<PAGE>
- --------------------------------------------------------------------------------
Form 10 - Q
Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- ---------
Commission File Number 0-20829
DIAMOND HOME SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3886872
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
222 Church Street, Woodstock, Illinois 60098
(Address of principal executive offices, including zip code)
(815) 334-1414
(Registrant's telephone number, including area code)
------------------------------------------------
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 (_)
The number of shares of the registrant's common stock outstanding as of October
29, 1999, the latest practicable date, was 8,507,375 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
[In thousands, except per share data]
<S> <C> <C> <C> <C>
Net sales.............................. $ 65,942 $76,505 $188,907 $170,996
Cost of sales.......................... 45,515 50,013 126,853 108,153
----------------------------------------------------------
Gross profit........................... 20,427 26,492 62,054 62,843
Operating expenses:
Selling, general, and
administrative expense.............. 22,648 24,104 64,402 57,995
Restructuring expense................ 1,393 -- 2,706 --
Operating interest expense........... 107 83 316 206
Amortization expense................. 694 316 2,129 750
----------------------------------------------------------
Operating income (loss)................ (4,415) 1,989 (7,499) 3,892
Interest expense....................... 1,122 1,039 3,375 1,791
Interest income and other.............. 163 147 472 403
----------------------------------------------------------
Income (loss) before income taxes...... (5,374) 1,097 (10,402) 2,504
Income taxes (benefit)................. 685 531 (1,163) 1,130
----------------------------------------------------------
Net income (loss)...................... $( 6,059) $ 566 $( 9,239) $ 1,374
==========================================================
Net income (loss) per share:
Basic................................ $ ( 0.71) $ 0.07 $ ( 1.09) $ 0.16
==========================================================
Diluted.............................. $ ( 0.71) $ 0.07 $ ( 1.09) $ 0.16
==========================================================
Weighted average number of common
shares outstanding:
Basic................................ 8,507 8,507 8,507 8,507
==========================================================
Diluted.............................. 8,507 8,508 8,507 8,508
==========================================================
</TABLE>
See accompanying notes.
2
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
(In thousands)
Assets
Current assets
<S> <C> <C>
Cash and cash equivalents............................ $ 3,655 $ 5,104
Accounts receivable, net............................. 23,606 22,138
Inventories, net..................................... 15,822 15,771
Refundable income taxes.............................. 1,251 1,297
Prepaids and other current assets................... 2,309 3,994
Deferred income taxes................................ 1,480 1,500
-------- --------
Total current assets.................................. 48,123 49,804
Finance company accounts receivable, net.............. 8,533 10,011
Net property, plant and equipment..................... 19,900 20,812
Intangible assets, net................................ 36,890 38,981
Other................................................. 6,161 6,521
-------- --------
Total assets.......................................... $119,607 $126,129
======== ========
</TABLE>
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
<TABLE>
Current liabilities
<S> <C> <C>
Due to bank and current portion of long-term debt.... $ 47,292 $ 10,225
Accounts payable and accrued liabilities............. 24,338 22,181
Deferred revenue..................................... 1,453 1,621
-------- --------
Total current liabilities............................. 73,083 34,027
Long-term liabilities:
Long-term debt....................................... 8,904 44,705
Warranty and retention............................... 10,364 10,851
Deferred income taxes................................ -- 267
Other................................................ 2,020 1,867
-------- --------
Total long-term liabilities........................... 21,288 57,690
Common stockholders' equity........................... 25,236 34,412
-------- --------
Total liabilities and common stockholders' equity..... $119,607 $126,129
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
(In thousands)
1999 1998
----------- ------------
<S> <C> <C>
Net income (loss).......................................................... ($9,239) $ 1,374
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........................................... 4,392 1,550
Deferred income taxes................................................... 247 (577)
Other................................................................... 334 227
Changes in operating assets and liabilities:
Accounts receivable and other assets................................... 551 (4,405)
Inventories............................................................ (51) (938)
Accounts payable and accrued expenses.................................. 2,157 (1,449)
Deferred revenues...................................................... (168) (356)
Warranty and retention................................................. (487) 1,129
------- -------
Net cash (used in) operating activities................................. (2,264) (3,445)
Investing activities:
Acquisition of Reeves Southeastern Corporation, net of cash acquired..... -- (30,938)
Consumer finance loans originated, net of collections.................... 1,478 (2,298)
Other.................................................................... (672) 630
Capital expenditures, net................................................ (1,180) (2,460)
------- -------
Net cash (used in) investing activities.................................. (374) (35,066)
Financing activities:
Advances under revolving credit agreement, net........................... 4,013 100
Proceeds on (payments of) term debt and capital leases................... (2,051) 30,000
Borrowings on finance company bank line of credit, net................... (436) 2,475
Payments on notes receivable from officers for treasury stock and other.. 63 102
Payments due to stockholders............................................. (400) (436)
------- -------
Net cash provided by financing activities................................ 1,189 32,241
Net (decrease) in cash and cash equivalents.............................. (1,449) (6,270)
Cash and cash equivalents at beginning of period......................... 5,104 9,966
Cash and cash equivalents at end of period............................... $ 3,655 $ 3,696
======= =======
Supplemental cash flow disclosure:
Interest paid............................................................ $ 3,394 $ 1,089
Income taxes paid........................................................ $ 6 $ 1,241
======= =======
Investing and financing activities exclude the following non-cash
transactions:
Acquisition of Reeves Southeastern Corporation through notes payable. $ -- $ 11,413
======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month and nine-month periods ended September 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. Furthermore, the Company is in default on its bank
loans and currently has a forbearance agreement with its lenders and Sears
through June 30, 2000. Marquise separately has a forbearance agreement through
December 20, 1999. These forbearances are contingent on a number of conditions,
and there can be no assurance that these conditions will be met. (See Note 6
"Debt" and the section "Liquidity and Capital Resources".) For further
information, refer to the consolidated financial statements included in the
Company's 1998 Annual Report on Form 10-K and Form 8-K/A filed May 13, 1998.
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.
These condensed consolidated financial statements include Diamond Home
Services, Inc. (the "Company") and its subsidiaries Diamond Exteriors, Inc./R/
("Exteriors"), Reeves Southeastern Corporation ("Reeves"), Marquise Financial
Services, Inc. ("Marquise"), and Solitaire Heating and Cooling, Inc. d/b/a
KanTel/TM/ ("KanTel").
2. Consumer Financing
The following summarized condensed financial information for Marquise, the
Company's finance subsidiary, is before elimination of inter-company
transactions in consolidation:
5
<PAGE>
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
Assets:
Cash $ 210,000 $ 343,000
Financing receivables, net 8,533,000 10,011,000
Other assets 1,267,000 1,237,000
Total assets $10,010,000 $11,591,000
================== =================
Liabilities and stockholder's equity:
Due to Bank $ 4,089,000 $ 4,525,000
Due to Diamond Exteriors, Inc. 5,617,000 6,724,000
Other 52,000 74,000
------------------ -----------------
Total liabilities 9,758,000 11,323,000
Total stockholder's equity 252,000 268,000
Total liabilities and stockholder's equity $10,010,000 $11,591,000
================== =================
</TABLE>
Results of operations for the three months and nine months ended September 30,
1999 and 1998, respectively:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------
1999 1998 1999 1998
----------------- ------------ ---------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Financing income $ 343,000 $407,000 $1,111,000 $1,194,000
General and administrative expenses (1) 447,000 505,000 1,295,000 1,472,000
-----------------------------------------------------------------
Income (loss) before income taxes (104,000) 98,000 (184,000) 277,000
Income taxes (benefit) (38,000) 42,000 (68,000) 114,000
-----------------------------------------------------------------
Net income (loss) ($66,000) $ 56,000 ($116,000) $ 163,000
=================================================================
(1) Includes interest expense paid or payable to Exteriors and provision for credit losses.
Cash flow for the nine months ended September 30, 1999 and 1998, respectively:
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Cash at beginning of period $ 343,000 $ 0
Net cash used in operating activities (168,000) (276,000)
Net cash provided by (used in) investing activities 1,478,000 (2,298,000)
Net cash provided by (used in) financing activities (1,443,000) 2,813,000
------------ ------------
Cash at end of period $ 210,000 $ 239,000
============ ============
At September 30, 1999, Marquise had no approved and unfunded loan commitments.
</TABLE>
6
<PAGE>
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 in notes payable which, commencing in
May, 1999, began accruing interest at the rate of 7% per annum and 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.
On November 16, 1998 the Company acquired certain net assets and the
telephone lead-taking operation and telemarketing business (which are now owned
by KanTel) 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 allocation of the
acquisition purchase prices is as follows:
Purchase price $43,419,000
Transaction costs 1,600,000
------------------
Total purchase price $45,019,000
==================
Fair value of assets acquired $ 63,072,000
Goodwill 10,661,000
Liabilities assumed (28,714,000)
-------------------
Total $ 45,019,000
===================
The following unaudited pro forma information for the three months and nine
months ended September 30, 1998 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 and other
intangible assets, 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.
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------------
(Unaudited)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $65,942,000 $76,505,000 $188,907,000 $201,525,000
Net income (loss) (6,059,000) $ 566,000 (9,239,000) 1,301,000
Net income (loss)
per share - diluted $ (0.71) $ 0.07 $ (1.09) $ 0.15
</TABLE>
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. Receivables
In connection with the Sears Forbearance Agreement (see below), the Company
and Exteriors entered into an agreement for payment of the credit participation
fee accrued through December 31, 1999, which agreement was entered into to
resolve all issues and aspects of a dispute between Exteriors and Sears
regarding the amount of credit participation fee income due to Exteriors. Under
the agreement, $1 million was paid to Exteriors at or about the time of the
execution of the Sears Forbearance Agreement in partial satisfaction of the
credit participation fee. The remaining amount of the disputed credit
participation fee was fixed at $1.8 million. Of this $1.8 million, and subject
to the performance by Exteriors of certain conditions, Sears is required to pay
$500,000 to Exteriors on January 31, 2000, and $1.3 million (less certain
reserves) no earlier than January 1, 2002 (or earlier, in the case of
termination without cause by Sears, or expiration, of the Sears license
agreement prior to January 1, 2001). From and after January 1, 2000, the credit
participation fee will be two-tenths of a percent (0.2%) to be paid in its
entirety at each settlement of a related installed home improvement financing.
There can be no assurance that all of the conditions will occur for Sears's
payment of the $1.8 million discussed above or that such amount, in whole or in
part, will be paid.
5. Inventories
The components of inventories at September 30, 1999 and December 31, 1998
are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------------------------
(Unaudited)
<S> <C> <C>
Raw materials $ 361,000 $ 449,000
Work in progress 1,012,000 861,000
Finished goods 14,449,000 14,461,000
----------------------------------
Total $15,822,000 $15,771,000
==================================
</TABLE>
8
<PAGE>
6. Debt
As of September 30, 1999, the Company was in default under its secured
credit facility from a group of banks (the "Bank Group") as a result of the
Company's failure to make required principal payments on certain term loans at
September 30, 1999, the Company's violation of minimum cash flow and net worth
covenants, as defined, and Marquise's failure to pay its bank loan at maturity
(see below). The Company anticipates that it will continue to be in violation of
financial covenants and be unable to make required quarterly principal payments
on the term loans through at least June 30, 2000.
The Bank Group has not waived these defaults. Accordingly, the Company has
classified all $40.4 million of its outstanding debt to the Bank Group to
current portion of long-term debt on its balance sheet at September 30, 1999. On
November 2, 1999, the Company and the Bank Group entered into a forbearance
agreement dated October 29, 1999 ("Bank Forbearance Agreement"). Under the terms
of the Bank Forbearance Agreement, the Bank Group agreed that, unless a
standstill termination event, as defined, occurs, (a) it will forbear through
June 30, 2000 (the "Standstill Period") from exercising its rights with respect
to the Company's existing and anticipated future defaults, including the failure
to make required quarterly principal payments on the term loans, and (b) it will
continue to make revolving loans, as defined and limited per the terms of the
Bank Forbearance Agreement, for the operations of Reeves. The Company and its
subsidiaries, among other things, agreed to (a) grant the Bank Group additional
liens on certain assets of Reeves and Marquise, (b) limitations on transfer of
funds between and among the Company and its subsidiaries and (c) various
reporting and financial performance measures. Additionally, during the
Standstill Period, the Company agreed to pursue diligently the sale of Reeves
and to use the proceeds to pay, among other things, the Bank Group debt. Also,
during the Standstill Period and subsequent to the repayment of the existing
Marquise bank loan, all collections of the Marquise portfolio, net of expenses,
will be used to pay the Bank Group debt. Concurrently, the Company intends to
pursue a refinancing of the Bank Group debt or other restructuring alternatives.
Under the Bank Forbearance Agreement, a standstill termination event will occur
if, among other things, the Company and/or its subsidiaries fail to achieve
certain financial performance targets; if the Company fails to meet certain
target dates for the sale of Reeves; if the license agreement between Sears,
Roebuck and Co. ("Sears") and Exteriors terminates; if the forbearance agreement
between Sears, the Company and Exteriors ("Sears Forbearance Agreement")
(discussed below) terminates; or if events of default occur in addition to those
existing and future defaults identified in the Bank Forbearance Agreement.
Exteriors is in default on the payment of various obligations to Sears and
on its performance of various obligations of its license agreement with Sears.
Sears has not waived these defaults. On November 2, 1999, the Company, Exteriors
and Sears entered into the Sears Forbearance Agreement. Under the Sears
Forbearance Agreement, Sears agreed to defer payment of certain license fees and
advertising billings (the "Sears Obligations") through June 30, 2000 and to
settle and accelerate the payment of certain credit participation fees owed to
Exteriors. Under the Sears Forbearance Agreement, Exteriors is required to meet
certain operational and financial performance targets, agreed to repay the Sears
Obligations, with interest at 7% per annum, commencing the third quarter 2000,
agreed to extend certain exclusivity
9
<PAGE>
provisions in the Sears license agreement until the Sears Obligations are repaid
and agreed to certain other matters. The Sears Forbearance Agreement is subject
to termination under the conditions stated therein, including failure to achieve
certain operational and financial performance targets or the commencement by the
Bank Group of enforcement actions against the Company or Exteriors. The Sears
Forbearance Agreement and the Bank Forbearance Agreement also contain certain
provisions regarding the relative priority of the Bank Group debt and the Sears
Obligations.
On August 15, 1999, Marquise's secured bank line of credit matured, and
Marquise is in default on its payment obligation under that line. Accordingly,
the Company has classified the $4.1 million outstanding under the Marquise line
as current debt on its balance sheet. The secured bank lender has not waived
Marquise's default; but on November 3, 1999, Marquise and its secured bank
lender entered into a forbearance agreement pursuant to which the secured bank
lender agreed to forbear from exercising its rights until December 20, 1999, if
certain conditions are met, including, without limitation, the sale of a portion
of Marquise's portfolio by November 15, 1999, that results in net proceeds (as
defined) of at least $3.3 million, which proceeds would be used to repay a
portion of the amount outstanding. Additionally, Marquise agreed to mandatory
weekly principal repayments, payment of a forbearance fee, an increase in the
interest rate to 11.5%, and to certain reporting requirements.
