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, 1998 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.
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(Exact name of registrant as specified in its charter)
Delaware 36-3886872
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Church Street
Woodstock, Illinois 60098
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(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
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(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 1, 1999 (based upon an estimate
that 57.2% 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 $27,400,000. 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 1, 1999, 8,507,375 shares of the registrant's Common Stock were
outstanding.
The following documents are incorporated into this Form 10-K by reference:
Selected portions of the Annual Report to Stockholders for the fiscal year
ended December 31, 1998 (Parts I and II). Proxy Statement for Annual
Meeting of Stockholders to be held on May 13, 1999 (Part III).
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PART I
ITEM 1. BUSINESS
A. GENERAL
The Company is one of the country's leading marketers and contractors
of installed home improvement products, including roofing systems, gutters,
fencing and doors, and one of the country's leading manufacturers and wholesale
distributors of fencing and perimeter security products. The Company's
subsidiary Diamond Exteriors, Inc.(R) ("Exteriors") markets and sells installed
home improvement products and services primarily under the "Sears" name pursuant
to a non-exclusive license agreement with Sears, Roebuck and Co. ("Sears") that
expires June 30, 1999. Exteriors markets and sells its products directly to
residential customers in 44 states through a combination of national and local
advertising and of in-home direct sales through its home consultants. 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's subsidiary Reeves Southeastern Corporation ("Reeves") manufactures and
sells fencing and other perimeter security products nationwide to distributors
and, through its subsidiary Foreline Security Corporation ("Foreline"), provides
electronic security products and services. Reeves and Foreline have
approximately 34 offices and properties in 19 states.
Segment reporting of financial information required by this Item is set
forth in footnote 16 ("Segment Data") to the notes to the Financial Statements
in the Company's Annual Report, which information is included in Exhibit 13.1
and hereby incorporated herein by reference.
B. INSTALLED HOME IMPROVEMENTS SEGMENT
PRODUCTS AND SERVICES
Set forth below is a brief description of the major products and
services offered by the installed home improvements segment:
Roofing and Gutters. Exteriors sells, furnishes, and arranges the installation
of most types of residential roofing systems, primarily asphalt (fiberglass and
organic mat based), architectural laminates, and premium 3-tab strip shingles
manufactured by Owens Corning and by Globe Building Materials, Inc. ("Globe"),
the Company's largest stockholder. In addition, Exteriors sells, furnishes, and
arranges the installation of aluminum, copper, and steel gutter systems.
Exteriors 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 installed
home improvement business. Exteriors also sells, furnishes, and arranges the
installation of soffit/fascia and siding for dormers and gable ends and repairs
chimneys in connection with its roofing installations. In 1998 Exteriors
terminated its test of a light commercial roofing program.
Fencing. Exteriors sells, furnishes, and arranges the installation of a variety
of residential fencing products. The primary product offering includes
galvanized and full color (vinyl and powder coated) chain link, premium wood
fence products and ornamental (PVC and aluminum) fences. All fence systems are
available in various heights and styles. The galvanized chain link system offers
a unique "ribbed" design for added strength that is sold exclusively through
Exteriors. (See "C. Manufacturing and Wholesale Distribution Segment.") This
segment also does fence repairs.
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Garage Doors. Exteriors sells, furnishes, and arranges the installation of
residential garage doors. The product offering provides the customer a selection
of high quality insulated and uninsulated steel doors including window options.
Exteriors also installs the Sears Craftsman brand garage door openers. In most
markets, Exteriors offers garage door repairs.
Entry and Security Doors. Exteriors sells, furnishes, and arranges the
installation of a variety of pre-finished energy-efficient fiberglass, steel,
and wood entry doors. All doors are available in several styles and colors.
Exteriors also sells patio doors, storm doors, and steel-framed security doors.
Additional Products. Secondary products which this segment sells and furnishes
and for which it arranges installations include mobile home products, skylights,
attic insulation, and gutter protection systems. Under certain circumstances
this segment does insurance estimates.
Fee and Finance Income. In 1998, Exteriors generated credit participation fee
income from Sears and its affiliates on installed sales financed by Sears and
its affiliates and from other third-party finance companies, totalling
approximately $2.2 million. In addition, Marquise, the Company's finance
subsidiary, provides secured fixed rate, fixed-term, retail installment
financing to all creditworthy customers that cannot obtain unsecured financing.
Finance interest income on receivables financed by Marquise totalled
approximately $1.6 million in 1998.
NATIONAL MARKETING AND SALES LEAD GENERATION
Exteriors's principal marketing activities are conducted by
participation in Sears's national preprints. In addition, Exteriors advertises
in the yellow pages, in local newspapers, and, to a lesser extent, on radio and
television, and, in conjunction with Sears, engages in national marketing
campaigns and a variety of other activities to generate leads. Exteriors
purchases all of its products directly from independent distributors and/or
manufacturers. All products sold by Exteriors under the license agreement must
be pre-approved by Sears.
SALES
Prior to 1999, potential customers who contacted Exteriors were
scheduled for an in-home presentation from a sales associate. Appointments were
set from the call center based on availability of sales associates. Each sales
office was subsequently responsible for assigning the appointments to a local
sales associate. Each sales associate typically had two to three appointments
each day and was required to report the results of each appointment on a daily
basis. In first quarter 1999, as part of a restructuring of operations,
Exteriors announced a substantial change to its sales program. Under its new
sales program, Exteriors plans to operate out of 55 sales offices initially.
Leads will be scheduled to a sales associate directly from the Company's
subsidiary Solitaire Heating and Cooling, Inc. ("KanTel(TM)"). The form and
frequency of in-home presentations are also being revised. The Company expects
that it will take several months to implement its new sales program.
INDEPENDENT INSTALLERS AND INSTALLATION MANAGEMENT
Prior to 1999 each sales office generally was staffed with an
installation manager and customer service project coordinator. In first quarter
1999 Exteriors announced that it was consolidating installation management and
coordination in eight mega-installation offices strategically located throughout
the country.
Exteriors retains independent installers to perform all of its
installations. Prior to retention, Exteriors generally pre-screens each
contractor's background and works to ensure that the contractor meets
Exteriors's customer service, quality, and safety standards. At December 31,
1998, Exteriors had approximately 984 independent installers (i.e., independent
installers who have worked in the past sixty days for Exteriors). Many
independent installers operate multiple installation crews.
In certain markets on a test basis Exteriors employs one or more
persons to provide follow-on service and repairs for jobs that Exteriors has
installed.
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SEARS LICENSE AGREEMENT
Currently, Exteriors conducts primarily all of its direct marketing and
installation activities under a license agreement with Sears. Exteriors entered
into a three-year license agreement with Sears effective January 1, 1996. The
license agreement authorizes Exteriors 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. In December 1998, Sears and Exteriors extended the license agreement's
expiration date to June 30, 1999. Under certain circumstances, the license
agreement may be further extended for a wind-down period of up to six months.
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 provide Sears with timely 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 established by 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. 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 that 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 Exteriors 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 Exteriors in connection with sales made pursuant to the
license agreement. If Sears declines any credit application, Exteriors, 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
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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. Exteriors's right to
receive the participation fee is subject to termination under certain
circumstances.
In 1996, 1997 and 1998, Exteriors incurred license fees to Sears in the
aggregate amount of approximately $16.4 million, $16.9 million and $16.3
million, respectively. In addition, Sears and its affiliates have financed in
excess of $500 million of Exteriors's sales since the Company's inception.
Exteriors and Sears are currently negotiating a new license agreement
which Sears has stated may be subject to one or more sets of state franchise
laws. There can be no assurance that the license agreement will be renewed, nor
can there be any assurance that a renewed agreement will contain terms or
conditions substantially similar to those contained in the existing license
agreement. In the event that Sears were to terminate or fail to renew the
license agreement, the Company believes that, through its established sales
and/or installation system, its products and services could be marketed,
installed and financed 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 Exteriors
on its current terms or conditions, an increase in the rates of the license fee
paid by Exteriors to Sears, a decrease in the credit participation fee paid by
Sears to Exteriors, the addition of other Sears licensees marketing (or the
marketing by Sears or its affiliates of) Exteriors's products in Exteriors'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.
WORKING CAPITAL ITEMS
Customer Financing. During fiscal 1998, approximately 88.9% of
Exteriors's sales were financed, and, of the sales which were financed,
approximately 87.1% were financed through Sears and third party finance
companies, including Sears affiliates. A home consultant is generally able to
determine credit availability for a customer by calling one of Exteriors's
finance resources during the in-home presentation. In Exteriors's credit
arrangements with its third-party finance companies, the finance companies
assume all credit risk and Exteriors receives, upon completion of the
installation, the contract price (less discounts, sometimes, in the case of
non-prime credit). Because Exteriors's target market is a homeowner living in a
single family home, its potential customers generally are able to obtain
financing. However, in the past the credit approval rate of Sears and its
affiliates for Exteriors'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 Exteriors to continue to sell its products.
(See also "Sears License Agreement" above.)
Purchasing. Exteriors purchases roofing materials, gutters, doors,
fencing and related products primarily from a variety of local, regional, and
national independent distributors and/or manufacturers. Exteriors purchases most
fencing products directly from Reeves. Each independent distributor provides a
variety of services to Exteriors, including the maintenance of adequate
inventories to support Exteriors'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 Exteriors's
warranty under specified circumstances. Through the use of independent
distributors, Exteriors avoids the costs associated with maintaining an
inventory, with operating distribution centers, and with delivering materials to
job sites. The independent distributors benefit from their relationships with
Exteriors due to the consistent volume of purchases by Exteriors and the
resultant increased inventory turnover and the limited credit risk posed by
Exteriors.
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In 1996, 1997 and 1998 over 60% of Exteriors's roofing material
purchases were supplied by three independent distributors having facilities in
multiple locations. The Company believes that other distribution companies would
be able to offer comparable services and pricing to this segment. Owens Corning
Corp. and Globe primarily manufactured the roofing products that this segment
purchased. Approximately 8%, 8% and 10% in dollar volume of all roofing products
purchased by this segment during 1996, 1997 and 1998, respectively, were
manufactured by Globe. In 1998, Reeves manufactured approximately 75% of this
segment's fencing purchases.
SEASONALITY
Exteriors'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
Exteriors's markets located in the northeastern and north central U.S. and by
rainy weather, each of which limits Exteriors's ability to install exterior home
improvement products.
BACKLOG
Backlog at Exteriors, defined as jobs sold but not installed, increased
approximately $3.0 million, from approximately $10.9 million at December 31,
1997, to approximately $13.9 million at December 31, 1998.
COMPETITION
The industry in which Exteriors 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.
Exteriors 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 Exteriors. Exteriors also competes against
major retailers and manufacturers that may license and/or market and arrange for
the installation of products similar to Exteriors's, including Home Depot, Inc.
and Lowe's Companies, Inc. ("Lowe's"). To date, none of the retailer- or
manufacturer-sponsored programs has provided significant competition to
Exteriors. 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 Exteriors's directly to their customers. Exteriors competes on the
basis of price, Sears name recognition, workmanship, customer service, price,
and the ability of Exteriors and the manufacturer to fulfill their warranty
obligations. Because Exteriors's focus is on providing additional value to its
customers through warranty protection, insurance coverage, proprietary products
and superior customer service, Exteriors typically offers and sells its products
and services at prices that may be significantly higher than those of most of
its local competitors.
EMPLOYEES AND INDEPENDENT INSTALLERS
At December 31, 1998, Exteriors, KanTel(TM), and Marquise employed
approximately 1,170 persons, including approximately 600 sales associates and
approximately 120 part-time employees. In addition, at December 31, 1998,
Exteriors had relationships (i.e., independent installers who have performed an
installation for the Company in the last sixty days) with approximately 1,000
independent installers which perform installation services. Many of Exteriors's
independent installers operate multiple installation crews.
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C. MANUFACTURING AND WHOLESALE DISTRIBUTION SEGMENT
On April 20, 1998, the Company acquired all of the stock of Reeves and
its subsidiaries, including Foreline, for approximately $42.6 million in cash
and notes (including $1.5 million transaction costs). Reeves has been in
operation since 1947; Foreline has been in operation since 1961.
PRODUCTS
Set forth below is a brief description of the major products and
services offered by Reeves and Foreline:
Fencing Systems. Reeves sells a full line of fencing products including
galvanized and aluminized chain link, color coated chain link, gates, barbed
wire, barbed tape, welded wire, guard rails, wood, PVC and steel and aluminum
ornamental. These products are available in a wide variety of sizes and styles
and are used for all types of applications including residential, commercial,
industrial, military, prisons, airports and recreational facilities. In
conjunction with the sale of these products, Reeves also offers technical
support on selected products.
Access Control. Reeves sells a full line of access control products including
automatic gate operators, telephone entry systems and card access systems. A
team of specially trained personnel provides technical support for these
products.
Installation Management. In late 1998, Reeves began offering a private label
"furnished and installed" management service for fencing. This service was
initiated in conjunction with an agreement to provide these services for Lowe's.
Utilizing its own specialty line of fencing products, its pool of certified
independent fencing installers and its internally developed systems and
processes, Reeves is able to deliver a turn-key solution for the installation of
fencing systems.
Electronic Security. Foreline is a full service retailer of security systems and
related services. Products sold and serviced include specialized bank equipment
(vaults, safe deposit boxes, teller stations, drive thrus), card access systems,
closed circuit television surveillance systems and fire/burglar alarm systems.
Foreline also offers 24 hour monitoring of these systems via its own central
monitoring station.
Miscellaneous. Reeves sells mechanical steel tubing and related accessories to
manufacturers of portable canopies, carports, greenhouses and awning frames.
Reeves also wholesales and retails steel entry doors on a limited basis.
SALES
Most of Reeves's sales are to regional dealers and
contractor/installers, although it has a few national accounts (including
Exteriors) and a few other channels of distribution. No single customer accounts
for more than 5% of Reeves's sales.
WORKING CAPITAL
Reeves has a significant investment in both inventory and trade
accounts receivable. It is standard industry practice to stock locally an
adequate amount of commonly used items that are available for immediate pick-up
or delivery to customers. The items and quantity stocked vary depending on
geographical location, customer preferences, lead times and historic and
projected sales volumes. It is also standard industry practice to provide
customers with credit and in certain instances extended payment terms. Extended
payment terms are typically offered during the seasonally slow periods to induce
a stocking customer to purchase during these periods and on large construction
projects where payments to Reeves's customers are often delayed.
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RAW MATERIALS
Reeves purchases raw materials for its manufacturing processes and
finished goods for redistribution from a variety of domestic and foreign
distributors and/or manufacturers. Purchasing decisions are based primarily on
the delivered cost of the product, the quality of product and the ability of the
supplier to provide a consistent supply of the product. While Reeves currently
buys these products from a limited number of suppliers, each of the products
utilized is generally available from multiple sources. If necessary, Reeves
would be able to secure product from other suppliers on a comparable basis.
SEASONALITY AND BACKLOG
Reeves's results of operations may fluctuate from year to year or
quarter to quarter due to a variety of factors. Reeves expects lower levels of
sales and profitability during the period from mid-November through mid-March,
impacting the fourth and first quarters of each fiscal year. Reeves believes
this seasonality is caused by weather conditions in certain of Reeves's markets,
construction cycles and consumer buying habits with respect to exterior home and
garden products. Backlog at Reeves, defined as orders placed but not yet
delivered, was approximately $3.1 million at December 31, 1998.
COMPETITION
The industry in which this segment competes is fragmented and highly
competitive. Reeves competes for sales with numerous local and regional
wholesale distributors in each of its markets, some of which also buy product
from Reeves. In addition, Reeves also competes for sales with manufacturers
which sell their products directly to Reeves's customers in addition to or in
lieu of utilizing wholesale distributors like Reeves. Reeves also competes
against two other national manufacturer/wholesale distributors (MasterHalco,
Inc. and MMI Products, Inc.) and major retailers like Home Depot and Lowe's
which offer fencing materials to fence contractors.
Because Reeves and each of its competitors compete primarily on the
basis of price, reputation and service, Reeves expects highly competitive market
conditions to continue. As a whole the industry in which Reeves participates has
been undergoing a consolidation, with many of the smaller manufacturers and
wholesale distributors being purchased by larger manufacturers and/or wholesale
distributors. While the impact of this consolidation is unknown, Reeves believes
it will not impact its ability to compete.
EMPLOYEES
At December 31, 1998, this segment employed approximately 420
associates.
D. GOVERNMENT REGULATIONS
The businesses and activities of both segments are subject to various
federal, state, and local laws, regulations, and ordinances. Reeves is subject
to a consent decree related to property one of its subsidiaries owns, some or
all of which is a federal environmental Superfund site. Nevertheless, 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 either segment. (See also Item 7 - "Information Regarding Forward-Looking
Statements; Compliance with Government Regulations.")
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E. EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 18, 1999, the executive officers of the Company were as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
C. Stephen Clegg 48 Chairman of the Board and Chief Executive Officer
Geoffrey H. Foreman 49 President and Chief Operating Officer
Michael A. Augello 43 Vice President; President, Reeves
Eugene J. O'Hern, Jr. 55 Controller
Richard G. Reece 50 Vice President, Chief Financial Officer and Treasurer
Joseph U. Schorer 45 Vice President, General Counsel and Secretary
</TABLE>
MR. C. STEPHEN CLEGG has been a director of the Company since September
1993 and has served as the Company's Chairman of the Board and Chief Executive
Officer since February 1996 and as President from April 1996 to September 1998.
