a material effect upon the capital expenditures, earnings and
competitive position of the Company and its subsidiaries.
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 and that
impose examination, reporting, and other regulatory requirements. In many
states, issuance of licenses is dependent upon a finding of public convenience,
and of financial responsibility, character and fitness of the applicant.
Licenses are revocable for cause.
In addition, the financing activities of the Company and its subsidiaries
are subject to the Federal Consumer Credit Protection Act ("FCCPA"), which 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. Moreover, certain states may require
Exteriors or Marquise to make additional disclosures to consumers (such as
identifying installers and suppliers) and to take other actions (such as giving
waiting periods that exceed federal requirements) when consumer credit contracts
are executed.
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, 1997, the Company employed approximately 1,200 persons,
including approximately 650 sales associates and approximately 200 part-time
employees. In addition, the Company has relationships (i.e., independent
installers who have performed an installation for the Company in the last sixty
days) with approximately 1,600 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.
RECENT DEVELOPMENTS
On March 6, 1998, the Company announced an agreement to acquire all the
stock of Reeves Southeastern Corporation ("Reeves") for approximately $42
million in cash and notes. Reeves is a national manufacturer and distributor of
fencing and perimeter security products. The consummation of the transaction is
subject to various closing conditions.
EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE REGISTRANT
As of March 16, 1998, the executive officers and other key employees of the
Company were as follows:
NAME AGE POSITION
EXECUTIVE OFFICERS:
C. Stephen Clegg 47 Chairman of the Board, Chief Executive Officer and
President
Jerome E. Cooper 57 Vice President - Installations
James M. Gillespie 58 Vice President - Business Development and a Director
Ronald D. Greene 43 Vice President - National Sales
Eugene J. O'Hern, Jr. 54 Controller
Richard G. Reece 49 Vice President, Chief Financial Officer and Treasurer
Joseph U. Schorer 44 Vice President, General Counsel and Secretary
OTHER KEY EMPLOYEES:
Stuart M. Davidson 35 Vice President - MIS
Thomas A. Jackson 43 Vice President - Exteriors
David T. Jones 48 Vice President - Exteriors
Marvin Lerman 55 Vice President - Purchasing
Ian F. Ostergaard 49 Vice President - Human Resources
Ann Crowley Patterson 38 Vice President
S. Austin Sawyer 64 President - Marquise
Kenneth H. Smith 55 Vice President - Marketing
R.Q. Whitmire 48 Vice President - Exteriors
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, for processing sales
leads, and for other services. HI owns a majority of the common stock of The
Handy Craftsmen, Inc. ("Handy Craftsmen"). Mr. Clegg is also a controlling
shareholder of Alexander & Walsh, Inc., which provides advertising and other
marketing services to the Company. Mr. Clegg is president of Clegg Industries,
Inc., a private investment firm which he founded in September 1988. Mr. Clegg
devotes and intends to devote a majority of his time to the Company. 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. JEROME E. 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. 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. RONALD D. GREENE, Vice President - National Sales, joined the Company
in January 1998. From 1990 until he joined the Company, Mr. Greene was
Executive Vice President of Sales for American Magnetite, Inc., a privately held
corporation and Sears licensee in the installed home improvement industry.
Prior to 1990, Mr. Greene was an officer of Amre, Inc., a marketer and installer
in the home improvement industry.
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, a manufacturer of automobile and industrial components.
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. 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.
MR. JOSEPH U. SCHORER has served as Vice President, General Counsel and
Secretary of the Company and its subsidiaries, of Globe, of Mid-West Spring and
of Catalog since March 1997. Mr. Schorer 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. STUART M. 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, Mr. Davidson was Director of
Information Systems with Scott Foresman, the educational publishing division of
HarperCollins.
MR. THOMAS A. JACKSON has been Regional Vice President of the East Region
of the Company since January 1998. From January 1997 until January 1998 Mr.
Jackson served as a Region Vice President of Sales and Installation for the
Company and, from May 1993 until January 1997, Mr. Jackson was the Vice
President of Sales of the eastern region of the Company. Prior to joining the
Company, from 1976 until 1989, Mr. Jackson held various retail management
positions with Sears and, from 1989 until May 1993, he was the regional product
manager responsible for buying and marketing installed home improvements for
Sears.
MR. DAVID T. ("TIM") JONES has been Regional Vice President of the
Southeast Region of the Company since January 1998. Mr. Jones joined the
Company in May 1993 as Vice President - Field Operation for the southeast
region. Prior to joining the Company, Mr. Jones held various retail management
positions with Sears from 1971 until 1989 and served as a regional manager of
the installed home improvements division of Sears from 1989 until May 1993.
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. IAN F. OSTERGAARD, Vice President - Human Resources, joined the Company
in December, 1997. From January, 1981, until he joined the Company, Mr.
Ostergaard was employed by Citibank, FSB of Illinois. He held several positions
at Citibank, FSB, the last one being Senior Vice President - Human Resources,
from April, 1992, until December, 1997.
MS. ANN CROWLEY PATTERSON has served as Vice President 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. 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 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. KENNETH H. SMITH joined the Company as Vice President - Marketing in
February 1997. Prior to joining the Company, Mr. Smith served for eighteen
years in various marketing, product development, and quality/customer support
positions at S.C. Johnson & Sons, Inc., a global marketer of various home and
commercial packaged goods products.
MR. R.Q. WHITMIRE has served as Regional Vice President of Sales and
Installations for the central region of the Company from May 1995 until January
1998. In January 1998 he became Regional Vice President of the West Region of
the Company, which combined the former central and west regions of the Company.
From 1993 until May 1995 he served in various management positions in the
Company. Prior to joining the Company in 1993, Mr. Whitmire was employed with
Sears for 23 years at various retail management positions. His last position
with Sears was district sales manager for Home Improvements from 1988 through
1993.
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, 1997, the Company leased approximately 70
sales/installation offices. These offices occupy between 200 and 3,000 square
feet (with an average of approximately 1,600 square feet) and typically have
lease terms ranging from one 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, as amended, alleges, among other things, that
Mr. Clegg breached his fiduciary duty to the Company by causing Catalog (in lieu
of the Company) to acquire Handy Craftsmen. 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 relating to the
Company's affairs are challenged in the complaint. The complaint also makes
allegations against Mr. Clegg and Mr. Pollock which include breach of fiduciary
duty as a result of alleged conflicts of interest related to certain
transactions which have been consummated at Globe.
The Company believes that the allegations respecting the Company in 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 the excerpts from the registrant's Annual Report to Stockholders for
the fiscal year ended December 31, 1997, under the caption "Corporate Data,"
which information is included in Exhibit 13.1 and hereby incorporated herein by
reference.
Other than a special, one-time dividend of approximately $8.6 million 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 lines of credit place 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 excerpts from
registrant's Annual Report to Stockholders for the fiscal year ended December
31, 1997, under the caption "Selected Financial Data," which information is
included in Exhibit 13.1 and 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 excerpts from
registrant's Annual Report to Stockholders for the fiscal year ended December
31, 1997, under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," which information is included in Exhibit
13.1 and incorporated herein by reference.
------------------------------------------------
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein 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 incorporated in May 1993 by a group consisting primarily of
a group of 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 in 1997 the
Company's operating income decreased from 1996 levels. There can be no
assurance that the Company's revenue growth and profitability will be sustained.
Dependence on Sears License
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. As it has done in the past, the
Company expects to negotiate and revise its license agreement on terms that meet
the Company's three fundamental principles in dealing with Sears: (1) top-line
growth, (2) quality, and (3) licensee profitability. 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 upon the
license's scheduled expiration on December 31, 1998. 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's exercise of its right to discontinue the Company's license in any market
or for any product or a decline in Sears's 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. (See also
"Sears License Agreement" under Item 1.)
Warranty Exposure
The Company provides each customer with a warranty on product and labor.
Certain manufacturers' 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 roofing installers (generally one to two years) is significantly
shorter in duration than that provided by the Company to its roofing 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 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. (See also "Warranty" under Item 1).
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 and retain
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.
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 1997, approximately 39% of the sales
associates generated approximately 65% 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. (See also "Sales" under Item 1).
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
warranty for labor on certain 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. (See also
"Independent Installers" under Item 1.)
Interest Rate and Inflation Sensitivity
The ability to finance purchases on an affordable basis, 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 1997, approximately 88% of the Company's sales were financed, and,
of the sales which were financed, approximately 85% 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.
Many of the Company's customers who finance their purchases through
Marquise 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 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, unlike purchases financed through third
party finance companies, such as Sears affiliates. Marquise 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 the financing Marquise has
obtained will be sufficient to support its expanded operations. (See also
"Customer Financing" under Item 1.)
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 a group of executives within a
short period of time could have a material adverse effect on the Company's
operations. Certain of the Company's executive officers also hold executive
positions and have responsibilities with Globe, certain of its affiliates and
other companies and expect to continue in these positions. 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 large, 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 or manufacturers 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. (See
also "Competition" under Item 1.)
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. (See also
"Seasonality and Backlog" under Item 1.)
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,
environmental laws and regulations relating to the disposal of demolition debris
and other solid wastes, and building and zoning regulations. 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.
Marquise 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. Moreover,
individual states may require Exteriors or Marquise to make certain
disclosures to consumers when consumer credit contracts are executed. Although
the Company believes that Marquise 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's business will not have an
adverse effect on the Company's ability to provide customer financing of its
products or on the profitability of such activities. (See also "Government
Regulations" under Item 1.)
Reeves Southeastern Corporation
On March 6, 1998, the Company announced an agreement to acquire all the
stock of Reeves for approximately $42 million in cash and notes. Reeves is a
national manufacturer and distributor of fencing and perimeter security
products. The tentative structure of the acquisition contemplates a purchase
price of approximately $34 million in cash and short-term notes in addition to
long-term notes of indeterminable value of up to $8 million. Consummation of
the transaction is subject to a variety of closing conditions. Management
anticipates the acquisition to close by the end of April 1998. The failure to
integrate Reeves's operations successfully might have a material adverse effect
on the Company's performance.
Year 2000
The Year 2000 date change issue is believed to affect virtually all
companies and organizations. If not corrected, many long term applications
could fail or create erroneous results by or at Year 2000. The Company is
undertaking an investigation to determine if the Company's computer systems, the
Company's products, and the computer systems of Sears and the Company's vendors,
installers, and creditors (as they relate to the Company) are Year 2000
compliant. The failure of any of the foregoing matters to be Year 2000
compliant might materially adversely affect the Company. (See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" set forth in excerpts from registrant's Annual Report to
Stockholders for the fiscal year ended December 31, 1997, included in Exhibit
13.1 and incorporated herein by reference.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in excerpts from
registrant's Annual Report to Stockholders for the fiscal year ended December
31, 1997, 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 included in Exhibit
13.1 and 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 14, 1998, 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 Other 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 14, 1998,
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 14, 1998,
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 14, 1998,
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, 1997 and
1996;
(ii) Consolidated Statements of Operations - years ended December
31, 1997, 1996, and 1995;
(iii) Consolidated Statements of Changes in Common
Stockholders' Equity - years ended December 31, 1997, 1996,
and 1995;
(iv) Consolidated Statements of Cash Flows - years ended
December 31, 1997, 1996, and 1995;
(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 therefore 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, 1997.
(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 30, 1998.
DIAMOND HOME SERVICES, INC.
By /s/ 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 30, 1998, in the capacities indicated:
SIGNATURE TITLE
/s/ Stephen Clegg Chairman of the Board, Chief Executive
C. Stephen Clegg Officer, President and Director
(Principal Executive Officer)
/s/ Richard G. Reece Vice President, Chief Financial Officer and
Richard G. Reece Treasurer (Principal Financial Officer)
/s/ Eugene J. O'Hern, Jr. Controller (Principal Accounting Officer)
Eugene J. O'Hern, Jr.
/s/ James F. Bere Jr.
James F. Bere Jr. Director
/s/ James M. Gillespie
James M. Gillespie Director
/s/ William Griffin
William Griffin Director
/s/ Jacob Pollock
Jacob Pollock Director
/s/ George A. Stinson
George A. Stinson Director
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
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. (3)
10.9(g) Fourth Amendment and Waiver to Loan and Security Agreement between
Diamond Exteriors, Inc. and American National Bank and Trust Company
of Chicago (filed herewith).
10.9(h) Guaranty between Diamond Home Services, Inc. and American National
Bank and Trust Company of Chicago (filed herewith).
10.9(i) Amendment to Guaranty between Diamond Home Services, Inc. and American
National Bank and Trust Company of Chicago (filed herewith).
10.9(j) Fifth Amendment and Waiver 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 Frank
Cianciosi (filed herewith).
10.11 License Agreement between Globe Building Materials, Inc. and Diamond
Home Services, Inc. (1)
13.1 Excerpts from 1997 Annual Report to Stockholders (filed herewith).
21.2 Subsidiaries of Diamond Home Services, Inc. (filed herewith).
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.
(3) Incorporated herein by reference to the exhibit of equivalent number to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
FOURTH AMENDMENT AND WAIVER TO LOAN AND SECURITY AGREEMENT
This Fourth Amendment and Waiver to Loan and Security Agreement, made
as of November 30, 1997 (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 the Amended and Restated Revolving Note dated as of
December 3, 1996 (the "Existing Note"), made by the Company in favor of the Bank
in the original principal amount of $15,000,000;
WHEREAS, the Company has requested that the Bank amend and restate the
Existing Note to change the maturity date to February 28, 1998;
WHEREAS, the Bank and the Company have agreed to amend the Loan
Agreement to, among other things, (i) incorporate the modifications to the
Existing Note and (ii) modify certain financial and other covenants;
WHEREAS, the Company has requested that the Bank waive certain Events
of Default arising as a result of the Company's failure to comply with certain
financial and other covenants, and the Bank has agreed to such a request;
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 5 of this Amendment
(the "Closing Date"), effective as of November 30, 1997, the Loan Agreement is
amended as follows:
1.1 Section 8.5(c) of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
(c) The Company has no material contingent liabilities not provided
for or disclosed in the financial statements provided under Section 9.1.
1.2 Sections 8.20 and 8.21 of the Loan Agreement are amended by
deleting the text of such sections in its entirety and replacing it as follows:
[INTENTIONALLY OMITTED].
1.3 Section 8.25 of the Loan Agreement is amended by deleting such
section in its entirety and replacing it as follows:
8.25 Patents, Licenses. The Company possesses adequate licenses,
patents, patent applications, copyrights, service marks, trademarks,
trademark applications, tradestyles, tradenames and similar assets to
continue to conduct its business as heretofore conducted by it.
1.4 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
minus 100% of the amount of cash used by Diamond Home Services, Inc. to
repurchase its stock, calculated at the end of each of the Company's fiscal
quarters through the Credit Termination Date.
1.5 Section 9.8 of the Loan Agreement is amended by deleting clause
(vii) from such section in its entirety and replacing it as follows:
(vii) Indebtedness of the Company owing to Diamond Home Services, Inc.
evidenced by the promissory note dated as of June 23, 1996, in the original
principal amount of $33,147,000;
1.6 Section 9.17 of the Loan Agreement is amended by deleting clause
(b) to such section in its entirety and replacing it as follows:
(b) an aggregate amount for other capital expenditures, whether funded by
Capital Leases or otherwise, in excess of $2,500,000 per year.
SECTION 2. AMENDMENTS TO RELATED DOCUMENTS
2.1 Exhibits to Loan Agreement. On the Closing Date, Exhibit A to
the Loan Agreement is replaced with Exhibit A to this Amendment.