The Company, or its subsidiaries, are in default, due to non-payment of
scheduled principal and interest, on acquisition notes issued in connection with
the acquisition of Reeves, on amounts due former shareholders in connection with
the 1994 repurchase of the Company's stock and on note obligations related to
KanTel. The total amount of principal and interest due at September 30, 1999 and
not paid is approximately $350 thousand. The Company and its subsidiaries do not
expect to be able to make future payments under these obligations through at
least June 30, 2000. The total amount of scheduled principal and interest due
under these obligations through June 30, 2000 is approximately $3.0 million. The
Company has initiated discussions with these creditors; however, resolution of
these obligations will be dependent upon the Company's ability to repay or
refinance the Bank Group debt and to attain sufficient future profits and cash
flows.
The Company has retained special counsel and a financial and operating
crisis consultant to advise the Company of its financial, operating and legal
alternatives as it addresses its debt situation.
7. Segment Data
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 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 improvements; and lead-taking and telemarketing
operations.
10
<PAGE>
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 and earnings before interest, income taxes,
depreciation and amortization for the installed home improvement segment for
1999 includes a pretax charge of $2,706,000 for restructuring and related
expenses.
11
<PAGE>
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
1999 1998 1999 1998
------------------------------ --------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales
Installed Home Improvements $ 34,579,000 $46,616,000 $ 95,280,000 $116,623,000
Manufacturing and Distribution 31,363,000 29,889,000 93,627,000 54,373,000
----------------------------- -------------------------------
65,942,000 76,505,000 188,907,000 170,996,000
Inter-segment sales:
Manufacturing and Distribution 1,435,000 1,452,000 4,023,000 3,012,000
Eliminations (1,435,000) (1,452,000) (4,023,000) (3,012,000)
----------------------------- -------------------------------
Net Sales 65,942,000 76,505,000 188,907,000 170,996,000
============================== ================================
Pre-tax income (loss)
Installed Home Improvements (5,319,000) 485,000 (10,869,000) 914,000
Manufacturing and Distribution (55,000) 612,000 467,000 1,590,000
----------------------------- -------------------------------
(5,374,000) 1,097,000 (10,402,000) 2,504,000
============================== ================================
Depreciation and amortization expense
Installed Home Improvements 855,000 265,000 2,119,000 810,000
Manufacturing and Distribution 722,000 433,000 2,273,000 740,000
----------------------------- -------------------------------
1,577,000 698,000 4,392,000 1,550,000
============================== ================================
Additions to property, plant, and
equipment
Installed Home Improvements 78,000 796,000 683,000 1,961,000
Manufacturing and Distribution 111,000 155,000 497,000 499,000
----------------------------- -------------------------------
189,000 951,000 1,180,000 2,460,000
============================== ================================
Earnings (Loss) before interest
expense, income taxes, depreciation
and amortization
Installed Home Improvements (4,522,000) 638,000 (8,967,000) 1,612,000
Manufacturing and Distribution 1,834,000 2,196,000 6,160,000 4,233,000
------------------------------ --------------------------------
($2,675,000) $ 2,834,000 ($2,635,000) $ 5,845,000
============================== ================================
</TABLE>
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 quarters of each year. The Company
believes that this seasonality is caused by 1) 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; and 2) reduced demand for commercial and industrial
fencing and related products.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
RESULTS OF OPERATIONS
Third Quarter 1999 Compared to Third Quarter 1998
Net Sales
Net sales decreased $10.6 million, or 13.9%, from $76.5 million for the
third quarter 1998 to $65.9 million for the third quarter 1999.
Installed Home Improvements
Installed home improvement product sales decreased $12.0 million, or 25.8%,
from $46.6 million for the third quarter of 1998 to $34.6 million for the third
quarter of 1999. Net sales attributable to roofing and gutter products and
services decreased $9.5 million, or 30.6%, to $21.6 million in the third quarter
1999. Net sales attributable to fencing products and services decreased $917
thousand, or 11.3%, to $7.2 million in the third quarter of 1999. Net sales
attributable to garage doors, entry doors, and other products and services
decreased $1.2 million, or 19.5%, to $5.1 million in the third quarter 1999.
Credit participation fee income decreased $304 thousand to $328 thousand in the
third quarter 1999. Finance interest income decreased $64 thousand to $344
thousand on receivables financed by the Company's finance subsidiary, Marquise.
Backlog, defined as jobs sold but not installed, decreased $3.9 million from
$17.8 million at the end of June 1999 to $13.9 million at the end of the third
quarter 1999. Backlog increased $2.6 million from $16.0 million at the end of
June 1998 to $18.6 million at the end of the third quarter 1998. The decrease in
installed sales was attributable to the continuing effects of the restructuring
and related activities in this segment including poor operating efficiencies
measured in reduced close ratios, increased cancellations, reduced credit
approvals, delays in scheduling installers and insufficient numbers of certified
installers in certain markets.
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution sales increased $1.5 million, or
5.0%, from $29.9 million for the third quarter 1998 to $31.4 million for the
third quarter 1999. Manufacturing and wholesale distribution sales are comprised
of the following major product lines:
13
<PAGE>
<TABLE>
<CAPTION>
Three months ending
September 30,
1999 1998
----------- -----------
<S> <C> <C>
Chain link and accessories $19,583,000 $20,284,000
Wood 5,149,000 4,714,000
Ornamental/specialty 3,139,000 2,524,000
Gate operators and access control 2,008,000 1,199,000
Security systems 2,530,000 2,620,000
Other 389,000 --
----------------------------
32,798,000 31,341,000
Less: inter-segment sales 1,435,000 1,452,000
----------------------------
$31,363,000 $29,889,000
============================
</TABLE>
Backlog, defined as orders placed but not delivered, increased
approximately $200 thousand from $4.6 million at the end of June 1999 to $4.8
million at the end of the third quarter 1999.
Gross Profit
Gross profit decreased $6.1 million, or 23.0%, from $26.5 million, or 34.6%
of net sales, for the third quarter 1998 to $20.4 million, or 31.0% of net
sales, for the third quarter 1999.
Installed Home Improvements
Installed home improvement product gross profit decreased $6.2 million, or
32.1%, from $19.3 million, or 41.4% of installed home improvement product sales,
for the third quarter 1998 to $13.1 million, or 37.9% of installed home
improvement product sales, for the third quarter 1999. The decrease in gross
profit amount was attributable to the 25.8% decrease in sales and $368 thousand
decrease in credit participation fee income and finance income. The license fee
incurred to Sears decreased $1.2 million from $4.8 million in the third quarter
1998 to $3.6 million for the third quarter 1999, and, expressed as a percentage
of net installed home improvement product sales (which is defined as installed
home improvement product sales or segment sales excluding credit participation
and finance interest income), increased from 10.5% for the third quarter 1998 to
10.6% of net installed home improvement product sales for the third quarter
1999. The decrease in license fee incurred to Sears in the third quarter 1999
was due to an overall decrease in net installed home improvement sales; and the
percentage increase is attributable to a slight change in product mix. On
January 1, 1996, Sears and the Company entered into an agreement which has been
amended and extended through December 31, 2001. In addition, this agreement was
subject to Sears Forbearance Agreement discussed in Note 6. 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 $7.0 million, or 30.4%, from $23.0 million, or 50.5%
of net installed home improvement product sales, for the third quarter 1998 to
$16.0 million, or 46.3% of net installed home improvement product sales, for the
third quarter 1999.
14
<PAGE>
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution gross profit increased $131
thousand, or 1.8%, from $7.2 million, or 23.0% of gross (before inter-segment
elimination) segment revenue, for the third quarter 1998 to $7.3 million, or
22.5% of gross segment revenue, for the third quarter 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $1.5 million, or
6.2%, from $24.1 million in the third quarter 1998 to $22.6 million in the third
quarter 1999 and, as a percentage of net sales, increased from 31.5% to 34.3%.
Installed Home Improvements
Selling, general and administrative expenses for this segment decreased
$2.1 million, or 11.2%, from $18.7 million in the third quarter 1998 to $16.6
million in the third quarter 1999 and, as a percentage of installed home
improvement sales, increased from 40.2% to 48.0%. Selling expense representing
sales managers' and home consultants' direct compensation, direct advertising
expense and lead-taking costs increased $1.6 million to $11.1 million for the
third quarter 1999; as a percentage of net installed sales, selling expense
increased from 20.4% to 32.1%. Selling compensation increased $2.2 million, or
41.5%, from $5.3 million in the third quarter 1998 to $7.5 million in the third
quarter 1999; as a percentage of net installed sales, selling compensation
increased from 11.4% to 21.7%. The percentage increase in selling compensation
was attributable to the imbalance of fixed cost components in the new
compensation plan to below-plan net installed sales volume. The primary purpose
of the changes in selling compensation programs is to improve recruiting and
retention of home consultants and sales management. Effective May 1, 1999, as
part of the restructuring initiative, the compensation arrangement for home
consultants, sales managers, and field operations management was changed to
include: 1) for selling compensation, minimum draws and fixed auto allowances
offset by lower commission rates; and 2) for field operations management,
increased quota incentive bonuses. This program was terminated as part of the
restructuring in the third quarter 1999 and replaced essentially by the prior
variable cost program, which the Company believes is more cost effective. Direct
advertising expense decreased $900 thousand, or 27.2%, from $3.4 million for the
third quarter 1998 to $2.5 million for the third quarter 1999; as a percentage
of net installed sales, direct advertising expense decreased from 7.4% for the
third quarter 1998 to 7.2% for the third quarter 1999. Lead-taking costs
increased approximately $300 thousand, or 30.0% from $1.0 million for the third
quarter 1998 to $1.3 million for the third quarter 1999; as a percentage of net
installed sales, lead-taking costs increased from 2.1% to 3.8%. The increase was
attributable to a 4.1% increase in total leads or scheduled appointments,
increased service levels (to reduce incidence of abandoned calls), ongoing
development of new scripts and database maintenance.
General and administrative expenses representing administrative support
including training, customer service, home consultant support services, field
installations operations, and Marquise payrolls and Company benefits and general
expenses, decreased $3.8 million from $9.1
15
<PAGE>
million for the third quarter 1998 to $5.3 million for the third quarter 1999;
as a percentage of net segment sales, general and administrative expenses
decreased from 19.5% to 15.4%. Performance-based compensation paid to officers,
field installation managers and field operations staff, including KanTel,
increased $11 thousand from $165 thousand in the third quarter 1998 to $176
thousand in the third quarter 1999. No performance-based compensation was paid
to officers in the third quarter 1999. Included in general and administrative
expenses in the third quarter 1999 are expenses approximating in the aggregate
$1.1 million for the "University of Diamond" training (which was discontinued in
the third quarter 1999, and is expected to be replaced by a more cost effective
program), customer service, and home consultant services.
Manufacturing and Wholesale Distribution
Selling, general and administrative expenses for this segment increased
$572 thousand, or 10.6%, from $5.4 million for the third quarter 1998 to $5.9
million in the third quarter 1999 and, as a percentage of gross segment
revenues, increased from 17.1% in the third quarter 1998 to 18.3% in the third
quarter 1999. Selling expenses representing the operations, primarily payroll
and related costs, and facilities and equipment costs, of distribution centers
increased $403 thousand, or 9.1%, to $4.8 million in the third quarter of 1999.
General and administrative expenses increased $168 thousand, or 15.2%, to $1.1
million in the third quarter of 1999.
Restructuring Expense
During the third quarter 1999, the Company recorded a $1.4 million pre-tax
charge for restructuring and related activities in its installed home
improvements segment, comprised of a $246 thousand charge for severance, a $237
thousand charge for restructuring consultancy and related expenses, and a $910
thousand charge for discontinuation of a sales compensation plan (referred to
above). Restructuring expenses are expected to continue through June 30, 2000.
Restructuring expenses for the fourth quarter 1999 are expected to approximate
$600 thousand.
Operating Interest Expense
Operating interest expense increased from $83 thousand in the third quarter
1998 to $107 thousand in the third quarter 1999. The increase in operating
interest expense resulted from the Company's finance subsidiary's borrowings
during the quarter and interest rate spread.
Amortization of Intangibles
Amortization of intangibles increased $378 thousand from $316 thousand in
the third quarter 1998 to $694 thousand in the third quarter 1999. The
amortization expense relates primarily to goodwill incurred in connection with
the September 1994 stock repurchase from management and the amortization of
intangibles, including goodwill and covenants not to compete, related to the
Reeves acquisition in April 1998 and to a lesser extent the KanTel acquisition
in November 1998. The increase reflects a revaluation of the goodwill and
covenants not to compete related to the Reeves acquisition.
16
<PAGE>
Interest Expense
Interest expense increased from $1.0 million in the third quarter 1998 to
$1.1 million in the third quarter 1999. This increase reflects working capital
requirements related to Reeves, and an increase in the interest rate spread;
and, capitalized leases related to the Company's new information technology
systems.
Interest Income and Other
Interest income increased $16 thousand from $147 thousand in the third
quarter 1998 to $163 thousand in the third quarter 1999, primarily due to
finance income on Reeves's trade receivables partially offset by decreased
interest income from lower Company invested cash balances.
Income Taxes
The Company's income tax expense for the third quarter 1999 increased from
$531 thousand, or an effective rate of 48.4%, for the third quarter 1998 to $685
thousand for the third quarter 1999. The difference in the effective income tax
rate and the federal statutory rate (34%) is due primarily to amortization of
certain intangibles (which increased in 1999) which are not deductible for
federal income tax purposes and the effect of state income taxes. The Company's
income tax expense for the third quarter 1999 also reflects a reserve adjustment
for future benefits of operating losses incurred and timing differences which
may not be realized.
17
<PAGE>
First Nine Months 1999 Compared to First Nine Months 1998
Net Sales
Net sales increased $17.9 million, or 10.5%, from $171.0 million for the
first nine months 1998 to $188.9 million for the first nine months 1999. Reeves,
acquired in April, 1998, contributed $93.6 million to net sales in the first
nine months 1999, compared to $54.4 million for the twenty-three weeks ended
September 30, 1998.
Installed Home Improvements
Installed home improvement product sales decreased $21.3 million, or 18.3%,
from $116.6 million for the first nine months 1998 to $95.3 million for the
first nine months 1999. Net sales attributable to roofing and gutter products
and services decreased $16.7 million or 22.1% to $58.9 million for the first
nine months 1999. Net sales attributable to fencing products and services
decreased $2.1 million or 10.4% to $18.3 million for the first nine months 1999.
Net sales attributable to garage doors, entry doors, and other products and
services decreased $2.3 million or 12.7% to $15.6 million for the first nine
months 1999. Credit participation fee income decreased $331 thousand to $1.2
million in the first nine months 1999. Interest income on receivables financed
by the Company's consumer finance subsidiary, Marquise, decreased $83 thousand
to $1.1 million for the first nine months 1999. Backlog, defined as jobs sold
but not installed, was approximately $13.9 million at both the end of December,
1998 and the end of the first nine months 1999. Backlog increased $7.7 million
from $10.9 million at the end of December 1997 to $18.6 million at the end of
the third quarter 1998. The decrease in installed sales was attributable to the
continuing effects of the restructuring and related activities in this segment
including poor operating efficiencies measured in reduced close ratios,
increased cancellations, reduced credit approvals, delays in scheduling
installers and insufficient numbers of certified installers in certain markets.