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, Inc. which received fees from the Company for providing call center
services, for processing sales leads, and for other services prior to the
acquisition of its principal business by KanTel(TM). 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. Mr. Clegg is currently a director of two other public companies,
Birmingham Steel Corporation, a steel production company, and RVM Industries,
Inc., a manufacturer of aluminum products.
MR. GEOFFREY H. FOREMAN joined the Company as President and Chief
Operating Officer in October 1998. From November 1989 until he joined the
Company, Mr. Foreman was senior vice president of sales, marketing and
distribution at Wayne-Dalton Corp., an international manufacturer of garage
doors, entry doors, and automatic openers.
MR. MICHAEL A. AUGELLO has served as Vice President of the Company and
President of Reeves and Foreline since the Company's acquisition of Reeves in
April 1998. From 1990 until the acquisition, Mr. Augello served in various
positions at Reeves. He has been Reeves's president since 1994.
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.
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.
MR. JOSEPH U. SCHORER joined the Company in 1997 as acting Vice
President, General Counsel and Secretary, and since March 1997, has served as
Vice President, General Counsel and Secretary of the Company, Globe, Mid-West
Spring and Catalog and their subsidiaries. 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.
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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 that expires December
31, 2001. As of December 31, 1998, Exteriors leased approximately 64
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. As of December 31, 1998, KanTel(TM)
principally operated at premises occupying approximately 15,000 square feet in
Lawrence, Kansas, pursuant to a lease agreement that expires December 31, 2000.
Reeves has two manufacturing and central distribution facilities. The
Tampa, Florida facility consists of approximately 160,000 square feet of
manufacturing and warehouse space on a 16-acre site. The Midfield, Alabama
facility consists of approximately 50,000 square feet of combined manufacturing
and warehouse space on a 6-acre site.
Reeves has 32 local sales/distribution offices in its network. These
facilities generally consist of 3,000 to 10,000 square feet of office and
warehouse space and from one to four acres of outside storage space. Fourteen of
the 32 facilities are leased, with the remainder being owned.
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. 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 a Sears licensee that does home improvement repairs. 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. 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 Annual Report under the caption "Corporate Data"
and in note 17 to the Financial Statements "Quarterly Financial Information,"
which information is included in Exhibit 13.1 and hereby incorporated herein by
reference.
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<PAGE>
In the last two fiscal years, the Company has not declared or paid any
cash dividends on its Common Stock. 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 the
Annual Report 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 the
Annual Report 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, as amended. 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, Exteriors's reliance on home consultants and on the
availability of qualified independent installers, and conditions in the home
improvement industry, including the fencing industry, technology matters related
to Year 2000, the collection of trade and finance receivables, and the
maintenance of and access to inventory. The Company's plans, objectives,
estimates, and expectations are subject to change at the discretion of the
Company. Actual results, performance or achievements of the Company may differ
materially from 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:
Operating History and Recent Operating Results
The Company was incorporated in May 1993 by a group consisting
primarily 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, Exteriors'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, costs, and expenses and
in 1997 and 1998 Exteriors's operating income decreased from prior levels. There
can be no assurance that the Company's revenue growth and profitability will be
sustained or that the restructuring announced in first quarter 1999 of its
installed home improvement business will generate forecast results.
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Dependence on Sears License
A substantial portion 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, and Sears may
license the same home improvement products to other licensees within Exteriors's
markets or sell the same products or services itself. As it has done in the
past, the Company expects to negotiate and revise Exteriors's 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 Exteriors, the license agreement may not be renewed or extended by Sears or
Sears may condition extension or renewal on the agreement by the Company and its
subsidiaries to terms substantially less advantageous than the terms under the
current license agreement. Termination of the license agreement or certain
rights thereunder, the failure of Sears to renew the license agreement with
Exteriors on its current terms, an increase in the rates of the license fee paid
by Exteriors to Sears or a decrease in the credit participation fee paid by
Sears or its affiliates to Exteriors, the addition of other Sears licensees
marketing Exteriors's products in Exteriors's markets, Sears's exercise of its
right to discontinue Exteriors's license in any market or for any product, the
development or acquisition by Sears itself or its affiliates of competing
businesses, products or services, 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, Exteriors
would need to find alternative methods to market its products. The alternative
methods may not 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 "B. Installed Home
Improvements Segment; Sears License Agreement" under Item 1.)
Warranty Exposure
Exteriors provides each customer with a warranty on product and labor.
Certain manufacturers' product warranties often provide a declining amount of
coverage over time, while Exteriors's warranty coverage does not decline during
the warranty period. The labor warranty that Exteriors receives from its
independent roofing installers (generally one to two years) is significantly
shorter in duration than that provided by Exteriors to its roofing customers.
Due to Exteriors's limited operating history and the length of the warranties
provided by Exteriors, there can be no assurance that the warranty reserve is
adequate. In all cases, Exteriors 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 Exteriors's
expense and without the Company's consent, any customer complaints, (ii)
Exteriors has agreed to and supports Sears policy of "Satisfaction Guaranteed or
Your Money Back" as it relates to customer complaints and adjustment, and (iii)
Exteriors's customers are third party beneficiaries of the product and labor
warranty given by Exteriors 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 Exteriors,
materially exceeds the warranty reserve or if certain manufacturers or a
significant number of independent installers are unable to fulfill their
warranty obligations, Exteriors's results of operations could be materially
adversely affected.
Reeves provides a warranty, generally varying from 5 to 25 years, on
each product sold. For the products that Reeves does not manufacture, Reeves
typically gives the customer the same warranty that Reeves receives from the
manufacturer. If the manufacturer goes out of its business or otherwise fails to
comply with its warranty obligations, Reeves may be responsible for any warranty
failure. With respect to products that it manufactures, Reeves maintains
products liability insurance with scope and in the amounts and exclusions
typical for a company of Reeves's size and for products such as those that
Reeves manufactures. A liability claim that exceeds these limits or within these
insurance exclusions could result in claims that would have a materially adverse
effect on Reeves's business.
Foreline's warranty may be longer in duration for products it
distributes than the warranty of the manufacturer, and so Foreline may be liable
for warranty amounts for which it has no recourse against the manufacturer.
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Reliance on Home Consultants
Exteriors's success depends upon its ability to identify, develop and
retain qualified employees, particularly home consultants. As a result,
Exteriors devotes significant resources to the training and development of its
home consultants. There can be no assurance that Exteriors will continue to be
able to identify, develop and retain qualified home consultants.
To the extent that Exteriors does not successfully hire and retain
qualified home consultants or they are unable to achieve anticipated performance
levels, Exteriors's ability to penetrate existing and new markets and,
therefore, the Company's sales growth could be significantly delayed or
adversely affected.
Exteriors has experienced significant turnover with respect to its
sales associates in the past, because, among other reasons, Exteriors's sales
associates (now referred to as home consultants) worked on a commission-only
basis and because, in certain regions of the country, the business is seasonal.
In 1998, approximately 20% of the sales associates generated approximately 70%
of net installed sales. Increased turnover and/or loss of productive home
consultants has a direct impact on net sales and profitability. The turnover of
home consultants results in increased recruitment and training costs and a lower
than desired conversion rate of sales leads to sales. Exteriors recently revised
its compensation system for home consultants, but Exteriors has no experience
with the impact of this revised compensation system. To the extent that the
turnover rate of home consultants continues or increases, or Exteriors loses a
significant number of its most productive home consultants, the net sales and
profitability of the Company could be adversely affected. (See also "B.
Installed Home Improvements Segment; Sales" under Item 1).
Dependence on Availability of Qualified Independent Installers
Part of the Company's success depends upon Exteriors's ability to
continue to identify and hire independent installers possessing the technical
skills, experience and financial stability necessary to meet Exteriors's quality
standards and to satisfy Exteriors's insurance requirements. Because Exteriors
provides up to a 15-year warranty for labor on certain products, hiring
qualified independent installers who will perform the work in accordance with
Exteriors's specifications and predetermined quality standards is extremely
important. Most of Exteriors's independent installers also compete directly with
Exteriors and Exteriors, to a lesser extent, competes with other home
improvement companies for the services of independent installers. Exteriors only
retains an independent installer at the time an installation is sold. As a
result, no independent installer is obligated to work for Exteriors until the
independent installer accepts an assignment. In the past, Exteriors 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, Exteriors in sufficient numbers to satisfy Exteriors's installation
requirements. Exteriors's policy requires that its independent installers
satisfy Exteriors'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, Exteriors could incur ultimate liability for any injury or damage
claims. (See also "B. Installed Home Improvements Segment; Independent
Installers" under Item 1.)
Under its agreement with Lowe's, Reeves has assumed various obligations
regarding the quality of installations its installers perform. Reeves's failure
to obtain a sufficient number of qualified installers might materially adversely
affect Reeves's rights under the Lowe's agreement.
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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 Exteriors's products. As interest rates
increase, customers often pay higher monthly payments which may make Exteriors's
products less affordable, and, as a result, the Company's net sales and
profitability may decrease. The Company's borrowings are generally subject to
variable interest rates. The Company does not hedge all of its interest rate
exposure. Profitability may be affected if the Company is unable to pass on to
its customers increases in the interest rates the Company pays.
Dependence on Availability of Third Party Credit
The Company believes that the majority of installed home improvements
in the United States are financed. During 1998, approximately 88.9% of
Exteriors's sales were financed, and, of the sales which were financed,
approximately 87.1% 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 Exteriors'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, Exteriors's results of operations could be adversely
affected.
Many of Exteriors's customers who finance their purchases through
Marquise may be higher credit risks than Exteriors'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 Exteriors'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 has experienced
credit losses and 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 "B. Installed Home Improvements Segment; Customer
Financing" under Item 1.)
Dependence on Key Personnel
The Company and its subsidiaries are currently dependent upon the
ability and experience of their executive officers and there can be no assurance
that the Company and its subsidiaries 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. These officers currently devote and
intend to devote a majority of their time to the management of the Company. The
Company and its subsidiaries generally do not have employment agreements with
their executive officers, although termination of Mr. Foreman's employment under
certain circumstances entitles Mr. Foreman to certain separation payments. The
Company and its subsidiaries do not maintain key-man life insurance on any of
their officers or key personnel.
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Highly Competitive Market
The industry in which the Company and its subsidiaries compete is
large, fragmented and competitive. Exteriors 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 Exteriors.
Exteriors also competes against major retailers or manufacturers which market
and install products similar to Exteriors's. Reeves competes against other
manufacturers and distributors of fencing products and against major retailers.
Its program for furnishing and installing fencing products competes against
major retailers and manufacturers as well as local home improvement dealers.
Foreline competes against companies with significantly greater resources. 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 be
profitable. (See also "B. Installed Home Improvements Segment; Competition" and
"C. Manufacturing and Wholesale Distribution Segment; Competition" under Item
1.)
Seasonality; Quarterly Fluctuations
The results of operations for Exteriors and Reeves 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 "B. Installed Home Improvements Segment; Seasonality" and "C.
Manufacturing and Wholesale Distribution Segment; Seasonality and Backlog" under
Item 1.)
Compliance with Government Regulations
The business and the activities of the Company, its subsidiaries and
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, Department of Transportation regulations (in the
case of Reeves), environmental laws and regulations relating to water and air
quality, hazardous wastes and the disposal of demolition debris and other solid
wastes, and building and zoning regulations. In certain jurisdictions, Exteriors
or one of its employees is required to be licensed as a contractor. In addition,
certain jurisdictions require Exteriors or the independent installer to obtain a
building permit for each installation. In addition, such laws and regulations,
may, among other things, regulate Exteriors'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 in complying
with such laws. Although the Company believes that it and its subsidiaries have
been and are 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.
In 1998, Exteriors began a test program in which it leased vehicles to
be used by home consultants. The failure of any home consultant to comply with
safety laws could expose Exteriors to substantial liability. Likewise, Reeves
ships products on trucks that Reeves owns or leases. Reeves maintains insurance
coverage with exclusions and limits that are typical for companies of Reeves's
size. If a claim arises against Reeves within an insurance exclusion or in
excess of policy limits, Reeves could be materially adversely affected.
Reeves is subject to a consent decree with federal regulatory
authorities related to environmental contamination on Superfund sites owned by a
Reeves subsidiary and on other sites. The decree requires Reeves to engage in
ongoing monitoring for water pollution and may require Reeves, depending on
results of testing and the conclusions of regulatory authorities, to expend
additional amounts for testing, treatment, and/or other costs related to the
property. Reeves also has certain other ongoing environmental remediation costs.
The amounts to be spent by Reeves may become material in the future.
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Marquise and Exteriors are 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 related to
consumer financing to: (i) obtain and maintain certain licenses and
qualifications; (ii) limit the interest rates, fees and other charges Exteriors
and/or Marquise are allowed to charge; and (iii) limit or prescribe certain
other terms on 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 and Exteriors have been and currently are 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 their business will not have an adverse effect on
their ability to provide customer financing of their products or on the
profitability of such activities.
KanTel(TM) is subject to a variety of federal and state regulations
regarding telemarketing activities, including regulations promulgated under the
Telephone Consumer Protection Act of 1991. These regulations provide penalties
for failure to comply with their terms. To the extent KanTel(TM) engages solely
in in-bound telemarketing (i.e., responding to calls that consumers place to
Sears, the Company, or the Company's subsidiaries), some of these regulations
are of limited applicability. A change in these regulations, the advent of new
statutes or regulations, or a change in KanTel(TM)'s activities (such as the
commencement of outbound telemarketing activities) could materially increase the
cost of KanTel(TM)'s operations and therefore affect the Company's
profitability. KanTel(TM)'s failure to comply with federal and state regulations
could subject KanTel(TM) to sanctions or, under certain circumstances,
restrictions on its operations that could also have a materially adverse effect
on the Company. (See also "Government Regulations" under Item 1.)
Dependence on Telecommunications Services
The Company's subsidiaries are materially dependent on service provided
by various local and long distance telephone companies. A significant increase
in the cost of telecommunications voice or data services, or any significant
interruption in telecommunications voice or data services, could have a
materially adverse effect on the Company.
Reliance on Technology
The Company has invested significantly in sophisticated and specialized
telecommunications and computer technology, and has focused on the application
of this technology to provide customized solutions to meet its clients needs.
The Company anticipates that it will be necessary to continue to select, invest
in and develop new and enhanced technology on a timely basis in the future in
order to maintain its competitiveness. The Company's future success will depend
in part on its ability to continue to develop information technology solutions
which keep pace with evolving industry standards and changing infrastructure
requirements and client demands. In addition, the Company's business is highly
dependent on its computer and telephone equipment and software systems, and the
temporary or permanent loss of such equipment or systems, through casualty or
operating malfunction, could have a materially adverse effect on the Company's
business.
Year 2000
The Year 2000 date change issue is believed to affect virtually all
companies and organizations. If not corrected, many applications could fail or
create erroneous results by or at Year 2000. The Company is undertaking an
investigation to determine its Year 2000 readiness, including a determination as
to whether the computer systems of the Company and its subsidiaries, the
computer systems of Sears and vendors, installers, and creditors of the Company
and its subsidiaries (as they relate to the Company and its subsidiaries), and
the products with embedded chip technology that Foreline distributed 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 the Annual Report included in Exhibit 13.1 and
incorporated herein by reference.)
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Inventory
Inventory management has become increasingly complex as the Company
continues to rationalize its supply chain and increase the mix of product and
service offerings through commercial and retail channels. Channel suppliers
constantly adjust their ordering patterns in response to the Company's and its
competitors' prices as well as seasonal fluctuations in end-user demand. Some of
the Company's products are imported and require long lead times and large
minimum quantities. Channel purchasers may increase orders during times of
shortages or cancel or delay orders in times of excess supply or in anticipation
of price decreases. Excess supplies could result in price reductions, increased
carrying costs and inventory write-down which in turn could adversely affect the
Company's gross margins.
Stock Price
The Company's stock price is subject to volatility. The announcement of
new products or new channels, quarterly variations in the Company's results of
operations, changes in earnings or revenue estimates by the investment community
as well as speculation in the press or investment community are among the
factors affecting the Company's stock price. In addition, general market and
economic conditions unrelated to the Company's current or projected operating
performance can affect the stock price. For these reasons, recent trends should
not always be considered reliable indicators of future stock price or financial
results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in an excerpt from
the Annual Report under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
which information is 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 the
Annual Report 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 13, 1999, under the captions
"Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance," which information is hereby
incorporated herein by reference.
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<PAGE>
b. Executive officers of the Company
Reference is made to "Executive Officers 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 13,
1999, under the captions "Executive Compensation," "Compensation Committee
Report on Executive Compensation," "Compensation Committee Interlocks and
Insider Participation," "Employment Agreements," 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 13,
1999, 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 13,
1999, 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, 1998 and 1997;
(ii) Consolidated Statements of Operations -
years ended December 31, 1998, 1997 and
1996;
(iii) Consolidated Statements of Changes in Common
Stockholders' Equity - years ended December
31, 1998, 1997 and 1996;
(iv) Consolidated Statements of Cash Flows -
years ended December 31, 1998, 1997 and
1996;
(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.
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<PAGE>
(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
In the three months ended December 31, 1998, the Company filed
the following reports on Form 8-K:
(1) A report filed December 3, 1998, concerning
amendments to the Company's by-laws concerning the
time for a stockholder's giving notice of an intent
to present new business at the Company's annual
meeting of shareholders;
(2) A report filed December 21, 1998, concerning extension of
the Sears license agreement.
(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.