2.2 Schedules. On the Closing Date, (i) Schedule 8.5 to the Loan
Agreement is amended by adding to such schedule the information contained on
Schedule I to this Amendment, (ii) Schedule 8.8 to the Loan Agreement is amended
by adding to such schedule the information contained on Schedule II to this
Amendment and (iii) Schedule 9.4 to the Loan Agreement is amended by adding to
such schedule the information contained on Schedule III to this Amendment. On
the Closing Date, Schedules 8.20 and 8.25 are deemed deleted in their entirety.
2.3 Related Documents. On the Closing Date, the Existing Note is
amended, restated and replaced in its entirety by the Second Amended and
Restated Revolving Note dated as of November 30, 1997 (the "Amended Note"), made
by the Company in favor of the Bank in the original principal amount of
$15,000,000. Upon receipt of the Amended Note, the Bank will mark the Existing
Note "superseded" and return it to the Company.
SECTION 3. WAIVER
3.1 Financial Covenants. On the Closing Date, the Bank waives any
Event of Default under Sections 12.1(e) and 12.1(i) of the Loan Agreement due
solely to the Company's noncompliance with the covenants set forth in Sections
9.7, 9.11 and 9.17 of the Loan Agreement and DHS' noncompliance with the
covenants set forth in Sections 5.8 and 5.10 of the Guaranty dated as of
December 3, 1996 (the "DHS Guaranty"), made by DHS in favor of the Bank, each
for the period ending September 30, 1997.
3.2 Hayward Inspection. On the Closing Date, the Bank waives any
Event of Default under Section 12.1(f) of the Loan Agreement due to the events
described on Schedule IV to this Amendment, which events may violate the
representations and warranties set forth in Section 8.14(c) of the Loan
Agreement.
3.3 Other. Nothing in this Amendment in any way is deemed to be (i)
a waiver of any other Event of Default or (ii) an agreement to forbear from
exercising any remedies with respect to such other Events of Default.
SECTION 4. REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Amendment and to extend future
credit under the Loan Agreement, as amended by this Amendment, the Company
represents and warrants to the Bank that:
4.1 Due Authorization; No Conflict; No Lien; Enforceable Obligation.
The execution, delivery and performance by the Company of this Amendment and the
Amended 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), and do not and will not contravene or
conflict with any provision of (i) any law, (ii) any judgment, decree or order
or (iii) its articles or certificate of incorporation or by-laws, and do not and
will not contravene or conflict with, or cause any lien to arise under, any
provision of any agreement or instrument binding upon the 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.
4.2 No Default; Representations and Warranties. As of the Closing
Date, except as set forth in Section 3 of the Amendment, (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, except for any such representation or warranty that is expressly
made as of a specified date, in which case such representation or warranty was
true and correct as of such specified date.
SECTION 5. CONDITIONS TO EFFECTIVENESS
The obligation of the Bank to make the amendments, waivers and
consents contemplated by this Amendment, and the effectiveness thereof, are
subject to the following:
5.1 Representations and Warranties. The representations and
warranties of the Company contained in this Amendment are true and correct as of
the Closing Date.
5.2 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) Fourth Amendment and Waiver. This Amendment.
(B) Amended Note. The Amended Note substantially in the form of
Exhibit A to this Amendment.
(C) Schedules. Schedules I, II, III and IV to this Amendment.
(D) Amendment to Guaranty. An amendment to the DHS Guaranty,
substantially in the form of Exhibit B to this Amendment.
(E) Secretary's Certificate. A certificate of the Secretary of the
Company as to (i) true and correct copies of the Company's articles or
certificate of incorporation and by-laws 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) Consents Certified copies of all documents evidencing any
necessary corporate action, consents and governmental approvals, if
any, with respect to this Amendment, the Amended Note or any other
document provided for under this Amendment.
(G) Other. Such other documents as the Bank may reasonably
request.
SECTION 6. MISCELLANEOUS
6.1 Captions. The recitals to this Amendment (except for
definitions) and the section captions used in this Amendment are for convenience
only and do not affect the construction of this Amendment.
6.2 Governing Law; Severability. THIS AMENDMENT IS A CONTRACT MADE
UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. Wherever
possible, each provision of this Amendment must be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of this
Amendment is prohibited by or invalid under such law, such provision is
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Amendment.
6.3 Counterparts. This Amendment may be executed in any number of
counterparts and by the different parties on separate counterparts, and each
such counterpart is deemed to be an original, but all such counterparts together
constitute but one and the same Amendment. The Company and the Bank agree to
accept facsimile counterparts.
6.4 Successors and Assigns. This Amendment is binding upon the
Company, the Bank and their respective successors and assigns, and inures to the
sole benefit of the Company, the Bank and their successors and assigns. The
Company cannot assign its rights or delegate its duties under this Amendment.
6.5 References. From and after the Closing Date, each reference in
the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein," or
words of like import, and each reference in the Loan Agreement or any other
Related Document to the Loan Agreement, the Existing 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 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.
6.6 Continued Effectiveness. 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 Note, as applicable. The Company and the Bank
expressly do not intend to extinguish the Loan Agreement or the Existing Note.
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 Note. The Loan Agreement, as amended by this Amendment, and the
Existing 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
Note are ratified and confirmed.
6.7 Costs, Expenses and Taxes. The Company affirms and acknowledges
that Section 13.5 of the Loan Agreement applies to this Amendment and the
transactions and agreements and documents contemplated under this Amendment.
* * *
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
Diamond Home Services, Inc., guarantor under the Guaranty dated as of
December 3, 1996 (the "Guaranty"), made in favor of the Bank, acknowledges that
it has read this Amendment and consents to this Amendment and agrees that its
guarantee of the Guaranteed Obligations (as defined in the Guaranty) continues
in full force and effect, is valid and enforceable and is not impaired or
otherwise affected by the execution of this Amendment or any other document or
instrument delivered in connection with this Amendment.
DIAMOND HOME SERVICES, INC.
By:
Name:
Title:
EXHIBIT A
FORM OF AMENDED NOTE
[ATTACHED]
EXHIBIT B
FORM OF AMENDMENT TO GUARANTY
[ATTACHED]
SCHEDULE I
LITIGATION AND CONTINGENT LIABILITIES
[TO BE PROVIDED BY THE COMPANY]
SCHEDULE II
EMPLOYEE BENEFIT PLANS
[TO BE PROVIDED BY THE COMPANY]
SCHEDULE III
INSURANCE
[ATTACHED]
SCHEDULE IV
DESCRIPTION OF HAYWARD INSPECTION
[TO BE PROVIDED BY THE COMPANY]
GUARANTY
This Guaranty, made as of December 3, 1996 (this "Guaranty"), is by
Diamond Home Services, Inc., a Delaware corporation (the "Guarantor"), in favor
of American National Bank and Trust Company of Chicago, a national banking
association (the "Bank"). Capitalized terms used in this Guaranty 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, the Guarantor (f/k/a Diamond Exteriors, Inc.) 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 the Guarantor, Diamond Exteriors, Inc.
(f/k/a Diamond Home Services, Inc.), a wholly owned subsidiary of the Guarantor
("Diamond Exteriors"), and the Bank, Diamond Exteriors assumed all of the
rights, duties, obligations and liabilities of the Guarantor under the Loan
Agreement and the Related Documents;
WHEREAS, Diamond Exteriors has requested that the Bank, among other
things, (i) modify the terms of the credit facility evidenced by the Loan
Agreement and the 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 the Third Amendment and Release to Loan and Security Agreement of
even date with this Guaranty (the "Third Amendment"), between Diamond Exteriors
and the Bank;
WHEREAS, it is a condition to the amendments to the Loan Agreement and
releases of Collateral contemplated by the Third Amendment that the Guarantor
have executed and delivered this Guaranty;
WHEREAS, the Guarantor acknowledges that the amendments to the Loan
Agreement and releases of Collateral contemplated by the Third Amendment
benefits the Guarantor both directly and indirectly; and
WHEREAS, in consideration of the benefits that inure to the Guarantor,
and in order to induce the Bank to make the amendments to the Loan Agreement and
releases of Collateral contemplated by the Third Amendment, the Guarantor
desires to guarantee the due and punctual payment of all of Diamond Exterior's
Liabilities;
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which are
acknowledged, the Guarantor agrees with the Bank as follows:
SECTION 1. GUARANTEE.
1.1 Guarantee.
(A) The Guarantor unconditionally and irrevocably guarantees the full
and prompt payment when due (whether at maturity or earlier by reason of
acceleration or otherwise) of, and the performance of, all of Diamond Exterior's
Liabilities under the Loan Agreement and the Related Documents, whether now or
hereafter existing and whether for principal, interest, fees, expenses or
otherwise, and interest accruing on such Liabilities following the filing of a
bankruptcy petition by or against Diamond Exteriors or the Guarantor
(collectively, the "Loan Parties"), at the applicable rate specified for Base
Rate Loans in the Loan Agreement, whether or not such interest is allowed as a
claim in bankruptcy. The Guarantor further agrees that this Guaranty is an
absolute guarantee of payment and is not a guarantee of collection.
(B) (i) The Guarantor will pay to the Bank, on demand by the Bank and
in immediately available funds, the full amount of the Liabilities then due and
payable, and whether for principal, interest, fees, expenses or otherwise, and
interest accruing on the Liabilities following the filing of a bankruptcy
petition by or against any of the Loan Parties at the applicable rate specified
for Base Rate Loans in the Loan Agreement, whether or not such interest is
allowed as a claim in bankruptcy and (ii) the Guarantor further agrees to pay to
the Bank and reimburse the Bank for, on demand and in immediately available
funds, (a) all losses, fees, costs and expenses (including, without limitation,
all court costs and reasonable attorneys' and paralegals' fees, costs and
expenses) paid or incurred by the Bank in: (I) endeavoring to collect all or
any part of the Liabilities from, or in prosecuting any action against any of
the Loan Parties relating to the Loan Agreement, the Related Documents or the
transactions contemplated thereby; (II) taking any action with respect to any
security or Collateral securing the Liabilities or obligations of any of the
Loan Parties; and (III) preserving, protecting or defending the enforceability
of, or enforcing, this Guaranty or its respective rights under this Guaranty
(all such losses, fees, costs and expenses described in clauses (I) through (II)
above are referred to as the "Expenses") and (b) interest on the Expenses, from
the date of demand under this Guaranty until paid in full at the applicable rate
specified for Base Rate Loans in the Loan Agreement. The undertakings of the
Guarantor to the Bank as specified in this Section 1.1 are referred to
collectively as the "Guaranteed Obligations."
1.2 Liabilities Unconditional. The Guarantor guarantees that the
Liabilities will be paid strictly in accordance with the terms of the Loan
Agreement and the Related Documents regardless of any law, regulation or order
now or hereafter in effect in any jurisdiction affecting such terms or the
rights of the Bank with respect to the Liabilities. The Guarantor agrees that
its Guaranteed Obligations under this Guaranty shall be unconditional,
irrespective of:
(A) the validity, enforceability, avoidance, assignment or
subordination of any of the Liabilities, the Loan Agreement or the Related
Documents;
(B) the absence of any attempt by or on behalf of the Bank to
collect, or to take any other action to enforce, all or any part of the
Liabilities whether from or against any other guarantor, if any;
(C) the election of any remedy by or on behalf of the Bank with
respect to all or any part of the Liabilities;
(D) any change in the time, manner or place of payment of, or in any
other term of, or any increase in the amount of, all or any of the
Liabilities, or the waiver, consent, extension, forbearance or granting of
any indulgence by or on behalf of the Bank with respect to any provision in
the Loan Agreement or the Related Documents;
(E) the failure of the Bank to take any steps to perfect and maintain
its security interest in, or to preserve its rights to, any security or
collateral for all or any part of the Liabilities;
(F) the election by or on behalf of the Bank, in any proceeding
instituted under the United States Bankruptcy Code, 11 U.S.C. Sections
101-1330 (the "Bankruptcy Code"), of the application of section
1111(b)(2) of the Bankruptcy Code;
(G) any borrowing or grant of a security interest by the Guarantor,
as debtor in possession, under section 364 of the Bankruptcy Code;
(H) the disallowance, under section 502 of the Bankruptcy Code, of
all or any portion of the claims of the Bank for repayment of all or any
part of the Liabilities, including without limitation, any Expenses;
(I) any other circumstance which might otherwise constitute a legal
or equitable discharge or defense of the Guarantor; or
(J) any change, restructuring or termination of or to the corporate
structure or existence of the Guarantor, or any restructuring or
refinancing of all or any portion of the Liabilities.
1.3 Enforcement; Application of Payments. The Bank may proceed
directly and at once, without notice, against the Guarantor to obtain
performance of and to collect and recover the full amount, or any portion, of
the Guaranteed Obligations, without first proceeding against either Diamond
Exteriors, any other guarantor or any other Person, or against any security or
collateral for the Liabilities. The Bank has the exclusive right to determine
the application of payments and credits, if any, from any of the Loan Parties,
or from any other Person on account of the Liabilities, the Guaranteed
Obligations or any other liability of any of the Loan Parties to the Bank.
1.4 Waivers.
(A) The Guarantor waives, to the fullest extent permitted by
applicable law, promptness, diligence, presentment, demand of payment, filing of
claims with a court in the event of receivership or bankruptcy of the Guarantor,
protest or notice with respect to all or any part of the Guaranteed Obligations,
all setoffs and counterclaims and all presentments, demands for performance,
notices of nonperformance, protests, notices of protest, notices of dishonor and
notices of acceptance of this Guaranty or any other guaranty, the benefits of
all statutes of limitation, the benefits of any statute the effect of which
would require the Bank to first proceed against Diamond Exteriors, any other
guarantor or any other Person to enforce or collect all or any portion of the
Liabilities before proceeding against the Guarantor for the enforcement of the
Guarantor's obligations under this Guaranty, and all other demands whatsoever
(and will not require that the same be made on any other Loan Party as a
condition precedent to the obligations of the Guarantor under this Guaranty),
and covenants that this Guaranty will not be discharged, except by indefeasible
payment in full in cash and performance of the Liabilities and the Guaranteed
Obligations.
(B) The Guarantor consents that from time to time, and without
further consent of the Guarantor, the Bank may take any or all of the following
actions without affecting the liability of the Guarantor: (i) extend, renew,
modify, compromise, settle or release the Liabilities (including any increase or
decrease in the interest rate); (ii) release or compromise any liability of any
party or parties with respect to the Liabilities; (iii) release its security
interest in the Collateral or exchange, surrender or otherwise deal with the
Collateral as the Bank may determine; or (iv) exercise or refrain from
exercising any right or remedy of the Bank.
(C) In the event the Bank bids at any foreclosure or trustee's sale
or at any private sale permitted by law or under any of the Related Documents,
the Bank may bid all or less than the amount of the Liabilities and the amount
of such bid need not be paid by the Bank but will be credited against the
Liabilities. The amount of the successful bid at any such sale, whether the
Bank or any other Person is the successful bidder, will be conclusively deemed
to be the fair market value of the Collateral.
(D) The Guarantor agrees that, notwithstanding the foregoing and
without limiting the generality of the foregoing, if the Bank is prevented by
applicable law from exercising its rights to accelerate the maturity of the
Liabilities, to collect interest on the Liabilities or to enforce or exercise
any other right or remedy with respect to the Liabilities or Guaranteed
Obligations, or the Bank is prevented from taking any action to realize on the
Collateral, the Guarantor agrees to pay to the Bank, upon demand therefor, the
amount which otherwise would have been due and payable had such rights and
remedies been permitted to be exercised by the Bank.