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution sales for the first nine months
1999 and the twenty-three weeks ending September 30, 1998 are comprised of the
following major product lines:
18
<PAGE>
<TABLE>
<CAPTION>
Twenty-three
Nine Months Ended Weeks Ended
September 30, 1999 September 30, 1998
<S> <C> <C>
Chain link and accessories $59,710,000 $37,245,000
Wood 14,903,000 9,210,000
Ornamental/specialty 8,144,000 4,566,000
Gate operators and access control 5,703,000 2,121,000
Security systems 8,516,000 4,243,000
Other 674,000 --
--------------------------------------------
97,650,000 57,385,000
Less: inter-segment sales 4,023,000 3,012,000
$93,627,000 $54,373,000
============================================
</TABLE>
Backlog, defined as orders placed but not delivered, increased $1.7 million
from $3.1 million at the end of December 1998 to $4.8 million at the end of
September 1999.
Gross Profit
Gross profit decreased $789 thousand, from $62.8 million, or 36.8% of net
sales, for the first nine months 1998 to $62.1 million, or 32.8% of net sales,
for the first nine months 1999. Reeves contributed $22.6 million to gross
profit in the first nine months 1999, compared to $13.2 million for the twenty-
three weeks ended September 30, 1998.
Installed Home Improvements
Installed home improvement product gross profit decreased $10.1 million, or
20.4%, from $49.6 million, or 42.5% of installed home improvement product sales,
for the first nine months 1998 to $39.5 million, or 41.4% of installed home
improvement product sales, for the first nine months 1999. The decrease in gross
profit amount was attributable to a 18.3% decrease in sales and $414 thousand
decrease in credit participation fee income and in finance interest income. The
license fee incurred to Sears decreased $2.0 million, or 16.9%, from $11.8
million, or 10.4% of net installed home improvement product sales, for the first
nine months 1998 to $9.8 million, or 10.3% of net installed home improvement
product sales, for the first nine months 1999. The decrease in the license fee
incurred to Sears for the first nine months 1999 was due to an overall decrease
in net installed home improvement product sales. Effective January 1, 1996,
Sears and the Company entered into a three-year license agreement which has been
amended and extended through December 31, 2001. In addition, this agreement was
subject to the Sears Forbearance Agreement discussed in Note 6. 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 $11.7 million, or 19.9%, from $58.7 million, or 51.5%
of net installed home improvement product sales, for the first nine months 1998
to $47.0 million, or 49.3% of net installed home improvement product sales, for
the first nine months 1999. The decrease in gross
19
<PAGE>
profit amount was attributable to a 18.3% decrease in net installed home
improvement product sales.
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution gross profit increased $9.4
million, or 71.2%, from $13.2 million in the twenty-three weeks ended September
30, 1998 to $22.6 million in the first full nine months 1999 and, as a
percentage of gross (before inter-segment elimination) segment revenue,
increased from 23.0% to 23.2%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $6.4 million, or
11.0%, from $58.0 million in the first nine months 1998 to $64.4 million in the
first nine months 1999 and, as a percentage of net sales, increased from 33.9%
to 34.1% .
Installed Home Improvements
Selling, general and administrative expenses for this segment decreased
$1.7 million, or 3.5%, from $48.4 million in the first nine months 1998 to $46.7
million in the first nine months 1999 and, as a percentage of installed home
improvement sales, increased from 41.5% to 49.0%. Selling expenses representing
sales managers' and home consultants' direct compensation, direct advertising
expense and lead-taking costs increased $2.0 million to $22.7 million for the
first nine months 1999; and, as a percentage of net installed sales, selling
expense increased from 17.8% to 23.9%. Selling compensation increased $2.4
million, or 21.6%, from $11.2 million in the first nine months 1998 to $13.6
million in the first nine months 1999; as a percentage of net installed sales,
selling compensation increased from 9.6% to 14.3%. The percentage increase in
selling compensation was attributable to the third quarter 1999 imbalance of
fixed costs components in the new compensation plan to below-plan net installed
sales. The primary purpose of the changes in selling compensation programs is to
improve recruiting and retention of home consultants and sales management.
Effective May 1, 1999, as part of the restructuring initiative, the compensation
arrangement for home consultants, sales managers, and field operations
management has been changed to include: 1) for selling compensation, minimum
draws and fixed auto allowances offset by lower commission rates; and 2) for
field operations management, increased quota incentive bonuses. This program was
terminated as part of the third quarter 1999 restructuring and replaced
essentially by the prior variable cost program which the Company believes is
more cost effective. Direct advertising expense decreased $1.1 million, or
14.9%, from $7.4 million for the first nine months 1998 to $6.3 million for the
first nine months 1999; as a percentage of net installed sales, direct
advertising expense decreased from 8.3% for the first nine months 1998 to 7.6%
for the first nine months 1999. Lead-taking costs increased $647 thousand, or
30.0% from $2.2 million for the first nine months 1998 to $2.9 million for the
first nine months 1999; as a percentage of net installed sales, lead-taking
costs increased from 1.9% to 2.9%. The increase was attributable to a 12.5%
increase in total leads or scheduled appointments during the first nine months,
and increased service levels, development of new scripts and database
maintenance.
20
<PAGE>
General and administrative expense representing administrative support
including training, customer service, home consultant support services, field
installations operations, and Marquise payrolls and Company benefits and general
expenses, decreased $3.7 million, or 13.4% from $27.7 million for the first nine
months 1998 to $24.0 million for the first nine months 1999; as a percentage of
net segment sales, general and administrative expenses decreased from 23.8% to
25.2%. Performance-based compensation paid to officers, field installation
managers and field operations staff, including KanTel, increased $85 thousand
from $854 thousand in the first nine months 1998 to $939 thousand in the first
nine months 1999. No performance-based compensation was paid to officers in the
first nine months 1999. Included in general and administrative expenses in the
first nine months 1999 are expenses approximating in the aggregate $2.2 million
for the "University of Diamond" training, customer service, and, commencing in
the second quarter, home consultant services.
Manufacturing and Wholesale Distribution
Selling, general, and administrative expenses for the first nine months
1999 for this segment includes selling expenses of $14.3 million representing
the operations, primarily payroll and related costs, and facilities and
equipment costs, of 31 distribution centers and $3.3 million of general and
administrative expenses. For the twenty-three weeks ended September 30, 1998,
selling, general, and administrative expenses consisted of $7.8 million in
selling expenses and $1.8 million in general and administrative expenses.
Restructuring Expense
During the first nine months 1999, the Company recorded a $2.7 million pre-
tax charge for restructuring and related activities in its installed home
improvements segment, comprised of a $1.0 million charge for severance and
employee retention incentive bonuses, approximately $500 thousand for
restructuring consultancy and related expenses, and a $1.2 million charge for
out-of-pocket expenses related to restructuring implementation and
discontinuation of sales compensation programs. Restructuring expenses for the
fourth quarter 1999 are expected to approximate $600 thousand.
Operating Interest Expense
Operating interest expense increased from $206 thousand in the first nine
months 1998 to $316 thousand in the first nine months 1999. The increase in
operating interest expense resulted from the Company's finance subsidiary's
borrowings during the first nine months and an increase in the interest rate
spread.
Amortization of Intangibles
Amortization of intangibles increased $1.4 million from $750 thousand in
the first nine months 1998 to $2.1 million in the first nine months 1999. The
amortization expense relates primarily to goodwill incurred in connection with
the September 1994 stock repurchase from management and the amortization of
intangibles, including goodwill and covenants not to compete,
21
<PAGE>
related to the Reeves acquisition in April 1998 and to a lesser extent the
KanTel acquisition in November 1998.
Interest Expense
Interest expense increased from $1.8 million in the first nine months 1998
to $3.4 million in the first nine months 1999. This increase reflects the full
nine month effect of interest expense incurred related to the debt associated
with the acquisition of Reeves, and an increase in the interest rate spread;
and, capitalized leases related to the Company's new information technology
systems.
Interest Income and Other
Interest income increased $69 thousand from $403 thousand in the first nine
months 1998 to $472 thousand in the first nine months 1999.
Income Taxes
The Company's income tax expense decreased from $1.1 million, or an
effective rate of 45.1%, for the first nine months 1998 to a $1.2 million
benefit, or an effective rate of 11.2%, for the first nine months 1999. 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. The net benefit in
1999 reflects a reserve recorded in the third quarter 1999 for operating losses
and timing differences which may not be realized.
22
<PAGE>
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, to fund
the operations of the Company's finance subsidiary, Marquise, and, more
recently, to fund new information technology systems, acquisitions, and 1999
restructuring and operating losses of its installed home improvement business.
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. The Company's manufacturing and wholesale
distribution businesses require minimal levels of capital expenditures while its
installed home improvement businesses are not capital intensive. Capital
expenditures for first nine months 1999 and years 1998 and 1997 were
approximately $1.3 million, $3.8 million, and $4.3 million, respectively.
Capital expenditures for 1999 are expected to approximate $2.0 million,
primarily related to ongoing new equipment purchases and software development
for the Company's information technology systems and major plant repairs. Future
requirements for new information technology and other capital expenditures are
expected to be funded by cash flow from operations and capital leases. During
1997, the Company announced a stock repurchase program to repurchase up to
1,000,000 shares of its common stock. During the second and third quarters 1997
the Company purchased 572,300 shares of its common stock for $4.7 million. The
Company's bank credit facilities impose certain restrictions on the repurchase
of common stock.
On April 20, 1998, the Company acquired all of the issued and outstanding
stock of Reeves for approximately $42.6 million, including transaction expenses.
In November, 1998, the Company acquired certain net assets and the business of
KanTel, the lead-taking and telemarketing operation (which are now owned by
KanTel) of H.I Inc., a related party, for approximately $2.4 million in cash and
convertible subordinated notes.
In connection with the Reeves acquisition, the Company obtained a $42
million, as amended, secured credit facility from a bank group (the "Bank
Group"). See "Notes to Consolidated Financial statements; Debt." Given the
Company's installed home improvement segment's operating losses during the first
three quarters of 1999, the Company has moderated and will continue to moderate
its capital spending, its acquisitions, and its expansion activities (both of
complementary new products and into new markets), and has reduced and will
continue to reduce operating costs. It is not likely the Company will activate
its stock repurchase program announced in 1997. The Company does not expect to
have sufficient resources to pay approximately $3.0 million of non-Bank Group
debt obligations due through June 30, 2000 as they mature. See "Notes to
Consolidated Financial Statements: Debt." Provided there are no terminations of
either the Bank Forbearance Agreement or the Sears Forbearance Agreement, and
dependent upon future revenues and the implementation of further cost
reductions, the Company believes it will have sufficient capital to meet all of
its obligations through June 30, 2000 except for the $3.0 million debt
obligation discussed above. There can be no assurance that the Bank Group and
Sears will not be entitled to terminate their forbearance obligations, the
Company will achieve its goals for revenue and cost reductions, or that other
adverse events will not occur. If the forbearance obligations terminate without
other arrangements from Sears or the Bank Group regarding financing, or if the
Company does not meet its goals for revenue and cost reductions, or if other
material adverse conditions occur, the Company, among other things, will have to
seek financing from alternative sources and/or discontinue some or all of its
operations and/or seek a sale of some or all of its remaining businesses and/or
seek other legal and/or financial relief, including protection under an
appropriate chapter of the Bankruptcy Code. The Company's ability to meet all of
its obligations at or after the time the Bank Forbearance Agreement or the Sears
Forbearance Agreement terminates will depend on a variety of factors,
23
<PAGE>
including the agreement of Sears to provide further financial accommodations,
repayment, refinancing, or other restructuring of the Company's obligations.
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 businesses' customers. The Company can not fund
new loans under the terms of the Marquise forbearance agreement. Marquise has
been capitalized and funded with the Company's excess operating cash flow and
borrowings under its bank lines of credit. In December 1997, Marquise obtained a
$10 million secured line of credit and, at September 30, 1999, had borrowed $4.1
million under it. See "Notes to Consolidated Financial Statements; Debt."
Marquise is in the process of selling its consumer finance loans in order to
repay its bank loan. Marquise expects that the proceeds from the sale of a
portion of its portfolio and future collections, net of expenses, for the
portfolio will be sufficient to repay its senior secured bank debt under the
terms of the Marquise forbearance agreement. There is no assurance, however,
that the sale of the portion of the portfolio will be consummated or that no
future event will occur that will adversely impact future collections or
expenses. The terms of the Bank Forbearance Agreement provide that, after the
Marquise senior lender is repaid in full, all collections, net of expenses, will
be used to repay the Company's senior secured bank debt. Marquise's ability to
fund future consumer financing for Exteriors is dependent upon its ability to
obtain new financing which is unlikely until the Company's Bank Group debt is
repaid, refinanced, or otherwise restructured.
From its inception in June 1993, the Company has generated cash flow from
operations of approximately $26.2 million. Cash flows from operations have been
used to fund and leverage the Company's investing activities, including
acquisitions, Marquise consumer lending activities, and capital expenditures;
and its financing activities, including the repurchase of 42.2% of common stock
in September 1994 from management, and repurchase of 6.3% of common stock in
1997. At September 30, 1999, the Company had approximately $27.3 million in cash
and cash equivalents and trade receivables and negative working capital of $24.9
million after reclassification of $28.3 million of long-term Bank Group debt to
current liabilities. At September 30, 1999, the Company had $56.2 million in
total debt including $40.2 million borrowed under its bank lines of credit.
Through October 31, 1999, the Company was fully borrowed under its available
bank lines of credit.
The Nasdaq National Market has minimum maintenance standards for continued
listing including, among others, a $4 million Net Tangible Asset threshold. At
September 30, 1999, the Company had less than $4 million net tangible assets.
Due to continuing losses, there can be no assurance that the Company's common
stock will continue to be listed and traded on the Nasdaq.
Year 2000 State of Readiness
Please refer to the Company's 1998 Management's Discussion and Analysis of
Financial Condition and Results of Operations included in its 1998 Annual Report
to Shareholders for a detailed description of the Company's approach to and
organization of the Year 2000 ("Y2K") problem. The information provided below
constitutes a "Year 2000 Readiness Disclosure" for purposes of the Year 2000
Information Readiness and Disclosure Act.
24
<PAGE>
The Company believes that it has implemented successfully essentially all
the systems and programming changes necessary to address Y2K internal IT and
non-IT readiness issues, as well as third-party readiness issues.
Total costs for Y2K readiness is approximately $350,000. 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 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 low-tech nature of the Company's products and services minimizes the
risk of Y2K compliance except for the Company's Foreline subsidiary. 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. As part
of its Y2K readiness, the Company is preparing to replace suppliers or eliminate
suppliers from consideration, which to date it has not done, for new business if
the supplier is not prepared for Y2K.
