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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from --------- to ---------
Commission File Number 0-20829
DIAMOND HOME SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3886872
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Church Street, Woodstock, Illinois 60098
(Address of principal executive offices, 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 ( )
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date: 9,074,900 shares of
Common Stock outstanding as of October 31, 1996.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
(In thousands, except per share data)
<S> <C> <C> <C> <C>
NET SALES . . . . . . . . . . . . . . . . . $46,492 $36,459 $114,974 $89,955
Cost of sales . . . . . . . . . . . . . . . 25,962 21,097 64,096 52,125
GROSS PROFIT . . . . . . . . . . . . . . . 20,530 15,412 50,878 37,830
Operating expenses:
Selling, general, and administrative 16,245 12,619 42,151 32,851
expense . . . . . . . . . . . . . . . .
Operating interest expense . . . . . . - - 234 -
Amortization expense . . . . . . . . . 135 126 396 376
OPERATING INCOME . . . . . . . . . . . . . 4,150 2,667 8,097 4,603
Interest income(expense), net . . . . . . . 122 (96) 26 (434)
Income before income taxes . . . . . . . . 4,272 2,571 8,123 4,169
Income tax provision . . . . . . . . . . . 1,681 1,039 3,264 1,744
NET INCOME . . . . . . . . . . . . . . . . $2,591 $1,532 $4,859 $2,425
INCOME PER SHARE . . . . . . . . . . . . . $.28 $.25 $.67 $.39
Weighted average number of common shares and
equivalent outstanding . . . . . . . . . . 9,198 6,250 7,296 6,250
See accompanying notes.
</TABLE>
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
(UNAUDITED)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $8,516 $4,715
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . 7,675 3,389
Finance company accounts receivable . . . . . . . . . . . . . . 18,357 542
Prepaids and other current assets . . . . . . . . . . . . . . . 1,393 567
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 895 404
Total current assets . . . . . . . . . . . . . . . . . . . . . 36,836 9,617
Net property and equipment . . . . . . . . . . . . . . . . . . . . 1,507 1,437
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . 17,043 17,395
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 1,089 1,051
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,146 643
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,621 $30,143
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities . . . . . . . . . . . $14,730 $13,077
Due to stockholders . . . . . . . . . . . . . . . . . . . . . . 554 1,354
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 732 -
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 16,016 14,431
Long-term liabilities:
Warranty and retention . . . . . . . . . . . . . . . . . . . . 7,144 4,617
Due to stockholders . . . . . . . . . . . . . . . . . . . . . . 1,222 4,862
Total long-term liabilities . . . . . . . . . . . . . . . . . . . . 8,366 9,479
Preferred stock, at redemption price . . . . . . . . . . . . . . . - 1,400
Common stockholders' equity . . . . . . . . . . . . . . . . . . . . 34,239 4,833
Total liabilities and common stockholders' equity . . . . . . . . . $58,621 $30,143
See accompanying notes.
</TABLE>
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
(IN THOUSANDS)
1996 1995
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,859 $2,425
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 599 524
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (529) (1,044)
Changes in operating assets and liabilities:
Accounts receivable and other assets . . . . . . . . . . . . . . . (5,927) (1,390)
Accounts payable and accrued expenses . . . . . . . . . . . . . . 1,653 5,275
Warranty and retention . . . . . . . . . . . . . . . . . . . . . . 2,527 1,758
Net cash provided by operating activities . . . . . . . . . . . . . . . . 3,182 7,548
Investing activities:
Consumer finance loans originated . . . . . . . . . . . . . . . . . . . . (22,603) -
Consumer finance loans repaid . . . . . . . . . . . . . . . . . . . . . . 4,788 -
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (273) (778)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . (18,088) (778)
Financing activities:
Issuance of Common Stock, net of offering expenses . . . . . . . . . . . 33,147 -
Common Stock special dividend . . . . . . . . . . . . . . . . . . . . . . (8,600) -
Preferred Stock redemption . . . . . . . . . . . . . . . . . . . . . . . (1,400) -
Borrowings (repayment) on bank line of credit, net . . . . . . . . . . . - (7,283)
Payments due to stockholders . . . . . . . . . . . . . . . . . . . . . . (4,440) (1,920)
Net cash provided by (used in) financing activities . . . . . . . . . . . 18,707 (9,203)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . 3,801 (2,433)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . 4,715 5,048
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . 8,516 $2,615
Supplemental cash flow disclosure:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $738 $233
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,061 $2,099
See accompanying notes.
</TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(TABULAR AMOUNTS ARE IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month and
nine-month periods ended September 30, 1996 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1996.
For further information, refer to the consolidated financial statements
included in the Company's Registration Statement on Form S-1, as amended
(Reg. No. 333-10973).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
Credit participation fees paid by Sears and its affiliates are
recognized in the period the receivables are placed with Sears and its
affiliates, without recourse to the Company, utilizing the discounted
present value of the contractual payment stream. Approximately 71% of the
total credit participation fee earned is received in cash during the first
three years. Credit participation fees paid by other third-party finance
companies on receivables placed with these third-party finance companies,
without recourse to the Company, are recognized when received.
3. CONSUMER FINANCING
The Company's consumer finance subsidiary, Marquise Financial
Services, Inc. ("Marquise Financial"), began operations on November 20,
1995. Marquise Financial provides consumer financing through direct
consumer loans to customers of the Company. Finance receivables are payable
through monthly installments and may be secured or unsecured. Marquise
Financial's first billings for monthly installments to consumers occurred
on January 9, 1996. Interest income from finance receivables is recognized
using the interest method. Accrual of interest income on finance
receivables is suspended when a loan is contractually delinquent for 90
days or more and resumes when the loan becomes contractually current. No
interest income was recorded during 1995. Provisions for credit losses are
charged to income in amounts sufficient to maintain the allowance at a
level considered adequate to cover the losses of principal and interest in
the existing portfolio. It is Marquise Financial's policy to charge-off
finance receivables when they are 210 days past due.
The following summarized condensed financial information for Marquise
Financial is before eliminations of intercompany transactions in
consolidation:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $180 -
Financing receivables . . . . . . . . . . . . . . . . . . . 18,357 $542
Other current assets . . . . . . . . . . . . . . . . . . . . 46 5
Intangibles, net . . . . . . . . . . . . . . . . . . . . . . 133 122
$18,716 $669
LIABILITIES AND STOCKHOLDER'S EQUITY:
Due to Diamond . . . . . . . . . . . . . . . . . . . . . . . $18,528 $442
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 3
Total Liabilities . . . . . . . . . . . . . . . . . . . . . 18,596 445
Total stockholder's equity . . . . . . . . . . . . . . . . . 120 224
Total liabilities and stockholder's equity . . . . . . . . . $18,716 $669
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AND NINE MONTHS ENDED SEPTEMBER 30, 1996, RESPECTIVELY:
Financing income . . . . . . . . . . . . . . . . . . . . . . $726 $1,219
General and administrative expenses . . . . . . . . . . . . 726 1,393
Loss before tax benefit . . . . . . . . . . . . . . . . . . 0 (174)
Income tax benefit . . . . . . . . . . . . . . . . . . . . . 0 70
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $0 $104
CASH FLOW FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996:
Net cash used in operating activities . . . . . . . . . . . ($104)
Net cash used in investing activities . . . . . . . . . . . (17,867)
Net cash provided by financing activities . . . . . . . . . 18,151
Cash at September 30, 1996 . . . . . . . . . . . . . . . . . $180
</TABLE>
4. STOCKHOLDERS' EQUITY
At September 30, 1996, and December 31, 1995, the Company had
9,074,900 and 6,249,950 common shares, respectively, issued and
outstanding.
The Company has reserved 620,000 shares of Common Stock in respect to
the 1996 Incentive Stock Option Plan. On June 19, 1996, the Company issued
275,000 options to purchase Common Stock at an exercise price of $13 per
share. At September 30, 1996, 68,750 options to purchase Common Stock were
exercisable. Through September 30, 1996, no options to purchase Common
Stock were exercised or cancelled.