(E) The Guarantor assumes responsibility for keeping itself informed
of the financial condition of Diamond Exteriors and of all other circumstances
bearing upon the risk of nonpayment of the Liabilities or any part thereof, that
diligent inquiry would reveal. The Guarantor agrees that the Bank has no duty
to advise it of information known to the Bank regarding such condition or any
such circumstance. In the event that the Bank in its sole discretion undertakes
at any time or from time to time to provide any such information to the
Guarantor, the Bank is under no obligation (i) to undertake any investigation
not a part of its regular business routine, (ii) to disclose any information
which it wishes to maintain confidential or (iii) to make any other or future
disclosures of such information or any other information to the Guarantor.
(F) The Guarantor consents and agrees that the Bank is under no
obligation to marshal any assets in favor of the Guarantor or otherwise in
connection with obtaining payment of any or all of the Liabilities or Guaranteed
Obligations from any Person or source.
1.5 Subrogation. The Guarantor will not exercise any rights which it
may acquire by way of subrogation under this Guaranty, by any payment made under
this Guaranty or otherwise, until all the Liabilities have been paid in full.
If any amount is paid to the Guarantor on account of such subrogation rights at
any time when the Liabilities have not been paid in full, such amount will be
held in trust for the benefit of the Bank and will be immediately paid to the
Bank to be credited and applied upon the Liabilities whether matured or
unmatured, in accordance with the terms of the Loan Agreement. If (i) the
Guarantor makes payment to the Bank of all or any part of the Liabilities and
(ii) all the Liabilities have been paid in full, the Bank will, at the
Guarantor's request, execute and deliver to the Guarantor appropriate documents,
without recourse and without representation or warranty, necessary to evidence
the transfer by subrogation to the Guarantor of any interest in the Liabilities
resulting from such payment by the Guarantor.
1.6 Effectiveness; Termination; Release. This Guaranty becomes
effective upon its execution by the Guarantor and continues in full force and
effect and may not be terminated or otherwise revoked until all of the
Liabilities under the Loan Agreement and the Related Documents and the
Guaranteed Obligations under this Guaranty have been indefeasibly paid in full
in cash, all financing arrangements between any of the Loan Parties and the Bank
have been terminated. If, notwithstanding the foregoing, the Guarantor has any
right under applicable law to terminate or revoke this Guaranty, the Guarantor
agrees that such termination or revocation will not be effective until a written
notice of such revocation or termination, specifically referring to this Section
1.6, signed by the Guarantor, is actually received by the Bank. Such notice
will not affect the right and power of the Bank to enforce rights arising prior
to receipt of such notice by the Bank. If the Bank grants loans or takes other
action after the Guarantor terminates or revokes this Guaranty but before the
Bank receives such written notice, the rights of the Bank with respect to this
Guaranty is the same as if such termination or revocation had not occurred.
1.7 Taxes. All payments by the Guarantor under this Guaranty will be
made free and clear of and without deduction for any present or future income,
excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or
other charges of any nature whatsoever imposed by any taxing authority.
SECTION 2. REMEDIES.
The Bank has, in addition to any other rights and remedies contained
in this Guaranty, the Loan Agreement, the Related Documents, all of the rights
and remedies of a secured party under the Uniform Commercial Code and other
applicable laws, all of which rights and remedies are cumulative, and not
exclusive, to the extent permitted by law.
SECTION 3. REPRESENTATIONS AND WARRANTIES.
The Guarantor represents and warrants that as of the date of the
execution of this Guaranty, and so long as this Guaranty remains in effect:
3.1 Corporate Existence. The Guarantor is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and is duly qualified as a foreign corporation and
is in good standing in all states where the nature and extent of the business
transacted by it or the ownership of its assets makes such qualification
necessary.
3.2 Corporate Authority. The execution and delivery by the Guarantor
of this Guaranty and the performance of its obligations under this Guaranty:
(i) are within its corporate powers; (ii) are duly authorized by its board of
directors (and, if necessary, its shareholders); (iii) are not in contravention
of the terms of its articles or certificate of incorporation or by-laws, or of
any indenture, agreement or undertaking to which it is a party or by which it or
any of its property is bound; (iv) does not, as of the execution of this
Guaranty, require any consent, registration or approval of any Governmental
Authority; (v) does not contravene any contractual or governmental restriction
binding upon the Guarantor and (vi) will not result in the imposition of any
Lien upon any property of the Guarantor under any existing indenture, mortgage,
deed of trust, loan or credit agreement or other material agreement or
instrument to which the Guarantor is a party or by which it or its property may
be bound or affected.
3.3 Binding Effect. This Guaranty is the legal, valid and binding
obligations of the Guarantor and is enforceable against the Guarantor in
accordance with its terms.
3.4 Solvency. As more fully set forth on the Solvency and Business
Purpose Affidavit delivered by the Guarantor in connection with the Guaranty,
substantially in the form of Exhibit A, the Guarantor is not "insolvent" nor
will its incurrence of obligations, direct or contingent, to repay the
Liabilities render it "insolvent." For purposes of this Section 3.4, a
corporation is "insolvent" if (i) the "present fair salable value" (as defined
below) of its assets is less than the amount that will be required to pay its
probable liability on its existing debts and other liabilities (including
contingent liabilities) as they become absolute and matured; (ii) its property
constitutes unreasonably small capital for it to carry out its business as now
conducted and as proposed to be conducted including its capital needs; (iii) it
intends to, or believes that it will, incur debts beyond its ability to pay such
debts as they mature (taking into account the timing and amounts of cash to be
received by it and amounts to be payable on or in respect of debt of it), or the
cash available to it after taking into account all of its other anticipated uses
of the cash is anticipated to be insufficient to pay all such amounts on or in
respect of its debt when such amounts are required to be paid; or (iv) it
believes that final judgments against it in actions for money damages will be
rendered at a time when, or in an amount such that, it will be unable to satisfy
any such judgments promptly in accordance with their terms (taking into account
the maximum reasonable amount of such judgments in any such actions and the
earliest reasonable time at which such judgments might be rendered), or the cash
available to it after taking into account all other anticipated uses of its
cash, is anticipated to be insufficient to pay all such judgments promptly in
accordance with their terms. For purposes of this Section 3.4, the following
terms have the following meanings: (a) the term "debts" includes any legal
liability, whether matured or unmatured, liquidated, absolute, fixed or
contingent, (b) the term "present fair salable value" of assets means the amount
which may be realized, within a reasonable time, either through collection or
sale of such assets at their regular market value and (c) the term "regular
market value" means the amount which a capable and diligent businessman could
obtain for the property in question within a reasonable time from an interested
buyer who is willing to purchase under ordinary selling conditions.
3.5 Financial Statements.
(A) All balance sheets, statements of operations and other financial
data which have been or will hereafter be furnished to the Bank for the purposes
of or in connection with this Guaranty do and will present fairly the financial
condition of the Persons involved as of the dates thereof and the results of
their operations for the period(s) covered thereby.
(B) The Guarantor's balance sheet as of September 30, 1996, and the
related statements of the Guarantor's income and retained earnings,
respectively, copies of which have been furnished to the Bank, fairly present
the Guarantor's financial condition as at such date and the results of the
Guarantor's operations for the period ended on such date, all in accordance with
GAAP (but absent footnote disclosures and year-end adjustments for interim
reports), consistently applied. Since September 30, 1996, there has been no
material adverse change in such condition or operations.
3.6 Loans. Other than under this Guaranty, the Guarantor currently
has no Indebtedness.
3.7 Survival of Warranties. All representations and warranties
contained in this Guaranty survive the execution and delivery of this Guaranty.
3.8 Subsidiaries. As of the date of this Guaranty, the Guarantor has
no Subsidiaries other than Diamond Exteriors, Marquise Financial Services, Inc.,
a Delaware corporation, and Solitaire Heating and Cooling, Inc., a Delaware
corporation.
3.9 Litigation and Contingent Liabilities.
(A) No litigation (including, without limitation, derivative
actions), arbitration proceedings, governmental proceedings or investigations or
regulatory proceedings that claim monetary damages in excess of (i) $100,000 in
any single proceeding or (ii) $500,000 in aggregate for all such proceedings are
pending or threatened (in writing and of which an officer of the Guarantor has
knowledge) against the Guarantor, nor does the Guarantor know of any basis for
any of the foregoing. In addition, there are no inquiries, formal or informal,
which might give rise to such actions, proceedings or investigations.
(B) The Guarantor has obtained all licenses, permits, franchises and
other governmental authorizations necessary to the ownership of its properties
or to the conduct of its businesses, a failure to obtain or violation of which
could reasonably be expected to, in the aggregate, have a material adverse
effect on the condition (financial or otherwise), business, results of
operations or prospects of the Guarantor.
(C) The Guarantor has no material contingent liabilities not provided
for or disclosed in the financial statements referred to in Section 3.5(B).
3.10 Other Agreements. The Guarantor is not in default under any
agreement, contract, lease or commitment to which it is a party or by which it
is bound, the effect of which could reasonably be expected to have a material
adverse effect on the condition (financial or otherwise), business, results of
operations or prospects of the Guarantor. The Guarantor knows of no dispute
regarding any agreement, contract, lease or commitment which could reasonably be
expected to have a material adverse effect on the condition (financial or
otherwise), business, results of operations or prospects of the Guarantor.
3.11 Compliance with Applicable Laws. The Guarantor is in compliance
with the requirements of all applicable laws, rules, regulations, and orders of
all governmental authorities (Federal, state, local or foreign, and including,
without limitation, environmental laws, rules, regulations and orders), a breach
of which could reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), business, results of operations or prospects
of the Guarantor.
3.12 Securities Matters. The consummation of the transactions
contemplated by this Guaranty, the Loan Agreement and the Related Documents will
not violate any provision of the Securities Laws. The Guarantor agrees to
indemnify the Bank and hold the Bank harmless from the claims of any Persons in
connection with any of the Securities Laws and relating to the Loans or the
transactions contemplated by this Agreement and the Related Documents, unless
such claim arises from the wilful misconduct of the Bank.
3.13 Investment Company Act. The Guarantor is not an "investment
company," or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
3.14 Public Utility Holding Company Act. The Guarantor is not a
"holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company," or of a "subsidiary company" of a "holding
company," within the meaning of the Public Utility Holding Company Act of 1935,
as amended.
SECTION 4. AFFIRMATIVE COVENANTS.
The Guarantor covenants and agrees that so long as this Guaranty
remains in effect:
4.1 Corporate Existence and Franchises. Except as otherwise
expressly permitted in this Guaranty, maintain in full force and effect its
separate existence and all rights, licenses, leases and franchises reasonably
necessary to the conduct of its business.
4.2 Books, Records and Inspections. Maintain complete and accurate
books and records, permit the Bank to have access, upon reasonable notice, with
reasonable frequency and during ordinary business hours, to the Guarantor's
books and records, and permit the Bank to inspect the Guarantor's properties and
operations.
4.3 Taxes and Liabilities. Promptly pay when due all taxes, duties,
assessments, license fees, registration fees and other liabilities, except such
taxes, duties, assessments, license fees, registration fees and other
liabilities as the Guarantor is diligently contesting in good faith and by
appropriate proceedings; provided that the Guarantor has provided for and is
maintaining adequate reserves with respect thereto in accordance with GAAP.
4.4 Compliance with Applicable Laws. Comply with the requirements of
all applicable laws, rules, regulations, and orders of all governmental
authorities (federal, state, local or foreign and including, without limitation,
Environmental Laws), a breach of which could reasonably be expected to have a
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Guarantor, except where the Guarantor
is contesting an alleged breach in good faith and by proper proceedings and for
which the Guarantor is maintaining adequate reserves in accordance with GAAP.
4.5 Notice of Suit or Adverse Change in Business. The Guarantor
will, as soon as possible, and in any event within five days after the Guarantor
learns of the following, give written notice to the Bank of (i) any material
proceeding(s) (including, without limitation, litigation, investigations,
arbitration or governmental proceedings) being instituted or threatened to be
instituted by or against the Guarantor in any federal, state, local or foreign
court or before any commission or other regulatory body (federal, state, local
or foreign), (ii) notice that the Guarantor's operations are not in full
compliance with requirements of applicable federal, state or local
environmental, health and safety statutes and regulations, (iii) notice that the
Guarantor is subject to federal or state investigation evaluating whether any
remedial action is needed to respond to the release of any hazardous or toxic
waste, substance or constituent, or other substance into the environment and
(iv) notice that any properties or assets of the Guarantor are subject to an
Environmental Lien.
SECTION 5. NEGATIVE COVENANTS.
The Guarantor covenants and agrees that so long as this Guaranty
remains in effect:
5.1 Indebtedness. Not incur or permit to exist any Indebtedness
except for the Indebtedness arising under this Guaranty.
5.2 Liens. Not create or permit to exist any Lien with respect to
any assets now owned or hereafter acquired.
5.3 Guaranties, Loans, Advances or Investments. Not become or be a
guarantor or surety of, or otherwise become or be responsible in any manner
(whether by agreement to purchase any obligations, stock, assets, goods or
services, or to supply or advance any funds, assets, goods or services, or
otherwise) with respect to any undertaking of any other Person, or make or
permit to exist any loans or advances to, or investments in, any other Person,
except for (i) the endorsement, in the ordinary course of collection, of
instruments payable to it or to its order, (ii) Eligible Short-Term Investments,
(iii) guaranties of which the Bank is the beneficiary, (iv) stock, obligations
or securities received in settlement of debts owing to the Guarantor in the
ordinary course of business; and (v) if no Loans are outstanding, investments in
municipal or corporate bonds with a rating equal to "A" by Standard & Poor's or
common stock in any company traded on a national securities exchange or quoted
on NASDAQ; provided, further, however, that in no event shall the Guarantor
acquire pursuant to Section 5.3(v) more than 5% of the outstanding common stock
of any company traded on a national securities exchange or quoted on NASDAQ.
5.4 Dividend Restrictions. Not make any payment in cash, property or
other assets upon or in respect of any shares of any class of its capital stock
including, without limiting the foregoing, payments as dividends and payments
for the purpose of redeeming, purchasing or otherwise acquiring any shares of
any class of its capital stock, including in the term "stock" any warrant or
option or other right to purchase such stock, or making any other distribution
in respect as any such shares of stock or set aside any funds for any such
purpose; provided, however, the Guarantor may repurchase its capital stock held
by employees of the Guarantor upon their retirement, termination, disability or
death so long as such repurchase does not violate any of the financial covenants
contained in Section 5 and could not reasonably be expected to result in a
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Guarantor; provided, further, however,
that the Guarantor may make dividends in cash and stock so long as if
immediately after making such dividend, the Guarantor would be in compliance
with each of the financial covenants contained in Section 5.
5.5 Mergers, Consolidations, Sales. Not be a party to any (i)
merger, (ii) consolidation or exchange of stock, (iii) purchase or other
acquisition of all or substantially all of the assets or stock of any class of,
or any partnership or joint venture interest in, any other Person, (iv) sale,
transfer, conveyance or lease of all or any substantial part of its assets or
(v) sale or assignment, with or without recourse, of any receivables (other than
for collection of delinquent Accounts in the ordinary course of business);
provided, however, that the Guarantor may be a party to a transaction described
in clause (i), (ii) or (iii) above so long that (a) immediately before and after
such transaction, the Guarantor would be in compliance with each of the
financial covenants contained in Section 5, (b) immediately after such
transaction, Globe would continue to own, directly or indirectly, in the
aggregate at least 35% of the voting common stock of the entity resulting from
such transaction and members of the board of directors of the Guarantor
designated by either the present management group of the Guarantor or by Globe
would continue to constitute a majority of the board of directors of the entity
resulting from such transaction and (c) immediately after such transaction, the
Bank may make reasonable modifications to the financial covenants contained in
Section 5 and in Section 9 of the Loan Agreement. The Guarantor agrees that
upon a transaction described in clause (i), (ii) or (iii) above, the Guarantor
or the entity resulting from such a transaction will, at its cost and expense,
execute and deliver all further instruments and documents that the Bank may
reasonably request.