While the Company is essentially complete with its Year 2000 implementation
plan, the Company's efforts for the remainder of the project will be devoted to
ongoing identification and analysis of the most likely worst-case scenarios for
third-party relationships affected by Y2K. These scenarios could include
possible infrastructure collapse, for example, 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, 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 1) winter weather in certain of the Company's
markets located in the northeastern and north central U.S. and by rainy
25
<PAGE>
weather, each of which limits the Company's ability to install exterior home
improvement products; and, 2) reduced demand for commercial and industrial
fencing and related products.
Certain statements contained herein, 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 or unknown risks,
including, but not limited to, general economic and business conditions, matters
related to the licensing agreement between Diamond Exteriors, Inc. and Sears,
Roebuck and Co., warranty exposure, the Company's reliance on home consultants
and on the availability of qualified independent installers, lead activity and
costs related thereto, the outcome of discussions with the Bank Group, other
potential lenders and creditors, and Sears regarding forbearance and possible
additional extensions of credit, and conditions in the installed home
improvement industry. There can be no assurance that the actual future results,
performance, or achievements expressed or implied by such forward-looking
statements will occur. Users of forward-looking statements are encouraged to
review Item 7 of the Company's most recent annual report on Form 10-K, its
filings on Form 10-Q, management's discussion and analysis in the Company's most
recent annual report to stockholders, the Company's filings on Form 8-K, and
other federal securities law filings for a description of other important
factors that may affect the Company's business, results of operations and
financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
No material changes from the disclosures in the Company's Form 10-K for the
fiscal year ended December 31, 1998.
26
<PAGE>
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Please see the discussion in Part I, Item 2, under "Liquidity and Capital
Resources" regarding the Company's default on its secured syndicated bank
facilities and regarding notes payable to former shareholders of Reeves
Southeastern Corporation.
The amount due to the Bank Group on which the Company is in default as of
September 30, 1999 was $1.1 million and the total arrearage on November 15, 1999
was $1.1 million.
ITEM 6. EXHIBITS
(a) Exhibits
(10.1) Forbearance Agreement between the Company and the Bank
Group dated September 1, 1999.
(10.2) Employment letter between the Company and James W.
Bradshaw dated September 28, 1999.
(10.3) Extension Agreement between the Company and the Bank
Group dated October 1, 1999.
(10.4) Second Forbearance Agreement between the Company and the
Bank Group dated October 29, 1999. (Portions of exhibits
have been omitted pursuant to a request for confidential
treatment.)
(27) Financial Data Schedule.
(b) A report on Form 8-K was filed on August 25, 1999 regarding the
Company's press release announcing the resignation of Geoffrey H.
Foreman as President and Chief Operating Officer.
(c) A report on Form 8-K was filed on September 9, 1999, regarding
the Company's press release announcing the resignation of George
A. Stinson from the Company's Board of Directors.
27
<PAGE>
Signatures
Pursuant to the requirements 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.
DIAMOND HOME SERVICES, INC.
Date: November 15, 1999 By: /S/ Eugene J. O'Hern, Jr.
--------------------------------
Eugene J. O'Hern, Jr.
Controller
(For the Registrant and as
Principal Accounting Officer)
28
<PAGE>
Exhibit 10.1
Forbearance Agreement
Diamond Home Services, Inc.
222 Church Street
Woodstock, Illinois 60098
Re: Defaults and Request for Forbearance Under that Certain Credit Agreement
Dated as of April 20, 1998 as Previously Amended
(the "Credit Agreement")
Gentlemen:
This letter will confirm various recent conversations among representatives
of this bank as agent under the Credit Agreement (the "Agent") and
representatives of Diamond Home Services, Inc. (the "Borrower") regarding the
defaults described below (the "Existing Defaults") by the Borrower under the
Credit Agreement and the Banks' analysis that the Borrower's financial condition
and operating results have continued to deteriorate. On August 19 of this year,
the Borrower furnished the Banks projections which reflected the Borrower's cash
balances to be at a level which the Banks have determined insufficient to
support the normal operation of the Borrower's business as soon as 45 days from
the date of such projections. The Banks are extremely concerned over the
Borrower's condition and prospects (financial and otherwise). The Existing
Defaults consist of noncompliance as of June 30, 1999 with the financial
covenant contained in Section 8.30 of the Credit Agreement (requiring the
Borrower's maintenance of a minimum EBITDA after Capital Expenditures) and an
Event of Default arising by virtue of the cross default in Section 9.1(g) of the
Credit Agreement by reason of Marquise's non-compliance with the Existing
Marquise Financing. For convenience, all terms defined in the Credit Agreement
shall, when capitalized and used in this letter, have the same meanings that
such terms have in the Credit Agreement.
In recent discussions, the Borrower has requested that the Banks waive, or
at least forbear from exercising their rights and remedies with respect to, the
Existing Defaults and consent to a proposed sale by Marquise of certain of its
Property. The Banks are not willing at this time to waive the Existing Defaults.
However, during the period (the "Standstill Period") ending on September 29,
1999 (the "Scheduled Standstill Expiration Date"), the Banks will provide the
Borrower with the limited additional financial support described below and
forbear from accelerating the Obligations and enforcing the liens granted by the
Collateral Documents and consent to such a sale by Marquise on the terms,
conditions and provisions contained in this letter if the Borrower agrees to the
same. However, the Banks are not otherwise waiving the Existing Defaults or any
other Defaults or Events of Defaults that may occur.
As a condition to granting the Standstill Period, the Banks require the
following acknowledgments and agreements by the Borrower and the Material
Subsidiaries (whose
<PAGE>
acceptance must be (x) made by their acceptance hereof without modification in
the spaces provided for that purpose below and (y) received by the Agent no
later than 2:00 p.m., Chicago time on Wednesday, September 1, 1999).
Accordingly, upon the execution hereof by the Agent, the Banks, the Borrower and
the Material Subsidiaries, it is agreed as follows:
1. Amounts Owing. The Borrower acknowledges and agrees that the principal
amount of Loans and L/C Obligations as of August 26, 1999 is $40,475,000
($16,875,000 in Term Loans, $0 in Swing Loans, $22,900,000 in Revolving Loans
and $700,000 in L/C Obligations) and such amount (together with interest
thereon) is justly and truly owing by the Borrower without defense, offset or
counterclaim.
2. Acknowledgment of Default. The Borrower is in default under the Credit
Agreement as a result of the Existing Defaults described in the first paragraph
of this Agreement. The Borrower acknowledges that under Sections 7.2 and 9.2 of
the Credit Agreement, because of the Existing Defaults, the Banks are permitted
and entitled to terminate the Commitments, to decline to provide further funding
to the Borrower, to accelerate the Obligations and exercise any other rights or
remedies that may be available under the Loan Documents or under applicable law.
The Borrower represents to the Banks that the Borrower is unaware of any
Defaults or Events of Default other than the Existing Defaults.
3. Forbearance. Unless and until a Standstill Termination occurs, the
Banks will not accelerate the Obligations or enforce any of the liens granted
under the Collateral Documents or exercise any other rights or remedies
available solely by reason of the Existing Defaults. Notwithstanding anything
contained in this letter to the contrary, neither the Banks nor any of their
Affiliates are forbearing from exercising any of their rights to terminate any
of their interest rate hedging arrangements with the Borrower or any of its
Subsidiaries.
4. Consent to Marquise Sale. Unless and until a Standstill Termination
occurs, the Banks will consent to the Disposition made by Marquise to Green Tree
Financial Servicing Corporation ("Green Tree") with respect to Property owned by
Marquise pursuant to the same or substantially the same terms and conditions set
forth in the draft of that certain Green Tree Contract Purchase Agreement (the
"Purchase Agreement") faxed from Green Tree to Marquise on August 18, 1999;
provided, however, that such Disposition is for a gross cash consideration
payable entirely at closing to Marquise of not less than 103% of the face
principal amount of the Contracts (as defined in the Purchase Agreement).
5. No Additional Credit. The Borrower acknowledges that the Banks have
exercised their right to cease extending any additional credit under the Credit
Agreement and that as a result, from and after the date of this letter, the
Banks will not extend additional credit under the Revolving Credit and Harris
Trust and Savings Bank will not extend additional credit under the Swing Line;
provided, however, that unless and until a Standstill Termination occurs, the
Banks will continue, pursuant to Section 1.6(c) of the Credit Agreement, to make
Base Rate Loans to repay Reimbursement Obligations arising from drawings paid on
Letters of Credit. Any failure by the Borrower to make any payment as and when
required by this letter (including any payment required by the Borrowing Base
provisions of the Credit Agreement as modified by this letter) shall be deemed
an Event of Default under subsection 9.1(a) of the Credit Agreement
-2-
<PAGE>
entitling the Agent and the Banks to invoke the rights and remedies available
upon the occurrence of such an Event of Default; and any other noncompliance
with any of the terms, conditions or provisions of this letter shall be deemed
an Event of Default under subsection 9.1(c) of the Credit Agreement after notice
thereof to the Borrower in accordance with the terms of the Credit Agreement, in
each case entitling the Agent and the Banks to invoke the rights and remedies
available upon the occurrence of such a Default or Event of Default, as the case
may be. The Defaults and Events of Default arising from any failure to pay as
required by, or any other noncompliance with, this letter are in addition to the
Events of Default currently set forth in the Credit Agreement.
6. Borrowing Base. The Borrower must not at any time permit the excess of
the Borrowing Base as then determined and computed over the sum of Revolving
Loans, Swing Loans and L/C Obligations then outstanding to fall below
$2,500,000. The Borrower shall immediately make such payments as are necessary
to assure such excess never falls below such amount. As soon as available, and
in any event within two Business Days after the last day of each calendar week,
the Borrower shall furnish to the Agent and the Banks a Borrowing Base
Certificate showing the computation of the Borrowing Base in reasonable detail
as of the close of business on the last day of such week, prepared by the
Borrower and certified by its president or chief financial officer.
7. Proceeds of Collateral. As and when the Agent so requests, the
Borrower shall establish and maintain such arrangements as shall be necessary or
appropriate to assure that the proceeds of collections on accounts receivable
and other Collateral of the Borrower and its Material Subsidiaries are deposited
(in the same form as received) in accounts maintained with, or under the
dominion and control of, the Agent, such accounts to constitute special
restricted accounts, the Borrower acknowledging that the Agent has (and is
hereby granted) a lien on such accounts and all funds contained therein to
secure the Obligations. If and to the extent that proceeds are deposited and/or
maintained in one or more accounts maintained with financial institutions other
than the Agent, the immediately preceding sentence's requirement of dominion and
control shall be satisfied with respect to such deposit accounts only if the
financial institutions maintaining such accounts shall have delivered to the
Agent blocked account agreements satisfactory to the Agent in form and substance
pursuant to which such financial institutions acknowledge and agree the Agent's
Lien thereon, waive any right of offset or bankers' liens thereon (other than
with respect to account maintenance charges and returned items) and agree that,
upon notice from the Agent, the collected balances in such accounts will only be
transferred to the Agent. Without limiting the generality of the foregoing, the
Borrower and Reeves must deliver to the Agent such blocked account agreements
for their respective existing accounts at American National Bank and Trust
Company ("ANB"), NationsBank, National Association ("Nations"), AMCORE Bank,
National Association ("AMCORE") and Fidelity Investments Bank of New York
("Fidelity") by no later than September 15, 1999. At no time after September 15,
1999 shall the amount of balances at banks which have not delivered such blocked
account agreements (excluding for this purpose ANB, Nations, AMCORE and
Fidelity) exceed $300,000 in the aggregate. The Banks agree with the Borrower
that if and so long as no Standstill Termination has occurred or is continuing,
amounts on deposit in the accounts maintained with the Agent will (subject to
the rules and regulations of the Agent as from time to time in effect applicable
to demand deposit accounts) be made available to the
-3-
<PAGE>
Borrower and its Material Subsidiaries for use in the conduct of their business.
Upon the occurrence of a Standstill Termination, the Agent may apply the funds
on deposit in such accounts to the Obligations.
8. Turnaround Consultant. The Borrower shall continue to retain High
Ridge Partners or such other third party consulting firm as is satisfactory to
the Banks to assist in the conduct of the Borrower's business and the Borrower
shall take reasonable steps to assure that representatives of such firm are
available for discussions with the Banks regarding the Borrower's financial
condition and prospects (whether or not any member of the Borrower is present).
9. Forbearance Fee. In consideration of the Banks' agreements in this
letter, the Borrower shall pay to the Agent for the ratable account of the Banks
a fee of $63,000. Such fee shall be deemed fully earned immediately upon the
execution by the Agent and Banks and the acceptance by the Borrower and the
Material Subsidiaries of this letter in the spaces provided for that purpose
below. Such fee shall be due and payable on the Standstill Termination.
10. Intercompany Advances to Marquise. The Borrower shall not, nor shall
it permit any Subsidiary to, directly or indirectly, make any investments in, or
any intercompany loans or advances to, Marquise or any of its subsidiaries
beyond those investments, loans and advances that exist as of the date hereof.
11. Mergers, Sales and Acquisitions. During the Standstill Period, the
Borrower shall not, nor shall it permit any Subsidiary, without the written
consent of the Banks, to (i) merge any Subsidiary with and into the Borrower or
any other Subsidiary, (ii) sell, transfer, lease or otherwise dispose of
Property of the Borrower or any Subsidiary (other than in the ordinary course)
or (iii) make any Acquisitions.
12. No More Fixed Rate Loans. Effective immediately, no more Fixed Rate
Loans shall be advanced, continued or created by conversion, and any Fixed Rate
Loans outstanding as of today's date shall as of the last day of their
respective Interest Periods, automatically be reborrowed as Base Rate Loans.
13. Net Cash Position. A Standstill Termination shall be deemed to occur
if any one of the following occurs:
(a) the adjusted book position of Diamond Exteriors, Inc.
("Exteriors"), as of the close of any calendar week, is more than $150,000
less than the amount projected for such week end in the projections
attached hereto as Schedule One (the "Projections");
(b) the net cash flow position of Reeves and Foreline Security
Corporation ("FSC"), taken together on a consolidated basis, as of the
close of any calendar week, is more than $150,000 less than the aggregate
amount projected for such Subsidiaries for such week end in the
Projections; or
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<PAGE>
(c) the non-cash items plus DEI interest position of Marquise, as of
the close of any calendar month must remain positive (greater than $1).
For purposes of this Agreement, the "adjusted book," "net cash flow" and
"non-cash items plus DEI interest" positions of Exteriors, Reeves, Foreline
and Marquise shall be calculated in the same form and manner as the same
were calculated in the Projections.