5. COMMON STOCK OFFERING
In June 1996, the Company issued 2,824,950 shares of common stock
(including underwriters' over-allotment option) at $13 per share in its
initial public offering. Proceeds from the offering, net of underwriting
commissions and related expenses totaling $3.7 million, were $33.1 million.
Following the offering, the Company had 9,074,900 common shares issued and
outstanding. A portion of the offering proceeds were used to pay a $8.6
million special dividend to pre-offering stockholders.
In September 1996, the Company's largest stockholder, Globe Building
Materials, Inc. ("Globe"), sold 750,000 shares of common stock at $29 per
share in a public offering. The Company did not receive any proceeds from
the public offering.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRD QUARTER 1996 COMPARED TO THIRD QUARTER 1995
Net sales
Net sales increased $10.0 million, or 27.5%, from $36.5 million for
the third quarter 1995 to $46.5 million for the third quarter 1996.
Approximately 46.6% of the increase in net sales was attributable to
roofing and gutter products and services, net sales of which increased $4.8
million to $30.5 million for the third quarter 1996. Approximately 26.1% of
the increase in net sales was attributable to fencing products and
services, net sales of which increased $2.6 million to $8.2 million for the
third quarter 1996. Approximately 13.2% of the increase in net sales was
attributable to garage door and entry door products and services, net sales
of which increased $1.3 million to $6.4 million for the third quarter of
1996. The balance, 14.1% of the increase in net sales, was due to credit
participation fee income of $685 thousand from Sears and its affiliates ,
which was payable beginning January 1, 1996, on installed sales financed by
Sears and its affiliates during the quarter, and interest income of $726
thousand on receivables financed by the Company's newly-formed consumer
finance subsidiary, Marquise Financial. The third quarter increases in net
sales were due primarily to an increase in the number of installations as
the Company increased the average number of its sales associates during the
comparative period from 640 to 752; and, new in 1996, credit participation
fee and finance income.
Gross Profit
Gross profit increased $5.1 million, or 33.2%, from $15.4 million, or
42.3% of net sales, for the third quarter 1995 to $20.5 million, or 44.2%
of net sales, for the third quarter 1996. The increased gross profit
resulted from an increased number of installations, an increase in balance
of sales to higher margin products and services, primarily fencing, the
credit participation fee income from Sears and its affiliates and interest
income from Marquise Financial. The license fee incurred to Sears increased
$979 thousand, or 25.1%, from $3.9 million, or 10.7% of net installed
sales, for the third quarter 1995 to $4.9 million, or 10.5% of net
installed sales, for the third quarter 1996. The dollar increase in the
license fee incurred to Sears for the third quarter 1996 was due to the
increase in sales volume. Sears and the Company entered into a new three-
year license agreement effective January 1, 1996. Among other things, the
license agreement provides for a fixed license fee, at the March 1995
license fee rate, to be charged during the term of the license agreement.
Gross profit before the Sears license fee, credit participation fee and
interest income increased $4.7 million, or 24.3%, from $19.3 million, or
53.0% of net installed sales, for the third quarter 1995 to $24.0 million,
or 53.2% of net installed sales, for the third quarter 1996. The unit costs
of materials, installation labor and warranty expense remained relatively
constant during the quarterly period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $3.6 million,
or 28.7%, from $12.6 million in the third quarter 1995 to $16.2 million in
the third quarter 1996 and, as a percentage of net sales, increased from
34.6% to 34.9%. The dollar increase in selling, general and administrative
expenses resulted primarily from expenses associated with increased sales
volume, the increased number of sales associates and expenses related to
the hiring of personnel to support the expansion of the infrastructure of
the Company's core sales and installation business including the expansion
of Marquise Financial. Direct advertising expense increased $525 thousand,
or 33.1%, from $1.6 million for the third quarter 1995 to $2.1 million for
the third quarter 1996; as a percentage of net sales, direct advertising
expense increased from 4.3% for the third quarter 1995 to 4.5% for the
third quarter 1996, reflecting advertising price increases partially offset
by improved utilization of sales leads primarily due to the increase in the
number of sales associates. Selling commission expense increased $868
thousand, or 23.5%, from $3.7 million in the third quarter 1995 to $4.6
million in the third quarter 1996; as a percentage of net installed sales,
selling commission expense remained constant at 10.1%. Sales
representatives are compensated on a variable commission basis depending
upon the type and gross profit of product sold. Performance-based
compensation paid to officers and regional sales and production managers
increased $277 thousand, or 49.4%, from $561 thousand in the third quarter
1995 to $838 thousand in the third quarter 1996, primarily due to the
increase in operating income. The balance of selling, general and
administrative expenses, primarily sales lead-generation activities,
administrative, field operations and Marquise Financial payrolls and
related costs and general expenses, increased $2.0 million, or 29.8%, from
$6.7 million, or 18.5% of net sales, in the third quarter 1995 to $8.7
million, or 18.8% of net sales, in the third quarter 1996. The dollar
increase was primarily due to increased expenses relating to support
personnel and services required to manage the Company's expanding
infrastructure and captive finance subsidiary, Marquise Financial.