5.6 Transactions with Affiliates. Not enter into any transaction
with any Affiliate except (i) transactions in the ordinary course of business
and on terms and conditions at least as favorable to the Guarantor as the terms
and conditions that would apply in a similar transaction with a Person who is
not an Affiliate and (ii) the subordinated promissory note made by Diamond
Exteriors to the Guarantor in connection with the original public offering of
the common stock of the Guarantor.
5.7 Subsidiaries. Not create or allow to exist any Subsidiaries
other than those listed in Section 3.8.
5.8 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 Diamond
Exteriors' fiscal quarters through the Credit Termination Date.
5.9 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 Diamond Exteriors' fiscal quarters through the Credit
Termination Date.
5.10 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 Diamond Exteriors' fiscal quarters
through the Credit Termination Date and measured over the immediately preceding
twelve-month period ending on such calculation date.
5.11 Other Agreements. Not enter into any agreement containing any
provision which would be violated or breached by the performance of its
obligations under this Guaranty or under any instrument or document delivered or
to be delivered by it under this Guaranty or in connection with this Guaranty or
which would violate or breach any provision of this Guaranty or of any such
instrument or document.
SECTION 6. MISCELLANEOUS.
6.1 Amendments; Waiver. No amendment or waiver of any provision of
this Guaranty nor consent to any departure by the Guarantor from this Guaranty
is in any event be effective unless the same is in writing and signed by the
Bank, and in the case of any amendment, signed by the Guarantor. Any waiver or
consent given by the Bank in accordance with the preceding sentence is effective
only in the specific instance and for the specific purpose for which given.
6.2 Addresses for Notices. All notices and other communications
provided for under this Guaranty must be in writing (including telegraphic,
telex, telecopy or facsimile) and mailed, telegraphed, telexed, telecopied,
facsimiled or delivered by hand, if to the Guarantor, at the address specified
on the signature page of this Guaranty for the Guarantor, and if to the Bank, at
the addresses specified in the Loan Agreement, or at such other address as shall
be designated by such party in a written notice to the other party complying as
to delivery with the terms of this Section 6.2. All such notices and other
communications will be effective as set forth in the Loan Agreement.
6.3 No Waiver.
(A) No failure on the part of the Bank to exercise, and no delay in
exercising, any right under this Guaranty operates as a waiver of such right,
nor does any single or partial exercise of any right under this Guaranty
preclude any other or further exercise of such right or the exercise of any
other right.
(B) Failure by the Bank at any time or times hereafter to require
strict performance by Diamond Exteriors, the Guarantor or any other Person of
any of the provisions, warranties, terms or conditions contained in the Loan
Agreement or the Related Documents now or at any time or times hereafter
executed by Diamond Exteriors, the Guarantor or such other Person and delivered
to the Bank does not waive, affect or diminish any right of the Bank at any time
or times hereafter to demand strict performance thereof, and such right will not
be deemed to have been modified or waived by any course of conduct or knowledge
of the Bank or any agent, officer or employee of the Bank.
(C) No waiver by the Bank of any default operates as a waiver of any
other default or the same default on a future occasion, and no action by the
Bank permitted under this Guaranty in any way affects or impairs any of the
rights of the Bank or the obligations of the Guarantor under this Guaranty,
under the Loan Agreement or any of the Related Documents. Any determination by
a court of competent jurisdiction of the amount of any principal or interest or
other amount constituting any of the Liabilities or Guaranteed Obligations will
be conclusive and binding on the Guarantor irrespective of whether the Guarantor
was a party to the suit or action in which such determination was made.
6.4 Assignment. This Guaranty is binding upon the Guarantor, its
successors and assigns, and inures to the benefit of and be enforceable by the
Bank and its successors, transferees and assigns. The Guarantor has no right to
assign its rights or delegate its duties under this Guaranty.
6.5 Reinstatement. This Guaranty remains in full force and effect
and continue to be effective should any petition be filed by or against any Loan
Party for liquidation or reorganization, should any Loan Party become insolvent
or make an assignment for the benefit of creditors or should a receiver or
trustee be appointed for all or any significant part of the assets of any Loan
Party and, to the fullest extent permitted by law, continues to be effective or
be reinstated, as the case may be, if at any time payment and performance of the
Liabilities, or any part thereof, is, under applicable law, rescinded or reduced
in amount, or must otherwise be restored or returned by any obligee of the
Liabilities or such part thereof, whether as a "voidable preference",
"fraudulent transfer" or otherwise, all as though such payment or performance
had not been made. In the event that any payment, or any part thereof, is
rescinded, reduced, restored or returned, the Liabilities and Guaranteed
Obligations will, to the fullest extent permitted by law, be reinstated and
deemed reduced only by such amount paid and not so rescinded, reduced, restored
or returned. Notwithstanding anything to the contrary in this Guaranty, the
provisions of this Section 6.5 survive termination of this Guaranty.
6.6 Application of Payments. Notwithstanding any contrary provision
contained in this Guaranty or in any Related Document, the Guarantor does
irrevocably waive the right to direct the application of any and all payments at
any time or times hereafter received by the Bank from the Guarantor or with
respect to any of the Collateral, and the Guarantor does irrevocably agree that
the proceeds of the Collateral may be applied by the Bank, in its sole
discretion, to payment of the Guaranteed Obligations in the following order or
in any other order chosen by the Bank, unless a court of competent jurisdiction
shall otherwise direct:
(A) FIRST, to payment of all costs and expenses of the Bank incurred
in connection with the collection and enforcement of the Liabilities and
the Guaranteed Obligations;
(B) SECOND, to payment of that portion of the Liabilities
constituting accrued and unpaid interest and fees owing to the Bank;
(C) THIRD, to payment of the principal of the Liabilities owing to
the Bank; and
(D) FOURTH, the balance, if any, after all of the Guaranteed
Obligations have been satisfied, to the Guarantor or its successor or
assign or to whomever may be lawfully entitled to receive such as a court
of competent jurisdiction may direct.
6.7 Governing Law; Severability. This Guaranty is governed by, and
be construed and interpreted in accordance with, the internal laws of the State
of Illinois. Wherever possible, each provision of this Guaranty will be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Guaranty is prohibited by or invalid under
applicable law, such provision will be ineffective only to the extent of such
prohibition or invalidity and without invalidating the remaining provisions of
this Guaranty.
6.8 SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL.
(A) EXCLUSIVE JURISDICTION. EXCEPT AS PROVIDED IN CLAUSE (B) BELOW,
THE GUARANTOR AGREES THAT ALL DISPUTES ARISING OUT OF, CONNECTED WITH, RELATED
TO OR INCIDENTAL TO THIS GUARANTY, WHETHER ARISING IN CONTRACT, TORT, EQUITY OR
OTHERWISE, WILL BE RESOLVED ONLY BY STATE OR FEDERAL COURTS LOCATED IN COOK
COUNTY, ILLINOIS, BUT THE GUARANTOR ACKNOWLEDGES THAT ANY APPEALS FROM THOSE
COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF COOK COUNTY, ILLINOIS.
THE GUARANTOR WAIVES IN ALL DISPUTES ANY OBJECTION THAT IT MAY HAVE TO THE
LOCATION OF THE COURT CONSIDERING THE DISPUTE.
(B) OTHER JURISDICTIONS. THE GUARANTOR AGREES THAT THE BANK HAS THE
RIGHT TO PROCEED AGAINST THE GUARANTOR OR ITS PROPERTY IN A COURT IN ANY
LOCATION TO ENABLE THE BANK TO REALIZE ON SUCH PROPERTY (INCLUDING, WITHOUT
LIMITATION, THE COLLATERAL) OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER
ENTERED IN FAVOR OF THE BANK. THE GUARANTOR AGREES THAT IT WILL NOT ASSERT ANY
PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING BROUGHT BY THE BANK TO REALIZE ON
PROPERTY OF THE GUARANTOR (INCLUDING, WITHOUT LIMITATION, THE COLLATERAL) OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE BANK. THE GUARANTOR
WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH THE
BANK HAS COMMENCED A PROCEEDING DESCRIBED IN THIS CLAUSE (B).
(C) WAIVER OF JURY TRIAL. THE GUARANTOR WAIVES ANY RIGHT TO HAVE A
JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR
OTHERWISE, BETWEEN THE BANK AND THE GUARANTOR ARISING OUT OF, CONNECTED WITH,
RELATED TO OR INCIDENTAL TO THIS GUARANTY. THE GUARANTOR AGREES AND CONSENTS
THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION WILL BE DECIDED BY COURT
TRIAL WITHOUT A JURY AND THAT THE BANK MAY FILE AN ORIGINAL COUNTERPART OR A
COPY OF THIS GUARANTY WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE
GUARANTOR TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.
6.9 Section Titles. The section titles contained in this Guaranty
are without substantive meaning or content of any kind whatsoever and are not a
part of this Guaranty.
6.10 Execution in Counterparts. This Guaranty may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed are deemed to be an original and all of which
taken together constitute one and the same Guaranty.
6.11 Acknowledgement. The Guarantor acknowledges receipt of a copy
of the Loan Agreement.
6.12 Miscellaneous. All references in this Guaranty to any Loan
Party include their respective successors and assigns, including, without
limitation, a receiver, trustee or debtor-in-possession of or for such Persons.
All references to the singular are deemed to include the plural where the
context so requires.
* * *
Delivered at Chicago, Illinois, as of the day and year first above
written.
DIAMOND HOME SERVICES, INC.
By:________________________________
Name:
Title:
Address:
Acknowledged and agreed to
as of the 3rd day of December, 1996.
AMERICAN NATIONAL BANK AND TRUST
Guarantor OF CHICAGO
By: ____________________________
Laurie B. Tanselle
Assistant Vice President
EXHIBIT A
SOLVENCY & BUSINESS PURPOSE AFFIDAVIT
OF
DIAMOND HOME SERVICES, INC.
STATE OF ILLINOIS )
)
COUNTY OF: )
I, _______________, as ________________
of Diamond Home Services, Inc. (the "Guarantor"),
being first duly sworn on oath, depose and say
that:
1. I am a resident of the State of
_______.
2. I am the duly elected, qualified
and acting _________ of the Guarantor, a
corporation duly organized and in good standing
under the laws of the State of Delaware.
3. I am familiar with all of the
Guarantor's business and financial affairs,
including, without limitation, all of the matters
and things described in this Affidavit.
4. As of the date of this affidavit, the Guarantor is not
"insolvent" nor will its incurrence of obligations, direct or contingent, to
repay the Liabilities render it "insolvent." For purposes of this Affidavit, a
corporation is "insolvent" if (i) the "present fair salable value" (as defined
below) of its assets is less than the amount that will be required to pay its
probable liability on its existing debts and other liabilities (including
contingent liabilities) as they become absolute and matured; (ii) its property
constitutes unreasonably small capital for it to carry out its business as now
conducted and as proposed to be conducted including its capital needs; (iii) it
intends to, or believes that it will, incur debts beyond its ability to pay such
debts as they mature (taking into account the timing and amounts of cash to be
received by it and amounts to be payable on or in respect of debt of it), or the
cash available to it after taking into account all of its other anticipated uses
of the cash is anticipated to be insufficient to pay all such amounts on or in
respect of its debt when such amounts are required to be paid; or (iv) it
believes that final judgments against it in actions for money damages will be
rendered at a time when, or in an amount such that, it will be unable to satisfy
any such judgments promptly in accordance with their terms (taking into account
the maximum reasonable amount of such judgments in any such actions and the
earliest reasonable time at which such judgments might be rendered), or the cash
available to it after taking into account all other anticipated uses of its
cash, is anticipated to be insufficient to pay all such judgments promptly in
accordance with their terms. For purposes of this Affidavit, the following
terms have the following meanings: (a) the term "debts" includes any legal
liability, whether matured or unmatured, liquidated, absolute, fixed or
contingent, (b) the term "present fair salable value" of assets means the amount
which may be realized, within a reasonable time, either through collection or
sale of such assets at their regular market value and (c) the term "regular
market value" means the amount which a capable and diligent businessman could
obtain for the property in question within a reasonable time from an interested
buyer who is willing to purchase under ordinary selling conditions.
Name:
Title:
Subscribed and sworn to before the undersigned, a notary public in and
for the state and county aforesaid, this ____ day of December, 1996.
Notary Public
My commission expires:
AMENDMENT TO GUARANTY
This Amendment to Guaranty, dated as of November 30, 1997 (this
"Amendment"), is by and between Diamond Home Services, Inc. (f/k/a Diamond
Exteriors, 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 Guaranty (as
defined below).
W I T N E S S E T H:
WHEREAS, the Company and the Bank are parties to the Guaranty dated as
of December 3, 1996 (as such guaranty may be amended, modified, restated or
supplemented from time to time, the "Guaranty"), under which the Company
guaranteed the obligations and liabilities of its wholly owned subsidiary,
Diamond Exteriors, Inc., to the Bank under the Loan and Security Agreement dated
as of February 6, 1996, as amended, supplemented or otherwise modified;
WHEREAS, the Bank and Diamond Exteriors, Inc. are entering into the
Fourth Amendment and Waiver to Loan and Security Agreement of even date herewith
(the "Fourth Amendment");
WHEREAS, it is a condition precedent under the Fourth Amendment that
the Company amend the Guaranty as provided in this Amendment;
NOW, THEREFORE, in consideration of premises and mutual agreements
contained in this Amendment and other good and valuable consideration, the
receipt and sufficiency of which are acknowledged, the Company and Bank agree as
follows:
SECTION 1. AMENDMENT TO GUARANTY
On the date this Amendment becomes effective, after satisfaction by
the Company of each of the conditions set forth in Section 2 below (the "Closing
Date"), effective as of November 30, 1997, the Guaranty is amended as follows:
1.1 Section 3.9(C) of the Guaranty is amended by deleting such
section in its entirety and replacing it as follows:
(C) The Guarantor has no material contingent liabilities not provided
for or disclosed in the financial statements referred to in Section 3.5(B)
or such similar updated financial statements as the Guarantor provides the
Bank.
1.2 Section 5.1 of the Guaranty is amended by deleting such section
in its entirety and replacing it as follows:
5.1 Indebtedness. Not incur or permit to exist any Indebtedness
except for (i) the Indebtedness arising under this Guaranty and the
Indebtedness arising under the capital maintenance agreement among Diamond
Exteriors, the Guarantor and Harris Trust and Savings Bank and (ii)
Capitalized Lease Obligations (including Capitalized Lease Obligations of
Diamond Exteriors) not to exceed $750,000 in the aggregate at any time
outstanding.