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<PAGE>
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 18, 1999.
DIAMOND HOME SERVICES, INC.
By /s/ C. Stephen Clegg
-------------------------
C. Stephen Clegg, Chairman of the Board
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 18, 1999, in the capacities indicated:
SIGNATURE TITLE
/s/ C. Stephen Clegg Chairman of the Board, Chief Executive Officer
C. Stephen Clegg and Director (Principal Executive Officer)
/s/ Richrad 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
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
3.1 Amended and Restated Certificate of Incorporation of the
Company (1)
3.2 Amended and Restated By-Laws of the Company (filed
herewith)
10.1 Registration Rights Agreement between the Company and Globe
Building Materials, Inc. (2)
10.1(a) Amendment to Registration Rights Agreement between the
Company and Globe Building Materials, Inc. (2)
10.2 Form of Indemnity Agreement between the Company and its
directors and certain officers. (2)
10.3 License Agreement between Sears, Roebuck and Co. and
Diamond Exteriors, Inc., dated January 1, 1996. (2)
10.3(a) Amendment Agreement between Sears, Roebuck and Co. and
Diamond Exteriors, Inc., dated July 1, 1996. (1)
10.3(b) Extension Agreement between Sears, Roebuck and Co. and
Diamond Exteriors, Inc., dated December 17, 1998. (3)
10.4 Lease between the Company and Haldun Square Partners dated
May 3, 1995. (2)
10.5* Form of Agreement between the Company and each of the
following managers of the Company: Frank Cianciosi, Jerome
Cooper, James M. Gillespie, Rodger Ibach, Marvin Lerman and
Ronald Schurter. (2)
10.6* Form of Agreement between the Company and certain of its
managers. (2)
10.7* The Company's Incentive Stock Option Plan. (2)
10.8* The Company's 1996 Nonemployee Director Stock Option Plan.
(2)
10.9 Credit Agreement dated April 20, 1998, between the Company
and Harris Trust and Savings Bank, as agent. (4)
10.9(a) First Amendment to Credit Agreement dated August 13, 1998,
among the Company, Harris Trust and Savings Bank, and
others. (5)
10.9(b) Second Amendment to Credit Agreement dated November 13,
1998, among the Company, Harris Trust and Savings Bank, and
others. (6)
10.9(c) Waiver to Credit Agreement dated December 23, 1998, among
the Company, Harris Trust and Savings Bank, and others
(filed herewith).
10.9(d) Amendment to Waiver to Credit Agreement dated January 20,
1999, among the Company, Harris Trust and Savings Bank, and
others (filed herewith).
10.10* Letter to Geoffrey H. Foreman (filed herewith).
10.11 Stock Purchase Agreement dated March 5, 1998, among the
Company, shareholders of Reeves Southeastern Corp., and
others (7)
13.1 Excerpts from 1998 Annual Report to Stockholders (filed
herewith).
21.2 Subsidiaries of the Company (filed herewith).
23.1 Consent of Ernst & Young LLP (filed herewith).
27 Financial Data Schedule (filed herewith).
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* 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. 333-10973.
(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. 333-3822.
(3) Incorporated herein by reference to the exhibit 10 to the Company's
Report on Form 8-K filed on December 21, 1998.
(4) Incorporated herein by reference to exhibit 10.1 to the Company's
Report on Form 8-K filed on April 30, 1998.
(5) Incorporated herein by reference to exhibit 10.1 to the Company's
Report on Form 10-Q filed on November 16, 1998.
(6) Incorporated herein by reference to exhibit 10.2 to the Company's
Report on Form 10-Q filed on November 16, 1998.
(7) Incorporated by reference to exhibit 2.1 to the Company's Report on
Form 8-K filed on April 30, 1998.
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AMENDED AND RESTATED BY-LAWS
OF
DIAMOND HOME SERVICES, INC.
(A DELAWARE CORPORATION)
as amended on March 18, 1999
<PAGE>
TABLE OF CONTENTS
ARTICLE 1 - CERTIFICATE OF INCORPORATION PAGE
Section 1.1. Contents...........................................1
Section 1.2. Certificate in Effect..............................1
ARTICLE 2 - MEETINGS OF STOCKHOLDERS
Section 2.1. Place..............................................1
Section 2.2. Annual Meeting.....................................1
Section 2.3. Special Meetings...................................1
Section 2.4. Notice of Meetings.................................1
Section 2.5. Affidavit of Notice................................2
Section 2.6. Quorum.............................................2
Section 2.7. Voting Requirements................................2
Section 2.8. Proxies and Voting.................................2
Section 2.9. Director Nominations...............................3
Section 2.10. New Business.......................................3
Section 2.11. Stockholder List...................................4
Section 2.12. Record Date........................................4
ARTICLE 3 - DIRECTORS
Section 3.1. Duties.............................................5
Section 3.2. Number; Election and Term of Office................5
Section 3.3. Compensation.......................................5
Section 3.4. Reliance on Books..................................5
ARTICLE 4 - MEETINGS OF THE BOARD OF DIRECTORS
Section 4.1. Place..............................................5
Section 4.2. Annual Meeting.....................................6
Section 4.3. Regular Meetings...................................6
Section 4.4. Special Meetings...................................6
Section 4.5. Quorum.............................................6
Section 4.6. Action Without Meeting.............................6
Section 4.7. Telephone Meetings.................................6
Section 4.8. Interested Directors...............................7
ARTICLE 5 - COMMITTEES OF DIRECTORS
Section 5.1. Designation........................................7
Section 5.2. Records of Meetings................................8
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ARTICLE 6 - NOTICES
Section 6.1. Method of Giving Notice............................8
Section 6.2. Waiver.............................................9
ARTICLE 7 - OFFICERS
Section 7.1. In General.........................................9
Section 7.2. Principal Officers ................................9
Section 7.3. Election of Other Officers.........................9
Section 7.4. Salaries...........................................9
Section 7.5. Term of Office.....................................9
Section 7.6. The Chairman of the Board.........................10
Section 7.7. The Chief Executive Officer.......................10
Section 7.8 The President and Chief Operating Officer.........10
Section 7.9. The Chief Financial Officer.......................10
Section 7.10. The Vice Presidents...............................10
Section 7.11. The Secretary.....................................11
Section 7.12. The Assistant Secretary...........................11
Section 7.13. The Treasurer.....................................11
Section 7.14. The Assistant Treasurer...........................11
ARTICLE 8 - RESIGNATIONS, REMOVALS AND VACANCIES
Section 8.1. Directors.........................................12
Section 8.2. Officers..........................................12
ARTICLE 9 - CERTIFICATE OF STOCK
Section 9.1. Issuance of Stock.................................13
Section 9.2. Right to Certificate; Form........................13
Section 9.3. Facsimile Signature...............................13
Section 9.4. Lost Certificates.................................13
Section 9.5. Transfer of Stock.................................14
Section 9.6. Registered Stockholders...........................14
ARTICLE 10 - INDEMNIFICATION
Section 10.1. Third Party Actions...............................14
Section 10.2. Derivative Actions................................14
Section 10.3. Expenses..........................................15
Section 10.4. Authorization.....................................15
Section 10.5. Advance Payment of Expenses.......................15
Section 10.6. Non-Exclusiveness.................................15
Section 10.7. Insurance.........................................15
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Section 10.8. Constituent Corporations..........................16
Section 10.9. Additional Indemnification........................16
ARTICLE 11 - EXECUTION OF PAPERS.............................................16
ARTICLE 12 - FISCAL YEAR.....................................................16
ARTICLE 13 - DEPOSITORIES....................................................17
ARTICLE 14 - SEAL............................................................17
ARTICLE 15 - OFFICES
Section 15.1. Registered Office.................................17
Section 15.2. Principal Office..................................17
ARTICLE 16 - AMENDMENTS......................................................17
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DIAMOND HOME SERVICES, INC.
AMENDED AND RESTATED BY-LAWS
ARTICLE 1
CERTIFICATE OF INCORPORATION
Section 1.1. Contents. These By-laws, the powers of the
corporation and of its Directors and stockholders, and all matters concerning
the conduct and regulation of the business of the corporation shall be subject
to such provisions in regard thereto, if any, as are set forth in said
Certificate of Incorporation.
Section 1.2. Certificate in Effect. All references in these
By-laws to the Certificate of Incorporation shall be construed to mean the
Certificate of Incorporation of the corporation as from time to time amended and
restated, including (unless the context shall otherwise require) all
certificates and any agreement of consolidation or merger filed pursuant to the
Delaware General Corporation Law, as amended.
ARTICLE 2
MEETINGS OF STOCKHOLDERS
Section 2.1. Place. All meetings of the stockholders may be
held at such place either within or without the State of Delaware as shall be
designated from time to time by the Board of Directors, the Chairman of the
Board or the President and stated in the notice of the meeting or in any duly
executed waiver of notice thereof.
Section 2.2. Annual Meeting. The annual meeting of the
stockholders, commencing in 1997, shall be held each year within 180 days after
the close of the immediately preceding fiscal year of the corporation, at such
date and time as shall be designated from time to time by the Board of
Directors, and stated in the notice or waiver of notice of the meeting.
Section 2.3. Special Meetings. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise prescribed by the
General Corporation Law of the State of Delaware, the Certificate of
Incorporation or these By-laws, may only be called by the President, the
Chairman of the Board or a majority of the Board of Directors then in office.
Such request shall state the purpose or purposes of the proposed meeting.
Section 2.4. Notice of Meetings. A written notice of all
meetings of stockholders stating the place, date and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the special
meeting is called, shall be given to each stockholder entitled to vote at such
meeting. Except as otherwise provided by law, such notice shall be given not
less than ten nor more than sixty (60) days before the date of the meeting. If
mailed, notice is given when deposited in the United States mail, postage
prepaid, directed to the stockholder at his
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address as it appears on the records of the corporation. Business transacted at
any special meeting of stockholders shall be limited to the purposes stated in
the notice.
Section 2.5. Affidavit of Notice. An affidavit of the
Secretary or an Assistant Secretary or the transfer agent of the corporation
that notice of a stockholders meeting has been given shall, in the absences of
fraud, be prima facie evidence of the facts stated therein.
Section 2.6. Quorum. The holders of a majority of the stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statue or by the Certificate of Incorporation or by these By-laws. If, however,
such quorum shall not be present or represented by proxy at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, the Chairman of the Board or the President, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, except as hereinafter provided, until a quorum
shall be present or represented. At such adjourned meeting at which a quorum
shall be present or represented any business may be transacted which might have
been transacted at the original meeting. If the adjournment is for more than
thirty (30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 2.7. Voting Requirements. When a quorum is present at
any meeting, the vote of the holders of a majority of the stock having voting
power present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which by express
provision of any applicable statute, the Certificate of Incorporation or these
By-laws, a different vote is required, in which case such express provision
shall govern and control the decision of such question.
Section 2.8. Proxies and Voting. Unless otherwise provided by
the General Corporation Law of the State of Delaware, the Certificate of
Incorporation or these By-laws, each stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share of the
capital stock having voting power held by such stockholder, but no proxy shall
be voted on after three years from its date, unless the proxy provides for a
longer period. Persons holding stock in a fiduciary capacity shall be entitled
to vote the shares so held. Shares of the capital stock of the corporation owned
by the corporation shall not be voted, directly or indirectly.
If shares or other securities having voting power stand of
record in the names of two or more persons, whether fiduciaries, members of a
partnership, joint tenants, tenants in common, tenants by the entirety or
otherwise, or if two or more persons have the same fiduciary relationship
respecting the same shares, unless the Secretary of the corporation is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect:
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(a) If only one votes, his act binds all;
(b) If more than one vote, the act of the majority so voting
binds all;
(c) If more than one vote, but the vote is evenly split on any
particular matter, each faction may vote the securities in question
proportionally, or any person voting the shares, or a beneficiary, if
any, may apply to the Court of Chancery or such other court as may have
jurisdiction to appoint an additional person to act with the persons so
voting the shares, which shall then be voted as determined by a
majority of such persons and the person appointed by the Court. If the
instrument so filed shows that any such tenancy is held in unequal
interests, a majority or even split for the purpose of this subsection
shall be a majority or even split in interest.
Section 2.9. Director Nominations. Nominations for the
election of Directors may be made by the Board of Directors or by any
stockholder entitled to vote for the election of Directors. Nominations by
stockholders shall be made in writing and delivered or mailed by first class
United States mail, postage prepaid, to the Secretary of the corporation not
less than sixty (60) nor more than ninety (90) days prior to the date of the
annual meeting or if the corporation mails its notice and proxy to the
stockholders less than sixty (60) days prior to the annual meeting, within ten
(10) days after the notice and proxy is mailed. Each stockholder nomination
shall set forth (i) the name, age, business address and, if known, residence
address of each nominee proposed in such nomination, (ii) the principal
occupation or employment of each such nominee, and (iii) the number of shares of
capital stock of the corporation which are beneficially owned by each nominee;
and in addition, evidence of the nominee's willingness to serve as a Director
shall also be provided. Upon delivery, such nominations shall be posted in a
conspicuous place in the principal office of the corporation. Ballots bearing
the names of all persons nominated by the stockholders shall be provided for use
at the annual meeting.
The chairman of the meeting of stockholders at which any
election of Directors is to occur may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
Section 2.10. New Business. Any new business to be taken up at
any meeting of the stockholders, other than such new business to be taken up at
the request of the Chairman of the Board or the Board of Directors, shall be
stated in writing and delivered or mailed by first class United States mail,
postage prepaid, to the Secretary of the corporation at the principal executive
offices of the corporation not less than ninety (90) nor more than one hundred
twenty (120) days before the first anniversary of the date of the most recent
annual meeting (the "New Business Due Date"), and all business so stated,
proposed, and delivered or mailed shall be considered at the annual meeting; but
no other proposal shall be acted upon at the annual meeting. This provision
shall not prevent the consideration and approval or disapproval at the annual
meeting of reports of officers, Directors, and committees; but in connection
with such reports, no new business shall be acted upon at such annual meeting
unless stated and filed as herein provided. If the chairman of the annual
meeting determines that business was not
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properly brought before the annual meeting in accordance with the foregoing
procedures, the chairman shall declare to the meeting that the business was not
properly brought before the meeting and such business shall not be transacted.
Section 2.11. Stockholder List. The officer who has charge of
the stock ledger of the corporation shall prepare and make, at least ten (10)
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present. The original or duplicate stock ledger shall be the
only evidence as to who are the stockholders entitled to examine such list, the
stock ledger or the books of the corporation, or to vote in person or by proxy
at any meeting of stockholders.
Section 2.12. Record Date. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) nor less than
ten (10) days before the date of such meeting, nor more than sixty (60) days
prior to any other action. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date of the adjourned meeting.
If no record date is fixed by the Board of Directors:
(a) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close
of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held.
(b) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board
of Directors adopts the resolution relating thereto.
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ARTICLE 3
DIRECTORS
Section 3.1. Duties. The business and affairs of the
corporation shall be managed by or under the direction of its Board of Directors
which may exercise all such powers of the corporation and do all such lawful
acts and things as are not by the General Corporation Law of the State of
Delaware, nor by the Certificate of Incorporation nor by these By-laws directed
or required to be exercised or done by the stockholders.
Section 3.2. Number; Election and Term of Office. The number
of Directors which shall constitute the whole Board of the corporation shall be
as determined from time to time exclusively by the Board of Directors and set
forth in a resolution of the Board of Directors. Directors shall be elected by
the Corporation's stockholders at the annual meeting of the stockholders, except
as provided in Section 8.1 of Article 8, and each Director elected shall hold
office until the next annual meeting of stockholders and until a successor is
duly elected and qualified or until his or her earlier death, resignation or
removal. Directors need not be stockholders.
Section 3.3. Compensation. Unless otherwise restricted by the
Certificate of Incorporation or these By-laws, the Board of Directors shall have
the authority to fix the compensation of Directors. The Directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as Directors. No such payment shall preclude any
Director from serving the corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
Section 3.4. Reliance on Books. A member of the Board of
Directors or a member of any committee designated by the Board of Directors
shall, in the performance of his duties, be fully protected in relying in good
faith upon the books of account or reports made to the corporation by any of its
officers, or by an independent certified public accountant, or by an appraiser
selected with reasonable care by the Board of Directors or by any committee, or
in relying in good faith upon other records of the corporation.
ARTICLE 4
MEETINGS OF THE BOARD OF DIRECTORS
Section 4.1. Place. The Board of Directors of the corporation
may hold meetings, both regular and special, at such place or places within or
without the State of Delaware as the Board of Directors may from time to time
determine, or as may be specified or fixed in the respective notices or waivers
of notice of such meeting.
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Section 4.2. Annual Meeting. The annual meeting of the Board
of Directors shall be held immediately following the annual meeting of
stockholders each year or any special meeting held in lieu thereof, or at such
other time as the Board of Directors may from time to time determine or as may
be specified or fixed in the notices or waivers of notice of such meeting.
Section 4.3. Regular Meetings. Regular meetings of the Board
of Directors may be held without notice at such time and at such place as shall
from time to time be determined by the Board.
Section 4.4. Special Meetings. Special meetings of the Board
may be called by the Chairman of the Board or the President on two (2) days'
notice to each Director either personally, by mail, by telegram or by facsimile.
Special meetings shall be called by the Chairman of the Board, the President or
the Secretary in like manner and on like notice on the written request of any
two Directors unless the Board consists of only one Director, in which case
special meetings shall be called by the Chairman of the Board, the President or
the Secretary in like manner and on like notice on the written request of the
sole Director.