14. Additional Information. The Borrower must furnish the Banks the
following information in addition to that currently required by the Loan
Documents:
(a) as soon as available, but in any event no later than the second
Business Day of each calendar week, a report of the actual net cash flow
position for the immediately preceding week (commencing with the week
ending September 5, 1999) for each of Exteriors, Reeves, FSC and Marquise,
broken down in categories similar to the Projections and otherwise in
reasonable detail, signed by the chief financial officer of the Borrower,
or another officer of the Borrower reasonably acceptable to the Agent;
(b) as soon as available, but in any event no later than the second
Business Day of each calendar week, a report describing the variance
between the actual net cash flow positions on a cumulative basis from
August 30, 1999 through the close of the immediately preceding week
(commencing with the week ending September 5, 1999) for each of Exteriors,
Reeves, FSC and Marquise and the amounts projected for such period for such
party in the Projections, broken down in categories similar to the
Projections and otherwise in reasonable detail, together with an
explanation in reasonable detail of the reasons for such variance, all
signed by the chief financial officer of the Borrower, or another officer
of the Borrower reasonably acceptable to the Agent; and
(c) as soon as available, but in any event no later than the second
Business Day of each calendar week, a report of the aggregate amount of
balances on deposit, as of the close of the immediately preceding week from
and commencing with the week ending September 5, 1999, at accounts
maintained by the Borrower and the Material Subsidiaries at banks and other
financial institutions as to which blocked account agreements conforming
with the requirements of paragraph 7 above have not yet been delivered and
which sets out separately, to the extent relevant, balances on deposit at
ANB, Nations, AMCORE and Fidelity, in reasonable detail, signed by the
chief financial officer of the Borrower, or another officer of the Borrower
reasonably acceptable to the Agent.
15. No Material Adverse Change. No change shall occur since July 31, 1999
in the condition or prospects, financial or otherwise, of the Borrower or any
Material Subsidiary, taken as a whole, which the Agent or Required Banks deem
materially adverse.
16. Standstill Termination. As used in this letter, "Standstill
Termination" shall mean the occurrence of the Scheduled Standstill Expiration
Date, or, if earlier, the occurrence of any one or more of the following events:
(a) any Default or Events of Default under the Credit Agreement, in each case
other than the Existing Defaults; (b) any failure by the Borrower for any
-5-
<PAGE>
reason to comply with any term, condition or provision contained in this letter;
(c) any representation made in this letter or pursuant to it proves to be
incorrect or misleading in any material respect when made; or (d) the occurrence
of any event or the existence of any condition in each case which is specified
herein as a "Standstill Termination". The occurrence of any Standstill
Termination shall be deemed an Event of Default under the Credit Agreement. Upon
the occurrence of a Standstill Termination, the Standstill Period is
automatically terminated and the Banks are then permitted and entitled under
Sections 7.2, 9.2, 9.3 and 9.4 of the Credit Agreement, among other things, to
permanently terminate the Commitments, to decline to provide further funding, to
require payments on the L/C Obligations, to accelerate the Obligations and to
exercise any other rights and remedies that may be available under the Loan
Documents or applicable law.
17. No Waiver and Reservation of Rights. The Borrower and the Material
Subsidiaries (the Borrower and the Material Subsidiaries being hereinafter
referred to collectively as the "Loan Parties" and each individually as a "Loan
Party") acknowledge that the Banks are not waiving the Existing Defaults, but
are simply agreeing to forbear from exercising their rights with respect to the
Existing Defaults to the extent expressly set forth in this letter. Each Loan
Party will not assert and hereby forever waives any right to assert that the
Agent or the Banks are obligated in any way to continue beyond the Standstill
Period to forbear from enforcing their rights or remedies or that the Agent and
the Banks are not entitled to act on the Existing Defaults after the occurrence
of a Standstill Termination as if such default had just occurred and the
Standstill Period had never existed. Each Loan Party acknowledges that the Banks
have made no representations as to what actions, if any, the Banks will take
after the Standstill Period or upon the occurrence of any Standstill
Termination, a Default or Event of Default, and the Banks and the Agent must and
do hereby specifically reserve any and all rights and remedies they have (after
giving effect hereto) with respect to the Existing Defaults and each other
Default or Event of Default that may occur.
18. Release. For value received, including without limitation, the
agreements of the Banks in this letter, each Loan Party hereby releases the
agent and each Bank, its current and former shareholders, directors, officers,
agents, employees and professional advisors (collectively, the "Released
Parties") of and from any and all demands, actions, causes of action, suits,
controversies, acts and omissions, liabilities, and other claims of every kind
or nature whatsoever, both in law and in equity, known or unknown, which each
Loan Party has or ever had against the Released Parties from the beginning of
the world to this date, including, without limitation, those arising out of the
existing financing arrangements between the Banks, and each Loan Party further
acknowledges that, as of the date hereof, it does not have any counterclaim,
set-off or defense against the Released Parties, each of which the Borrower
hereby expressly waives.
19. Loan Documents Remain Effective. Except as expressly set forth in this
letter, the Loan Documents remain in full force and effect. Without limiting the
foregoing, each Loan Party agrees to comply with all of the terms, conditions
and provisions of the Loan Documents except to the extent such compliance is
irreconcilably inconsistent with the express provisions of this letter. This
letter and the Loan Documents are intended by the Banks as a final expression of
-6-
<PAGE>
their agreement and are intended as a complete and exclusive statement of the
terms and conditions of that agreement.
20. Fees and Expenses. The Borrower shall pay all reasonable fees and
expenses (including attorneys' fees) heretofore incurred by the Banks and their
counsel in connection with the drafting and preparation of the Loan Documents
and incurred by the Banks and their counsel in connection with the drafting and
preparation of this Agreement, and the supervision of legal matters in
connection with this Agreement.
This Agreement shall take effect upon its execution by the Agent and Banks
and its acceptance by the Borrower and the Material Subsidiaries. By their
acceptance hereof, the Borrower and the Material Subsidiaries represent that
they have the necessary power and authority to execute, deliver and perform the
undertakings contained herein and that the same do bind the Borrower and the
Material Subsidiaries hereto. This Agreement shall be governed by Illinois law
and shall be governed and interpreted on the same basis as the Credit Agreement.
-7-
<PAGE>
Dated as of September 1, 1999.
Harris Trust And Savings Bank,
individually and as Agent
By
Its
-----------------------------------
LaSalle Bank, National Association
By
Its
-----------------------------------
Bank of America, N.A.
By
Its
-----------------------------------
-8-
<PAGE>
Accepted and agreed to.
Diamond Home Services, Inc.
By
Its
-----------------------------------
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<PAGE>
Material Subsidiaries' Consent
The undersigned, being all the Material Subsidiaries of the Borrower, have
heretofore executed and delivered to the Banks a Guaranty and certain other
Collateral Documents and hereby consent to the above Agreement and confirm that
their Guaranty and such Collateral Documents and all of the undersigneds'
obligations thereunder remain in full force and effect. The undersigned further
agree that the consent of the undersigned to any further modifications in the
credit arrangements contemplated by the Credit Agreement shall not be required
as a result of this consent having been obtained. Each Material Subsidiary shall
take such action as the Borrower is required by this letter to cause such
Material Subsidiary to take, and shall refrain from taking such action as the
Borrower is required by the above Agreement to prohibit such Material Subsidiary
from taking.
Reeves Southeastern Corporation
By
Its
-----------------------------------
Foreline Security Corporation
By
Its
-----------------------------------
Diamond Exteriors, Inc.
By
Its
-----------------------------------
Marquise Financial Services, Inc.
By
Its
-----------------------------------
Reeves Southeastern Realty, Inc.
By
Its
-----------------------------------
<PAGE>
Schedule One
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<PAGE>
Exhibit 10.2
September 24, 1999
VIA FACSIMILE (480-607-8360)
Mr. Jim Bradshaw
5721 E. Horseshoe Road
Paradise Valley, AZ 85253
Dear Jim:
This letter confirms our offer for your promotion to become the
position of president and a director of Reeves Southeastern Corporation
("Reeves") and vice president of Diamond Home Services, Inc. ("Diamond") Your
annual base salary will be $190,000. If you are still employed by Reeves and
Diamond as of June 30, 2000, or if your employment terminates prior to June 30,
2000, other than as a result of your voluntary resignation or termination of
your employment for cause, Reeves shall also pay you an incentive bonus of
$25,000 at June 30, 2000 (or upon termination of employment, if earlier).
Furthermore, Diamond grants to you, effective on the date you accept
this offer, an option to purchase 25,000 shares of Diamond's common stock at a
price per share equal to the fair market value of the stock on that effective
date. Subject to the terms to be set forth in a stock option agreement that
will be sent to you shortly, one-quarter of these options vest immediately and
the remaining three-quarters shall vest in three equal amounts on each of the
three succeeding anniversary dates of your acceptance of this promotion. Please
understand that these are non-qualified options and are not issued pursuant to
the Diamond Home Services, Inc. Incentive Stock Option Program.
Please understand that employment is at will and that employment can
be terminated for any reason not prohibited by law or for no reason and that,
except in the circumstances described above, Reeves and Diamond have no
obligation to pay you severance in the event your employment terminates.
Please indicate your acceptance of this offer by signing a copy of
this letter in the space indicated below and returning it to me.
We look forward to your success in your new position.
Very truly yours,
C. Stephen Clegg
<PAGE>
Chairman and Chief Executive Officer
ACCEPTED:
____________________
James W. Bradshaw
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<PAGE>
Exhibit 10.3
Extension Agreement
Diamond Home Services, Inc.
222 Church Street
Woodstock, Illinois 60098
Re: Defaults by Diamond Home Services, Inc. (the "Borrower")
and request for extension of forbearance under that certain
Credit Agreement dated as of April 20, 1998 as previously amended
(the "Credit Agreement")
_________________________________________________________________
Gentlemen:
As you know, there are currently Existing Defaults by the Borrower under
the Credit Agreement. In addition, the Borrower has informed the Banks that the
Borrower will be unable to make the principal payment on the Term Loans
scheduled as due today. We are currently party to a September 1, 1999
Forbearance Agreement with the Borrower and the Material Subsidiaries (the
"Forbearance Agreement") which sets out the terms and conditions upon which the
Banks were willing to provide the Borrower with limited financial support and
forbear from accelerating the Obligations and enforcing the liens granted by the
Collateral Documents during the Standstill Period. Terms defined in the
Forbearance Agreement are used herein with the same meanings.
The Borrower has requested that the Banks extend to October 18, 1999 the
Scheduled Standstill Expiration Date and refrain from acting on the Borrower's
failure to make the principal payment on the Term Loans required today. This
letter will confirm the terms, conditions and provisions upon which the Banks
are willing to so extend the forbearance arrangements. Accordingly, effective
upon the Borrower's and the Material Subsidiaries' acceptance of this letter by
the Borrower's and the Material Subsidiaries' execution in the space provided
for that purpose below (which acceptance must occur without any modification of
the terms of this letter and no later than 5:00 p.m., Chicago time, on Monday,
October 4, 1999), the Banks agree to extend the forbearance arrangements with
the Borrower under the following terms and conditions:
1. Extension. The Scheduled Standstill Expiration Date shall be and
hereby is extended from September 29, 1999 to October 18, 1999. All
references in the Forbearance Agreement to September 29, 1999 shall be
deemed references to October 18, 1999.
2. Acknowledgment of Amounts Owing. The Borrower acknowledges and
agrees that the principal amount of Loans and L/C Obligations as of
September 29, 1999,
<PAGE>
is $40,416,710 ($16,875,000 in Term Loans, $0 in Swing Loans, $22,841,710
in Revolving Loans and $700,000 in L/C Obligations) and such amount
(together with interest thereon) is justly and truly owing by the Borrower
to the Banks without defense, offset or counterclaim.
3. No Additional Credit. The Borrower acknowledges that the Banks
continue to exercise their right to cease extending any additional credit
under the Credit Agreement; provided, however, that unless and until a
Standstill Termination occurs, the Banks will continue, pursuant to Section
1.6(c) of the Credit Agreement, to make Base Rate Loans to repay
Reimbursement Obligations arising from drawings paid on Letters of Credit.
4. Net Cash Position. The Projections set forth in Schedule One to
the Forbearance Agreement are being replaced by the projections attached
hereto as Schedule One (the "New Projections"). All references in the
Forbearance Agreement to the Projections shall be deemed references to the
New Projections.
5. September 30, 1999 Principal Payment. The Borrower has
indicated its inability to make the principal payment on the Term Loans
scheduled as due today. The Banks agree that this failure to make such
payment shall constitute an "Existing Default" to the same extent as if it
were originally included in the Forbearance Agreement as an Existing
Default. As more fully set forth in the Forbearance Agreement, the Banks
are not waiving this or any other Existing Default.
6. KanTel. No later than October 8, 1999, the Borrower shall, and
shall cause its Subsidiaries to, execute and deliver such instruments and
documents (including without limitation UCC financing statements, stock
certificates and stock powers), and do such further acts and things, as the
Agent shall reasonably deem necessary to confirm and assure that the
Property acquired by the Borrower and its Subsidiaries as a result of their
acquisition of KanTel constitutes Collateral in the manner contemplated by
the Loan Documents.
7. Lien on Reeves Real Estate. Notwithstanding anything contained in
the Credit Agreement to the contrary, no later than the Scheduled
Standstill Expiration Date (as extended hereby), the Borrower (i) shall
have reached agreement with the Agent on the form of mortgage necessary to
grant to the Agent for the benefit of itself and the Banks a Lien on each
parcel of real property owned by Reeves and designated by the Agent to
secure the Obligations and Hedging Liability and (ii) shall at its expense
order for each such parcel designated by the Agent (no parcel with a fair
market value of less than $100,000 to be so designated), the following
items: a survey, environmental report and commitment for a mortgagee's
policy of title insurance from a title insurer reasonably acceptable to the
Agent insuring the validity of the relevant mortgage and its status as a
first Lien (subject to Liens permitted by the Credit Agreement) on the real
property encumbered thereby (it being understood that (i) the Agent may not
at its discretion require each of such items for each such parcel and (ii)
the placement of an
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order for any item prior to the Scheduled Standstill Expiration Date does
not necessarily mean that the item so ordered will be provided prior to
such date).
8. Green Tree Purchase. The Banks will consent to the Disposition
made by Marquise to Green Tree Financial Servicing Corporation ("Green
Tree") of Property owned by Marquise pursuant to the same or substantially
the same terms and conditions as are set forth in the draft of the Green
Tree Contract Purchase Agreement ("Draft Purchase Agreement") faxed from
Green Tree to Marquis on August 18, 1999; provided, however, that (i) such
disposition is made prior to any Standstill Termination, (ii) such
Disposition is for a gross cash consideration payable entirely at closing
to Marquis of not less than 103% of face principal amount of the Contracts
(as defined in the Draft Purchase Agreement) and (iii) any guaranty or
other support by the Borrower or any Subsidiary for Marquise's obligations
with respect to such Disposition shall be on terms and conditions
satisfactory to the Banks.
9. Intercompany Payables between Reeves and Diamond Exteriors, Inc.
Diamond Exteriors, Inc. ("Exteriors") purchases goods from Reeves in the
ordinary course of its business and such purchases give rise to
intercompany payables. A Standstill Termination shall be deemed to occur
if Exteriors' intercompany payables to Reeves remain unpaid for a period
longer than what is generally now the case for Exteriors' other accounts
payable, and in no event shall such intercompany payables remain unpaid
longer than what generally is now the case for Exteriors' accounts payable
to its other third party material vendors.
10. Legal Expense. No later than the Scheduled Standstill
Termination Date, the Borrower must pay in full all of the Agent's invoices
and legal expenses for work done in connection with the credit arrangements
contemplated by the Credit Agreement.
11. New Borrowing Base Reporting. The Agent conducted a field
audit on the Collateral in September of this year (the "Field Audit").