1.3 Section 5.4 of the Guaranty is amended by deleting such section
in its entirety and replacing it as follows:
5.4 Dividend Restrictions. Not make any payment in cash, property or
other assets upon or in respect of any shares of any class of its capital
stock including, without limiting the foregoing, payments as dividends and
payments for the purpose of redeeming, purchasing or otherwise acquiring
any shares of any class of its capital stock, including in the term "stock"
any warrant or option or other right to purchase such stock, or making any
other distribution in respect as any such shares of stock or set aside any
funds for any such purpose; provided, however, the Guarantor may repurchase
its capital stock held by employees of the Guarantor or its subsidiaries
upon their retirement, termination, disability or death so long as such
repurchase does not violate any of the financial covenants contained in
Section 5 and could not reasonably be expected to result in a material
adverse effect on the condition (financial or otherwise), business, results
of operations or prospects of the Guarantor; provided, further, that the
Guarantor may otherwise repurchase its capital stock so long as the total
spent in repurchasing such stock (including stock repurchased from
employees under the preceding provision) does not exceed $8,500,000 in the
aggregate; provided, further, however, that the Guarantor may make
dividends in cash and stock so long as if immediately after making such
dividend, the Guarantor would be in compliance with each of the financial
covenants contained in Section 5.
1.4 Section 5.6 of the Guaranty is amended by deleting such section
in its entirety and replacing it as follows:
5.6 Transactions with Affiliates. Not enter into any transaction
with any Affiliate except (i) transactions in the ordinary course of
business and on terms and conditions at least as favorable to the Guarantor
as the terms and conditions that would apply in a similar transaction with
a Person who is not an Affiliate, (ii) the subordinated promissory note
made by Diamond Exteriors to the Guarantor in connection with the original
public offering of the common stock of the Guarantor and (iii) the capital
maintenance agreement among Diamond Exteriors, the Guarantor and Harris
Trust and Savings Bank.
1.5 Section 5.7 of the Guaranty is amended by deleting such section
in its entirety and replacing it as follows:
5.7 Subsidiaries. Not create or allow to exist any Subsidiaries
other than (i) those listed in Section 3.8, (ii) such other Subsidiaries as
are permitted by the Bank under the Loan Agreement and (iii) Subsidiaries
created solely for acquisitions and having substantially no assets (it
being understood that the Bank reserves its right to consent to such
acquisitions under Section 5.5).
1.6 Section 5.8 of the Guaranty is amended by deleting such section
in its entirety and replacing it as follows:
5.8 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
minus 100% of the amount of cash used by the Guarantor to repurchase its
stock, calculated at the end of each of the Company's fiscal quarters
through the Credit Termination Date.
SECTION 2. CONDITIONS TO EFFECTIVENESS
The obligation of the Bank to make the amendments contemplated by this
Amendment, and the effectiveness of such amendments, are subject to the Bank
having 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) Amendment to Guaranty. This Amendment.
(B) Fourth Amendment. The Fourth Amendment.
(C) Consents. Certified copies of all documents evidencing all
necessary corporate actions, consents and governmental approvals, if
any, with respect to this Amendment or any other document provided for
under this Amendment.
(D) Other. Such other documents as the Bank may reasonably
request.
SECTION 3. MISCELLANEOUS
3.1 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.
3.2 Governing Law; Severability. THIS AMENDMENT IS A CONTRACT MADE
UNDER AND GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO
CONFLICT OF LAWS PRINCIPLES. Wherever possible, each provision of this
Amendment must be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Amendment is prohibited by or
invalid under such law, such provision is only ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Amendment.
3.3 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.
3.4 Successors and Assigns. This Amendment is binding upon the
Company and the Bank and their respective successors and assigns, and inures to
the sole benefit of the Company and the Bank and their respective successors and
assigns. The Company has no right to assign its rights or delegate its duties
under this Amendment.
3.5 References. From and after the Closing Date, each reference in
the Guaranty to "this Guaranty," "hereunder," "hereof," "herein," or words of
like import, and each reference in any other document to the Guaranty or to any
term, condition or provision contained "thereunder," "thereof," "therein," or
words of like import, mean and are a reference to the Guaranty (or such term,
condition or provision, as applicable), as amended, supplemented, restated or
otherwise modified by this Amendment.
3.6 Continued Effectiveness. Notwithstanding anything contained in
this Amendment to the contrary, the terms of this Amendment are not intended to
and do not serve to effect a novation as to the Guaranty. The parties to this
Amendment expressly do not intend to extinguish the Guaranty. Instead, it is
the express intention of the parties to this Amendment to reaffirm the
indebtedness created by the Guaranty. The Guaranty, as amended by this
Amendment, remains in full force and effect.
* * *
Delivered at Chicago, Illinois, as of the day and year first above
written.
DIAMOND HOME SERVICES, INC.
By:_____________________________
Name:
Title:
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By:_____________________________
Laurie B. Tanselle
Assistant Vice President
FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Fifth Amendment to Loan and Security Agreement, made as of
February 28, 1998 (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 the Second Amended and Restated Revolving Note dated as
of November 30, 1997 (the "Existing Note"), made by the Company in favor of the
Bank in the original principal amount of $15,000,000;
WHEREAS, the Company has requested that the Bank amend and restate the
Existing Note to change the maturity date to May 31, 1998;
WHEREAS, the Bank and the Company have agreed to amend the Loan
Agreement to, among other things, incorporate the modifications to the Existing
Note;
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 AND RELATED DOCUMENTS
On the date this Amendment becomes effective, after satisfaction by
the Company of each of the conditions set forth in Section 3 of this Amendment
(the "Closing Date"), the Loan Agreement and Related Documents is amended as
follows:
1.1 Exhibits to Loan Agreement. On the Closing Date, Exhibit A to
the Loan Agreement is replaced with Exhibit A to this Amendment.
1.2 Related Documents. On the Closing Date, the Existing Note is
amended, restated and replaced in its entirety by the Third Amended and Restated
Revolving Note dated as of February 28, 1998 (the "Amended Note"), made by the
Company in favor of the Bank in the original principal amount of $15,000,000.
Upon receipt of the Amended Note, the Bank will mark the Existing Note
"superseded" and return it to the Company.
SECTION 2. REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Amendment and to extend future
credit under the Loan Agreement, as amended by this Amendment, the Company
represents and warrants to the Bank that:
2.1 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), and do not and will not contravene or
conflict with any provision of (i) any law, (ii) any judgment, decree or order
or (iii) its articles or certificate of incorporation or by-laws, and do not and
will not contravene or conflict with, or cause any lien to arise under, any
provision of any agreement or instrument binding upon the 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.
2.2 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, except for any such
representation or warranty that is expressly made as of a specified date, in
which case such representation or warranty was true and correct as of such
specified date.
SECTION 3. CONDITIONS TO EFFECTIVENESS
The obligation of the Bank to make the amendments, waivers and
consents contemplated by this Amendment, and the effectiveness thereof, are
subject to the following:
3.1 Representations and Warranties. The representations and
warranties of the Company contained in this Amendment are true and correct as of
the Closing Date.
3.2 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) Fifth Amendment. This Amendment.
(B) Amended Note. The Amended Note substantially in the form of
Exhibit A to this Amendment.
(C) Secretary's Certificate. A certificate of the Secretary of the
Company as to (i) true and correct copies of the Company's articles or
certificate of incorporation and by-laws 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.
(D) Consents Certified copies of all documents evidencing any
necessary corporate action, consents and governmental approvals, if
any, with respect to this Amendment, the Amended Note or any other
document provided for under this Amendment.
(E) Other. Such other documents as the Bank may reasonably
request.
SECTION 4. MISCELLANEOUS
4.1 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.
4.2 Governing Law; Severability. THIS AMENDMENT IS A CONTRACT MADE
UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. Wherever
possible, each provision of this Amendment must be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of this
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.
4.3 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.
4.4 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.
4.5 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 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 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.
6.6 Continued Effectiveness. 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 Note, as applicable. The Company and the Bank
expressly do not intend to extinguish the Loan Agreement or the Existing Note.
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 Note. The Loan Agreement, as amended by this Amendment, and the
Existing 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
Note are ratified and confirmed.
6.7 Costs, Expenses and Taxes. The Company affirms and acknowledges
that Section 13.5 of the Loan Agreement applies to this Amendment and the
transactions and agreements and documents contemplated under this Amendment.
* * *
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
Vice President
Diamond Home Services, Inc., guarantor under the Guaranty dated as of
December 3, 1996 (as amended, the "Guaranty"), made in favor of the Bank,
acknowledges that it has read this Amendment and consents to this Amendment and
agrees that its guarantee of the Guaranteed Obligations (as defined in the
Guaranty) continues in full force and effect, is valid and enforceable and is
not impaired or otherwise affected by the execution of this Amendment or any
other document or instrument delivered in connection with this Amendment.
DIAMOND HOME SERVICES, INC.
By:
Name:
Title:
EXHIBIT A
FORM OF AMENDED NOTE
[ATTACHED]
SETTLEMENT AGREEMENT
This Agreement and Full and Final Release of Claims ("Agreement") is made
as of the day of , 1997, by and between Frank
Cianciosi ("Employee") and Diamond Home Services, Inc. ("Diamond Homes"). In
this 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;
WHEREAS, the Company and the Employee desire that the Company pay the
Employee (a) additional salary in consideration for Employee's past services
with the Company and Employee's willingness to facilitate an orderly transition
of his work and (b) additional compensation in consideration for the Employee's
agreements regarding non-competition, confidentiality and other matters as set
forth herein.
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 Entity, on account of, or
arising out of, any acts or omissions by any Diamond Entity whatsoever. Without
limiting the foregoing, Employee further agrees that, as a material inducement
to Diamond Homes to enter into this Agreement, Employee irrevocably and
unconditionally releases and discharges Diamond from any claim of discrimination
or other improper treatment on any basis, including race, color, age, sex,
disability or handicap, arising under any state, federal or local statute, law,
ordinance, rule, regulation, policy or procedure, including without limitation
Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of
1991, the Age Discrimination in Employment Act, the Illinois Human Rights Act,
the Employee Retirement Income Security Act, the Family and Medical Leave Act,
the Americans with Disabilities Act, and any other federal, state, or local
statute, ordinance, or regulation with respect to employment. Employee further
releases Diamond from any other claims, demands, or actions with respect to
Employee's employment with Diamond or the termination of Employee's employment
with Diamond, including, but not limited to, any right of payment for disability
or any other statutory or contractual right of payment, or any claim for relief
on the basis of an alleged tort or breach of contract under the common law of
any state. Employee specifically acknowledges that this release is made
voluntarily and without any duress or coercion of any kind. Without limiting
the foregoing, this Agreement also waives and releases any claim (a) that
Diamond breached or violated (i) any contract, agreement, promise or duty, legal
or equitable, written or oral, express or implied, (ii) any law, ordinance,
rule, regulation, policy, or procedure, or (iii) any term or condition of
Employee's employment and (b) for compensation, fringe benefits, reimbursement
or other damages that are or may be due from Diamond. Employee agrees that
Diamond has no liability for any attorneys' fees or costs resulting from an
attorney's review of this Agreement and consultation with Employee concerning
this Agreement. It is intended that this section operate as a general release
and as a covenant not to sue.
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 Agreement. Diamond Homes and Employee each represents,
warrants and acknowledges to the other that each intends to be bound by this
Agreement. Employee represents and warrants that, as of the date this Agreement
becomes effective, he is the only person entitled to assert any claim on behalf
of himself, that he is the sole owner of all claims and matters released herein,
and that he has not assigned, transferred, or encumbered all or any part or
interest in such claims and other matters. Employee agrees to indemnify and hold
Diamond harmless from the breach of any of these or any other representations or
warranties made by the Employee in this Agreement.
3. Diamond Homes and Employee each recognizes that this Agreement does not
constitute an admission of liability or fault by either party, and each party
specifically denies that there has been any illegal or improper conduct by that
party or his/its agents. It is further agreed that evidence of this agreement
shall be inadmissible in any other action or arbitration of any kind, unless
introduced by or with the permission of Diamond.
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 of incentive compensation, based
on Diamond Homes's 1997 second quarter results, of any incentive compensation
attributable to Employee's employment for the period from April 1, 1997, through
the Termination Date, as determined by pro-rating a pro forma calculation of the
Company'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 and upon the final approval, in its sole
discretion, of the Compensation Committee of the Board of Directors of Diamond
Homes) (the "1997 Incentive Compensation Payment"); and (iii) the Security
Payments. Sixty percent (60%) of a preliminary calculation of the 1997
Incentive Compensation Payment shall be paid at the same time in 1997 as 1997
second quarter incentive compensation payments, if any, are made to corporate
executives of Diamond Homes and shall be made on a basis reflecting Employee's
duties and responsibilities at the Company from April 1, 1997 through the
Termination Date and the remaining forty percent (40%) shall be paid at the same
time in 1998 as the final portions of all 1997 incentive compensation payments,
if any, are made to corporate executives of Diamond Homes (it being understood
that such payments are subject to reduction for payment of any applicable
federal, state and local taxes and it being further understood that such 40%
payment may be reduced or eliminated depending on 1997 full-year results). In
addition, Diamond Homes hereby releases and forever discharges Employee and his
successors, assigns, relatives, related entities and affiliates other than
Diamond (collectively, "Employee Releasees") 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
Diamond Homes has or may claim to have against Employee Releasees, on account
of, or arising out of, any acts or omissions by Employee whatsoever; provided,
however, that the release by Diamond Homes contained herein relates only to
those claims that Diamond Homes actually knows as of the date of this Agreement;
and provided further that the term "Diamond Homes knows" and phrases of similar
import shall mean the actual knowledge of C. Stephen Clegg, Jerome Cooper, James
M. Gillespie, Marvin Lerman, or Richard G. Reece. Diamond Homes specifically
acknowledges that this release is made voluntarily and without any duress or
coercion of any kind. Diamond Homes agrees that Employee Releasees have no
liability for any attorneys' fees or costs resulting from an attorney's review
of this Agreement and consultation with Diamond Homes concerning this Agreement.
It is contemplated that release operate as both a release and a covenant not to
sue.
5. Settlement Election.
a. For purposes of this 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 the amounts
described in this subpart b. Beginning on the first regular payday at Diamond
Homes that is seven or more days after the Election Date and ending on and
including the date that is fifty weeks later (the "Last Payment Date"), Employee
shall be entitled to receive every two weeks a payment in the amount of $8653.85
(each such payment being a "Regular Continuation Payment" and all such payments
being "Continuation Payments"). In addition, by executing and delivering a
notice substantially in the form of Exhibit A to Diamond Homes at its corporate
offices in Woodstock, Illinois (the "Office") on or before the close of
business, Woodstock, Illinois time on the Election Date, Employee may further
elect for Diamond Homes to deduct from the Regular Continuation Payments premium
payments for medical insurance (including dental and vision coverage). If the
Employee elects medical insurance deductions pursuant to the preceding sentence,
Diamond Homes shall pay for Employee's medical benefits through the Last Payment
Date, as if Employee continued to be an Employee of the Company ("Medical
Payments"). For the purpose of this 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, it being understood by Employee that any
amounts actually received by him are subject to reduction for payment of any
applicable federal, state and local taxes and, if the Employee so elects,
premium payments for medical insurance.
c. On or before the last day of the revocation period described in
section 13 below (such last day being the "Election Date"), Employee may elect
to receive, in lieu of the Continuation Payments, a lump sum payment of
$225,000.00 ("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 B 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 Pittsburgh, Pennsylvania (or if Employee elects by
marking the Notice, shall directly deposit at Employee's bank account), on the
date that is fourteen days after the Election Date, 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
1997 Incentive Compensation 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 1997
Incentive Compensation Payment, and the Security Payments.
6. Security Payment. Diamond Homes shall make twenty-nine (29) payments,
one for each of the months in the period from August 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 August 31, 1997. In addition,
Employee shall receive an additional payment of $5,000 on July 31, 1997, if this
Agreement becomes effective before July 31, 1997, and if and to the extent
Employee did not receive a payment for July 1997 under that certain agreement
dated April 1, 1996. It is understood and agreed that the amount of such
Security Payments and such additional payments may be reduced for payment of
applicable federal, state, and local taxes.