Section 4.5. Quorum. At all meetings of the Board, a majority
of the Directors then in office shall constitute a quorum for the transaction of
business and the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the Certificate of
Incorporation or by these By-laws. Common or interested Directors may be counted
in determining the presence of a quorum at a meeting of the Board of Directors.
If a quorum shall not be present at any meeting of the Board of Directors, the
Directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 4.6. Action Without Meeting. Unless otherwise
restricted by the Certificate of Incorporation or these By-laws, any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may be taken without a meeting, if all members of the
Board or committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the Board or
committee.
Section 4.7. Telephone Meetings. Unless otherwise restricted
by the Certificate of Incorporation or these By-laws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or any committee, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at the meeting.
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Section 4.8. Interested Directors.
(a) No contract or transaction between a corporation and one
or more of its Directors or officers, or between a corporation and any other
corporation, partnership, association, or other organization in which one or
more of its Directors or officers are Directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the Director or officer is present at or participates in the meeting of the
Board or committee which authorizes the contract or transaction, or solely
because his or their votes are counted for such purpose, if:
(i) the material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the
Board of Directors or the committee, and the Board or committee in good
faith authorizes the contract or transaction by the affirmative vote of
a majority of the disinterested Directors, even though the
disinterested Directors be less than a quorum; or
(ii) the material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction
is specifically approved in good faith by vote of the stockholders; or
(iii) the contract or transaction is fair as to the
corporation as of the time it is authorized, approved or ratified by
the Board of Directors, a committee or the stockholders.
(b) Common or interested Directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
ARTICLE 5
COMMITTEE OF DIRECTORS
Section 5.1. Designation.
(a) The Board of Directors may by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the Directors of the corporation. The Board may
designate one or more Directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
(b) In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
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(c) Any such committee, to the extent provided in the
resolution of the Board of Directors designating the committee, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, to the extent such
powers and authority are permitted by the Delaware General Corporation Law as
such may be amended from time to time. Such committee or committees shall have
such name or names as may be determined from time to time by resolution adopted
by the Board of Directors.
(d) The following committees shall automatically and without
any further action be designated, with the responsibilities and authorities
described:
(i) Executive Committee: The Executive Committee shall have
and may exercise all the powers and authority of the Board of Directors
in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers
which may require it; but the Executive Committee shall not have the
power or authority in reference to (i) amending the Certificate of
Incorporation, (ii) adopting an agreement of merger or consolidation,
(iii) recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, (v) amending the By-laws of the
corporation or (vi) taking any actions prohibited by the Corporation's
Certificate of Incorporation, Amended and Restated By-laws or
applicable law.
(ii) Compensation Committee: The Compensation Committee shall
review and determine the annual salary, bonus, stock options and other
benefits of the Corporation's management.
(iii) Audit Committee: The Audit Committee shall oversee the
Corporation's internal accounting controls, review the internal audit
department of the Corporation, participate in the selection of
independent auditors, review the audit plan with the independent
auditors and review the annual report and the independent audit.
Section 5.2. Records of Meetings. Each committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when required.
ARTICLE 6
NOTICES
Section 6.1. Method of Giving Notice. Whenever, under any
provision of the General Corporation Law of the State of Delaware or of the
Certificate of Incorporation or of these By-laws, notice is required to be given
to any Director or stockholder, such notice shall be
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given in writing by the Secretary or the person or persons calling the meeting
by leaving such notice with such Director or stockholder at his residence or
usual place of business or by mailing it addressed to such Director or
stockholder, at his address as it appears on the records of the corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be personally delivered or deposited in the United
States mail. Notice to Directors may also be given by telegram or facsimile.
Section 6.2. Waiver. Whenever any notice is required to be
given under any provision of the General Corporation Law of the State of
Delaware or of the Certificate of Incorporation or of these By-laws, a waiver
thereof in writing, signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends the meeting for the express
purpose of objecting at the beginning of the meeting to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders, Directors or members of a committee of Directors need be
specified in any written waiver of notice.
ARTICLE 7
OFFICERS
Section 7.1. In General. The officers of the corporation shall
be chosen by the Board of Directors and shall include a Chairman of the Board, a
Chief Executive Officer, a President and Chief Operating Officer, a Chief
Financial Officer, a Secretary and a Treasurer. The Board of Directors may also
choose one or more Vice Presidents, Assistant Secretaries and Assistant
Treasurers. Any number of offices may be held by the same person, unless the
Certificate of Incorporation or these By-laws otherwise provide.
Section 7.2. Principal Officers. The officers shall be chosen
by the Board of Directors. The officers shall be a Chairman of the Board, a
Chief Executive Officer, a President and Chief Operating Officer, a Chief
Financial Officer, a Secretary, and a Treasurer. Any person may hold two or more
offices at the same time.
Section 7.3. Election of Other Officers. The Board of
Directors may appoint such other officers and agents as it shall deem
appropriate who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board.
Section 7.4. Salaries. The salaries of all officers and agents
of the corporation may be fixed by the Board of Directors.
Section 7.5. Term of Office. The officers of the corporation
shall hold office until their successors are elected and qualified or until
their earlier resignation or removal. Any officer elected or appointed by the
Board of Directors may be removed at any time in the manner specified in Section
8.2.
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Section 7.6. The Chairman of the Board. The Chairman of the
Board of Directors, subject only to the Board of Directors, shall have
supervisory authority over, and general management and control of, the property,
business and affairs of the corporation. He shall preside at all meetings of the
stockholders and of the Board of Directors. The Chairman, pursuant to the
authorization of the Board of Directors, shall have authority to vote all shares
of capital stock of any other corporation, standing in the name of the
corporation, at any meeting of stockholders of such other corporation, and may,
on behalf of the corporation, waive any notice of the calling of any such
meeting, and, pursuant to the authorization of the Board of Directors, may be
given written proxy in the name of the corporation to vote any or all shares of
capital stock of such other corporation owned by the corporation at any such
meeting. The Chairman shall perform such other duties as may be prescribed by
the Board of Directors from time to time.
Section 7.7. The Chief Executive Officer. The Chief Executive
Officer of the corporation, subject to the control of the Board of Directors and
the Chairman of the Board, shall in general supervise the business and affairs
of the corporation. The Chief Executive Officer shall, when the Chairman is not
present, preside at all meetings of the stockholders and of the Board of
Directors. The Chief Executive Officer may sign, with the Secretary or any other
proper officer of the corporation thereunto authorized by the Board of
Directors, certificates for or other instruments which the Board of Directors
has authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of Directors or by these
By-laws to some other officer or agent of the corporation, or shall be required
by law to be otherwise signed or executed; and in general shall perform all
duties incident to the office of chief executive officer and such other duties
as may be prescribed by the Board of Directors from time to time.
Section 7.8. The President and Chief Operating Officer. The
President and Chief Operating Officer (the "President"), subject to the control
of the Board of Directors, the Chairman of the Board and the Chief Executive
Officer, shall in general supervise the business and affairs of the corporation.
The President shall have particular responsibility for day-to-day operations of
the corporation. The President shall, when the Chairman and Chief Executive
Officer are not present, preside at all meetings of the stockholders and of the
Board of Directors. The President may sign, with the Secretary or any other
proper officer of the corporation thereunto authorized by the Board of
Directors, certificates for or other instruments which the Board of Directors
has authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of Directors or by these
By-laws to some other officer or agent of the corporation, or shall be required
by law to be otherwise signed or executed; and in general shall perform all
duties incident to the office of President and such other duties as may be
prescribed by the Board of Directors from time to time.
Section 7.9. The Chief Financial Officer. The Chief Financial
Officer shall perform such duties and have such other powers as the Board of
Directors, the Chairman of the Board, the Chief Executive Officer or the
President may from time to time prescribe.
Section 7.10. The Vice Presidents. The Vice Presidents shall
be designated in order as executive Vice President, Senior Vice President or
Vice President. There may be more than one person designated for each such
title. The Vice Presidents shall perform such duties as
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from time to time may be assigned to such Vice President by the Board of
Directors, the Chief Executive Officer, the President or Vice Presidents senior
in rank to such Vice President. The Vice President, in the absence of the
President or in the event of the President's death, inability or refusal to act,
shall perform the duties of the President, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the President.
Section 7.11. The Secretary. The Secretary shall attend all
meetings of the Board of Directors and all meetings of the stockholders and
record all the proceedings of the meetings of the corporation and of the Board
of Directors in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. He shall give, or cause to be given,
notice of all meetings of the stockholders and special meetings of the Board of
Directors, except as otherwise provided in these By-laws, and shall perform such
other duties as may be prescribed by the Board of Directors, the Chairman of the
Board, the Chief Executive Officer or the President, under whose supervision he
shall be. He shall have charge of the stock ledger (which may, however, be kept
by any transfer agent or agents of the corporation under his direction) and of
the corporate seal of the corporation.
Section 7.12. The Assistant Secretary. The Assistant
Secretary, or if there be more than one, the Assistant Secretaries in the order
determined by the Board of Directors (or if there be no such determination, then
in the order of their election) shall, in the absence of the Secretary or in the
event of his inability or refusal to act, perform the duties and exercise the
powers of the Secretary and shall perform such other duties and have such other
powers as the Board of Directors, the Chairman of the Board or the Chief
Executive Officer may from time to time prescribe.
Section 7.13. The Treasurer. The Treasurer shall have the
custody of the corporate funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the corporation in such depositories as may be designated by the Board
of Directors. The Treasurer shall disburse or supervise the disbursement of the
funds of the corporation as may be ordered by the Board of Directors, taking
proper vouchers for such disbursements, and shall render to the Board of
Directors, at its regular meetings, or when the Board of Directors so requires,
an account of all of his transactions as Treasurer and of the financial
condition of the corporation. If required by the Board of Directors, he shall
give the corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance of
the duties of this office and for the restoration to the corporation, in case of
his death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the corporation.
Section 7.14. The Assistant Treasurer. The Assistant
Treasurer, or if there shall be more than one, the Assistant Treasurers in the
order determined by the Board of Directors (or if there be no such
determination, then in the order of their election), shall, in the absence of
the Treasurer or in the event of his inability or refusal to act, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers as the Board of Directors, the Chairman of the
Board or the Chief Executive Officer may from time to time prescribe.
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ARTICLE 8
RESIGNATIONS, REMOVALS AND VACANCIES
Section 8.1. Directors.
(a) Resignations. Any Director may resign at any time by
giving written notice to the Board of Directors, the Chairman of the Board, the
President or the Secretary. Such resignation shall take effect at the time
specified therein; and unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
(b) Removals. Subject to any provisions of the Certificate of
Incorporation, the holders of stock entitled to vote for the election of
Directors may, at any meeting called for that purpose, by the affirmative vote
of a majority of the shares of such stock outstanding and entitled to vote
thereat, remove any Director or the entire Board of Directors, with or without
cause.
Whenever the holders of any class or series are entitled to
elect one or more Directors by the Certificate of Incorporation, this subsection
shall apply, in respect to the removal of a Director or Directors so elected, to
the vote of the holders of the outstanding shares of that class or series and
not to the vote of the outstanding shares as a whole.
(c) Vacancies. Vacancies occurring in the office of Director
and newly created Directorships resulting from any increase in the authorized
number of Directors shall be filled by a majority of the Directors then in
office, though less than a quorum, and the Directors so chosen shall hold
office, subject to the By-laws, until the next election of the class for which
such Directors shall have been chosen, and until their successors are duly
elected and qualified or until their earlier resignation or removal. Whenever
the holders of any class or classes of stock or series thereof are entitled to
elect one or more Directors by the Certificate of Incorporation, vacancies and
newly created Directorships of such class or classes or series may be filled by
a majority of the Directors elected by such class or classes or series thereof
then in office, or by a sole remaining Director so elected.
If there are no Directors in office, then an election of
Directors may be held in the manner provided by statute.
Unless otherwise provided in the Certificate of Incorporation
or these By-laws, when one or more Directors shall resign from the Board,
effective at a future date, a majority of the Directors then in office,
including those who have so resigned, shall have power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or resignations
shall become effective, and each Director so chosen shall hold office as
provided in this section in the filling of other vacancies.
Section 8.2. Officers. Any officer may resign at any time by
giving written notice to the Board of Directors, the Chairman of the Board, the
Chief Executive Officer, the President and Chief Operating Officer or the
Secretary. Such resignation shall take effect at the time specified therein; and
unless otherwise specified therein, the acceptance of such resignation
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shall not be necessary to make it effective. The Board of Directors may, at any
meeting called for that purpose, by vote of a majority of their entire number,
removal from office any officer of the corporation or any member of a committee,
with or without cause. Any vacancy occurring in the office of Chairman of the
Board, Chief Executive Officer, President and Chief Operating Officer, Secretary
or Treasurer shall be filled by the Board of Directors and the officers so
chosen shall hold office subject to the By-laws for the unexpired term in
respect of which the vacancy occurred and until their successors shall be
elected and qualify or until their earlier resignation or removal.
ARTICLE 9
CERTIFICATE OF STOCK
Section 9.1. Issuance of Stock. The Directors may, at any time
and from time to time, if all of the shares of capital stock which the
corporation is authorized by its Certificate of Incorporation to issue have not
been issued, subscribed for, or otherwise committed to be issued, issue or take
subscriptions for additional shares of its capital stock up to the amount
authorized in its Certificate of Incorporation. Such stock shall be issued and
the consideration therefor in the manner prescribed by law. Shares of stock with
par value may be issued for such consideration, having a value not less than par
value thereof.
Section 9.2. Right to Certificate; Form. Every holder of stock
in the corporation shall be entitled to have a certificate, signed by, or in the
name of the corporation by, the Chairman of the Board, the President or a Vice
President and the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the corporation, certifying the number of shares owned by
him in the corporation; provided that the Directors may provide by one or more
resolutions that some or all of any or all classes or series of the
corporation's stock shall be uncertified shares. Certificates may be issued for
partly paid shares and in such case upon the face or back of the certificates
issued to represent any such partly paid shares, the total amount of the
consideration to be paid therefor, and the amount paid thereon, shall be
specified.
Section 9.3. Facsimile Signature. Any of or all the signatures
on the certificate may be facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.
Section 9.4. Lost Certificates. The Board or Directors may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and /or to give the corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
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Section 9.5. Transfer of Stock. Upon surrender to the
corporation or the transfer agent of the corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignation or
authority to transfer, it shall be the duty of the corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
Section 9.6. Registered Stockholders. The corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the General
Corporation Law of the State of Delaware.
ARTICLE 10
INDEMNIFICATION
Section 10.1. Third Party Actions. The corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a Director
or officer of the corporation, or is or was serving at the request of the
corporation as a Director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believes to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
Section 10.2. Derivative Actions. The corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that is or
was a Director or officer of the corporation, or is or was serving at the
request of the corporation as a Director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the
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corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 10.3. Expenses. To the extent that a Director or
officer of the corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Sections 10.1 and 10.2,
or in defense of claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Section 10.4. Authorization. Any indemnification under
Sections 10.1 and 10.2 (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the Director or officer is proper in the circumstances
because he has met the applicable standard of conduct set forth in Sections 10.1
and 10.2. Such determination shall be made by (a) the Board of Directors by a
majority vote of a quorum consisting of Directors who were not parties to such
action, suit or proceeding, or (b) if such a quorum is not obtainable, or, even
if obtainable, a quorum of disinterested Directors so directs, by independent
legal counsel in a written opinion, or (c) by the stockholders.
Section 10.5. Advance Payment of Expenses. Expenses (including
attorneys' fees) incurred by an officer or Director in defending any civil,
criminal, administrative or investigative action, suit or proceeding shall be
paid by the corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such officer or
Director to repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the corporation as authorized in this Article
10.
Section 10.6. Non-Exclusiveness. The indemnification and
advancement of expenses provided by this Article 10 shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any By-Law, agreement, vote of
stockholders or disinterested Directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
The indemnification and advancement of expenses provided by,
or granted pursuant to, this Article 10 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a Director
or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 10.7. Insurance. The corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
Director or officer of the corporation, or is or was serving at the request of
the corporation as a Director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under the provisions of this
Article 10.
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For purposes of this Article 10, references to "other
enterprises" shall include employee benefit plans; references to "fines' shall
include any excise taxes assessed on a person with respect to any employee
benefit plan; and references to "serving at the request of the corporation"
shall include any service as a Director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such Director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this section.
Section 10.8. Constituent Corporations. The corporation shall
have power to indemnify any person who is or was a Director, officer, employee
or agent of a constituent corporation absorbed in a consolidation or merger with
this corporation or who is or was serving at the request of such constituent
corporation as a Director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, in the same manner as
hereinabove provided so that such persons will stand in the same position under
this Article with respect to this corporation as he would have stood with
respect to such constituent corporation if its separate existence had continued.
Section 10.9. Additional Indemnification. In addition to the
forgoing provisions of this Article 10, the corporation shall have the power, to
the full extent provided by law, to indemnify any person for any act or omission
of such person against all loss, cost, damage and expense (including attorneys'
fees) if such person is determined (in the manner prescribed in Section 10.4
hereof) to have acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interest of the corporation.
ARTICLE 11
EXECUTION OF PAPERS
Except as otherwise provided in these By-laws or as the Board
of Directors may generally or in particular cases otherwise determine, all
deeds, leases, transfers, contracts, bonds, notes, checks, drafts and other
instruments authorized to be executed on behalf of the corporation shall be
executed by any officer, agent or agents as may be authorized by the Board of
Directors from time to time.