Based on the information gained from the Field Audit, the Agent has
determined that the Borrower has been inaccurately computing and reporting
the Borrowing Base. No later than October 12, 1999, the Borrower must
accurately compute and report its Borrowing Base so as to eliminate the
inaccuracies revealed by the Field Audit.
12. Compliance With Forbearance Agreement. The Borrower must
continue to comply with all the terms, conditions and provisions of the
Forbearance Agreement as modified by this letter. Without limiting the
generality of the foregoing, the Borrower must continue to comply with the
Borrowing Base requirements as modified by the Forbearance Agreement and
this letter (it being understood and agreed that modifications of such
Borrowing Base requirements may be made as a result of the information
gained from the Field Audit).
13. Miscellaneous. Except as specifically modified by this letter,
the terms, conditions and provisions of the Forbearance Agreement remain in
full force and effect.
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Dated as of October 1, 1999.
Very truly yours,
Harris Trust and Savings Bank, individually
and as Agent
By
Its Vice President
LaSalle Bank, National Association
By
Its________________________________________
Bank of America, N.A.
By
Its_______________________________________
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The undersigned accept and agree to the above letter.
Diamond Home Services, Inc.
By
Its______________________
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Material Subsidiaries' Consent
The undersigned, being all the Material Subsidiaries of the Borrower, have
heretofore executed and delivered to the Banks a Guaranty and certain other
Collateral Documents and hereby consent to the above Agreement and confirm that
their Guaranty and such Collateral Documents and all of the undersigneds'
obligations thereunder remain in full force and effect. The undersigned further
agree that the consent of the undersigned to any further modifications in the
credit arrangements contemplated by the Credit Agreement shall not be required
as a result of this consent having been obtained. Each Material Subsidiary
shall take such action as the Borrower is required by this letter to cause such
Material Subsidiary to take, and shall refrain from taking such action as the
Borrower is required by the above Agreement to prohibit such Material Subsidiary
from taking.
Reeves Southeastern Corporation
By
Its___________________________
Foreline Security Corporation
By
Its___________________________
Diamond Exteriors, Inc.
By
Its___________________________
Marquise Financial Services, Inc.
By
Its___________________________
Reeves Southeastern Realty, Inc.
By
Its___________________________
<PAGE>
Schedule One
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Exhibit 10.4
Second Forbearance Agreement
This Agreement made as of this 29th day of October, 1999 by and among
Diamond Homes Services, Inc., a Delaware corporation (the "Borrower"), Diamond
Exteriors, Inc., a Delaware corporation ("Exteriors"), Reeves Southeastern
Corporation, a Florida corporation ("Reeves"), Marquise Financial Services,
Inc., a Delaware corporation ("Marquise"), Foreline Security Corporation, a
Florida corporation ("FSC"), Solitaire Heating and Cooling, Inc., a Delaware
corporation ("Kantel") and Reeves Southeastern Realty, Inc., a Florida
corporation ("Reeves Southeastern"), the Banks party to the Credit Agreement
hereinafter identified and defined and Harris Trust and Savings Bank as the
Banks' Agent (in such capacity, the "Agent");
Recitals:
A. The Borrower has furnished the Banks with projections which reflect
the Borrower's cash balances to be insufficient to support its normal operations
today, on which date the Borrower will be unable to meet its payroll
obligations.
B. The Borrower is currently out of compliance with the Credit Agreement
in the following respects (each such instance of noncompliance being hereinafter
referred to as an "Existing Default"):
(i) The Borrower's failure to make the principal payments required
to be paid on the Term Loans on September 30, 1999;
(ii) Noncompliance as of June 30, 1999 and September 30, 1999 with
the financial covenant contained in Section 8.30 of the Credit Agreement
requiring, among other things, the Borrower's maintenance of a minimum
EBITDA after capital expenditures;
(iii) Noncompliance as of September 30, 1999 with the financial
covenant contained in Section 8.23 of the Credit Agreement requiring, among
other things, the Borrower's maintenance of a minimum Net Worth; and
(iv) An Event of Default arising by virtue of the cross default in
Section 9.1(g) of the Credit Agreement by reason of Marquise's
noncompliance with the Existing Marquise Financing.
C. In recent discussions, the Borrower has indicated its inability to
comply with the Credit Agreement in the future in the following respects (each
such instance of future noncompliance being hereinafter referred to as a "Future
Default") (the Existing Defaults and the Future Defaults being hereinafter
referred to collectively as the "Unwaived Defaults"):
(i) The Borrower's failure to make the principal payments scheduled
to become due on the Term Loans on December 31, 1999 and March 31, 2000;
and
<PAGE>
(ii) Noncompliance as of December 31, 1999 and March 31, 2000 with
the financial covenant contained in Section 8.22 of the Credit Agreement
requiring, among other things, the Borrower's maintenance of a maximum Cash
Flow Leverage Ratio;
(iii) Noncompliance as of December 31, 1999 and March 31, 2000 with
the financial covenant contained in Section 8.24 of the Credit Agreement
requiring, among other things, the Borrower's maintenance of a minimum
Fixed Charge Coverage Ratio;
(iv) Noncompliance as of December 31, 1999 and March 31, 2000 with
the financial covenant contained in Section 8.25 of the Credit Agreement
requiring, among other things, the Borrower's maintenance of a minimum
Interest Coverage Ratio; and
(v) Noncompliance as of December 31, 1999 and March 31, 2000 with
the financial covenant contained in Section 8.31 of the Credit Agreement
requiring, among other things, the Borrower's maintenance of a maximum
Adjusted Cash Flow Leverage Ratio.
D. Also in recent discussions, the Borrower has requested that the Banks
forbear from exercising their rights and remedies with respect to the Unwaived
Defaults and consent to a proposed sale by Marquise of certain of its Property.
E. While the Banks are not willing to waive the Unwaived Defaults, during
the period (the "Standstill Period") ending on June 30, 2000 (the "Scheduled
Standstill Expiration Date"), the Banks will provide the Borrower with the
limited additional financial support described below and forbear from
accelerating the Obligations, enforcing the liens granted by the Collateral
Documents and exercising any other rights or remedies available solely by reason
of the Unwaived Defaults and consent to such a sale by Marquise on the terms,
conditions and provisions contained in this Agreement if the Borrower,
Exteriors, Reeves, Marquise, FSC and Reeves Southeastern (collectively the "Loan
Parties") each accept this Agreement (which acceptance must be (x) made by their
execution hereof without modification in the spaces provided for that purpose
below and (y) received by the Agent no later than 2:00 p.m., Chicago time on
Monday, November 1, 1999).
Now, Therefore, upon the execution hereof by the Agent, the Banks and the
Loan Parties, it is agreed as follows:
1. Amounts Owing. Each Loan Party acknowledges and agrees that the
principal amount of Loans and L/C Obligations as of October 27, 1999 is
$40,416,710 ($16,875,000 in Term Loans, $0 in Swing Loans, $22,841,710 in
Revolving Loans and $700,000 in L/C Obligations) and such amount (together with
interest thereon) is justly and truly, jointly and severally, owing by each Loan
Party without defense, offset or counterclaim.
2. Acknowledgment of Default. The Existing Defaults constitute Events of
Default under the Credit Agreement. Each Loan Party acknowledges that under
Sections 7.2 and 9.2 of the Credit Agreement, because of the Existing Defaults,
the Banks are permitted and entitled to terminate the Commitments, to decline to
provide further funding to the Borrower, to accelerate
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<PAGE>
the Obligations and exercise any other rights or remedies that may be available
under the Loan Documents or under applicable law. The Loan Parties represent to
the Banks that the Loan Parties are unaware of any Defaults or Events of Default
other than the Existing Defaults.
3. Forbearance. Unless and until a Standstill Termination occurs, the
Banks will not accelerate the Obligations or enforce any of the liens granted
under the Collateral Documents or exercise any other rights or remedies
available solely by reason of the Unwaived Defaults.
4. No Additional Credit Except as Follows. Each Loan Party acknowledges
that the Banks have exercised their right to cease extending any additional
credit under the Credit Agreement and that as a result, from and after the date
of this Agreement, the Banks will not extend additional credit under the
Revolving Credit and Harris Trust and Savings Bank will not extend additional
credit under the Swing Line; provided, however, that unless and until a
Standstill Termination occurs:
(a) The Banks will continue to make Borrowings of Revolving Credit
Loans to the Borrower for the sole purpose of the Borrower's substantially
concurrent intercompany advance of the proceeds of each such Borrowing to
Reeves and FSC to finance their ordinary working capital expenses of the
type reflected on the Reeves Budget provided that the aggregate principal
amount of Revolving Loans and L/C Obligations shall not at any time exceed
the lesser of (x) $22,841,710 (the aggregate amount of Revolving Loans
outstanding as of the date hereof) or (y) the sum of $5,149,064 plus the
Borrowing Base attributable solely to the Collateral of Reeves and FSC as
then determined and computed (such sum being hereinafter referred to as the
"Reeves/FSC Borrowing Base"), with payments and collections from Reeves and
FSC to be deemed (for purposes of determining compliance with this
proviso's requirement) first applied to Revolving Loans before application
to any other Obligations; and
(b) On and subject to the provisions of the Credit Agreement as
modified hereby and provided there is compliance with the proviso set forth
in the immediately preceding clause (a), the Banks will make Borrowings of
Base Rate Loans available to repay Reimbursement Obligations arising from
drawings paid on Letters of Credit and to cover interest due on the Loans
(it being understood that the liability for such Obligations shall not be
impaired to the extent such Loans, pursuant to the terms of the Credit
Agreement as modified hereby, are inadequate or cannot be made).
Any failure by the Borrower to make any payment as and when required by this
Agreement (including any payment required by the Borrowing Base provisions of
the Credit Agreement as modified by this Agreement) shall be deemed an Event of
Default under subsection 9.1(a) of the Credit Agreement entitling the Agent and
the Banks to invoke the rights and remedies available upon the occurrence of
such an Event of Default; and any other noncompliance with any of the terms,
conditions or provisions of this Agreement shall be deemed an Event of Default
under subsection 9.1(c) of the Credit Agreement after notice thereof to the
Borrower in accordance with the terms of the Credit Agreement, in each case
entitling the Agent and the Banks to invoke the rights and remedies available
upon the occurrence of such a Default or Event of Default, as the case may be.
The Defaults and Events of Default arising from any failure to pay as required
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<PAGE>
by, or any other noncompliance with, this Agreement are in addition to the
Events of Default currently set forth in the Credit Agreement.
5. Collateral Value. (a) Exteriors' Eligible Accounts. A Standstill
Termination shall be deemed to occur if the unpaid balance of Exteriors'
Eligible Accounts falls below (i) $5,000,000 as of the last day of any calendar
month (commencing November 30, 1999) other than January 31, 2000 or (ii)
$4,000,000 as of January 31, 2000.
(b) Reeves Borrowing Base. Reeves and FSC must not at any time permit the
Revolving Loans then outstanding to exceed the Reeves/FSC Borrowing Base as then
determined and computed. Reeves and FSC shall immediately make such payments as
are necessary to eliminate such excess.
(c) Reeves and FSC Revolving Loan Mechanization. No later than November
19, 1999, the Company shall make such arrangements as shall be necessary or
appropriate to arrange for the administration of the Revolving Loans on the
Agent's asset-based lending system. Under such system, collections on the
accounts receivable of Reeves and FSC will be applied daily in reduction of the
principal of then outstanding Revolving Loans, with new Revolving Loans to be
available under and subject to Section 4(a) hereof.
6. Marquise Collections. Upon repayment of the Existing Marquise
Financing, any and all Net Marquise Collections received in each calendar week
thereafter shall be remitted to the Agent no later than the second Business Day
of the immediately following week for application to the Term Loans (with
application to their installments in inverse order) until paid in full and then
to the remaining Obligations in accordance with Section 3 of the Credit
Agreement. No later than the repayment of the Existing Marquise Financing, each
day's Net Marquise Collections received by Marquise shall immediately be
delivered to the Agent (in the same form as received, together with any
necessary endorsement, if appropriate) for deposit in a deposit account
maintained by Marquise with the Agent for such purpose.
7. Asset Sales. Notwithstanding anything in the Credit Agreement to the
contrary, any and all Net Cash Proceeds from any Disposition or Event of Loss
shall be remitted to the Agent for application in reduction of the Term Loans.
Each such prepayment shall be applied to the remaining installments of the Term
Notes in the inverse order of their maturity.
8. Interest Payments. Reeves and FSC must keep interest current on the
Loans. The Banks will not charge interest at the default rates during the
Standstill Period. However, no more Fixed Rate Loans shall be advanced,
continued or created by conversion, and any Fixed Rate Loans outstanding as of
today's date shall as of the last day of their respective Interest Periods,
automatically be reborrowed as Base Rate Loans.
9. Reeves Sale. The Borrower has represented to the Banks that the
Borrower intends to sell Reeves within the time frame required below and use the
proceeds of such sale to pay, among other things, the Obligations. The Banks'
agreements herein are made in large part in reliance on such representation. A
Standstill Termination shall be deemed to occur if the Borrower or Reeves fail
for any reason to pursue diligently and in good faith such a sale
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<PAGE>
(including a failure to diligently analyze any Hart Scott Rodino issues that may
arise in the case of any industry buyer) or if any proposed buyer who has
executed a definitive purchase agreement for its acquisition of Reeves shall
fail to diligently and in good faith pursue a closing of such acquisition.
Without limiting the generality of the foregoing, failure to satisfy any of the
following shall constitute a Standstill Termination:
(a) The Borrower has indicated that it will retain within the next
thirty days a reputable investment banking firm with extensive experience
in the appropriate industry to assist the Borrower with its sale of Reeves.
A Standstill Termination will be deemed to occur if no such investment
banker has been retained by November 30, 1999 (or such later date to which
the Borrower and (in their discretion) the Banks mutually agree), or if the
investment banker so retained is not reasonably acceptable to the Banks.
The Borrower shall take all steps reasonably necessary to provide the Agent
and Banks access, upon reasonable request by the Agent, to such investment
banker (without any Loan Party present if the Agent so requests) for
discussions regarding its efforts to consummate such a sale.
(b) No later than January 30, 2000 (or such later date to which the
Borrower and (in their discretion) the Banks mutually agree), the Borrower
and Reeves must have completed assembly of a comprehensive package of
information regarding Reeves for submission as an offering memorandum to
prospective buyers and submitted such package to each of the prospective
buyers (both financial buyers and industry buyers) which the investment
banker has reasonably determined to be a purchaser worth contacting, with a
requirement that bids for the purchase of Reeves are due no later than
March 15, 2000.
(c) No later than April 30, 1999 (or such later date to which the
Borrower and (in their discretion) the Banks mutually agree), the Borrower
must furnish the Banks a copy of a fully executed definitive and binding
purchase agreement for a bona fide sale of Reeves to a third party (which
may condition the closing of the sale of Reeves upon satisfaction of due
diligence and other conditions of a type and scope customarily required by
sophisticated parties to be satisfied in similar sale transactions)
reasonably capable of closing prior to the Scheduled Standstill Termination
Date or such later date as the Borrower and (in their discretion) the Banks
mutually agree, for a consideration in an amount acceptable to the Borrower
and to which the Banks have consented.