7. Employee acknowledges that from time to time he has received salary,
medical benefits, a travel allowance, security payments pursuant to an agreement
dated April 1, 1996, incentive compensation, vacation pay, sick pay, other
benefits, and other compensation from Diamond for some or all of the period
through the Termination Date. Employee agrees that, upon the effectiveness of
this Agreement, his right to receive, and Diamond's obligation to pay, any
further salary, medical benefits, travel allowances, security payments,
incentive compensation, vacation pay, sick pay, other benefits, and other
compensation shall terminate and shall be replaced by the obligations set forth
in this Agreement.
8. In consideration of the payments made to and to be made to Employee
under this 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 in the product lines of roofing,
gutters, fencing, entry doors, security doors, garage doors, storm windows,
replacement windows, siding, soffit and fascia (overhead and trim), mobile
home improvement products (including without limitation roofing, doors, and
windows), car ports, patio covers, financial services, heating and air
conditioning, duct cleaning, and carpet cleaning (the "Product Lines"),
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
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 subsections (ii) through
(vii) below regarding the conduct of Employee following the date of this
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 subsections (ii) through (vii)
below shall each be construed as a separate agreement independent of any
other provision of this Agreement, and the existence of any claim or cause
of action of Employee against the Company, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement
by the Company of any of those covenants. If the Company ceases to provide
or to contemplate providing services in any Product Line, that product line
shall, from and after the date of such cessation, no longer be a "Product
Line" for purposes of this Agreement.
(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 Election Date (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 subsection 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 subsection (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 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 informa-
tion, 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
Election Date (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 subsection 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 in the Product Lines 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
subsections (ii) through (vii) 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 Election Date (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 subsection 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 in any of the Product
Lines, 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
Election Date (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 subsection 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.
(vii) Non-Disparagement. Employee agrees that he will not act
in any manner that might damage the business or reputation of Diamond. He
further agrees that he will not counsel or assist any attorneys or their
clients in the presentation or prosecution of any disputes, differences,
grievances, claims, charges, or complaints against Diamond or any of its
officers, employees, or directors, unless under subpoena or other court
order to do so.
9. Employee acknowledges and agrees that his employment relationship with
Diamond terminated as of June 27, 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 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 Agreement. In addition, as partial consideration
for any damages to Diamond, if Employee or his affiliates shall breach any
provisions of this 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 Agreement. In
view of the difficulty of determining damages in the event of a breach of these
provisions, it is agreed that Diamond shall be entitled to damages in the amount
of at least $15,000, plus reasonable attorneys' fees and costs associated in
enforcing these provisions to judgment, in the event of a breach of this
Agreement by Employee, which remedies are agreed by Employee to be reasonable.
Diamond Homes shall be liable for Employee's reasonable attorneys' fees and
costs associated in defending himself, if Diamond Homes frivolously files and
prosecutes a lawsuit under this section against Employee. Employee understands
and agrees that these provisions are reasonable to protect the legitimate
interests of Diamond, and that the consideration is therefore adequate, and
Employee hereby waives any claim to the contrary.
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 Agreement, Employee
agrees to return all of Diamond's property promptly upon his execution of this
Agreement, including but not limited to the property specifically listed in this
section 12, to Diamond, c/o Eugene O'Hern, 222 Church Street, Woodstock,
Illinois.
13. Each party to this Agreement hereby affirms that it/he has had the
opportunity, and Diamond hereby advises Employee, to consult with counsel with
respect to the terms and conditions of this 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 Agreement. The
parties understand that this 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
Agreement. Employee acknowledges that he is being given twenty-one (21) days to
consider and execute this Agreement and that he has seven (7) days to revoke its
acceptance and cancel this Agreement measured from the date he executes this
Agreement to the close of business (5:00 p.m. local Woodstock, Illinois time) on
the seventh day thereafter. To be effective, revocation must be in writing and
received by Diamond Homes at the Office by the close of business on such seventh
day. Employee further acknowledges that this Agreement was delivered to and
received by him on July 24, 1997.
14. The provisions of this Agreement are severable, and if any part of it
is found to be unenforceable, the other provisions shall remain fully valid and
enforceable provided that, if any of the releases or other obligations of
Employee hereunder are unenforceable, then Diamond Homes shall no obligation to
make the payments or take the other actions contemplated under section 4.
15. The undersigned Employee affirms that the only consideration for his
signing this Agreement are the terms stated above; that no other promise or
Agreement of any kind has been made to or with him by any person or entity
whomsoever to cause him to execute this instrument; that this Agreement contains
all agreements and understandings between Employee and Diamond and fully
supersedes any all prior agreements or understandings between the parties hereto
pertaining to the subject matter of this Agreement; 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
Agreement.
16. Employee agrees to keep the terms, amount and fact of this Agreement
completely confidential and not to disclose any terms or conditions of this
Agreement to anyone, other than (a) to his spouse and children, (b) pursuant to
the provisions of subsection 8(ii) hereof, (c) as may be necessary to disclose
to attorneys and financial advisers, and (d) Employee may discuss with others
his obligations under this section and under sections 8(iv) and (vi).
17. This 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 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 Agreement shall become effective only if (a) on or before the
close of business at the Office on the date that is 22 days after Employee
receives this Agreement, Diamond Homes actually receives, at the Office, a copy
of this Agreement executed by Employee and (b) the time for revocation of this
Agreement under section 13 has expired with no such revocation having occurred
pursuant to that section. This Agreement shall become effective upon the
expiration of the revocation period described in the foregoing sentence if the
conditions described in the foregoing sentence have occurred as of that date.
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. The Company may enforce any claim arising out of this Agreement in any
state or federal court having subject matter jurisdiction and located in
Chicago, Illinois or McHenry County, Illinois. For the purpose of any action or
proceeding instituted with respect to any such claim, the Employee hereby
irrevocably submits to the jurisdiction of such courts. The Employee further
irrevocably consents to the service of process out of said courts by mailing a
copy thereof, by registered mail, postage prepaid, to the Employee at 1050 Saint
Mellion Drive, Presto, Pennsylvania 15142 or such other address as Employee
notifies the Company in writing (such notice by Employee to be hand-delivered,
to be sent by overnight courier, such as Federal Express, or to be sent by
registered mail, in any case to the Office, attention Chief Executive Officer).
Employee agrees that such service, to the fullest extent permitted by law, (i)
shall be deemed in every respect effective service of process upon it in any
such suit, action or proceeding and (ii) shall be taken and held to be valid
personal service upon and personal delivery to it. Nothing herein contained
shall affect the right of the Company to serve process in any other manner
permitted by law or preclude the Company from bringing an action or proceeding
in respect hereof in any other country, state or place having jurisdiction over
such action. The Employee hereby irrevocably waives, to the fullest extent
permitted by law, any objection which it may have or hereafter have to the
laying of the venue of any such suit, action or proceeding brought in any such
court, located in Chicago, Illinois or McHenry County, Illinois and any claim
that any such suit, action or proceeding brought in such a court has been
brought in an inconvenient forum.
21. THE EMPLOYEE AND THE COMPANY HEREBY EXPRESSLY WAIVE ANY RIGHT TO A
TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER
THIS AGREEMENT AND AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED
BEFORE A COURT AND NOT BEFORE A JURY.
22. This Agreement may only be changed or modified in writing signed by
both of the parties hereto. Section headings are for convenience only and do
not constitute a part of the Agreement.
23. This Agreement may be executed in one or more counterparts, all of
which together shall constitute one and the same Agreement.
WHEREFORE, the parties have executed this Agreement as of the date first
written above.
DIAMOND HOME SERVICES, INC.
________________________
By: C. Stephen Clegg
Its: Chief Executive Officer
_________________________
Frank Cianciosi
EXHIBIT A
To: Diamond Home Services, Inc.
Attn: Eugene O'Hern
From: Frank Cianciosi ("Employee")
Reference is made to the Agreement dated June 30, 1997, between Employee
and Diamond Homes Services, Inc. ("Agreement"). Unless otherwise indicated or
the context otherwise requires, defined terms in this notice have the meanings
given to them in the Agreement. Employee has NOT elected the Lump Sum Payment.
Employee elects to have medical insurance premiums payable by him under the
Diamond Homes medical insurance plan (or the Sears Flex Plan, if applicable)
deducted from his Continuation Payments.
_________________________
Frank Cianciosi
EXHIBIT B
To: Diamond Home Services, Inc.
Attn: Eugene O'Hern
From: Frank Cianciosi
Reference is made to the Agreement dated June 30, 1997, between Employee
and Diamond Homes Services, Inc. ("Agreement"). Unless otherwise indicated or
the context otherwise requires, defined terms in this notice have the meanings
given to them in the Agreement. Employee hereby elects the option of a Lump Sum
Payment pursuant to the Agreement.
_____________________
Frank Cianciosi
Please direct deposit the Lump Sum Payment. [Initial if
direct deposit election is taken.]
<TABLE>
Selected Financial Data
<CAPTION>
(Unaudited)
For the years ended December 31
($ in thousands except earnings per share)
1997 1996 1995 1994 1993*
<S> <C> <C> <C> <C> <C>
Net sales $161,109 $157,068 $124,848 $94,186 $20,548
Operating income 3,262 10,989 6,795 2,951 (1,179)
Net income 2,304 6,815 3,735 1,995 (1,179)
Net income per share -- diluted 0.26 0.88 0.60 0.22 (0.12)
At year end:
Working capital 7,739 17,178 (4,814) (8,324) 42
Total assets 56,589 58,793 30,143 29,275 4,837
Debt 3,148 1,662 6,216 15,553 1,187
Stockholders' equity 34,210 36,236 4,833 936 (979)
Number of sales associates 631 678 631 496 260
Number of independent 1,577 1,300 1,315 1,003 389
installers
Number of employees 1,197 1,260 1,109 857 458
Number of jobs installed 64,270 64,338 55,261 37,510 7,294
Net sales per employee $135 $125 $113 $110 $45
* Period from June 1, 1993, inception of the Company's operations, to December
31, 1993.
</TABLE>
OVERVIEW
The Company has achieved record sales in each of the last three years, and
record earnings in two of the past three years. In 1997, the Company's
earnings, as more fully described below, were significantly less than in 1996.
Net sales increased $36.3 million from $124.8 million in 1995 to $161.1 million
in 1997. Operating income decreased $3.5 million from $6.8 million in 1995 to
$3.3 million in 1997. Net income decreased $1.4 million, from $3.7 million in
1995 to $2.3 million in 1997. The growth in net sales was attributable to
increases in lead generation, number of sales associates, number of independent
installers, and in 1996 and 1997, credit participation fee income negotiated
with third-party finance companies and finance interest income from the
Company's 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. The trend in record earnings in 1995 and 1996 did
not continue in 1997, primarily due to the de-leveraging effects of increased
advertising expenditures without a corresponding increase in lead production, as
well as the costs of recruiting and training a significant number of new sales
associates, in early 1997, coupled with income not realized as a result of
below-plan close ratios for the new sales associates. In addition, the 1997
results of operations reflect the Company's ongoing investment in its
infrastructure to continue to generate the anticipated sales and installation
activity for 1998 and beyond.
Stockholders' equity increased $29.4 million from $4.8 million at December
31, 1995 to $34.2 million at December 31, 1997. During this two-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 1997, 6.3%
of its common stock, 3) commenced, in 1997, investment in information technology
systems, and 4) launched and funded its own finance subsidiary. Cash flow from
operating activities during the three year period aggregated $16.4 million.
RESULTS OF OPERATIONS
Fiscal 1997 Compared to Fiscal 1996
Net Sales
Net sales increased $4.0 million, or 2.6% from $157.1 million in 1996 to
$161.1 million in 1997. Net sales attributable to roofing and gutter products
and services decreased $590 thousand, or 0.6%, to $102.2 million in 1997. Net
sales attributable to fencing products and services increased $442 thousand, or
1.7%, to $26.8 million in 1997. Net sales attributable to garage doors, entry
doors, and other products and services increased $5.4 million, or 22.9%, to
$29.2 million in 1997. Net sales attributable to credit participation fee
income decreased $415 thousand to $1.9 million in 1997. Net sales attributable
to finance interest income decreased $833 thousand to $1.1 million on
receivables financed by the Company's finance subsidiary, Marquise Financial.
The increase in net sales was due primarily to a) higher percentage of higher
priced proprietary products, b) an increase in the number of installations as
the Company increased the number of installation crews operated by the
increasing number of independent installers, and c) an increase in the average
number of sales associates during the comparative years from 707 to 773.
Partially offsetting these increases was a decrease in credit participation fee
and finance interest income. Backlog, defined as jobs sold but not installed,
decreased $3.9 million from $14.8 million at the end of December 1996 to $10.9
million at the end of December 1997.
Gross Profit
Gross profit increased $1.2 million, or 1.6%, from $69.3 million, or 44.1%
of net sales, in 1996 to $70.5 million, or 43.7% of net sales, in 1997. The
decrease in gross profit, expressed as a percentage of net sales, resulted from
a $1.2 million decrease in credit participation fee income and in finance
interest income, partially offset by an increase in proprietary product
offerings and an increase in the balance of sales to higher margin products and
services. The license fee incurred to Sears increased $539 thousand, or 3.3%,
from $16.4 million, or 10.7% of net installed sales, in 1996 to $16.9 million,
or 10.7% of net installed sales, in 1997. The increase in the license fee
incurred to Sears in 1997 was commensurate with the overall increase in sales.
The shift in the balance of sales, primarily doors, to higher license fee
products and services was offset by increases in new test program sales with
reduced license fees. Sears and the Company entered into a three-year license
agreement effective January 1, 1996. Among other things, the license agreement
provides for a fixed license fee, at the March 1995 license fee rate, to be
charged during the term of the license agreement. Gross profit before the Sears
license fee, credit participation fee and finance interest income increased $2.9
million, or 3.6%, from $81.5 million, or 53.3% of net installed sales, in 1996
to $84.4 million, or 53.4% of net installed sales, in 1997. 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 $8.8 million, or
15.2%, from $57.8 million in 1996 to $66.6 million in 1997 and, as a percentage
of net sales, increased from 36.8% to 41.3%. The increase in selling, general
and administrative expenses resulted primarily from expenses associated with
increased net sales, the increased number of and the cost of recruiting and
training new sales associates and expenses related to the hiring of additional
personnel to support the expansion of the infrastructure of the Company's core
sales and installation business including the expansion of Marquise Financial.
Direct advertising expense increased $2.5 million, or 31.4%, from $7.8 million
in 1996 to $10.3 million in 1997; as a percentage of net sales, direct
advertising expense increased from 4.9% in 1996 to 6.4% in 1997, reflecting the
de-leveraging effect created by increased direct advertising placements and
below plan lead generating effectiveness of ad placements during the year.
Selling commission expense, including attendant payroll-related benefits,
increased $850 thousand, or 5.4%, from $15.8 million in 1996 to $16.6 million in
1997; as a percentage of net installed sales, selling commission expense
increased from 10.3% to 10.5% in 1997. 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, sales and
production managers decreased $2.9 million, or 71%, from $4.1 million in 1996
to $1.2 million in 1997, primarily due to the decrease in operating income. The
balance of selling, general and administrative expenses, primarily sales lead-
generation activities, administrative, field operations and Marquise Financial
payrolls and related costs and general expenses, increased $8.4 million, or
27.9%, from $30.1 million, or 19.2% of net sales, in 1996 to $38.5 million, or
23.9% of net sales, in 1997. The increase was primarily due to increased
expenses related to recruiting and training new sales associates and support
personnel and services required to manage the Company's anticipated sales volume
increases, expanding infrastructure and finance subsidiary, Marquise Financial.