ARTICLE 12
FISCAL YEAR
The fiscal year of the corporation shall end on the 31st day
of December of each year.
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ARTICLE 13
DEPOSITORIES
The Board of Directors or an officer designated by the Board
shall appoint banks, trust companies, or other depositories in which shall be
deposited from time to time the money or securities of the corporation.
ARTICLE 14
SEAL
The Corporate seal shall have inscribed thereon the name of
the corporation, the year of its organization and the word "Delaware." The seal
may be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
ARTICLE 15
OFFICES
Section 15.1. Registered Office. The registered office in the
State of Delaware shall be located at 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of the corporation's registered agent
at such address shall be The Corporation Trust Corporation.
Section 15.2. Principal Office. The corporation may also have
offices within and without the State of Delaware as the Board of Directors may
from time to time determine or the business of the corporation may require.
ARTICLE 16
AMENDMENTS
These By-laws may be amended or repealed by the vote of a
majority of the directors present at any meeting at which a quorum is present or
by the vote of the holders of the majority of the total outstanding voting stock
of the corporation, present in person or represented by proxy, at any meeting of
stockholders at which a quorum is present.
17
DIAMOND HOME SERVICES, INC.
WAIVER TO CREDIT AGREEMENT
Harris Trust and Savings Bank Bank of America National Trust and
Chicago, Illinois Savings Association
Chicago, Illinois
LaSalle National Bank
Chicago, Illinois
Ladies and Gentlemen:
Reference is hereby made to that certain Credit Agreement dated as of
April 20, 1998, as amended by that certain letter agreement dated as of April
23, 1998, that certain First Amendment dated as of August 13, 1998 and that
certain Second Amendment (the "SECOND AMENDMENT") dated as of November 13, 1998
(such Credit Agreement as so amended being hereinafter referred to as the
"CREDIT AGREEMENT"), and currently in effect by and among, Diamond Home
Services, Inc., a Delaware corporation (the "BORROWER"), and you (the "BANKS").
All capitalized terms used herein without definition shall have the same
meanings herein as such terms have in the Credit Agreement.
The Second Amendment waives the Borrower's noncompliance with the
minimum EBITDA covenant set forth in Section 8.26(b) of the Credit Agreement.
The effectiveness of this waiver is conditioned upon the effectiveness no later
than December 31, 1998 (the "EXISTING AMENDMENT DEADLINE") of an amendment to
the Credit Agreement (the "AMENDMENT TO RESET FINANCIAL COVENANTS") described in
the Second Amendment. The Borrower hereby requests that the Banks (i) extend the
Existing Amendment Deadline and (ii) waive any noncompliance by the Borrower as
of December 31, 1998 with the Interest Coverage Ratio set forth in Section 8.25
of the Credit Agreement, and the Banks are willing to do so under the terms and
conditions set forth in this Waiver.
1. EXTENSION OF AMENDMENT DEADLINE. Effective upon the Borrower's
acceptance of this Waiver in the space provided for that purpose below, the
Banks hereby extend the Existing Amendment Deadline to January 20, 1999 (the
"NEW AMENDMENT DEADLINE").
2. WAIVER. The Borrower may not be in compliance with Section 8.25 of
the Credit Agreement by virtue of the borrower's allowing the Interest Coverage
Ratio to be less than 3.0 to 1.0 at the end of its fiscal quarter ending on or
about December 31, 1998. The Borrower has requested that the Banks waive such
noncompliance (if any) with Section 8.25. Accordingly, subject to the Borrower's
acceptance of this Waiver in the space provided for that purpose below, and
subject as well to the satisfaction of the conditions subsequent set forth below
in this Section, the Banks hereby waive (subject to satisfaction of such
conditions) compliance with such Section 8.25 as of the Borrower's fiscal
quarter ending on or about December 31, 1998. Notwithstanding anything in this
Waiver to the contrary, the waiver given in this Section is subject to, and its
effectiveness is contingent upon, the effectiveness of the Amendment to Reset
Financial Covenants no later than the New Amendment Deadline. If the Amendment
to Reset Financial Covenants does not take effect before the New Amendment
Deadline, this Waiver shall immediately have no further force and effect, and an
Event of Default shall immediately exist under Section 9.1(b) of the Credit
Agreement by virtue of the Borrower's noncompliance with such Section 8.25 as of
any fiscal quarter of the Borrower ending after January 1, 1999 and also does
not waive compliance with any other terms, conditions and provisions of the
Credit Agreement.
3. SECOND AMENDMENT FEE. The Banks agree to defer until the New
Amendment Deadline the $168,750 balance of the Amendment Fee due and payable
pursuant to the Second Amendment. The Borrower's failure to pay the balance of
this Amendment Fee when due and payable shall constitute an Event of Default. No
additional fee is due and payable in consideration of this Waiver.
4. REPRESENTATIONS. In order to induce the Banks to execute and deliver
this Waiver, the Borrower hereby represents to the Banks that as of the date
upon which this Waiver becomes effective, after giving effect to this Waiver,
the Borrower is in full compliance with all of the terms and conditions of the
Credit Agreement, as amended hereby, and no Default or Event of Default shall
have occurred and be continuing under the Credit Agreement.
5. MISCELLANEOUS.
5.01 Except as specifically waived hereby, the Credit Agreement shall
continue in full force and effect in accordance with its original terms.
Reference to this specific Waiver need not be made in the Credit Agreement, the
Notes, or any other instrument or document executed in connection therewith, or
in any certificate, letter or communication issued or made pursuant to or with
respect to the Credit Agreement, any reference in any of such items to the
Credit Agreement being sufficient to refer to the Credit Agreement as
specifically waived hereby.
5.02 This Waiver may be executed in any number of counterparts, and by
the different parties on different counterpart signature pages, all of which
taken together shall constitute one and the same agreement. Any of the parties
hereto may execute this Waiver by signing any such counterpart and each of such
counterparts shall for all purposes be deemed to be an original. This Waiver
shall be governed by the internal laws of the State of Illinois.
5.03 The Borrower agrees to pay all reasonable out-of-pocket costs and
expenses incurred by the Banks in connection with the preparation, execution and
delivery of this Waiver and the documents and transactions contemplated hereby,
including the reasonable fees and expenses of counsel for the Agent with respect
to the foregoing.
Dated as of December 23, 1998
DIAMOND HOME SERVICES, INC.
By /s/
Its Vice President and Chief Financial Officer
Accepted and agreed to in Chicago, Illinois as of the date and year last above
written.
HARRIS TRUST AND SAVINGS BANK
By /s/
Its Vice President
LASALLE NATIONAL BANK
By /s/
Its Assistant Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION (successor by merger
to Bank of America Illinois)
By /s/
Its Senior Vice President
DIAMOND HOME SERVICES, INC.
AMENDMENT TO WAIVER TO CREDIT AGREEMENT
Harris Trust and Savings Bank Bank of America National Trust and
Chicago, Illinois Savings Association
Chicago, Illinois
LaSalle National Bank
Chicago, Illinois
Ladies and Gentlemen:
Reference is hereby made to that certain Credit Agreement dated as of
April 20, 1998, as amended by that certain letter agreement dated as of April
23, 1998, that certain First Amendment dated as of August 13, 1998 and that
certain Second Amendment (the "SECOND AMENDMENT") dated as of November 13, 1998
(such Credit Agreement as so amended being hereinafter referred to as the
"CREDIT AGREEMENT"), and currently in effect by and among, Diamond Home
Services, Inc., a Delaware corporation (the "BORROWER"), and you (the "BANKS").
Reference is also hereby made to that Certain Waiver to Credit Agreement dated
as of December 23, 1998 and currently in effect by and among the Borrower and
the Banks (the "DECEMBER 1998 WAIVER"). All capitalized terms used herein
without definition shall have the same meanings herein as such terms have in the
Credit Agreement.
The Second Amendment waives the Borrower's noncompliance with the
minimum EBITDA covenant set forth in Section 8.26(b) of the Credit Agreement.
The December 1998 Waiver waives the Borrower's compliance as of December 31,
1998 with the Interest Coverage Ratio covenant set forth in Section 8.25 of the
Credit Agreement. Pursuant to the December 1998 Waiver, the effectiveness of the
Second Amendment's waiver of Section 8.26(b) and the December 1998 Waiver's
waiver of compliance with Section 8.25 as of December 31, 1998 are each
conditioned upon the effectiveness no later than January 20, 1999 (the
"AMENDMENT DEADLINE") of an amendment to the Credit Agreement described in the
Second Amendment. The Borrower hereby requests that the Banks amend the December
1998 Waiver to extend the Amendment Deadline to February 21, 1999, and the Banks
are willing to do so under the terms and conditions set forth in this Amendment.
1. AMENDMENT. Effective upon the Borrower's acceptance of this
Amendment in the space provided for that purpose below, the Banks hereby extend
the Amendment Deadline to February 12, 1999 (the "NEW AMENDMENT DEADLINE") and
any reference to the Amendment Deadline in the Waiver shall be deemed a
reference to the New Amendment Deadline.
2. SECOND AMENDMENT FEE. The Banks agree to defer until the New
Amendment Deadline the $168,750 balance of the Amendment Fee due and payable
pursuant to the Second Amendment. The Borrower's failure to pay the balance of
this Amendment Fee when due and payable shall constitute an Event of Default. No
additional fee is due and payable in consideration of this Amendment.
3. REPRESENTATIONS. In order to induce the Banks to execute and deliver
this Waiver, the Borrower hereby represents to the Banks that as of the date
upon which this Amendment becomes effective, after giving effect to this
Amendment, the Borrower is in full compliance with all of the terms and
conditions of the Credit Agreement, as amended hereby, and no Default or Event
of Default shall have occurred and be continuing under the Credit Agreement.
4. MISCELLANEOUS.
4.01 Except as specifically waived hereby, the Credit Agreement shall
continue in full force and effect in accordance with its original terms.
Reference to this specific Amendment need not be made in the Credit Agreement,
the Notes, or any other instrument or document executed in connection therewith,
or in any certificate, letter or communication issued or made pursuant to or
with respect to the Credit Agreement, any reference in any of such items to the
Credit Agreement being sufficient to refer to the Credit Agreement as
specifically amended hereby.
4.02 This Amendment may be executed in any number of counterparts, and
by the different parties on different counterpart signature pages, all of which
taken together shall constitute one and the same agreement. Any of the parties
hereto may execute this Amendment by signing any such counterpart and each of
such counterparts shall for all purposes be deemed to be an original. This
Amendment shall be governed by the internal laws of the State of Illinois.
4.03 The Borrower agrees to pay all reasonable out-of-pocket costs and
expenses incurred by the Banks in connection with the preparation, execution and
delivery of this Amendment and the documents and transactions contemplated
hereby, including the reasonable fees and expenses of counsel for the Agent with
respect to the foregoing.
Dated as of December 20, 1999
DIAMOND HOME SERVICES, INC.
By /s/
Its Vice President and Chief Financial Officer
Accepted and agreed to in Chicago, Illinois as of the date and year last above
written.
HARRIS TRUST AND SAVINGS BANK
By /s/
Its Vice President
LASALLE NATIONAL BANK
By /s/
Its Assistant Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION (successor by merger
to Bank of America Illinois)
By /s/
Its Senior Vice President
September 21, 1998
Mr. Geoffrey Foreman
2153 Larch Drive
Wooster, OH 44691
Dear Mr. Foreman:
This letter will confirm Diamond Home Services, Inc.'s offer to you for
the position of President and Chief Operating Officer reporting to me, C.
Stephen Clegg, Chairman and Chief Executive Officer.
This offer is contingent upon completion of a signed employment
application, a satisfactory background check performed by Diamond and the
Pinkerton Information Center, and your execution of the other documents
previously sent to you. Please complete, sign, and return the Application for
Employment, the Background Verification Acknowledgment and Authorization form
and the other documents.
The particulars of this offer are as follows:
POSITION: President and Chief Operating Officer of Diamond Home
Services, Inc. and Diamond Exteriors, Inc.
BASE ANNUAL
SALARY: $275,000 to be paid in equal semi-monthly
installments commencing on date work actually
commences.
BONUS: a) Signing Bonus:
$100,000 ($50,000 paid upon starting and, provided
employment has not previously terminated, $25,000 to
be paid at December 31, 1998, and $25,000 to be paid
at June 30, 1999). Signing bonus to be promptly
repaid if you voluntarily terminate your employment
within two years of start date for the purpose of
accepting new employment or retiring.
b) 1999 bonus:
At least 15% of the corporate executive bonus pool.
STOCK OPTION
GRANT: 120,000 shares under Incentive Stock Option Plan to
be granted as of employment start date (to be treated
as qualified options to extent permitted under ISO
Plan and Internal Revenue Code, otherwise to be
non-qualified)
Stock Price: 50,000 shares at the market
price on your employment start
date
50,000 shares at $13.00 per
share (IPO)
20,000 shares at $20.00 per
share
Vesting: Five years at 20% per year on
each employment anniversary
starting with the first
anniversary of start date
(right to have unvested options
vest shall terminate upon
termination of employment)
Future options will be provided under the Incentive
Stock Option Plan subject to the discretion of the
Compensation Committee and the Board.
SEVERANCE: Employment is at will, meaning that your employment
can be terminated for any reason not legally
prohibited or for no reason. If your employment is
terminated during the first three years of
employment, however, you will be entitled to one
year's base salary as severance unless employment
terminates as a result of resignation or for cause.
"Cause" shall mean indictment for or conviction of
any felony or any crime involving moral turpitude;
material misrepresentations or material omissions in
representations to the company or its board of
directors; violation of a material company policy;
or, as a result of your gross negligence or willful
misconduct, violation of any of your duties under
applicable law to the company, its board, or its
shareholders resulting in material economic harm to
the company or in a materially adverse effect on the
company, any business of the company, or any of the
company's operations, properties, prospects, or
business relationships.
GOVERNING LAW: Illinois (without regard to conflicts of law
principles)
In addition, Diamond will provide you with an auto allowance, full
company benefits, and reasonable relocation expense reimbursement.
Due to government regulations, all employees must provide evidence of
identity and eligibility for employment within three days of hire. Please be
prepared to complete the forms by bringing the required documents with you.
Your signature below constitutes your representation that you have no
non-compete or confidentiality obligations to Wayne-Dalton Corp. or any other
former employer that restricts or precludes your ability to perform your duties
as President and Chief Operating Officer as we have described those duties to be
as of this date.
We look forward to your joining us. Should you have any questions
regarding the offer, please call me at 815/334-2405.
Sincerely,
C. Stephen Clegg
ACCEPTED:
Geoffrey H. Foreman
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the years ended December 31
($ in thousands except earnings per share)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $244,890 $161,109 $157,068 $124,848 $94,186
Operating income 3,655 3,262 10,989 6,795 2,951
Net income 85 (1) 2,304 6,815 3,735 1,995
Net income per share -- diluted 0.01 (1) 0.26 0.88 0.60 0.22
At year end:
Working capital 15,777 7,739 17,178 (4,814) (8,324)
Total assets 126,129 56,589 58,793 30,143 29,275
Debt 54,930 3,148 1,662 6,216 15,553
Stockholders' equity 34,412 34,210 36,236 4,833 936
INSTALLED HOME IMPROVEMENTS
Net Sales $161,330 $161,109 $157,068 $124,848 $94,186
Operating Income (Loss) ( 668) 3,262 10,989 6,795 2,951
Number of sales associates 547 631 678 631 496
Number of independent installers 984 1,577 1,300 1,315 1,003
Number of employees 1,167 1,197 1,260 1,109 857
Number of jobs installed 65,032 64,270 64,338 55,261 37,510
Net sales per employee $138 $135 $125 $113 $110
MANUFACTURING AND DISTRIBUTION(2)
Net Sales $83,560
Operating Income 4,323
Number of employees 420
Net sales per employee $199
(1) Refer to quarterly financial information elsewhere herein.
(2) Includes Reeves since April 20, 1998.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
On April 20, 1998, the Company acquired all the issued and outstanding
stock of Reeves Southeastern Corporation ("Reeves") for cash and notes
aggregating $42.6 million (including transaction costs of $1.5 million). On
November 16, 1998, the Company acquired certain net assets and the call center
business of H.I., Inc. for cash and subordinated convertible notes aggregating
$2.4 million. These acquisitions were accounted for as purchases. The Company
manages and operates its business as two segments: 1) Installed home
improvements, which includes the Company's wholly-owned subsidiaries Diamond
Exteriors, Inc.(R) ("Exteriors"), Marquise Financial Services, Inc.
("Marquise"), and Solitaire Heating and Cooling, Inc. d/b/a KanTel(TM)
("KanTel") and 2) Manufacturing and wholesale distribution, which includes the
Company's wholly-owned subsidiary Reeves and its subsidiary, Foreline Security
Corp. ("Foreline").
Net sales increased $87.8 million, or 55.9%, from $157.1 million in
1996 to $244.9 million in 1998. Reeves, acquired in April, 1998, contributed
$83.6 million of the increase. Operating income decreased $7.3 million, or 66.7%
from $11.0 million in 1996 to $3.7 million in 1998. After adjustments for $1.5
million in restructuring charges and $2.3 million in large and unusual charges
in 1998, operating income was $7.5 million in 1998.