Operating Interest Expense
The Company had no operating interest expense for the third quarter
1996. Operating interest expense relates to bank borrowings required to
finance a portion of Marquise Financial's receivables. The Company
utilized a portion of the proceeds from the June 1996 initial public
offering to paydown all bank borrowings.
Amortization of Intangibles
Amortization of intangibles increased from $126 thousand in the third
quarter 1995 to $135 thousand in the third quarter 1996. The amortization
expense relates primarily to goodwill incurred in connection with the
September 1994 stock repurchase from management.
Interest Income, Net
Net interest income increased $218 thousand from $96 thousand net
interest expense in the third quarter 1995 to $122 thousand net interest
income in the third quarter 1996, primarily due to increased interest
income from invested cash balances and the reduction of interest expense
related to the notes payable to certain of the Company's senior managers in
connection with the September 1994 stock repurchase from management. $4.0
million of notes payable to senior managers was repaid during the first six
months of 1996.
Income Tax Provision
The Company's income tax provision increased from $1.0 million, or an
effective rate of 40.4%, for the third quarter 1995 to $1.7 million, or an
effective rate of 39.3%, for the third quarter 1996. The difference in the
effective income tax rate and the federal statutory rate (34%) is due
primarily to amortization of intangibles which are not deductible for
income tax purposes and the effect of state income taxes.
Net Income
The Company's net income increased $1.1 million from $1.5 million in
the third quarter 1995 to $2.6 million in the third quarter 1996.
FIRST NINE MONTHS 1996 COMPARED TO FIRST NINE MONTHS 1995
Net Sales
Net sales increased $25.0 million, or 27.8%, from $90.0 million for
the first nine months of 1995 to $115.0 million for the first nine months
of 1996. Approximately 54.0% of the increase in net sales was attributable
to roofing and gutter products and services, net sales of which increased
$13.5 million to $75.2 million for the first nine months of 1996.
Approximately 27.6% of the increase in net sales was attributable to
fencing products and services, net sales of which increased $6.9 million to
$21.3 million for the first nine months of 1996. Approximately 7.2% of the
increase in net sales was attributable to garage door and entry door
products and services, net sales of which increased $1.8 million to $15.7
million for the first nine months of 1996. The balance, 11.2% of the
increase in net sales, was due to credit participation fee income of $1.6
million from Sears and its affiliates, which was payable beginning January
1, 1996, on installed sales financed by Sears and its affiliates during the
first nine months, and interest income of $1.2 million on receivables
financed by the Company's newly-formed consumer finance subsidiary,
Marquise Financial. The increases in net sales were due primarily to an
increase in the number of installations as the Company increased the
average number of its sales associates during the comparative periods from
587 to 701 and increased selling prices in the first three months of the
year and, new in 1996, credit participation fee and finance income.