The increase in selling, general and administrative expenses, as a percentage of
net sales, was caused, in large part, by the aforementioned up-front investments
in infrastructure required to generate future sales and installation activity.
Amortization of Intangibles
Amortization of intangibles increased from $534 thousand in 1996 to $595
thousand in 1997. The amortization expense relates primarily to goodwill
incurred in connection with the September 1994 stock repurchase from management.
Interest Income (Expense), Net
Net interest income increased $542 thousand from $183 thousand in 1996 to
$725 thousand in 1997, primarily due to increased interest income from invested
cash balances and the elimination of interest expense related to the notes
payable to certain of the Company's senior managers in connection with the
September 1994 stock repurchase from management. $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 decreased from $4.4 million, or an
effective rate of 39.0%, in 1996 to $1.7 million, or an effective rate of 42.2%,
in 1997. The difference in the effective income tax rate and the federal
statutory rate (34%) is due primarily to amortization of intangibles which are
not deductible for income tax purposes and the effect of state income taxes.
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 was 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) an increase in 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 related primarily to goodwill
incurred in connection with the September 1994 stock repurchase from management.
Interest Income (Expense), 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the growth of the
Company, to fund the September 1994 stock repurchase from management, and, more
recently, to fund the operations of the Company's finance subsidiary, Marquise
Financial. The Company's primary sources of liquidity have been cash flow from
operations, borrowings under its bank credit facility, and, in June 1996, the
net proceeds of its initial public offering. The Company's core sales and
installation business is not capital intensive. Capital expenditures for 1997,
1996 and 1995 were approximately $4.3 million, $461 thousand and $888 thousand,
respectively. Capital expenditures for 1998 are expected to approximate $3.0
million, primarily related to ongoing new equipment purchases and software
development for the Company's information technology systems. Future
requirements for new information technology and other capital expenditures are
expected to be funded by cash flow from operations and operating leases. On
April 30, 1997, the Company announced a stock repurchase program to repurchase
up to 500,000 shares of its common stock and on August 12, 1997, the Company
increased the number of shares it is authorized to repurchase by 500,000 to
1,000,000 shares. During the second and third quarters 1997 the Company
purchased 572,300 shares of its common stock for $4.7 million. In March, 1998,
the Company signed a stock purchase agreement to acquire all of the issued and
outstanding stock of Reeves Southeastern Corp. for approximately $42 million.
In connection with the proposed acquisition, the Company is in the process of
replacing its $15 million unsecured line of credit with a $45 million secured
line. The Company believes that it has sufficient operating cash flow, working
capital base, and available bank lines of credit to meet all of its obligations
for the foreseeable future, including ongoing funding for Marquise Financial,
for the stock repurchase program announced in 1997, for investments in
information technology, and for the acquisition, development, and expansion of
complementary new products and services and markets.
In November 1995, the Company commenced the operations of Marquise
Financial. Marquise's 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 customers. In the fourth
quarter 1996, as a follow-on objective to expanding Marquise Financial's
consumer financing markets and products, Marquise introduced a new finance
product -- fixed rate loans secured by developed residential real estate -- to a
segment of its creditworthy customers that cannot obtain unsecured consumer
loans. During the second quarter 1997, Marquise Financial expanded its scope of
operations, in part to leverage its consumer finance infrastructure to i)
purchase from third parties portfolios of secured receivables, and ii) originate
secured receivables from customers of, and/or purchase individual secured
receivables originated by, entities other than the Company and its affiliates.
These entities do not necessarily engage in business in any of the Company's
product lines. As a general proposition, these entities are all expected to
operate businesses related to installed home improvement products and services,
although from time to time Marquise Financial may also originate or purchase
receivables secured by commercial real estate or otherwise acquire or originate
loans that do not constitute obligations arising from installed home
improvements. The outstanding principal amount of individual receivables
purchased by Marquise Financial from entities other than the Company may
significantly exceed the average amount of all receivables owned by Marquise
Financial. The Company is continually mindful of the risks associated with
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 line of credit, which
were subsequently paid down with a portion of the proceeds from the Company's
June 1996 initial public offering. In December 1997, Marquise Financial
obtained a $10 million secured line of credit and, at December 31, 1997, had
borrowed $2.1 million. At December 31, 1997, Marquise Financial has
approximately $8.8 million in net finance receivables. During 1997, Marquise
Financial originated or purchased approximately $5.5 million of fixed rate,
secured loans. At December 31, 1997, Marquise had approximately $800 thousand
in outstanding commitments of the fixed rate, secured loans. The Company
anticipates that its existing cash balances, the bank lines of credit, the sale
of Marquise Financial's consumer loan 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 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. At December 31, 1997, the
investment in the captive insurance company has been increased to approximately
$1.0 million. The primary objective of this captive insurance business is to
provide the means for offering workers' compensation and general liability
insurance coverage, primarily for Company installations, to qualified installers
as the Company seeks to maintain and expand its core complement of independent
installers. Premiums are immediately collected through deductions from 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 allowances 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. Premiums collected in 1997 were approximately $571
thousand.
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 finance Marquise Financial receivables) and repay
$3.2 million of notes to senior managers related to the September 1994 stock
repurchase. From its inception in June 1993, the Company has generated cash
flow from operations of approximately $23.3 million. The Company used $12.5
million of cash in connection with the repurchase of 40.2% of its Common Stock
in September 1994, $6.5 million for capital expenditures and $5.0 million for
the initial funding of Marquise's financing activities and start-up operations.
At December 31, 1997, the Company had approximately $16.6 million in cash and
cash equivalents and trade receivables and net working capital of $7.7 million.
At December 31, 1997, the Company had $25 million in bank lines of credit and
$3.3 million total debt including $2.1 million under its bank line of credit.
Year 2000
The Year 2000 date change issue is believed to affect virtually all
companies and organizations. If not corrected, many computer applications could
fail or create erroneous results by or at the year 2000. The Company has not
completed its assessment of compliance issues for the Company's computer systems
(both hardware and software), for equipment ancillary to the Company's business
that contains computers or computer chips, or for the computer systems of other
entities with which the Company does business, such as installers, suppliers,
creditors, and Sears. The Company has also not determined the cost of these
compliance issues or the time it will take to complete compliance.
As a preliminary assessment, the Company believes its new investments in
information technology systems, including software, are Year 2000 compliant and
as such should not pose significant operational problems for its computer
systems. The Company expects to complete its full assessment of the Year 2000
issue not later than December 31, 1998, which is prior to any anticipated impact
on its operating systems. As part of the Year 2000 assessment, the Company
expects to communicate with all of its significant suppliers, third-party
finance sources, and Sears to determine the extent to which the Company's
interface systems are vulnerable to those parties' failure to remedy their Year
2000 issues. There is no guarantee that the systems of other companies on which
the Company relies will be corrected in a timely manner or that the failure to
correct will not have a material adverse effect on the Company's systems. Year
2000 modifications and assessments are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
availability of certain resources and other factors. However, there can be no
guarantee the estimates and assessments will be achieved or come to pass, and
actual results could differ materially from those anticipated.
Seasonality
The Company's results of operations may fluctuate from year to year or
quarter to quarter due to a variety of factors. The Company expects lower
levels of sales and profitability during the period from mid-November through
mid-March, impacting the first and fourth quarter of each 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
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.
Forward-looking Statements
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-Qs, which identify some
of the specific factors which could cause actual results or events to differ
materially from those described in the forward-looking statements.
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31
1997 1996
(In Thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $9,966 $ 18,982
Accounts receivable 6,630 8,621
Refundable income taxes 986 1,725
Prepaids and other current assets 1,959 1,377
Deferred income taxes 872 794
Total current assets 20,413 31,499
Finance receivables 8,758 5,312
Property and equipment 6,469 2,193
Less: Accumulated depreciation (923) (586)
Net property and equipment 5,546 1,607
Intangible assets, net 16,514 16,961
Deferred income taxes 1,892 1,313
Other 3,466 2,101
Total assets $56,589 $58,793
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Due to bank $2,050$ --
Accounts payable 6,529 8,995
Accrued liabilities 3,541 4,772
Due to stockholders 554 554
Total current liabilities 12,674 14,321
Long-term liabilities:
Warranty 7,415 5,702
Retention 1,746 1,426
Due to stockholders 544 1,108
Total long-term liabilities 9,705 8,236
Commitments and contingencies (Notes 10 and 11) -- --
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 9
9,079,675 and 9,075,425 shares issued
Additional paid-in capital 34,040 33,971
Officer notes receivable (221) (510)
Retained earnings 5,070 2,766
Treasury stock (at cost); 572,300 shares (4,688) --
Total common stockholders' equity 34,210 36,236
Total liabilities and common stockholders' equity $56,589 $58,793
See accompanying notes.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996 1995
(In Thousands, except per share)
<S> <C> <C> <C>
Net sales $161,109 $157,068 $124,848
Cost of sales 90,633 87,739 72,245
Gross profit 70,476 69,329 52,603
Operating expenses:
Selling, general, and administrative expenses 66,619 57,806 45,305
Amortization expense 595 534 503
Operating profit 3,262 10,989 6,795
Interest income (expense), net 725 183 (410)
Income before income taxes 3,987 11,172 6,385
Income tax provision 1,683 4,357 2,650
Net income $ 2,304 $ 6,815 $ 3,735
Net income per share:
Basic $ .26 $ .88 $ .60
Diluted $ .26 $ .88 $ .60
Weighted average number of common shares
outstanding:
Basic 8,833 7,713 6,250
Diluted 8,833 7,778 6,250
See accompanying notes.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996, and 1995
<CAPTION>
ADDITIONAL OFFICER
COMMON PAID-IN NOTES TREASURY RETAINED
STOCK CAPITAL RECEIVABLE STOCK EARNINGS TOTAL
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1994 $ 6 $ 119 $ -- $ $ 816 $ 936
(5)
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
Purchase of common stock for treasury -- -- -- (4,688) -- (4,688)
Repayment of officer notes -- -- 289 -- -- 289
Exercise of common stock options and other -- 69 -- -- -- 69
Net income 1997 -- -- -- -- 2,304 2,304
December 31, 1997 $ 9 $ $ $ $ 5,070 $
34,040 (221) (4,688) 34,210
See accompanying notes.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31,
1997 1996 1995
(In Thousands)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 2,304 $ 6,815 $ 3,735
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization
932 825 706
Deferred income taxes
(657) (652) (468)
Provision for credit losses 1,259 767 4
Other -- (78) 37
Changes in operating assets and liabilities:
Accounts receivable 1,991 (5,232) 163
Refundable income taxes 739 (1,725) --
Prepaids and other assets (1,120) (1,762) (37)
Accounts payable (2,466) 1,352 2,746
Accrued expenses (1,431) (853) 2,120
Income taxes payable -- -- (904)
Warranty 1,913 2,241 1,957
Retention 320 461 389
Net cash provided by operating activities 3,784 2,159 10,448
INVESTING ACTIVITIES
Capital expenditures (4,276) (461) (888)
Loans originated and purchased (5,468) (23,606) (550)
Loans repaid 763 5,362 --
Proceeds from sale of finance receivables -- 12,707 --
Organizational costs (221) (22) (107)
Advances to "captive" insurance company (484) (448) --
Acquisition spending and other (270) (58) (61)
Net cash used in investing activities (9,956) (6,526) (1,606)
Financing activities
Issuance of Common Stock, net of offering expenses -- 32,951 --
Payments on notes receivable from officers for treasury
stock and other 358 237 162
Common Stock special dividend -- (8,600) --
Borrowings (repayment) of bank line of credit 2,050 -- (7,283)
Payments to stockholders (564) (4,554) (2,054)
Preferred Stock redemption -- (1,400)
Payments for purchase of common stock (4,688)
Net cash provided by (used in) financing activities (2,844) 18,634 (9,175)
Net increase (decrease) in cash and cash equivalents (9,016) 14,267 (333)
Cash and cash equivalents at beginning of period 18,982 4,715 5,048
Cash and cash equivalents at end of period $ 9,966 $ 18,982 $ 4,715
Supplemental cash flow disclosure:
Interest paid $ 344 $ 377 $ 233
Income taxes paid $ 1,601 $ 6,734 $ 4,082
See accompanying notes.
</TABLE>
1. BUSINESS AND ORGANIZATION
Diamond Home Services, Inc., formerly Diamond Exteriors,
Inc. (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, 1994. 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 negotiated a three-year license agreement with
Sears effective January 1, 1996. License fees are based on
gross sales and vary by product and service. License fees
approximated $16,950,000, $16,400,000, and $13,000,000 in
1997, 1996, and 1995, respectively.
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, 1997 and 1996, approximately 40.2% and
37.7%, 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 inter-company 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. The cost to acquire and
develop internal-use software is capitalized and depreciated
over its estimated useful life of five 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 years 1997 and 1996, the Company earned
$1,853,000 and $2,268,000, respectively, in credit
participation fee income. Included in the balance sheet
under the captions prepaids and other current assets are
$960,000 and $543,000 and in other assets $1,187,000 and
$795,000 of credit participation fee income due from Sears
and its affiliates at December 31, 1997 and 1996,
respectively.
Interest income from finance receivables is recognized using
the interest method. Loan origination fees and costs on
finance receivables are deferred and recognized in interest
income using the level-yield amortization 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
secured and unsecured 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, 1997 and 1996, was $16,255,000 and
$16,706,000, respectively, net of accumulated amortization
of $1,576,000 and $1,125,000, 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. 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.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128), which replaced the
calculation of primary and fully diluted earnings per common
share with basic and diluted earnings per common share.
Unlike primary earnings per common share, basic earnings per
common share excludes any dilutive effects of options,
warrants and convertible securities. All earnings per
common share amounts for all periods have been presented
and, where appropriate, restated to conform to the SFAS No.
128 requirements (see Note 14.)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its
components in the financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15,
1997. The adoption of SFAS No. 130 will have no impact on
the Company's consolidated financial position, results of
operations, or cash flows.
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.
RECLASSIFICATION
Certain amounts have been reclassified from 1996 to conform
to the 1997 presentation.
3. PROPERTY AND EQUIPMENT
The cost of property and equipment at December 31 is as
follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Equipment and software $5,660,000 $1,548,000
Leasehold improvements 454,000 379,000
Furniture and fixtures 355,000 266,000
$6,469,000 $2,193,000
</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-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, 1997 and 1996, $757,000 and $839,000,
respectively, of deferred direct-response advertising costs
was reported as non-current assets. Net advertising expense
was $10,244,000, $7,772,000, and $6,239,000 in 1997, 1996,
and 1995, respectively.
5. ACCRUED LIABILITIES
The components of accrued liabilities at December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Payroll and payroll-related $2,537,000 $3,922,000
Warranty 1,000,000 800,000
Other 4,000 50,000
$3,541,000 $4,772,000
</TABLE>
6. DEBT
At December 31, 1997, the Company had a $15,000,000
unsecured bank line of credit with no related borrowings
outstanding, and a $10,000,000 secured bank line of credit
for Marquise Financial. At December 31, 1997, $2,050,000
was borrowed under the Marquise Financial bank line of
credit. Interest on unsecured bank borrowings is payable
monthly at the bank's prime rate or at LIBOR plus 1.35%.