Cost, expenses and earnings as a percentage of net sales were as
follows:
1998 1997 1996
---- ---- ----
Cost of Sales 63.86% 56.26% 55.86%
Gross Profit 36.14% 43.74% 44.14%
Selling, General and Administrative 33.37% 41.35% 36.80%
Restructuring 0.63% 0.00% 0.00%
Operating Interest 0.12% 0.00% 0.00%
Amortization 0.53% 0.37% 0.34%
Operating Income 1.49% 2.02% 7.00%
Interest Expense 1.38% 0.00% 0.00%
Interest Income and Other 0.21% 0.45% 0.12%
Net Income 0.03% 1.43% 4.34%
Stockholders' equity increased $29.6 million, from $4.8 million at
December 31, 1995 to $34.4 million at December 31, 1998. Total debt increased
$48.7 million from $6.2 million at December 31, 1995 to $54.9 million at
December 31, 1998. The increase in total debt was related primarily to the
Reeves acquisition. During the three-year period the Company 1) completed, in
June 1996, its initial public offering; 2) repurchased 6.3% of its outstanding
stock; 3) acquired Reeves and KanTel; and 4) launched and funded its own
consumer financing company. Operating cash flow during the three-year period
aggregated $9.6 million.
RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997
Net Sales
Net sales increased $83.8 million, or 52.0%, from $161.1 million in
1997 to $244.9 million in 1998. Reeves contributed $83.6 million to net sales in
1998.
Installed Home Improvements
Net sales, after a $5.9 million increase in the fourth quarter 1998,
increased $221 thousand from $161.1 million in 1997 to $161.3 million in 1998.
Net sales attributable to roofing and gutter products and services increased
$5.3 million, or 5.4%, to $107.7 million in 1998. Net sales attributable to
fencing products and services decreased $1.2 million, or 4.1%, to $25.7 million
in 1998. Net sales attributable to garage doors, entry doors, and other products
and services decreased $5.1 million, or 17.5%, to $24.1 million in 1998. Net
sales attributable to credit participation fee income increased $332 thousand to
$2.2 million in 1998. Net sales attributable to finance interest income
increased $544 thousand to $1.6 million in 1998 on receivables financed by the
Company's finance subsidiary Marquise. The increase in net sales was due
primarily to an increase in total jobs installed and increases in credit
participation fee and finance interest income. Backlog, defined as jobs sold but
not installed, increased $3.0 million from $10.9 million at the end of December
1997 to $13.9 million at the end of December 1998.
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution sales are comprised of the
following major product lines:
Chain link and accessories $56,356,000
Wood 13,637,000
Ornamental/specialty 6,923,000
Gate operators and access control 3,849,000
Security systems 6,944,000
-----------------
87,709,000
Less: inter-segment sales 4,149,000
=================
$83,560,000
=================
After adjusting for the planned discontinuation of a pipe and tube
joint venture and a 12% increase in the fourth quarter 1998, manufacturing and
wholesale distribution sales were comparable to the prior 8 1/2 month period.
Backlog, defined as orders placed but not delivered, was approximately $3.1
million at December 31, 1998.
Gross Profit
Gross profit increased $18.0 million, or 25.5%, from $70.5 million, or
43.7% of net sales in 1997 to $88.5 million, or 36.1% of net sales in 1998.
Reeves contributed $20.0 million to gross profit in 1998.
Installed Home Improvements
Installed home improvement product gross profit decreased $2.0 million,
or 2.8%, from $70.5 million, or 43.7% of installed home improvement product
sales, in 1997 to $68.5 million, or 42.5% of installed home improvement product
sales, in 1998. After a $2.7 million increase in gross profit in the fourth
quarter 1998, the decrease in gross profit amount was attributable to lower
sales volume due primarily to the decrease in the first nine months in lead
count, to a $4.4 million decrease in door sales, and to a decrease in average
unit sales price during the year as a result of expanded and lower price points
throughout the year. Except for the fourth quarter, the decrease in gross
profit, expressed as a percentage of installed home improvement product sales,
resulted from a decrease in average unit sales price as a result of expanded and
lower price points, partially offset by a $328 thousand increase in the fourth
quarter in credit participation fee income and in finance interest income. The
license fee incurred to Sears decreased $639 thousand, or 3.8%, from $16.9
million, or 10.7% of net installed home improvement product sales, in 1997 to
$16.3 million, or 10.4% of net installed home improvement product sales, in
1998. The decrease in the license fee incurred to Sears in 1998 was due to an
overall decrease in net installed home improvement product sales and to a shift
in the balance of sales, primarily roofing repairs and pricing test programs, to
lower license fee products and services. On January 1, 1996 Sears and the
Company entered into a license agreement which has been extended through June
30, 1999. 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 decreased $3.4 million, or 4.1%,
from $84.4 million, or 53.4% of net installed home improvement product sales, in
1997 to $81.0 million, or 51.4% of net installed home improvement product sales,
in 1998. The decrease in gross profit amount and gross profit index during the
first nine months 1998 was attributable to lower sales volume, including the
decrease of $4.4 million in door sales for the year, and lower average unit
sales prices. The unit costs of materials, installation labor and warranty
expense remained relatively constant during the year.
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution gross profit was $20.0 million
or 22.8% of gross manufacturing and wholesale distribution revenue (before
inter-segment elimination).
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $15.1 million,
or 22.7%, from $66.6 million in 1997 to $81.7 million in 1998 and, as a
percentage of net sales, decreased from 41.3% to 33.4%. Reeves contributed $15.1
million in selling, general and administrative expense in 1998.
Installed Home Improvements
Selling, general and administrative expenses for this segment increased
$121 thousand, or 0.2%, from $66.6 million in 1997 to $66.7 million in 1998 and,
as a percentage of installed home improvement sales, increased from 41.3% to
41.4%. Included in the fourth quarter 1998 were large and unusual charges
approximating $2.3 million. These charges included $750 thousand for provisions
for credit losses on consumer finance receivables, $250 thousand for medical
expenses and not included in the fourth quarter 1997, $770 thousand for new
information technology systems and related expenses and $500 thousand for new
advertising test programs. Direct advertising expense increased $252 thousand,
or 2.5%, from $10.3 million in 1997 to $10.5 million in 1998; as a percentage of
net segment sales, direct advertising expense increased from 6.4% in 1997 to
6.7% in 1998, reflecting below-plan lead generating effectiveness of ad
placements and $500 thousand in test programs, offset by improved close ratios.
Lead-taking activities managed through KanTel increased $950 thousand, or 45.9%,
from $2.1 million in 1997 to $3.0 million in 1998. This increase was
attributable to increased telephone-answering service levels, various test
programs for monitoring consumer finance activities, and customer service
surveys. Selling commission expense, including attendant payroll-related
benefits, decreased $1.1 million, or 6.5%, from $16.6 million in 1997 to $15.5
million in 1998; as a percentage of net segment sales, selling commission
expense decreased from 10.5% in 1997 to 9.9% in 1998. 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 $483 thousand to $712 thousand in
1998, reflecting the decrease in net installed home improvement sales and
operating losses in 1998. The balance of selling, general and administrative
expenses, primarily administrative, field operations and Marquise and general
expenses, decreased $2.2 million, or 6.1%, from $36.4 million, or 22.6% of
segment sales, in 1997 to $34.2 million, or 21.2% of segment sales, in 1998.
Manufacturing and Wholesale Distribution
Selling, general, and administrative expenses for this segment includes
selling expenses of $12.3 million representing the operations, primarily payroll
and related costs, and facilities and equipment costs, of 32 distribution
centers and $2.8 million of general and administrative expenses.
Restructuring Expense
During the fourth quarter 1998, the Company recorded a $1.5 million
pre-tax charge for restructuring and related activities in its installed home
improvements segment. The $1.5 million charge was comprised of a $460 thousand
charge for the search and retention of a president and chief operating officer,
a $330 thousand charge for restructuring consulting and related expenses, a $550
thousand charge for the wind-down and termination of the captive insurance
company and a $200 thousand charge for severance. At December 31, 1998, the
allowance for restructuring expenses was approximately $200 thousand. In
addition, in the first quarter 1999 the Company expects to incur up to an
additional $1.0 million pre-tax charge for incurred and known severance and
other related restructuring expenses.
Operating Interest Expense
Operating interest expense increased from $0 in 1997 to $295 thousand
in 1998. The increase in operating interest expense resulted from the increase
in the Company's finance subsidiary's borrowings during the year.
Amortization of Intangibles
Amortization of intangibles increased $701 thousand, including a $546
thousand increase in the fourth quarter 1998, from $595 thousand in 1997 to $1.3
million in 1998. The amortization expense relates primarily to goodwill and
other intangibles incurred in connection with the September 1994 stock
repurchase from management and the Reeves acquisition in April 1998, and, to a
lesser extent, the KanTel acquisition in November 1998.
Interest Expense
Interest expense increased from $0 in 1997 to $3.4 million in 1998.
This increase reflects working capital borrowings and debt related to the
acquisition of Reeves and capitalized leases related to the Company's new
information technology systems.
Interest Income and Other
Interest income decreased $222 thousand from $725 thousand in 1997 to
$503 thousand in 1998, primarily due to decreased interest income from lower
average invested cash balances.
Income Tax Provision
The Company's income tax provision decreased from $1.7 million, or an
effective rate of 42.2%, in 1997 to $698 thousand, or an effective rate of
89.1%, in 1998. The difference in the effective income tax rate and the federal
statutory rate (34%) is due primarily to amortization of intangibles (which
increased in 1998) which are not deductible for income tax purposes and the
effect of state income taxes.
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. 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. Direct
advertising expense increased $2.5 million, or 31.8%, 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
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. 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 and Other
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.
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 acquisitions and the operations of the Company's finance
subsidiary, Marquise. The Company's primary sources of liquidity have been cash
flow from operations, borrowings under its bank credit facilities, and, in June
1996, the net proceeds of its initial public offering. Generally, the Company's
businesses are not capital intensive. Capital expenditures for 1998, 1997, and
1996 were approximately $3.8 million, $4.3 million, and $461 thousand,
respectively. Capital expenditures for 1999 are expected to approximate $3.2
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 capital 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 April, 1998, the Company
acquired all of the issued and outstanding stock of Reeves for approximately
$42.6 million. In November 1998, the Company acquired certain net assets and the
business of KanTel for approximately $2.4 million. In connection with the
acquisitions, the Company obtained a $42 million secured syndicated bank credit
facility. At December 31, 1998, pursuant to the terms of the syndicated bank
credit facility, the Company had in place interest rate swap agreements on $10
million in principal amount with members of its syndicated bank credit facility.
The Company's financial instrument holdings at year-end were analyzed to
determine their sensitivity to interest rate changes, noting that a 10% increase
in interest rates would not be material. 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, for investments in information technology, for
service of debt obligations, 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.
Marquise's primary objective is to support, along with other designated
third-party finance companies, the Company's requirement for providing financing
to its installed home improvement segment's customers. In the fourth quarter
1996, as a follow-on objective to expanding Marquise'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 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 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 from entities
other than Exteriors may significantly exceed the average amount of all
receivables owned by Marquise. 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 has
been capitalized and funded with the Company's excess operating cash flow and
secured borrowings under a $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 obtained a $10 million
secured line of credit and, at December 31, 1998, had borrowed $4.5 million. The
secured line of credit for Marquise expires April 1, 1999. The bank has agreed
to extend the expiration date until such time as Marquise can secure an
alternative credit facility. At December 31, 1998, Marquise has approximately
$10.0 million in net finance receivables. During 1998, Marquise originated or
purchased approximately $5.3 million of fixed rate, secured loans. At December
31, 1998, Marquise had approximately $1.7 million 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's consumer loan finance
receivables as market conditions may warrant from time to time and excess cash
flow from operations will be sufficient to satisfy the Company's financing cash
requirements in the foreseeable future.
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 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 $27.0 million. The Company used $12.5 million
of cash in connection with the repurchase of 42.2% 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, 1998, the Company had approximately $27.2 million in cash and cash
equivalents and trade receivables and net working capital of $15.8 million. At
December 31, 1998, the Company had $54.9 million in total debt including $41.3
million borrowed under its $52 million in bank lines of credit.
Year 2000
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information Readiness and Disclosure
Act. The Year 2000 ("Y2K") problem is believed to affect virtually all companies
and organizations. The Company's Y2K initiatives are focusing primarily on four
areas of potential impact: 1) internal information technology ("IT") systems; 2)
internal non-IT systems including services and embedded chips (controllers); 3)
Company products and services; and 4) readiness of significant third-parties
with which the Company has material business relationships.
The Company expects to implement successfully the systems and
programming changes necessary to address Y2K internal IT and non-IT readiness
issues. While the Company does not believe that the costs associated with
preparing for Y2K readiness will have a material adverse affect on the Company's
results of operations and financial condition, there can be no assurances that
there will be no delay in, or increased costs associated with, the
implementation of such changes required for readiness.
The Company has hired a dedicated Y2K readiness manager to oversee the
Company's Y2K readiness activities. The Y2K manager has senior management and
Board of Director sponsorship and provides semi-monthly progress reports to
senior management and quarterly reports to the Board of Directors. The Y2K
manager, assisted by the IT department, is responsible for raising awareness
throughout the Company, developing tests and methodologies for addressing Y2K
readiness, monitoring the development and implementation of business and
infrastructure plans to bring non-compliant applications into compliance on a
timely basis, and identifying and assisting in resolving high-risk issues.
The Company has organized its Y2K readiness program into the following
four phases: assessment; planning; preparation; and implementation. The
assessment phase involves taking an inventory of the Company's internal IT
applications to prioritize risk; identifying failure dates; developing a
solution strategy; estimating costs; and communicating among all businesses. The
planning consists of identifying the tasks necessary to ensure readiness,
scheduling remediation plans for applications and infrastructure and delivering
resource requirements and allocations. The third phase, preparation, involves
readying the development and testing environments and testing the remediation
process. The fourth phase, implementation, consists of executing the Company's
plans to fix, test, and implement critical applications and associated
infrastructure, and establishing contingency plans for processes that have an
impact on the Company's businesses.
The Company's target is to ensure that all applications are Y2K
compliant by June 30, 1999. The assessment, planning, and preparation phases are
substantially complete. As of March 15, 1999, the implementation phase is
approximately 75% complete and costs incurred through December 31, 1998
approximate $200,000. Total costs for Y2K readiness are estimated to range from
$300,000 to $400,000. The Company's programs for purchasing hardware and
software, which began in early 1997, have addressed many Y2K issues. The
Company's IT initiatives have replaced substantially all key software with new
industry software, such as Oracle ERP applications and Vantive for lead-taking
activities, and have installed or replaced new hardware such as Compaq and Bay
Networks. Reeves, a key subsidiary, has completed the upgrading of its AS/400
BPCS system to a Y2K-certified revision of the software.
The Company also is assessing its non-IT system readiness, such as
telephone systems, fax machines, facilities' alarms, fire detectors,
manufacturing equipment and other non-high-risk systems. While Y2K readiness for
non-IT systems is the responsibility of each business unit, the Company's Y2K
manager monitors the progress of the efforts to ensure operational continuity.
The low-tech nature of the Company's products and services minimizes
the risk of Y2K compliance except for the Company's Foreline subsidiary.
Foreline, with $10.0 million in annual sales, installs, services, and monitors
highly sophisticated equipment used in its security systems and solutions and
security monitoring services. Some of the products could be deemed critical in
security applications and non-performance to these customers could be
significant. Foreline believes that its customers are responsible for assessment
and costs attendant to achieving their Y2K compliance. Foreline, however, is
taking steps to preserve customer satisfaction and has taken steps to notify
customers of known non-compliant standards. Foreline has an internet website
dedicated to communicating Y2K issues to its customer base. The cost of the
readiness program for security products is not significant nor are future
readiness product costs, including customer satisfaction, expected to be
significant.
The Company has developed a Y2K process for dealing with key suppliers,
third-party finance companies, distributors and other business partners. The
process generally involves the following steps: 1) initial supplier survey; 2)
risk assessment, risk mitigation and contingency planning; 3) follow-up supplier
reviews and additional procedures, if necessary; and 4) testing. To date, the
majority of critical suppliers, such as Sears, and other third-party finance
companies, material suppliers, and distributors have responded that they are
addressing all their Y2K issues on a timely basis. The Company continues to
follow-up with those suppliers who have not responded and whose responses were
unsatisfactory. As part of its Y2K readiness, the Company is preparing to
replace suppliers or eliminate suppliers from consideration for new business if
the supplier is not prepared for Y2K.
The Company is working to identify and analyze the most likely
worst-case scenarios for third-party relationships affected by Y2K. These
scenarios could include possible infrastructure collapse. The failure of power
and water supplies, transportation disruptions, unforeseen product shortages due
to hoarding of products and failure of communications and financial systems -
any of which could have a material effect on the Company's ability to deliver
its products and services to its customers. While the Company has contingency
plans for most issues under its control, however, infrastructure problems
outside its control, such as product supplies and third-party financing could
result in delays in delivering its product and services. The Company would
expect that most utilities and service providers would be able to restore
service within days although more pervasive system problems for suppliers and
finance companies could last for two to four weeks or more depending on the
completion of the systems and the effectiveness of their contingency plans.
There is no assurance, despite its Y2K readiness efforts, that the
Company will be successful in its efforts to identify and address all Y2K
issues. Even if the Company were to complete all its assessment efforts,
implement remediation plans believed to be adequate and develop contingency
plans believed to be adequate, problems may not be identified or corrected in
time to prevent adverse consequences to the Company. The foregoing discussions
regarding estimated completion dates, costs, risks and other forward-looking
statements regarding Y2K are based on the Company's best estimates given
information that is currently available and is subject to change. Actual results
may differ materially from these estimates.