Gross Profit
Gross profit increased $13.0 million, or 34.5%, from $37.8 million, or
42.1% of net sales, for the first nine months of 1995 to $50.9 million, or
44.3% of net sales, for the first nine months of 1996. The increased gross
profit resulted from an increased number of installations, increased
selling prices in the first three months of the year, an increase in
balance of sales to higher margin products and services, primarily fencing,
the credit participation fee from Sears and its affiliates and interest
income from Marquise Financial, partially offset by the increase, in the
first quarter 1995, in the Sears license fee rate. The license fee incurred
to Sears increased $2.6 million, or 27.4%, from $9.4 million, or 10.4% of
net installed sales, for the first nine months 1995 to $12.0 million, or
10.7% of net installed sales, for the first nine months of 1996. The
increase in the license fee incurred to Sears for the first nine months of
1996 was due to the increase in sales volume and an increase in the
composite license fee rates related to the shift in balance of sales. Sears
and the Company entered into a new three-year license agreement effective
January 1, 1996. Among other things, the license agreement provides for a
fixed license fee, at the March 1995 license fee rate, to be charged during
the term of the license agreement. Gross profit before the Sears license
fee, credit participation fee and interest income increased $12.8 million,
or 26.9%, from $47.3 million, or 52.6% of net installed sales, for the
first nine months of 1995 to $60.1 million, or 53.5% of net installed
sales, for the first nine months of 1996. The unit costs of materials,
installation labor and warranty expense remained relatively constant during
the first nine month period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $9.3
million, or 28.3%, from $32.9 million in the first nine months 1995 to
$42.2 million in the first nine months 1996 and, as a percentage of net
sales, increased from 36.5% to 36.7%. The dollar increase in selling,
general and administrative expenses resulted primarily from the expenses
associated with the increased sales volume, the increased number of sales
associates and expenses related to the hiring of personnel to support the
expansion of the infrastructure of the Company's core sales and
installation business including the expansion of Marquise Financial.
Direct advertising expense increased $1.0 million, or 22.5%, from $4.8
million for the first nine months 1995 to $5.8 million for the first nine
months 1996; as a percentage of net sales, however, direct advertising
expense decreased from 5.3% for the first nine months 1995 to 5.1% for the
first nine months 1996, reflecting improved utilization of sales leads
primarily due to the increase in number of sales associates partially
offset by advertising price increases in the third quarter. Selling
commission expense increased $2.1 million, or 22.3%, from $9.2 million in
the first nine months 1995 to $11.3 million in the first nine months 1996;
as a percentage of net installed sales, selling commission expense
decreased from 10.3% in the first nine months 1995 to 10.1% in the first
nine months 1996. Sales representatives are compensated on a variable
commission basis depending upon the type and gross profit of product sold.
Performance-based compensation paid to officers and regional sales and
production managers increased $745 thousand, or 54.6%, from $1.4 million in
the first nine months 1995 to $2.1 million in the first nine months 1996,
primarily due to the increase in operating income. Management fees
incurred to Globe decreased from $444 thousand in the first nine months
1995 to $311 thousand in the first nine months 1996. The management fee
agreement between the Company and Globe was terminated June 20, 1996. The
balance of selling, general and administrative expenses, primarily sales
lead-generation activities, administrative, field operations and Marquise
Financial payrolls and related costs and general expenses, increased $5.6
million, or 33.1%, from $17.0 million, or 18.9% of net sales, in the first
nine months 1995 to $22.6 million, or 19.7% of net sales, in the first nine
months 1996. The increase was primarily due to increased expenses
relating to support personnel and services required to manage the Company's
expanding infrastructure and captive finance subsidiary, Marquise
Financial.
Operating Interest Expense
Operating interest expense, incurred in the first half of the year,
was $234 thousand for the first nine months 1996. The Company did not have
any operating interest expense in the first nine months of 1995. Operating
interest expense relates to bank borrowings required to finance a portion
of Marquise Financial's receivables. The Company utilized a portion of the
proceeds from the June 1996 initial public offering to paydown all bank
borrowings.
Amortization of Intangibles
Amortization of intangibles increased from $376 thousand in the first
nine months 1995 to $396 thousand in the first nine months 1996. The
amortization expense relates primarily to goodwill incurred in connection
with the September 1994 stock repurchase from management.