Interest on secured bank borrowings is payable monthly at
the bank's prime rate less 0.50% or LIBOR plus 1.25%. The
secured bank borrowings are secured by finance receivables,
among other things, owned by Marquise Financial and
supported by a capital maintenance agreement from Home
Services and Exteriors. At December 31, 1997, the interest
rate on the secured line of credit was 8%. The bank lines
of credit require the Company to maintain defined levels of
equity and working capital and certain financial ratios and
limit 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. All amounts due to
stockholders are subordinate to the unsecured bank line of
credit. The Company's debt approximates fair value at
December 31, 1997.
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>
1997 1996 1995
Current:
<S> <C> <C> <C>
Federal $2,025,000 $4,324,000 $2,567,000
State 315,000 685,000 551,000
Deferred:
Federal (598,000) (567,000) (385,000)
State (59,000) (85,000) (83,000)
$1,683,000 $4,357,000 $2,650,000
</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>
1997 1996 1995
<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
4.2 3.5 4.8
Goodwill amortization 3.2 1.1 2.0
Other, net .8 .4 .7
Effective tax rate 42.2% 39.0% 41.5%
</TABLE>
Deferred tax assets and liabilities are recognized for the
expected future tax impact of temporary differences between
the carrying amounts and the tax basis of assets and
liabilities.
The significant components of deferred tax assets and
liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
Deferred tax assets:
<S> <C> <C>
Warranty $3,973,000 $2,511,000
Allowance for loss on finance receivables 337,000 155,000
Other 461,000 504,000
Total deferred tax assets 4,771,000 3,170,000
Deferred tax liabilities:
Advertising (432,000) (397,000)
Depreciation (198,000) (153,000)
Other (1,377,000) (513,000)
Total deferred tax liabilities (2,007,000) (1,063,000)
Net deferred tax assets $2,764,000 $2,107,000
</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, 1997, 188,150 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 ratably over three years of continued
employment. At December 31, 1997, there were no stock
appreciation rights or awards attached to stock options.
Also, in 1996, the Company adopted the 1996 Non-employee
Director Stock Option Plan and has reserved 50,000 shares
for future issuance. At December 31, 1997, 47,000 shares
were available for future grant. The Non-employee Director
Stock Option Plan provides for the automatic issuance, after
one year from date of election as a director, of non-
qualified stock options and are exercisable over a 10 year
term and vest ratably over three years of continued service.
A summary of the Company's stock option activity, and
related information for the two years ended December 31,
1997, is set forth below. The Company did not have
Incentive Stock Option Plans prior to 1996.
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding, December 31, 1995 -- --
Granted 275,000 $13.00
Exercised (525) 13.00
Forfeited (1,950) 13.00
Outstanding, December 31, 1996 272,525 13.00
Granted 203,000 10.40
Exercised (4,250) 13.00
Forfeited (36,425) 13.00
Outstanding, December 31, 1997 434,850 $11.79
Exerciseable, December 31, 1996 68,131 $13.00
Exerciseable, December 31, 1997 166,925 $12.20
</TABLE>
<TABLE>
<CAPTION>
Outstanding Exerciseable
Weighted Weighted Average Weighted Average
Range of Option Average Exercise Price Exercise Price
Exercise Prices Shares Remaining Life Shares
<S> <C> <C> <C> <C> <C>
$13.00-$18.50 331,850 9 years $13.23 140,925 $13.13
$7.125 100,000 10 years $7.125 25,000 $7.125
$8.75 3,000 9.3 years $8.75 1,000 $8.75
434,850 166,925
</TABLE>
The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Options Issued
to Employees" (APB No. 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" (SFAS No.
123), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under
APB No. 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.
Disclosure of pro forma information regarding net income and
net income per common share is required by SFAS No. 123, and
has been determined as if the Company had accounted for its
stock options granted in 1997 and 1996 using SFAS No. 123.
The options granted in 1997 and 1996 were valued using the
Black-Scholes option pricing model. The weighted average
value of options granted during 1997 and 1996 was $3.02 and
$7.35, respectively. The Black-Scholes option valuation
model requires the input of highly subjective assumptions
and, because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's
opinion, the model cannot necessarily provide a single
measure of the fair value of its stock options. The
following assumptions were utilized in the valuation:
<TABLE>
<CAPTION>
December 31
1997 1996
<S> <C> <C>
Risk-free interest rate 6.20% 6.22%
Expected dividend yield 0% 0%
Expected stock price 50.0% 58.8%
volatility
Expected life options 5 years 5 years
</TABLE>
Had compensation cost for the Company's stock options
granted in 1997 and 1996 been determined based on the fair
value at the dates of the grants, the Company's net income
and net income per common share would have been as follows
on a pro forma basis (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996
<S> <C> <C> <C>
Net income applicable to common stock holders: As reported $2,304 $6,815
Pro forma 1,886 6,535
Basic earnings per common share: As reported 0.26 0.88
Pro forma 0.21 0.85
Diluted earnings per common share: As reported 0.26 0.88
Pro forma 0.21 0.84
</TABLE>
9. CONSUMER FINANCING
The following summarized financial information for Marquise
is before elimination of inter-company transactions in
consolidation.
Financial position at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Assets
CASH $ 23,000 $ 50,000
Finance receivables, net of allowances of $569,000 and
$404,000 in 1997 and 1996 8,758,000 5,312,000
Other assets 1,046,000 349,000
Total assets $9,827,000 $5,711,000
LIABILITIES AND STOCKHOLDER'S EQUITY
Due to bank $2,050,000 --
Due to Diamond Exteriors, Inc. 7,388,000 $5,623,000
Other liabilities 147,000 50,000
Total liabilities 9,585,000 5,673,000
Stockholder's equity 242,000 38,000
Total liabilities and stockholder's equity $9,827,000 $5,711,000
Operations for the period ended December 31:
1997 1996 1995
<S> <C> <C> <C>
Total finance income $1,108,000 $1,811,000 $
Interest expense paid to Diamond Exteriors, Inc. 400,000 668,000 --
Provision for credit losses 1,259,000 767,000 4,000
Net interest income (loss) (551,000) 376,000 (4,000)
Other income -- 130,000 --
Other expenses (894,000) (807,000) (39,000)
Loss before income tax benefit (1,445,000) (301,000) (43,000)
Income tax benefit 539,000 115,000 17,000
Net loss $(906,000) $ (186,000) $ (26,000)
Cash flows for the period ended December 31:
1997 1996 1995
Cash, at beginning of year $ 50,000 $ -- $ --
Net cash provided by (used in) operating activities 272,000 (115,000) (36,000)
Net cash used in investing activities (5,224,000) (5,016,000) (656,000)
Net cash provided by financing activities 4,925,000 5,181,000 692,000
Cash, at end of year $ 23,000 $ 50,000 $
</TABLE>
At December 31, 1997, Marquise Financial had approximately
$800 thousand in approved but not funded loan commitments.
10. COMMITMENTS
The Company leases certain real property and equipment under
long-term non-cancelable leases expiring at various dates
through 2001. In December 1997 and January 1998, the
Company entered into long term non-cancelable lease
agreements for computer equipment. The future minimum lease
payments with respect to the January 1998 agreements are
also included in the table below. Future minimum lease
payments under non-cancelable operating leases with initial
terms of one year or more consisted of the following at
December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
1998 $2,129,000
1999 1,581,000
2000 1,180,000
2001 167,000
Thereafter -
Total minimum lease payments $5,057,000
</TABLE>
Rent expense was $1,323,000, $1,127,000, and $850,000 in
1997, 1996, and 1995, 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 1997 and 1996, payments of $696,000 and
$769,000, respectively, were made to the related employee
group and $0 and $614,000, respectively, 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 $1,074,000 for such contingent payments is not
reflected in the consolidated financial statements at
December 31, 1997.
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 year 1995, 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 and $558,000 for the indicated
period in 1996, and for the year 1995, respectively. No
amounts were due to Globe at December 31, 1997 and 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 1997 and 1996 approximated
$2,230,000 and $302,000, respectively. In 1997, the Company
contracted with Alexander & Walsh, Inc. to provide
advertising and other marketing and communications services
to the Company. The total expenses incurred to Alexander &
Walsh in 1997 was $110,000. The quoted rates for the
various activities performed by H I, Inc. and Alexander &
Walsh, 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, 1997, approximately $88,500 was due to H I,
Inc.
13. INCOME PER SHARE
The following table summarizes the information used in
computing basic and diluted income per share.
<TABLE>
<CAPTION>
Years Ending December 31,
1997 1996 1995
<S> <C> <C> <C>
Numerator for both basic and diluted income per
share -- Net Income $2,304,000 $6,815,000 $3,735,000
Denominator for basic income per share
weighted shares outstanding 8,832,840 7,712,795 6,249,950
Effect of employee stock options
(dilutive potential of common shares) 570 64,900 --
Denominator for diluted income per share
diluted shares 8,833,410 7,777,695 6,249,950
</TABLE>
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial data for 1997 and 1996 is as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1997
<S> <C> <C> <C> <C> <C>
Net sales $30,175 $43,787 $48,301 $38,846 $161,109
Gross profit 13,363 19,722 21,245 16,146 70,476
Net income 155 651 1,350 148 2,304
Basic earnings per common share 0.02 0.07 0.16 0.02 0.26
Diluted earnings per common share 0.02 0.07 0.16 0.02 0.26
1996
Net sales $27,093 $41,389 $46,492 $42,094 $157,068
Gross profit 11,800 18,548 20,530 18,451 69,329
Net income 349 1,919 2,591 1,956 6,815
Basic earnings per common share 0.06 0.30 0.29 0.22 0.88
Diluted earnings per common share 0.06 0.30 0.28 0.21 0.88
</TABLE>
Note: Earnings per common share have been restated to
comply with SFAS No. 128. The earnings per common share
computation for the year is a separate, annual calculation.
Accordingly, the sum of the quarterly earnings per common
share amounts do not necessarily equal the earnings per
common share amounts for the year.
The Board of Directors
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, 1997 and 1996, 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, 1997. 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, 1997 and
1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally
accepted accounting principles.
Chicago, Illinois
February 20, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
OTHER KEY EMPLOYEES SUBSIDIARIES
Diamond Exteriors, Inc.
CORPORATE INFORMATION Stuart Davidson Marquise Financial Services,
Vice President-MIS Inc.
EXECUTIVE OFFICERS Solitaire Heating and Cooling,
Marvin Lerman Inc.
C. Stephen Clegg Vice President-Purchasing
President and Chief Executive FORM 10-K AND INVESTOR CONTACT
Officer Ian F. Ostergaard The Form 10-K Annual Report of
Vice President-Human Resources Diamond Home Services, Inc., as
Richard G. Reece filed with the Securities and
Vice President and Chief Ann Crowley Patterson Exchange Commission, is
Financial Officer Vice President available without charge to
stockholders upon written
Joseph U. Schorer Kenneth H. Smith request. Requests for this
Vice President, Secretary and Vice President-Marketing material and other investor
General Counsel contacts should be directed to
Thomas A. Jackson Richard Reece, Chief Financial
James "Milt" Gillespie Vice President-Region (1) Officer, at the corporate
Vice President-Business address.
Development David "Tim" Jones
Vice President-Region (2) NASDAQ SYMBOL
Jerome E. Cooper The Company's common stock is
Vice President-Installations R.Q. Whitmire traded on the Nasdaq Stock
Vice President-Region (3) Market (National Market) under
Ronald D. Greene the symbol DHMS.
Vice President-Sales S. Austin Sawyer
President-Marquise Financial MARKET PRICES AND DIVIDEND
Eugene J. O'Hern, Jr. INFORMATION
Controller SHAREHOLDER INFORMATION The table below sets forth the
high and low stock prices from
BOARD OF DIRECTORS EXECUTIVE AND ADMINISTRATIVE the date trading commenced
Offices through December 31, 1997.
C. Stephen Clegg, Chairman (1) Diamond Home Services, Inc.
222 Church Street Quarter Ended High Low
James F. Bere, Jr. (2)(3) Woodstock, Illinois 60098 June 30, 1996 $18.25 $13.00
Chairman and Chief Executive Telephone (815) 334-1414 September 30, 1996 $34.50 $14.75
Officer Facsimile (815) 334-1421 December 31, 1996 $30.25 $21.75
Ameritel Corporation March 31, 1997 $28.75 $25.75
STOCK TRANSFER AGENT June 30, 1997 $18.00 $8.375
William R. Griffin Harris Trust and Savings Bank September 30, 1997 $10.00 $6.75
Consultant 111 West Monroe December 31, 1997 $10.00 $6.625
Chicago, Illinois 60690
James "Milt" Gillespie (1) Inquiries regarding stock No cash dividends have been
transfers, lost certificates or declared or paid since the
Jacob Pollock address changes should be initial public offering. As of
Chairman, Chief Executive directed to Harris Trust at the December 31, 1997, Diamond Home
Officer and Treasurer above address. Services had approximately 2000
Ravens Metal, Inc. stockholders based on the number
Chief Executive Officer and DISTRICT OFFICES of holders of record and an
Chief Operating Officer Chicago, Illinois estimate of the number of
J. Pollock & Co. Chattanooga, Tennessee individual participants
Cincinnati, Ohio represented by security position
George A. Stinson (1)(2)(3) Columbus, Ohio listings.
Retired Dallas, Texas
Greensboro, North Carolina Annual Meeting
Hartford, Connecticut The 1998 Annual Meeting of
Los Angeles, California Stockholders will begin at 9:00
San Francisco, California a.m. local time on May 14, 1998,
Tampa, Florida at the Woodstock Opera House,
Washington, D.C. 121 Van Buren, Woodstock,
Illinois.
(1) Executive Committee
(2) Audit Committee
(3) Compensation Committee
</TABLE>
Exhibit 21.2 - Subsidiaries
Also Does Business Under
Name State of Incorporation Under The Following Names
Diamond Exteriors, Inc. Delaware Sears Roofing and Gutters
and similar names
Marquise Financial
Services, Inc. Delaware ----------
Solitaire Heating and
Cooling, Inc. Delaware ----------
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in Registration Statement (Form S-8
No. 333-13381) pertaining to the Diamond Home Services, Inc. Incentive Stock
Option Plan and the Diamond Home Services, Inc. 1996 Nonemployee Director Stock
Option Plan of Diamond Home Services, Inc. of our report dated February 20,
1998, with respect to the consolidated financial statements of Diamond Home
Services, Inc. incorporated by reference in the 1997 Annual Report (Form 10-K)
for the year ended December 31, 1997.
Chicago, Illinois
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996<F1> DEC-31-1995<F1>
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 9,966 18,982 4,715
<SECURITIES> 0 0 0
<RECEIVABLES> 7,616 10,386 3,389
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 20,413 31,499 9,617
<PP&E> 6,469 2,193 1,732
<DEPRECIATION> 923 586 295
<TOTAL-ASSETS> 56,589 58,793 30,143
<CURRENT-LIABILITIES> 12,674 14,321 14,431
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 9 9 6
<OTHER-SE> 34,201 36,227 4,827
<TOTAL-LIABILITY-AND-EQUITY> 56,589 58,793 30,143
<SALES> 161,109 157,068 124,848
<TOTAL-REVENUES> 161,109 157,068 124,848
<CGS> 90,633 87,739 72,245
<TOTAL-COSTS> 157,847 146,079 118,053
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (725) (183) 410
<INCOME-PRETAX> 3,987 11,172 6,385
<INCOME-TAX> 1,683 4,357 2,650
<INCOME-CONTINUING> 2,304 6,815 3,735
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,304 6,815 3,735
<EPS-PRIMARY> .26 .88 .60
<EPS-DILUTED> .26 .88 .60
<FN>
<F1>Restated
</FN>
</TABLE>