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 including demand for commercial and industrial fencing
and related products.
Inflation
Although inflation has slowed in recent years, it is still a factor in
the U.S. economy and the Company continues to seek ways to reduce its costs. To
date, 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 current reports on 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.
<PAGE>
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-----------
1998 1997
------------------------------------
ASSETS (In Thousands)
Current assets:
Cash and cash equivalents $5,104 $9,966
Accounts receivable 22,138 6,630
Inventories 15,771 --
Refundable income taxes 1,297 986
Prepaids and other current assets 3,994 1,959
Deferred income taxes 1,500 872
------------------------------------
Total current assets 49,804 20,413
Finance receivables 10,011 8,758
Property, plant and equipment 23,461 6,469
Less: Accumulated depreciation (2,649) (923)
------------------------------------
------------------------------------
Net property, plant and equipment 20,812 5,546
Intangible assets, net 38,981 16,514
Deferred income taxes -- 1,892
Other 6,521 3,466
====================================
Total assets $126,129 $56,589
====================================
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1998 1997
------------------------------------
<S> <C> <C>
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY (In Thousands) Current liabilities:
Due to bank and current portion of long-term debt $10,225 $2,604
Accounts payable and accrued liabilities 22,181 10,070
Deferred revenue 1,621 --
------------------------------------
Total current liabilities 34,027 12,674
Long-term liabilities:
Long-term debt 44,705 544
Warranty and retention 10,851 9,161
Deferred income taxes 267 --
Other 1,867 --
------------------------------------
Total long-term liabilities 57,690 9,705
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 shares issued in 1998 and 1997
Additional paid-in capital 34,040 34,040
Officer notes receivable (104) (221)
Retained earnings 5,155 5,070
Treasury stock (at cost); 572,300 shares (4,688) (4,688)
------------------------------------
Total common stockholders' equity 34,412 34,210
------------------------------------
====================================
Total liabilities and common stockholders' equity $126,129 $56,589
====================================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------------
(In Thousands, except per share)
<S> <C> <C> <C>
Net sales $244,890 $161,109 $157,068
Cost of sales 156,375 90,633 87,739
------------------------------------------------------
Gross profit 88,515 70,476 69,329
Operating expenses:
Selling, general, and administrative expenses 81,729 66,619 57,806
Restructuring charges 1,540 -- --
Operating interest expense 295 -- --
Amortization expense 1,296 595 534
------------------------------------------------------
Operating profit 3,655 3,262 10,989
Interest expense 3,375 -- --
Interest income and other 503 725 183
------------------------------------------------------
Income before income taxes 783 3,987 11,172
Income tax provision 698 1,683 4,357
======================================================
======================================================
Net income $ 85 $ 2,304 $ 6,815
======================================================
Net income per share:
Basic $0.01 $.26 $.88
Diluted $0.01 $.26 $.88
Weighted average number of common shares outstanding:
Basic 8,507 8,833 7,713
Diluted 8,510 8,833 7,778
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
<CAPTION>
Years ended December 31, 1998, 1997, and 1996
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, 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 34,040 (221) (4,688) 5,070 34,210
Repayment of officer notes -- -- 117 -- -- 117
Net income - 1998 -- -- -- -- 85 85
------------- ------------- -------------- ------------- -------------- -------------
December 31, 1998 $9 $34,040 ($104) ($4,688) $5,155 $34,412
============= ============= ============== ============= ============== =============
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
---------------------------------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $85 $ 2,304 $ 6,815
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,022 932 825
Deferred income taxes 422 (657) (652)
Provision for credit losses 1,239 1,259 767
Other 482 -- (78)
Changes in operating assets and liabilities:
Accounts receivable (1,750) 1,991 (5,232)
Inventories 1,535 -- --
Refundable income taxes (78) 739 (1,725)
Prepaids and other assets (1,786) (1,120) (1,762)
Accounts payable and accrued expenses (1,736) (3,897) 499
Deferred revenue 536 -- --
Warranty and retention 1,690 2,233 2,702
---------------------------------
Net cash provided by operating activities 3,681 3,784 2,159
INVESTING ACTIVITIES
Capital expenditures (3,759) (4,276) (461)
Loans originated and purchased (5,306) (5,468) (23,606)
Loans repaid 3,140 763 5,362
Acquisitions, net of cash acquired (32,998) (270) (58)
Proceeds from sale of finance receivables -- -- 12,707
Advances to "captive" insurance company -- (484) (448)
Other (232) (221) (22)
---------------------------------
Net cash used in investing activities (39,155) (9,956) (6,526)
FINANCING ACTIVITIES
Advances under revolving credit agreement, net 11,451 -- --
Proceeds on issuance of term debt 18,000 -- --
Borrowings on finance company bank line of credit 2,475 2,050 --
Payments of long-term debt and capital leases (877) -- --
Payments to stockholders (554) (564) (4,554)
Payments on notes receivable from officers for treasury stock and 117 358 237
other
Preferred Stock redemption -- -- (1,400)
Payments for purchase of common stock -- (4,688) -
Issuance of Common Stock, net of offering -- -- 32,951
expenses
Common Stock special dividend -- -- (8,600)
---------------------------------
Net cash provided by (used in) financing activities 30,612 (2,844) 18,634
---------------------------------
Net increase (decrease) in cash and cash equivalents (4,862) (9,016) 14,267
Cash and cash equivalents at beginning of period 9,966 18,982 4,715
---------------------------------
Cash and cash equivalents at end of period $5,104 $ 9,966 $18,982
=================================
Supplemental cash flow disclosure:
Interest paid $2,047 $ 344 $ 377
=================================
Income taxes paid $1,462 $ 1,601 $ 6,734
=================================
Investing and financing activities exclude the following activities:
Acquisition of Reeves and KanTel through notes payable $12,021 -- --
Capital lease obligations $1,545 -- --
=================================
See accompanying notes.
</TABLE>
<PAGE>
1. BUSINESS AND ORGANIZATION
Diamond Home Services, Inc., formerly Diamond Exteriors, Inc.(R) ("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.(R) ("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 Heating and Cooling, Inc. d/b/a
KanTel(TM) ("KanTel"), which was incorporated in Delaware on November 27, 1995.
On April 20, 1998 the Company acquired all of the issued and outstanding capital
stock of Reeves Southeastern Corporation ("Reeves"). The accompanying
consolidated financial statements include the accounts of the Company's
wholly-owned subsidiaries, Reeves, Exteriors, Marquise, and KanTel, collectively
referred to as the Company.
The Company operates in two industry segments: installed home
improvements and manufacturing and wholesale distribution. The installed home
improvement segment provides in-home direct sales and marketing for installed
home improvement products, primarily 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. Exteriors commenced its roofing,
gutter, door, and related exterior home improvement business on June 1, 1993,
and entered into its first license with Sears on that date.
Exteriors negotiated a license agreement with Sears effective January
1, 1996, and extended the current agreement through June 30, 1999. License fees
are based on gross sales and vary by product and service. License fees
approximated $16,311,000, $16,950,000, and $16,400,000, in 1998, 1997, and 1996,
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, 1998 and 1997, approximately 40.2% 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.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost of raw
materials and the raw materials content of work in progress and finished goods
and certain purchased finished goods for Reeves are determined on the last-in,
first-out method (LIFO) representing 33% of total inventory at December 31,
1998. Cost for the remainder of the inventory is determined on the first-in,
first-out method (FIFO).
PROPERTY, PLANT 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 twenty years.
The cost to acquire and develop internal-use software is capitalized and
depreciated over its estimated useful lives ranging between five and seven
years.
REVENUE RECOGNITION
Exteriors recognizes revenue upon completion of each installation and
receipt from the customer of a signed certificate of completion. Revenues from
manufactured and purchased product sales are recognized upon shipment. Security
installations, maintenance and monitoring services are recognized over the
contractual period or as services are rendered and accepted by the customer. 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 1998, 1997, and 1996 the Company earned
$2,185,000, $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 $1,568,000 and $960,000 and in other assets $1,037,000 and
$1,187,000 of credit participation fee income due from Sears and its affiliates
at December 31, 1998 and 1997, 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 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
uncollectable. Additionally, Marquise provides for the full charge-off of
finance receivables when the receivable becomes 180 days contractually
delinquent.
INTANGIBLES
The components of intangibles at December 31, 1998 and 1997 are as
follows:
1998 1997
---- ----
Goodwill $32,901,000 $17,831,000
Trademarks 6,500,000 --
Covenant not to compete 2,225,000 --
Organizational costs -- 259,000
------------------- ------------------
41,626,000 18,090,000
Accumulated amortization (2,645,000) (1,576,000)
=================== ==================
$38,981,000 $16,514,000
=================== ==================
The Company amortizes intangibles over five to forty years. The Company
at each balance sheet date evaluates for recognition of potential impairment of
its recorded intangibles, including goodwill, against the current and
un-discounted expected future cash flows. Impairment in recorded intangibles is
charged to income when identified.
WARRANTY AND RETENTION
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. In addition, to secure performance by its independent installers of
any labor-related warranty claims, the Company requires most installers to
deposit a retention which is held in reserve by the Company. At December 31,
1998 and 1997, the Company had retention reserves of $2.0 million and $1.7
million, respectively.
EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with
FASB No. 128, "Earnings per Share".
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. These
concentrations are limited due to the large number of customers comprising
Reeves customer base and their dispersion across a large geographic area of the
United States. See Note 11 for information on concentration of consumer finance
receivables.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. ACQUISITIONS
On April 20, 1998, the Company purchased all the outstanding shares of
Reeves for an aggregate consideration of $42,621,000 consisting of: 1)
$30,000,000 cash at closing; 2) $3,413,000 non-interest bearing notes payable in
installments through June 2000; 3) $7,708,000 in 7% notes payable (to be paid
into an escrow account for future possible environmental expenses, as defined)
in installments through June 2005; and 4) $1,500,000 in transaction costs (the
"Reeves Acquisition").
On November 16, 1998 the Company acquired certain net assets and the
telephone lead-taking operation and telemarketing business of H.I., Inc., a
related party, for an aggregate purchase price of $2,398,000 (including $100
thousand in transaction costs) consisting of $1,498,000 net cash at closing and
$900 thousand in 5% contingent convertible subordinated notes due October 2005.
Based on the terms of the transactions, the acquisitions are accounted
for as a purchase, in accordance with Accounting Principles Board Opinion No.
16. Accordingly, the accompanying consolidated statements of operations include
Reeves's and KanTel's results of operations since the date of acquisition. The
Company revalued the basis of Reeves's and KanTel's acquired assets and assumed
liabilities to fair value at the date of purchase. The purchase prices of Reeves
and KanTel are calculated as the cash plus fair value of notes paid plus the
Company's transaction costs. The difference between the purchase price and the
fair value of identifiable tangible and intangible assets acquired and the
liabilities assumed and incurred is recorded as goodwill and amortized over a
period of 40 years for Reeves and 7 years for KanTel. The Company has not
completed its valuation of the net assets acquired and the purchase price
allocation is subject to change which is not expected to be material. The
tentative allocation of acquisition purchase price is as follows:
Purchase price $43,419,000
Transaction costs 1,600,000
-------------------
Total purchase price $45,019,000
===================
Fair value of assets acquired $58,613,000
Goodwill 15,070,000
Liabilities assumed (28,664,000)
-------------------
Total $45,019,000
===================
The following unaudited pro forma information reflects the results of
the Company's operation as if the acquisitions had occurred at the beginning of
the period presented adjusted, in the case of Reeves, for 1) the effect of the
recurring charges related to the acquisition, primarily the amortization of
goodwill, interest expense on borrowings to finance the acquisition, and an
increase in depreciation expense due to the write-up to fair market value of
fixed assets; and 2) the elimination of compensation for prior management and
directors, certain benefit plans, and non-recurring charges.
Year Ended December 31,
1998 1997
Revenues $275,364,000 $279,069,000
Net income (loss) (198,000) 2,536,000
Net income per share - diluted ($0.02) $0.29
The pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results which actually would have
been attained if the acquisitions had been consummated on the dates indicated
above, nor does it purport to indicate or suggest what the results of the
operations of the Company will be for any future period.
4. INVENTORIES
The components of inventories at December 31 are as follows:
1998 1997
----------------- ----------------
Raw materials $449,000 $ --
Work-in-progress 861,000 --
Finished goods 14,461,000 --
================= ================
$15,771,000 $ --
================= ================
5. PROPERTY, PLANT AND EQUIPMENT
The costs of property, plant and equipment at December 31 are as
follows:
<TABLE>
<CAPTION>
Ranges of Useful
1998 1997 Lives
------------------------------------------------------
<S> <C> <C> <C>
Land $1,792,000 $ -- --
Buildings and improvements 4,246,000 454,000 10-20 years
Machinery and manufacturing equipment 5,234,000 -- 5-10 years
Computer equipment and software 9,507,000 5,660,000 5-7 years
Furniture and fixtures 1,137,000 355,000 3-7 years
Assets under capital lease 1,545,000 -- 5-7 years
------------------------------------
$23,461,000 $6,469,000
====================================
</TABLE>
6. 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, 1998 and 1997, $947,000 and $757,000, respectively, of
deferred direct-response advertising costs was reported as non-current assets.
Net advertising expense was $10,478,000, $10,244,000, and $7,772,000 in 1998,
1997, and 1996, respectively.
7. ACCRUED LIABILITIES
The components of accrued liabilities at December 31 are as follows:
1998 1997
------------------------------------
Payroll and payroll-related $2,346,000 $2,537,000
Interest 1,077,000 --
Warranty 1,000,000 1,000,000
Workers' compensation insurance 737,000 --
Environmental 576,000 --
Other 517,000 4,000
====================================
$6,253,000 $3,541,000
====================================
8. BORROWINGS
Due to Bank and Current Portion of Long-Term Debt and the related
average interest rates at December 31 are as follows:
<TABLE>
<CAPTION>
AVERAGE Average
1998 RATE 1997 Rate
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Current portion of long-term debt $5,700,000 8.1% $554,000 0%
Due to bank 4,525,000 7.9% 2,050,000 8%
============== ============ ============== ============
$10,225,000 $2,604,000
============== ============ ============== ============
</TABLE>
At December 31, 1998, the Company had $4.5 million outstanding under a
$10,000,000 bank secured line of credit for Marquise which expires April 1,
1999. The bank has agreed to extend the expiration date until such time as the
Company can secure an alternative credit facility. Interest on the secured line
of credit is prime plus .75% or LIBOR plus 3.00% and is secured by finance
receivables owned by Marquise and supported by a capital maintenance agreement
from Home Services and Exteriors.
Long-term debt and related maturities and interest rates at December 31
are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Term notes $18,000,000 $ --
Revolver 18,829,000 --
7% Acquisition notes payable 7,708,000 --
0% Acquisition notes payable 3,063,000 --
Due to stockholders 544,000 1,098,000
Capital leases and other 1,475,000 --
5% Convertible subordinated notes 1,200,000 --
Discounts (414,000) --
------------------- -------------------
50,405,000 1,098,000
Less: current portion (5,700,000) (554,000)
=================== ===================
$44,705,000 $544,000
=================== ===================
</TABLE>
In connection with the Reeves acquisition, in April 1998, the Company
replaced its $15,000,000 unsecured bank line of credit with a $42,000,000 (as
amended) secured syndicated bank credit facility. The credit facility, as
amended, is for a term of five years expiring April 2003. As of December 31,
1998, the Company was not in compliance with certain of the original credit
facility's cash flow and restrictive financial covenants. The Company has
amended its original credit facility to include, in significant part, the
reduction of the term note facility from $30 million to $18 million, the
increase of the revolving line of credit facility from $12 million to $24
million, the increase in interest rate spread on the term note facility, the
establishment of minimum cash flow threshold, as defined, for each of the first
three quarters of 1999 and the re-setting, at original credit facility levels,
of restrictive financial covenants commencing at December 31, 1999. The credit
facility, as amended, provides, among other things: 1) $18,000,000 in term notes
(to be used solely for the Reeves acquisition) with quarterly principal payments
of $1,125,000 commencing in June 1999; and 2) a $24,000,000 revolving line of
credit (to be used for Reeves's working capital requirements and general
corporate purposes). Through December 31, 1998, the interest rates are fixed as
follows: 1) term notes: LIBOR plus 3.00% or prime plus .75% (8.1% at December
31, 1998); and 2) revolving line of credit: LIBOR plus 3.00% or prime plus .75%
(8.1% at December 31, 1998). The interest rates on the term note was increased
by .50% to LIBOR plus 3.50% or prime plus 1.25% and the amount the Company can
borrow on the revolving line of credit is the aggregate of 85% of eligible
receivables and 55% of eligible inventories. The interest rate spread is based
on a matrix keyed to cash flow coverage ratios and ranges between LIBOR plus
1.00% to LIBOR plus 3.50% or prime to prime plus 1.25%. The credit facility also
provides for interest rate protection on at least $10 million in principal
amount of the term notes. At December 31, 1998, the Company had in place
interest rate swap agreements on $10 million in principal amount with members of
its syndicated bank credit facility. The terms of the credit facility, as
amended, contain, among other provisions, restrictive requirements for
maintaining cash flow and debt coverage ratios, minimum net worth, restrictions
on incurring additional debt, dividends, acquisitions and stock repurchases.
Deferred loan fees and costs are amortized over the term of the credit facility
(5 years).