Interest Income, Net
Net interest income increased $460 thousand from $434 thousand net
interest expense in the first nine months 1995 to $26 thousand net interest
income in the first nine months 1996, primarily due to increased interest
income from invested cash balances and the reduction of interest expense
related to notes payable to certain of the Company's senior managers in
connection with the September 1994 stock repurchase from management. $4
million of notes payable to senior managers was repaid during the first six
months 1996.
Income Tax Provision
The Company's income tax provision increased from $1.7 million, or an
effective rate of 41.8%, for the first nine months 1995, to $3.3 million,
or an effective rate of 40.2%, for the first nine months 1996. The
difference in the effective income tax rate and federal statutory rate
(34%) is due primarily to amortization of intangibles which are not
deductible for income tax purposes and the effect of state income taxes.
Net Income
The Company's net income increased $2.5 million from $2.4 million in
the first nine months 1995 to $4.9 million in the first nine months 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the growth of
the Company, the September 1994 stock repurchase from management, and, more
recently, to fund the operations of the Company's captive finance
subsidiary, Marquise Financial. The Company's primary sources of liquidity
have been cash flow from operations, borrowings under its bank credit
facility, and, in June 1996, from the net proceeds of its initial public
offering. The Company's core sales and installation business is not
capital intensive. Capital expenditures for 1994, 1995 and the first nine
months 1996 were approximately $573 thousand, $888 thousand and $272
thousand, respectively. Capital expenditures for the next twelve months
are expected to approximate $1.2 million, primarily related to ongoing
upgrading of computer hardware and software. Future requirements for
capital expenditures are expected to be funded by cash flow from
operations. The Company believes that it has sufficient operating cash
flow, working capital base, available bank credit facility as well as
additional bank financing currently being pursued by the Company with
respect to Marquise Financial, to meet all of its obligations for the
foreseeable future, including ongoing funding for Marquise Financial and
for the development and expansion of complementary product lines and
services.
In November 1995, the Company commenced the operations of Marquise
Financial, its consumer finance subsidiary. Marquise Financial has been
capitalized and funded with the Company's excess operating cash flow and
secured borrowings under the Company's $15 bank million line of credit,
which were subsequently paid down with a portion of the proceeds from the
Company's June 1996 initial public offering. At September 30, 1996,
Marquise Financial had consumer finance receivables of approximately $ 18.4
million. The Company anticipates that its existing cash balances, the bank
line of credit, the sale of Marquise Financial's consumer finance
receivables as market conditions may warrant from time to time and excess
cash flow from operations will be sufficient to satisfy the Company's
financing cash requirements in the foreseeable future.
The preceding paragraphs of this Liquidity and Capital Resources
section contain forward-looking statements about the funding of various
activities within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Actual results could differ materially from those projected in
the forward-looking statements. Factors that could cause actual results
to differ materially include, but are not limited to, the rate of growth of
the Company's revenues, the rate of expansion of the Company's business,
other available sources of financing for customer purchases, market
conditions with respect to the sale of consumer finance receivables, the
availability and cost of financing and cash flow from operations.
In June 1996, the Company issued 2,824,950 shares of Common Stock
(including underwriters' over-allotment option) at $13 per share in its
initial public offering. Proceeds from the offering, net of underwriting
commissions and related expenses totaling $3.7 million, were $33.1 million.
A portion of the offering proceeds was used to pay a $8.6 million special
dividend to pre-offering stockholders, repay all borrowings aggregating
$11.9 million under the bank line of credit (used to finance Marquise
Financial receivables) and repay $3.2 million of notes to senior managers
related to the September 1994 stock repurchase.
From its inception in June 1993, the Company has generated cash flow
from operations of approximately $20.5 million. The Company used $12.5
million of cash in connection with the repurchase of 40.2% of its Common
Stock in September 1994, $2.0 million for capital expenditures and $4.5
million for the initial funding of Marquise Financial's consumer financing
activities. At September 30, 1996, the Company had approximately $8.5
million in cash and cash equivalents and net working capital of $20.8
million. At September 30, 1996, the Company had available $15 million
in bank line of credit and $1.8 million total debt to management
stockholders. At September 30, 1996, the Company had no amounts
outstanding under its bank line of credit.