9B. Lien on Marquise Assets. Notwithstanding anything contained in the
Credit Agreement to the contrary, no later than November 5, 1999 (whether or not
the Existing Marquise Financing has been paid), Marquise shall grant the Agent a
lien on its Property to secure the Obligations on substantially the same terms
and conditions as the other Collateral Documents and in all events in a manner
satisfactory to the Agent in form and substance (which include without
limitation satisfactory bailee arrangements with First Union).
10. Lien on Reeves Real Estate. Notwithstanding anything contained in the
Credit Agreement to the contrary, (i) no later than November 17, 1999, Reeves
shall have executed and delivered to the Agent (or a security trustee therefor)
a mortgage (or trust deed) to grant to the
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<PAGE>
Agent for the benefit of itself and the Banks a Lien on each parcel of real
property owned by Reeves described on Exhibit A hereto to secure the
Obligations, (ii) no later than November 30, 1999, Reeves shall at the expense
of the Loan Parties (other than, during the Standstill Period, Exteriors)
provide to the Agent for each such parcel (except to the extent waived in
writing by the Agent), a survey and commitment for a mortgagee's policy of title
insurance in an amount equal to the value set forth on such Exhibit (or such
lesser amount as may be acceptable to the Agent in its discretion) from a title
insurer reasonably acceptable to the Agent insuring the validity of the relevant
mortgage (or trust deed) and its status as a first Lien (subject to Liens
permitted by the Credit Agreement) on the real property encumbered thereby and
(iii) no later than December 15, 1999, Reeves shall at the expense of the Loan
Parties (other than, during the Standstill Period, Exteriors) provide to the
Agent an environmental report for each such parcel to the extent requested by
the Agent.
11. Sears Licensing Arrangements. The Sears Licensing Agreement must
continue to be governed by the terms and conditions of the November 2, 1999 Term
Sheet currently in effect between and executed by Sears and Exteriors (the
"Sears Term Sheet"). A Standstill Termination shall be deemed to occur if (w) a
definitive binding agreement providing (in form and substance satisfactory to
the Banks) for the Sears Term Sheet has not been executed by Sears and
Exteriors by November 15, 1999 or (x) Exteriors at any time fails to defer
amounts due from Exteriors under the Sears Licensing Agreement as modified by
the Sears Term Sheet, to the maximum extent such deferral is permitted thereby
(Exteriors hereby agreeing that it will take all action as is necessary to defer
the maximum amount possible under the Sears Licensing Agreement as so modified),
(y) Exteriors or Sears breaches any term or condition of the Sears Licensing
Agreement as modified by the Sears Term Sheet (including without limitation
Sears' failure to remit to Exteriors the credit participation fee when so
provided by the Sears Term Sheet) or (z) Sears or Exteriors terminates (whether
with or without cause) the Sears Licensing Agreement as so modified. Each Loan
Party must (in form and substance reasonably acceptable to the Banks) fully
reserve (x) all its rights to assert that neither Sears nor its affiliates have
any right to recoup any monies and otherwise set off in reduction of amounts
Sears and its affiliates owe to any Loan Party, whether under the Sears
Licensing Agreement, on any accounts receivable of any Loan Party or otherwise
(any such right of Sears or any such affiliate being hereafter referred to
collectively as the "Sears Setoff Claims") and to contest any exercise of the
Sears Setoff Claims and (y) all of such Loan Party's other rights, claims and
causes of action with respect to the Sears Setoff Claims. Sears must
acknowledge (in form and substance reasonably acceptable to the Banks) that (x)
neither the Agent nor any Bank waives any of its rights, claims or causes of
action with respect to the Sears Setoff Claims and (y) the Agent and each Bank
fully reserves its right to assert their status as secured creditors of the Loan
Parties with a first priority, perfected lien and security interest (superior to
all other rights and interests) on all Property of the Loan Parties. The Banks
acknowledge and agree that Sears is fully reserving its right to assert any and
all of the Sears Setoff Claims and the Sears Licensing Agreement (as modified by
the Sears Term Sheet) as against the Loan Parties, Banks and Agent.
12. Sears Subordination. Sears has agreed to subordinate its rights to
payment of the License Deferral Amount, in an aggregate amount equal to the
Collateral Diminution, to the prior payment of the Obligations on the following
conditions:
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(a) During the Standstill Period and for so long thereafter as any
Collateral Diminution exists (whether or not bankruptcy or other insolvency
proceedings have been instituted by or against any Loan Party), no Loan
Party shall make any payment or distribution on or otherwise in respect of
the License Deferral Amount, and neither Sears nor its affiliates shall be
entitled to receive or retain any License Deferral Amount, until such time
as the Banks have received for application in reduction of the Obligations,
payments and collections from Exteriors or its Property (not from any other
Loan Party) in an aggregate amount after the Standstill Period equal to the
amount of the Collateral Diminution; and
(b) The foregoing subordination shall not preclude Sears or its
affiliates' collection of amounts due under the License Agreement or
otherwise, other than the License Deferral Amount (it being understood and
agreed, however, that the Bank Group reserves all of its rights and
remedies to contest any use by Sears or any of its affiliates of its
asserted setoff or recoupment rights, or any other right asserted as prior
to the Banks' and Agent's rights, to collect such amounts until the
Obligations have been paid in full).
13. Intercompany Advances. No Loan Party shall, nor shall any Loan Party
permit any of its Subsidiaries to, directly or indirectly, make any investments
in, or any intercompany loans or advances or any other payment to, any other
Loan Party or its Affiliates, except for (i) those investments, loans and
advances that exist as of the date hereof and appropriately reflected on the
Borrower's September 30, 1999 financial statements heretofore submitted to the
Banks, (ii) Exteriors' payment to Kantel (at rates not in excess of Kantel's
actual cost) for services provided to Exteriors by Kantel in the ordinary course
of Kantel's business, (iii) Marquise's payments to reimburse Exteriors for
payroll advanced, and general administrative and overhead expenses incurred, by
Exteriors for Marquise's benefit in the ordinary course of business, (iv)
payments by Reeves and Exteriors to reimburse the Borrower for general
administrative and overhead expenses incurred by the Borrower in the ordinary
course of its business, (v) intercompany advances by the Borrower to Reeves and
FSC of the Revolving Loans permitted by Section 4(a) above, (vi) intercompany
advances by and between Reeves and FSC in the ordinary course of their
respective business, (vii) Exteriors' payment to Marquise of a reasonable
servicing fee in consideration of Marquise's servicing of certain consumer loans
of Exteriors, (viii) Marquise's remittance to Exteriors of collections received
by Marquise on Exteriors' loan assets in connection with the aforesaid servicing
arrangements and (ix) intercompany payables due from Exteriors to Reeves in
compliance with Section 14 hereof.
14. Intercompany Payables between Reeves and Exteriors. Exteriors
purchases inventory and fence installation services from Reeves in the ordinary
course of Exteriors business and such purchases give rise to intercompany
payables due from Exteriors to Reeves. A Standstill Termination shall be deemed
to occur if (x) Exteriors' intercompany payables to Reeves at any one time
outstanding exceed $1,500,000 or (y) Exteriors fails to pay Reeves intercompany
payables on normal payment terms equivalent to those provided to Exteriors'
third party vendors in the ordinary course of Exteriors' business (other than
such payables which are classified as "unreconciled" or "disputed").
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15. Mergers, Sales and Acquisitions. During the Standstill Period, no
Loan Party shall, nor shall any Loan Party permit any of its Subsidiaries,
without the written consent of the Banks, to (i) merge any Subsidiary with and
into the Borrower or any other Subsidiary, (ii) sell, transfer, lease or
otherwise dispose of Property of the Borrower or any Subsidiary (other than
sales of inventory in the ordinary course) or (iii) make any Acquisitions.
16. Financial Performance. A Standstill Termination shall be deemed to
occur if any one of the following occurs:
(a) as determined at the first business day of January, 2000, and at
the first business day of each month thereafter, Exteriors' actual
cumulative installed sales revenues for all fully completed calendar months
commencing on October 1, 1999 (with such months taken together) shall be
less than 90% of the amount projected on a cumulative basis for such months
on Exhibit B hereto; or
(b) the actual cumulative Gross Marquise Collections for each fully
completed calendar month commencing on or at any time after November 1,
1999 (with such months taken together) shall be more than 20% less than the
amount projected on a cumulative basis for such months on the Marquise
Budget attached as Exhibit F; or
(c) the actual cumulative EBITDA of Reeves and FSC (with EBITDA
determined on a combined basis for Reeves and FSC, but in any event
increasing such EBITDA by the amount deducted in arriving at such EBITDA
amount in respect of audit charges and appraisal fees due the Agent and
transaction costs associated with this Agreement) for each fully completed
calendar month commencing on or at any time after November 1, 1999 (with
such months taken together) shall be less than the amount set forth for
such period on Exhibit C hereto.
17. Additional Information. The Borrower must furnish the Banks the
following information in addition to that currently required by the Loan
Documents:
(a) as soon as available, and in any event within three Business
Days after the last day of each calendar week (commencing with the week
ending October 29, 1999), a Borrowing Base Certificate showing the
computation of the Borrowing Base for Exteriors as of the close of such
week, together with a report of the License Deferral Amount (both the
License Deferral Amount deferred during such week and the aggregate
cumulative License Deferral Amount deferred on and after the commencement
of the arrangements contemplated by the Sears Licensing Agreement through
the close of such week), all of the foregoing in reasonable detail,
prepared by the Borrower and signed by the chief executive officer or chief
financial officer of Borrower, or another officer of Borrower reasonably
acceptable to the Agent;
(b) as soon as available, and in any event (i) prior to consummation
of the arrangements contemplated by Section 5(c) above, within three
Business Days after the last day of each calendar week (commencing with the
week ending today) and (ii) immediately upon consummation of the
arrangements contemplated by Section 5(c)
-8-
<PAGE>
above, no later than noon one Business Day after each Business Day, a
Borrowing Base Certificate showing the computation of the Borrowing Base
for Reeves and FSC combined as of the close of the first such Business Day,
in reasonable detail, prepared by Reeves and signed by the chief executive
officer or chief financial officer of Reeves, or another officer of Reeves
reasonably acceptable to the Agent;
(c) as soon as available, but in any event no later than twenty days
following the close of each calendar month, an income statement on each of
Reeves, FSC, Exteriors and Kantel as at the close of such month and an
income statement and statement of cash flows for such Loan Parties for the
month then ended, prepared in all material respects in accordance with
GAAP, with the statements for Reeves and FSC to show such Loan Parties on
both an individual and consolidated basis and all such statements otherwise
in reasonable detail, and with each such statement signed by the chief
executive officer or chief financial officer of the relevant Loan Party, or
another officer of such Loan Party reasonably acceptable to the Agent;
(d) as soon as available, but in any event no later than the 15th
day of each calendar month, a projection (each, an "eight-week Exteriors
cash projection") of Exteriors' weekly cash receipts and cash uses for the
immediately ensuing two calendar months, in reasonable detail and signed by
the chief executive officer or chief financial officer of Exteriors, or
another officer of Exteriors reasonably acceptable to the Agent;
(e) as soon as available, but in any event no later than the third
Business Day of each calendar week, a report describing the variance
between the actual cash receipts and actual cash uses during the
immediately preceding week for Exteriors and the amounts projected for such
period for Exteriors in the then most recent eight-week Exteriors cash
projection, in reasonable detail, together with an explanation in
reasonable detail of the reasons for such variance, all in reasonable
detail, signed by the chief executive officer or chief financial officer of
Exteriors, or another officer of Exteriors reasonably acceptable to the
Agent;
(f) as soon as available, but in any event no later than the 20th
day of each calendar month, a certificate from each of Exteriors, Marquise,
Reeves and FSC showing a computation of compliance with the requirements
imposed on such Loan Party by Section 16 hereof, in reasonable detail,
signed by the chief executive officer or chief financial officer of the
relevant Loan Party, or another officer of such Loan Party reasonably
acceptable to the Agent;
(g) as soon as available, but in any event no later than the third
Business Day of each calendar week (commencing immediately), a report of
the aggregate amount of balances on deposit, as of the close of the
immediately preceding week, at accounts maintained by the Loan Parties at
banks and other financial institutions as to which blocked account
agreements conforming with the requirements of Section 20 below have not
yet been delivered, in reasonable detail, signed by the chief financial
officer of the Borrower, or another officer of the Borrower reasonably
acceptable to the Agent;
-9-
<PAGE>
(h) no later than November 1, 1999, a budget of Marquise's ordinary
and necessary working capital expenses and an accompanying projection of
Marquise's cash receipts, in each case through at least the Scheduled
Standstill Termination Date, such budget and projection to be in reasonable
detail in a format similar to the Marquise Budget already submitted for the
period ending December 31, 1999 (except that such budget need be broken
down on only a month by month basis as opposed to a week by week basis) and
otherwise acceptable to the Agent in form and substance;
(i) as soon as available, but in any event, no later than the 15th
day of each calendar month (commencing December 15, 1999), a budget of
Marquise's ordinary and necessary working capital expenses and an
accompanying projection of Marquise's cash receipts, in each case for the
immediately ensuing two calendar months, such budget and projection to be
in reasonable detail in a format similar to the Marquise Budget already
submitted for the period ending December 31, 1999 and otherwise acceptable
to the Agent in form and substance
(j) no less frequently than once every two calendar weeks, an update
(which may be verbal) summarizing the Loan Parties' progress in locating a
purchaser for Reeves, in reasonable detail acceptable to the Agent and (if
written) signed by the chief executive officer of the Borrower, together
with copies of all written expressions of interest, letters of intent and
draft purchase agreements submitted by prospective buyers; and
(k) as soon as available, but in no event any later than their
submission to Sears, a copy of the financial and other information pursuant
to the Sears Term Sheet, including without limitation: (i) the Business
Plan for Exteriors referenced therein and (ii) each weekly tracking report
of all key drivers; and
(l) promptly upon request of the Agent or any Bank, such other
information regarding the sales of Marquise or Reeves or any other
Disposition as the Agent or such Bank shall reasonably request.
18. Turnaround Consultant. The Borrower shall continue to retain High
Ridge Partners or such other third party consulting firm as the Borrower shall
in its discretion select which is reasonably satisfactory to the Banks to assist
in the conduct of the Borrower's business. The Loan Parties shall take
reasonable steps to assure that representatives of such firm are available for
discussions with the Banks regarding the Loan Parties' financial condition and
prospects (whether or not any member of any Loan Party is present).
19. Green Tree Purchase. The Banks will consent to the Disposition made
by Marquise to Green Tree Financial Servicing Corporation ("Green Tree") of
Property owned by Marquise on the same or substantially the same terms and
conditions as are set forth in the draft of the Green Tree Contract Purchase
Agreement ("Draft Purchase Agreement") faxed from Green Tree to Marquise on
October 4, 1999; provided, however, that (i) such Disposition is made prior to
any Standstill Termination, (ii) such Disposition is for a gross cash
consideration payable entirely at closing to Marquise of not less than 103% of
face principal amount of the Contracts
-10-
<PAGE>
(as defined in the Draft Purchase Agreement) and (iii) any guaranty or other
support by the Borrower or any Subsidiary for Marquise's obligations with
respect to such Disposition shall be on terms and conditions no more burdensome
on the Borrower that those set forth in the form of guaranty for such purpose
heretofore approved by the Banks.