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 bank lines
of credit.
Capitalized leases include computer and manufacturing equipment leases
with interest rates ranging between 6.5% and 10%, payable in equal monthly
installments through December 2000.
The 5% convertible subordinated notes due April 2005 are convertible
into the Company's common stock only if KanTel's operations achieve certain
pre-determined cost-per-lead thresholds in any one year in 1999, 2000 and 2001.
The number of shares issuable upon conversion decreases from 300,000 shares to
75,000 shares, based upon the year in which the cost-per-lead threshold is
attained. The shares are issuable three months following the year in which the
threshold is met. The Company's debt approximates fair value at December 31,
1998.
The aggregate maturities for all long-term debt and capitalized leases
for each of the five years following December 31, 1998 are:
OTHER
CREDIT LONG-TERM DEBT
FACILITY
-------------- ----------------
1999 $3,375,000 $2,325,000
2000 4,500,000 2,532,000
2001 4,500,000 1,588,000
2002 4,500,000 1,544,000
2003 19,954,000 1,541,000
Thereafter -- 4,460,000
9. 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 as 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:
1998 1997 1996
------------------------------------------------------
Current:
Federal $90,000 $2,025,000 $4,324,000
State 57,000 315,000 685,000
Deferred:
Federal 476,000 (598,000) (567,000)
State 75,000 (59,000) (85,000)
======================================================
$698,000 $1,683,000 $4,357,000
======================================================
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>
1998 1997 1996
-----------------------------------------------
<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 11.2 4.2 3.5
Goodwill amortization 36.3 3.2 1.1
Other, net 7.6 .8 .4
-----------------------------------------------
Effective tax rate 89.1% 42.2% 39.0%
===============================================
</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>
1998 1997
------------------------------------
<S> <C> <C>
Deferred tax assets:
Warranty, environmental and benefits $5,121,000 $3,973,000
Valuation allowances 1,100,000 337,000
Other 577,000 461,000
------------------------------------
------------------------------------
Total deferred tax assets 6,798,000 4,771,000
Deferred tax liabilities:
Valuation allowances (1,626,000) --
Depreciation (2,357,000) (198,000)
Advertising and other (1,582,000) (1,809,000)
------------------------------------
------------------------------------
Total deferred tax liabilities (5,565,000) (2,007,000)
------------------------------------
====================================
Net deferred tax assets $1,233,000 $2,764,000
====================================
</TABLE>
10. EMPLOYEE BENEFITS
DEFINED CONTRIBUTION PLAN
The Company has two defined-contribution plans that cover substantially
all employees. Annual contributions are determined by formula based on earnings.
Contributions to the plans for 1998 were $126,000. There were no contributions
to the plans in 1997 and 1996.
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, 1998, 45,085 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 employees. All options granted have ten
year terms and generally vest ratably over three to five years of continued
employment. At December 31, 1998, 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 reserved 50,000 shares for future
issuance. At December 31, 1998, 44,000 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 that 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 three years ended December 31, 1998, 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 217,405 10.68
Exercised (4,250) 13.00
Forfeited (34,825) 13.00
----------------------- ------------------------
Outstanding, December 31, 1997 450,855 11.88
Granted 186,000 10.11
Exercised -- --
Forfeited (60,715) 11.61
----------------------- ------------------------
Outstanding, December 31, 1998 576,140 $11.34
======================= ========================
Exercisable, December 31, 1996 68,131 $13.00
======================= ========================
Exercisable, December 31, 1997 166,925 $12.20
======================= ========================
Exercisable, December 31, 1998 269,575 $12.00
======================= ========================
</TABLE>
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------------------- ---------------------------------
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>
$20.00 20,000 9.7 years $20.00 -- --
$13.00-$18.50 374,370 8.1 years $13.13 211,705 $13.08
$5.94-$8.75 131,770 9.1 years $7.125 57,870 $7.14
$3.875 50,000 9.7 years $3.875 -- --
-------------- -------------
576,140 269,575
</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 1998, 1997 and 1996 using
SFAS No. 123. The options granted in 1998, 1997 and 1996 were valued using the
Black-Scholes option pricing model. The weighted average value of options
granted during 1998, 1997 and 1996 was $2.16, $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:
December 31
------------------------------------
1998 1997 1996
---- ---- ----
Risk-free interest rate 5.50% 6.20% 6.22%
Expected dividend yield 0% 0% 0%
Expected stock price volatility 70.4% 50.0% 58.8%
Expected life options 5 years 5 years 5 years
Had compensation cost for the Company's stock options granted 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,
1998 1997 1996
<S> <C> <C> <C>
Net income (loss) applicable to common stock holders: As reported $85 $2,304 $6,815
Pro forma (494) 1,886 6,535
Basic earnings (loss) per common share: As reported 0.01 0.26 0.88
Pro forma (0.06) 0.21 0.85
Diluted earnings (loss) per common share: As reported 0.01 0.26 0.88
Pro forma (0.06) 0.21 0.84
</TABLE>
11. 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>
1998 1997
-----------------------------------------------
<S> <C> <C>
ASSETS
Cash $343,000 $23,000
Finance receivables, net of allowances of $832,000 and
$569,000 in 1998 and 1997 10,011,000 8,758,000
Other assets 1,237,000 1,046,000
-----------------------------------------------
Total assets $11,591,000 $9,827,000
===============================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Due to bank $4,525,000 $2,050,000
Due to Exteriors 6,724,000 7,388,000
Other liabilities 74,000 147,000
-----------------------------------------------
Total liabilities 11,323,000 9,585,000
Stockholder's equity 268,000 242,000
-----------------------------------------------
Total liabilities and stockholder's equity $11,591,000 $9,827,000
===============================================
</TABLE>
Operations for the period ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Total finance income $1,652,000 $1,108,000 $1,811,000
Interest expense 696,000 400,000 668,000
Provision for credit losses 913,000 1,259,000 767,000
-----------------------------------------------
Net interest income 43,000 (551,000) 376,000
(loss)
Other income 13,000 -- 130,000
Other expenses (1,252,000) (894,000) (807,000)
-----------------------------------------------
Loss before income tax benefit (1,196,000) (1,445,000) (301,000)
Income tax benefit 432,000 539,000 115,000
-----------------------------------------------
Net loss ($764,000) $(906,000) $ (186,000)
===============================================
</TABLE>
Cash flows for the period ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Cash, at beginning of $ 23,000 $ 50,000 $ --
Net cash provided by (used in) operating activities (89,000) 272,000 (115,000)
Net cash used in investing activities (2,192,000) (5,224,000) (5,016,000)
Net cash provided by financing activities 2,601,000 4,925,000 5,181,000
-----------------------------------------------
Cash, at end of year $343,000 $ 23,000 $ 50,000
===============================================
</TABLE>
Interest expense includes $401,000, $400,000 and $668,000 paid to
Exteriors in 1998, 1997, and 1996, respectively. At December 31, 1998, Marquise
had approximately $1,700,000 in approved but not funded loan commitments. At
December 31, 1998, 18.6% of finance receivables in the portfolio were originated
to residents of Florida (8.5%) and Texas (10.1%).
12. COMMITMENTS
The Company leases certain real property, vehicles and equipment under
long-term non-cancelable leases expiring at various dates through 2008. Future
minimum lease payments under non-cancelable operating leases with initial terms
of one year or more consisted of the following at December 31, 1998:
1999 $3,227,000
2000 2,108,000
2001 1,254,000
2002 592,000
2003 467,000
Thereafter 829,000
==================
Total minimum lease payments $8,477,000
==================
Rent expense was $3,472,000, $1,323,000, and $1,127,000, in 1998, 1997,
and 1996, 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 1998 and 1997, payments of $481,000 and $696,000, respectively,
were made to the related employee group and $184,000 and $0, respectively, were
forfeited due to change in employment status of respective employees. During
1996, payments of $769,000 were made to the related employee group and $614,000
were forfeited due to change in employment status of respective employees. The
remaining liability of $409,000 for such contingent payments is not reflected in
the consolidated financial statements at December 31, 1998.
13. CONTINGENCIES
One of Reeves's Tampa facilities has been listed, since 1982, on the
federal Environmental Protection Agency's (the "EPA") Superfund National
Priorities List; and both that facility and a nearby facility have been subject
to remedial actions under Superfund law. After several years of investigations
and studies to determine the nature and extent of the contamination of soil and
groundwater alleged to be attributable to pre-1982 plant operations, the EPA
issued records of decision ("ROD") for three separate operable units ("OU")
prescribing the EPA's selected methods of monitoring and remedial action for the
soil and surficial aquifer groundwater. These OUs and related RODs have been
included in a consent decree which was approved by the U.S. District Court in
July 1995. OU1, which addresses the remediation of certain soils, was completed
in October 1997 with the EPA issuance of a memorandum of acceptance. OU2 and OU3
initially required the monitoring of surficial aquifer groundwater and wetlands,
respectively. Depending on the results of the monitoring, the Company may need
to provide for contingent remediation solutions. In addition, Reeves has been
named a potential responsible party ("PRP") or has been involved in
environmental investigations of remediation at a number of other sites. The
terms of the Reeves acquisition agreement provide for the selling shareholders
("Sellers") to pay up to $8 million in environmental and remediation expenses in
excess of $2.5 million. At December 31, 1998, the Company had reserves for
future contingent liabilities of $2.4 million including $1.9 million in other
non-current liabilities. For the period since acquisition, the Company had
incurred $149,000 in environmental and related expenses which have been charged
to the reserve. Based on information available to the Company, the Company
believes that, when considering the aggregate of its reserves and its right to
offset the long-term Sellers' notes, additional environmental and remediation
costs, if any, will not have a materially adverse effect on the Company's
results of operations, financial condition or long-term liquidity.
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.
14. 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 for the indicated period in 1996. No amounts were
due to Globe at December 31, 1998 or 1997.
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 centralize and outsource its four regional lead-taking
activities to H.I., Inc.'s Lawrence, Kansas, facility. The aggregate amount of
lead-taking activities expenses incurred to H.I., Inc. in 1998 (through date of
acquisition), 1997 and 1996 approximated $2,600,000, $2,230,000, and $302,000
respectively. On November 16, 1998, the Company acquired certain net assets and
the lead-taking and call-center business of H.I., Inc. for $2.4 million
including transaction costs. At December 31, 1998 and 1997, approximately
$400,000 and $88,500, respectively, was due to H.I., Inc. In 1998 and 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 1998 and 1997 was $397,000 and $110,000,
respectively. 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.
15. INCOME PER SHARE
The following table summarizes the information used in computing basic
and diluted income per share.
<TABLE>
<CAPTION>
Years Ending December 31,
1998 1997 1996
<S> <C> <C> <C>
Numerator for both basic and diluted income per
share - Net Income $85,000 $2,304,000 $6,815,000
----------------- ----------------- -----------------
Denominator for basic income per share -
Weighted shares outstanding 8,507,375 8,832,840 7,712,795
Effect of employee stock options
(dilutive potential of common shares) 3,003 570 64,900
================= ================= =================
Denominator for diluted income per share -
Diluted shares 8,510,378 8,833,410 7,777,695
================= ================= =================
</TABLE>
The computation of diluted earnings per share did not assume the
conversion of the 5% contingent, convertible subordinated notes issued November
20, 1998 because their inclusion would have been anti-dilutive.
16. SEGMENT DATA
The Company has adopted FASB No. 131, "Disclosures about Segments of an
Enterprise and Related Information". With the acquisition of Reeves in April
1998, the Company operates in two industry segments and solely in the U.S.:
installed home improvements, and manufacturing and wholesale distribution. The
Company operated in one industry segment and solely in the U.S., installed home
improvements, in 1997 and 1996.
The industry segments are defined as follows:
Installed home improvements
Selling, furnishing and arranging the installation of roofing systems,
gutters, fencing, doors and related installed exterior home improvement
products; financing of installed home improvement, and lead-taking and
telemarketing operations.
Manufacturing and wholesale distribution
Manufacturing of chain-link fencing; wholesale distribution of
chain-link, wood, PVC and ornamental fencing and related products; installation,
maintenance and monitoring of perimeter security products and services.
Inter-segment sales are generally recorded at market. Income (loss)
from operations by segment consists of net sales less operating costs and
expenses including costs of borrowed funds, income and general corporate
expenses that are traceable to the business segment.
Income from operations for the installed home improvement segment for
1998 includes a pretax charge of $1,540,000 for restructuring and related
expenses and $2,270,000 in large and unusual charges incurred in the fourth
quarter 1998, including $750 thousand for provisions for credit losses on
consumer finance receivables, $250 thousand for medical expenses and not
included in the fourth quarter 1997, $770 thousand for new information
technology systems and related expenses and $500 thousand for new advertising
test programs.
Identifiable assets by business segment are those assets that are used
in the Company's operations in each segment and do not include general corporate
assets. General corporate assets consist primarily of cash and cash equivalents,
deferred taxes and corporate property and equipment. The accounting policies of
each operating segment are the same as those described in the Summary of
Significant Accounting Policies footnote.
1998
NET SALES
Installed Home Improvements $161,330,000
Manufacturing and Distribution 83,560,000
----------------
244,890,000
Inter-segment sales:
Manufacturing and Distribution 4,149,000
Eliminations (4,149,000)
================
Net Sales $244,890,000
================
PRE-TAX INCOME
Installed Home Improvements ($680,000)
Manufacturing and Distribution 1,463,000
================
$783,000
================
IDENTIFIABLE ASSETS AT DECEMBER 31:
1998
Installed Home Improvements $58,264,000
Manufacturing and distribution 68,434,000
General corporate 7,901,000
Eliminations (8,470,000)
----------------
$126,129,000
================
DEPRECIATION AND AMORTIZATION EXPENSE
Installed Home Improvements $1,394,000
Manufacturing and distribution 1,628,000
================
$3,022,000
================
ADDITIONS TO PROPERTY, PLANT, AND EQUIPMENT
Installed home improvements $3,208,000
Manufacturing and distribution 551,000
================
$3,759,000
================
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial data for 1998 and 1997 is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- -------------------------------------- -------------- -------------- ------------- -------------- --------------
1998
<S> <C> <C> <C> <C> <C>
Net sales $28,876 $65,615 $76,505 $73,894 $244,890
Gross profit 12,687 23,664 26,492 25,672 88,515
Net income (loss) 185 623 566 (1,289)(1) 85
Basic earnings per common share 0.02 0.07 0.07 (0.15) 0.01
Diluted earnings per common share 0.02 0.07 0.07 (0.15) 0.01
Range of Stock Prices 5 3/4-7 1/24 3/8-6 1/8 3 1/4-5 1/8 2 9/16-4 1/4 2 9/16-7 1/2
1997
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
Range of Stock Prices $16 3/4-28 3/4 $5 - 18 $6 3/4- 10 $6 5/8 - 10 $5 - 28 3/4
Note: 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.
(1) Includes $1,540 in restructuring costs and expenses, or $0.11 per diluted
share, and $2,270 in unusual charges, or $0.16 per diluted share. (Refer to
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.)
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
February 19, 1999
Exhibit 21.2 - Subsidiaries
<TABLE>
<CAPTION>
Also Does Business Under
Name State of Incorporation Under The Following Names
<S> <C> <C>
Diamond Exteriors, Inc.(R) Delaware Sears Home Central,
Sears Roofing and Gutters,
and similar names
Marquise Financial Services, Inc. Delaware ----------
Marquise Special Purpose Corp. Delaware ----------
Solitaire Heating and Cooling, Inc. Delaware KanTel(TM)
Reeves Southeastern Corporation Florida Southeastern Wire
Foreline Security Corporation Florida ----------
Reeves Southeastern Realty, Inc. Florida ----------
Diamond Realty Acquisition, Inc. Delaware ----------
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Diamond Home Services, Inc. of our report dated February 19, 1999, included
in the 1998 Annual Report to Shareholders of Diamond Home Services, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-13381) pertaining to the Diamond Home Services, Inc. Incentive
Option Plan and the Diamond Home Services, Inc. 1996 Non-employee Director Stock
Option Plan of our report dated February 19, 1999 with resepct to the
consolidated financial statements of Diamond Home Services, Inc. incorporated by
reference in the Annual Report (Form 10-K) for the year ended December 31, 1998.
Earnst & Young LLP
Chicago, Illinois
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 5,104 9,966 18,982
<SECURITIES> 0 0 0
<RECEIVABLES> 23,435 7,616 10,386
<ALLOWANCES> 0 0 0
<INVENTORY> 15,771 0 0
<CURRENT-ASSETS> 49,804 20,413 31,499
<PP&E> 23,461 6,469 2,193
<DEPRECIATION> 2,649 923 586
<TOTAL-ASSETS> 126,129 56,589 58,793
<CURRENT-LIABILITIES> 34,027 12,674 14,321
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 9 9 9
<OTHER-SE> 34,403 34,201 36,227
<TOTAL-LIABILITY-AND-EQUITY> 126,129 56,589 58,793
<SALES> 244,890 161,109 157,068
<TOTAL-REVENUES> 244,890 161,109 157,068
<CGS> 156,375 90,633 87,739
<TOTAL-COSTS> 241,235 157,847 146,079
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 2,872 (725) (183)
<INCOME-PRETAX> 783 3,987 11,172
<INCOME-TAX> 698 1,683 4,357
<INCOME-CONTINUING> 85 2,304 6,815
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 85 2,304 6,815
<EPS-PRIMARY> 0.01 0.26 0.88
<EPS-DILUTED> 0.01 0.26 0.88
</TABLE>