The Company's results of operations may fluctuate from year to year or
quarter to quarter due to a variety of factors. The Company expects lower
levels of sales and profitability during the period from mid-November
through mid-March, impacting the first and fourth quarter of each year.
The Company believes that this seasonality is caused by winter weather in
certain of the Company's markets located in the northeastern and north
central U.S. and rainy weather, each of which limits the Company's ability
to install exterior home improvement products.
PART II. OTHER INFORMATION
ITEM. 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.1) Diamond Home Services, Inc. Incentive Stock Option Plan, as
amended.
(27) Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter.
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.
By: /s/ Richard G. Reece
----------------------------------------
Richard G. Reece
Vice President and Chief Financial
Officer (For the Registrant and as
Principal Financial and Accounting
Officer)
Date: November 12, 1996
EXHIBIT 10.1
CONFORMED TO REFLECT
9/96 AMENDMENTS
DIAMOND HOME SERVICES, INC.
INCENTIVE STOCK OPTION PLAN
1. PURPOSE. The Diamond Home Services, Inc. Incentive Stock Option Plan
(the "Plan") is intended to provide incentives which will attract and retain
highly competent persons as officers and key employees of Diamond Home Services,
Inc. and its subsidiaries (collectively the "Company"), by providing them
opportunities to acquire shares of Common Stock of the Company ("Common Stock")
or to receive monetary payments based on the value of such shares pursuant to
the Awards described herein.
2. ADMINISTRATION. The Plan will be administered by the Compensation
Committee (the "Committee") appointed by the Board of Directors of the Company
from among its members which shall be comprised of not less than two non-
employee members of the Board; provided, however, that as long as the Common
Stock of the Company is registered under the Securities Exchange Act of 1934,
members of the Committee must qualify as disinterested persons within the
meaning of Securities and Exchange Commission Regulation Section 240.16b-3. The
Committee is authorized, subject to the provisions of the Plan, to establish
such rules and regulations as it deems necessary for the proper administration
of the Plan and to make such determinations and interpretations and to take such
action in connection with the Plan and any Awards granted hereunder as it deems
necessary or advisable. All determinations and interpretations made by the
Committee shall be binding and conclusive on all participants and their legal
representatives. No member of the Board, no member of the Committee and no
employee of the Company shall be liable for any act or failure to act hereunder,
by any other member or employee or by any agent to whom duties in connection
with the administration of this Plan have been delegated or, except in
circumstances involving his or her bad faith, gross negligence or fraud, for any
act or failure to act by such member of the Board or employee.
3. PARTICIPANTS. Participants will consist of such officers and key
employees of the Company as the Committee in its sole discretion determines to
be significantly responsible for the success and future growth and profitability
of the Company and whom the Committee may designate from time to time to receive
Awards under the Plan. Designation of a participant in any year shall not
require the Committee to designate such person to receive an Award in any other
year or, once designated, to receive the same type or amount of Awards as
granted to the participant in any year. The Committee shall consider such
factors as it deems pertinent in selecting participants and in determining the
amount and type of their respective Awards.
4. TYPES OF AWARDS. Awards under the Plan may be granted in any one or a
combination of (a) Stock Options, (b) Stock Appreciation Rights, or (c) Stock
Awards, all as described below (collectively "Awards").
5. SHARES RESERVED UNDER THE PLAN. There is hereby reserved for issuance
under the Plan an aggregate of Six Hundred Twenty Thousand (620,000) shares of
Common Stock, which may be authorized but unissued or treasury shares. Any
shares subject to an Award hereunder may thereafter be subject to new Awards
under this Plan if there is a lapse, cancellation, expiration, or termination of
any such Awards prior to issuance of the shares or if shares are issued under
such Awards and thereafter are reacquired by the Company pursuant to rights
reserved by the Company upon issuance thereof.