20. Proceeds of Collateral. The Borrower shall establish and maintain
such arrangements as shall be necessary or appropriate to assure that the
proceeds of collections on accounts receivable and other Collateral of the Loan
Parties are deposited (in the same form as received) in bank accounts maintained
with, or under the dominion and control of, the Agent, such bank accounts to
constitute special restricted bank accounts, the Loan Parties acknowledging that
the Agent has (and is hereby granted) a lien on such bank accounts and all funds
contained therein to secure the Obligations; provided, however, that such
arrangements need not be made with respect to bank accounts in which the
aggregate balances (in all such bank accounts taken together) at no time exceed
$500,000. If and to the extent that proceeds are deposited and/or maintained in
one or more bank accounts maintained with financial institutions other than the
Agent, the immediately preceding sentence's requirement of dominion and control
shall be satisfied with respect to such deposit accounts only if the financial
institutions maintaining such bank accounts shall have delivered to the Agent
blocked account agreements satisfactory to the Agent in form and substance
pursuant to which such financial institutions acknowledge and agree the Agent's
Lien thereon, waive any right of offset or bankers' liens thereon (other than
with respect to account maintenance charges and returned items) and agree that,
upon notice from the Agent, the collected balances in such bank accounts will
only be transferred to the Agent. The Banks agree with the Borrower that if and
so long as no Standstill Termination has occurred or is continuing, except for
payments and collections from Reeves and FSC to comply with Section 5(b) above
and Net Marquise Collections required to be prepaid pursuant to Section 6 above,
amounts on deposit in such bank accounts of each Loan Party will (subject to the
rules and regulations of the relevant depository as from time to time in effect
applicable to demand deposit accounts) be made available to such Loan Party for
use in the conduct of its business. Upon the occurrence of a Standstill
Termination, the Agent may apply the funds on deposit in such bank accounts in
reduction of the Obligations in accordance with Section 3 of the Credit
Agreement. The acceptance by the Agent and Lenders of the foregoing
arrangements contemplated by this Section does not constitute a waiver of any of
their rights, claims or causes of action with respect to the Sears Setoff
Claims.
21. Standstill Termination. As used in this Agreement, "Standstill
Termination" shall mean the occurrence of the Scheduled Standstill Expiration
Date, or, if earlier, the occurrence of any one or more of the following events:
(a) any Default or Events of Default under the Credit Agreement, in each case
other than the Unwaived Defaults; (b) any failure by the Borrower for any reason
to comply with any term, condition or provision contained in this Agreement; (c)
any representation made in this Agreement or pursuant to it proves to be
incorrect or misleading in any material respect when made; (d) any change shall
occur after October 29, 1999 in the condition or prospects, financial or
otherwise, of the Borrower or any Material Subsidiary, taken as a whole, which
the Agent or Required Banks in good faith deem materially adverse; or (e) the
occurrence of any event or the existence of any condition in each case which is
specified herein as a "Standstill Termination". The occurrence of any
Standstill Termination shall be deemed an Event of Default under the Credit
Agreement. Upon the occurrence of a Standstill Termination,
-11-
<PAGE>
the Standstill Period is automatically terminated and the Banks are then
permitted and entitled under Sections 7.2, 9.2, 9.3 and 9.4 of the Credit
Agreement, among other things, to permanently terminate the Commitments, to
decline to provide further funding, to require payments on the L/C Obligations,
to accelerate the Obligations and to exercise any other rights and remedies that
may be available under the Loan Documents or applicable law.
22. No Waiver and Reservation of Rights. The Loan Parties acknowledge
that the Banks are not waiving the Unwaived Defaults, but are simply agreeing to
forbear from exercising their rights with respect to the Unwaived Defaults to
the extent expressly set forth in this Agreement. Each Loan Party will not
assert and hereby forever waives any right to assert that the Agent or the Banks
are obligated in any way to continue beyond the Standstill Period to forbear
from enforcing their rights or remedies or that the Agent and the Banks are not
entitled to act on the Unwaived Defaults after the occurrence of a Standstill
Termination as if such default had just occurred and the Standstill Period had
never existed. Each Loan Party acknowledges that the Banks have made no
representations as to what actions, if any, the Banks will take after the
Standstill Period or upon the occurrence of any Standstill Termination, a
Default or Event of Default, and the Banks and the Agent must and do hereby
specifically reserve any and all rights and remedies they have (after giving
effect hereto) with respect to the Existing Defaults and each other Default or
Event of Default that may occur.
23. Release. For value received, including without limitation, the
agreements of the Banks in this letter, each Loan Party hereby releases the
agent and each Bank, its current and former shareholders, directors, officers,
agents, employees and professional advisors (collectively, the "Released
Parties") of and from any and all demands, actions, causes of action, suits,
controversies, acts and omissions, liabilities, and other claims of every kind
or nature whatsoever, both in law and in equity, known or unknown, which each
Loan Party has or ever had against the Released Parties from the beginning of
the world to this date, including, without limitation, those arising out of the
existing financing arrangements between the Banks, and each Loan Party further
acknowledges that, as of the date hereof, it does not have any counterclaim,
set-off or defense against the Released Parties, each of which the Borrower
hereby expressly waives.
24. Loan Documents Remain Effective. Except as expressly set forth in
this Agreement, the Loan Documents and all of the Loan Parties' obligations
thereunder, the rights and benefits of the Agent and Banks thereunder and the
liens and security interests created thereby remain in full force and effect.
Without limiting the foregoing, each Loan Party agrees to comply with all of the
terms, conditions and provisions of the Loan Documents except to the extent such
compliance is irreconcilably inconsistent with the express provisions of this
Agreement. This Agreement and the Loan Documents are intended by the Banks as a
final expression of their agreement and are intended as a complete and exclusive
statement of the terms and conditions of that agreement.
25. Fees and Expenses. No later than November 15, 1999, the Loan Parties
(other than, during the Standstill Period Exteriors) must pay in full all of the
Agent's invoices for field audit, appraisal and legal expenses in connection
with the credit arrangements contemplated by the
-12-
<PAGE>
Credit Agreement. The Borrower shall pay all other reasonable fees and expenses
(including attorneys' fees) heretofore incurred by the Banks and their counsel
in connection with the drafting and preparation of the Loan Documents and
incurred by the Banks and their counsel in connection with the drafting and
preparation of this Agreement, and the supervision of legal matters in
connection with this Agreement.
26. Definitions. The following terms shall have the following meanings
herein:
"Collateral Diminution" means the amount (the "Initial Collateral
Diminution Amount"), if any, by which (x) the arithmetic average of the unpaid
balance of Exteriors' Eligible Accounts as of the last Business Day of each of
the last four calendar weeks preceding the date of this Agreement (concluding
with the calendar week within which the date of this Agreement occurs)) exceeds
(y) the arithmetic average (the "Ending Eligible Accounts Balance") of the
unpaid balance of Exteriors' Eligible Accounts as of the last Business Day of
each of the last four calendar weeks preceding the Initial Diminution
Measurement Date (concluding with the calendar week within which the Initial
Diminution Measurement Date occurs); provided that: (1) the Agent shall
determine the Eligible Accounts in the manner required by the Credit Agreement;
(2) the Initial Diminution Measurement Date shall be the date on which the
Standstill Period terminates and shall not be later than June 30, 2000; (3) a
Subsequent Diminution Measurement Date shall occur once every four calendar
weeks after the Initial Diminution Measurement Date; (4) on each Subsequent
Diminution Measurement Date, the amount of the Collateral Diminution shall equal
the amount (if any) by which (A) the Initial Collateral Diminution Amount
exceeds (B) the excess of (i) the then highest arithmetic average of the unpaid
balance of Exterior's Eligible Accounts as of the last Business Day of each of
the last four calendar weeks preceding such Subsequent Diminution Measurement
Date and any prior Subsequent Diminution Measurement Date (including for such
purposes the four calendar weeks concluding with the calendar week within which
any Subsequent Diminution Measurement Date occurs) over (ii) the Ending Eligible
Accounts Balance; and (5) in no event shall the amount of the Collateral
Diminution exceed either the aggregate amount of the License Deferral Amount as
of the Initial Diminution Measurement Date or the Initial Collateral Diminution
Amount.
"Credit Agreement" shall mean that certain Credit Agreement dated as of
April 20, 1998 by and among the Loan Parties, the Agent and the Banks from time
to time party thereto as amended by First, Second and Third Amendments thereto
dated as of August 3, 1998, November 13, 1998, and March 30, 1999, respectively.
"License Deferral Amount" means as of any day, the aggregate amount of
licensing fees due Sears under Section 19 of the Sears Licensing Agreement that
Exteriors had the right to defer by the provisions of the Sears Term Sheet.
"Exteriors Budget" shall mean the budget headed "Projected Operating
Results" attached hereto as Exhibit D hereto.
"Gross Marquise Collections" means all payments and collections made on
Marquise's loan assets and all other proceeds of Marquise's Collateral.
-13-
<PAGE>
"Marquise Budget" shall mean the budget headed "Weekly Cash Flow" attached
hereto as Exhibit F and each budget for Marquise subsequently provided to the
Agent pursuant to Section 17(h) hereof.
"Net Marquise Collections" means with respect to each calendar week (each,
a "collection week"), all Gross Marquise Collections received during such
collection week in excess of the amount then reasonably expected as necessary to
cover Marquise's expenses through the close of the fourth week following such
collection week to the extent such expenses are reflected on the Marquise
Budget.
"Reeves Budget" shall mean the budget attached hereto as Exhibit E hereto.
"Sears" shall mean Sears, Roebuck and Co.
"Sears Licensing Agreement" shall mean that certain License Agreement dated
January 1, 1996, as amended, including the Credit Addendum attached as Exhibit B
thereto by and between Sears and Exteriors, and that certain letter agreement
dated June 30, 1999, each by and between Sears and the Borrower.
All capitalized terms used herein without definition shall have the same
meanings herein as such terms have in the Credit Agreement.
This Agreement shall take effect upon its execution by the Agent and Banks
and its acceptance by the Borrower and the Material Subsidiaries. By their
acceptance hereof, the Borrower and the Material Subsidiaries represent that
they have the necessary power and authority to execute, deliver and perform the
undertakings contained herein and that the same do bind the Borrower and the
Material Subsidiaries hereto. This Agreement shall be governed by Illinois law
and shall be governed and interpreted on the same basis as the Credit Agreement.
-14-
<PAGE>
Dated as of October 29, 1999.
Harris Trust And Savings Bank,
individually and as Agent
By
Its
--------------------------------------------
LaSalle Bank, National Association
By
Its
--------------------------------------------
Bank of America, N.A.
By
Its
--------------------------------------------
-15-
<PAGE>
Accepted and agreed to.
Diamond Home Services, Inc.
By
Its
--------------------------------------------
Reeves Southeastern Corporation
By
Its
--------------------------------------------
Foreline Security Corporation
By
Its
--------------------------------------------
Diamond Exteriors, Inc.
By
Its
--------------------------------------------
Marquise Financial Services, Inc.
By
Its
--------------------------------------------
Reeves Southeastern Realty, Inc.
By
Its
--------------------------------------------
Solitaire Heating and Cooling, Inc.
By
Its
--------------------------------------------
-16-
<PAGE>
Exhibit A
Address Estimated Value
3391 Lumpkin Road $170,000
Columbus, GA 31903
321 West J.J. Drive $273,263
Greensboro, NC 27406
North Kings Road $220,000
Greenville, SC 29606
2618 Rolac Road $281,743
Jacksonville, FL 32207
2709 John Deere Road $241,225
Knoxville, TN 37917
Laurinburg-Maxton AFB $270,000
Laurinburg, NC 28352
4002 50th Street SW $400,000
Midfield, AL 35228
1907 Hand Avenue $251,489
Mobile, AL 35228
617 Hill Street $320,516
Jefferson, LA
5614 Carder Road $227,690
Orlando, FL 32862-7368
2720 Bartram Road $650,000
Bristol, PA 19007
8619 Telegraph Road $290,000
Glen Allen, VA 23060
9800 Reeves Road $3,665,612
Tampa, FL 33619
Reeves Field $443,452
Broadway Avenue and
Flakenburg Road
Tampa, FL
<PAGE>
Exhibit B
Cumulative Exteriors Installed Sales Revenues
in Thousands (000's)
Test Date No Less than Amount Period Covered
01/01/2000 $26,063 10/99 - 12/99
02/01/2000 $33,009 10/99 - 01/00
03/01/2000 $40,935 10/99 - 02/00
04/01/2000 $48,226 10/99 - 03/00
05/01/2000 $56,960 10/99 - 04/00
06/01/2000 $66,914 10/99 - 05/00
<PAGE>
Exhibit C
Minimum Required Cumulative Reeves/FSC EBITDA
- --------------------------------------------------------------------------------
As of close of the calendar month: Cumulative EBITDA must not be less than:
- --------------------------------------------------------------------------------
November $306,028
- --------------------------------------------------------------------------------
December $612,309
- --------------------------------------------------------------------------------
January '00 $643,854
- --------------------------------------------------------------------------------
February $607,799
- --------------------------------------------------------------------------------
March $1,550,010
- --------------------------------------------------------------------------------
April $2,246,022
- --------------------------------------------------------------------------------
May $2,851,661
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
-2-
<PAGE>
Confidential material in Exhibits D, E and F has been deleted for filing
purposes and omitted pursuant to a request for confidential treatment.
Confidential material has been or will be filed separately. Confidential
material consists of 15 pages.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 3,655,000 3,696,000
<SECURITIES> 0 0
<RECEIVABLES> 23,606,000 23,733,000
<ALLOWANCES> 0 0
<INVENTORY> 15,822,000 16,368,000
<CURRENT-ASSETS> 48,123,000 50,266,000
<PP&E> 24,641,000 19,925,000
<DEPRECIATION> 4,741,000 1,696,000
<TOTAL-ASSETS> 119,607,000 125,459,000
<CURRENT-LIABILITIES> 73,083,000 35,049,000
<BONDS> 0 0
0 0
0 0
<COMMON> 10,000 10,000
<OTHER-SE> 25,226,000 35,676,000
<TOTAL-LIABILITY-AND-EQUITY> 119,607,000 125,459,000
<SALES> 188,907,000 170,996,000
<TOTAL-REVENUES> 188,907,000 170,996,000
<CGS> 126,853,000 108,153,000
<TOTAL-COSTS> 62,054,000 167,104,000
<OTHER-EXPENSES> (472,000) (403,000)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,375,000 1,791,000
<INCOME-PRETAX> (10,402,000) 2,504,000
<INCOME-TAX> (1,163,000) 1,130,000
<INCOME-CONTINUING> (9,239,000) 1,374,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,239,000) 1,374,000
<EPS-BASIC> (1.09) 0.16
<EPS-DILUTED> (1.09) 0.16
</TABLE>