6. STOCK OPTIONS. "Stock Options" will consist of awards from the
Company, in the form of agreements, which will enable the holder to purchase a
specific number of shares of Common Stock, at set terms and at a fixed purchase
price. Stock Options may be "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code ("Incentive Stock Options") or Stock
Options which do not constitute Incentive Stock Options ("Nonqualified Stock
Options"). The Committee will have the authority to grant to any participant
one or more Incentive Stock Options, Nonqualified Stock Options, or both types
of Stock Options (in each case with or without Stock Appreciation Rights). Each
Stock Option shall be subject to such terms and conditions consistent with the
Plan as the Committee may impose from time to time, subject to the following
limitations:
(A) EXERCISE PRICE. Each Stock Option granted hereunder shall
have such per-share exercise price as the Committee may determine at
the date of grant provided, however, that the per-share exercise price
for Incentive Stock Options shall not be less than 100% of the Fair
Market Value of the Common Stock on the date the option is granted and
provided further that the per-share exercise price for Nonqualified
Stock Options shall not be less than 85% of the Fair Market Value of
the Common Stock on the date the option is granted.
(B) PAYMENT OF EXERCISE PRICE. The option exercise price may
be paid by check or, in the discretion of the Committee, by the
delivery of shares of Common Stock of the Company then owned by the
participant; provided, however, that option agreements may provide
that payment of the exercise price by delivery of shares of Common
Stock of the Company then owned by the participant may be made only if
such payment does not result in a charge to earnings for financial
accounting purposes as determined by the Committee. In the discretion
of the Committee, payment may also be made by delivering a properly
executed exercise notice to the Company together with a copy of
irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds to pay the exercise price.
To facilitate the foregoing, the Company may enter into agreements for
coordinated procedures with one or more brokerage firms.
(C) EXERCISE PERIOD. Stock Options granted under the Plan shall
be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee, provided, however
that no Stock Options shall be exercisable later than ten years after
the date they are granted. All Stock Options shall terminate at such
earlier times and upon such conditions or circumstances as the
Committee shall in its discretion set forth in such option at the date
of grant.
(D) LIMITATIONS ON INCENTIVE STOCK OPTIONS. Incentive Stock
Options may be granted only to participants who are employees of the
Company or one of its subsidiaries (within the meaning of
Section 424(f) of the Internal Revenue Code) at the date of grant.
The aggregate Fair Market Value (determined as of the time the option
is granted) of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by a participant during any
calendar year (under all option plans of the Company) shall not exceed
$100,000. Incentive Stock Options may not be granted to any
participant who, at the time of grant, owns stock possessing (after
the application of the attribution rules of Section 424(d) of the
Code) more than 10% of the total combined voting power of all classes
of stock of the Company, unless the option price is fixed at not less
than 110% of the Fair Market Value of the Common Stock on the date of
grant and the exercise of such option is prohibited by its terms after
the expiration of five years from the date of grant of such option.
(E) REDESIGNATION AS NON-QUALIFIED STOCK OPTIONS. Options
designated as "incentive stock options" that fail to continue to meet
the requirements of Section 422 of the Internal Revenue Code shall be
redesignated as non-qualified options for Federal income tax purposes
automatically without further action by the Committee on the date of
such failure to continue to meet the requirements of Section 422 of
the Code.
(F) LIMITATION OF RIGHTS IN SHARES. The recipient of a Stock
Option shall not be deemed for any purpose to be a stockholder of the
Company with respect to any of the shares subject thereto except to
the extent that the Stock Option shall have been exercised and, in
addition, a certificate shall have been issued and delivered to the
participant.
(G) INDIVIDUAL LIMITATION ON NUMBER OF SHARES. The number of
shares subject to Stock Options which may be granted during any
calendar year to any one participant shall not exceed three hundred
thousand (300,000) shares.
7. STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, grant
Stock Appreciation Rights to the holders of any Stock Options granted hereunder.
In addition, Stock Appreciation Rights may be granted independently of and
without relation to options. Each Stock Appreciation Right shall be subject to
such terms and conditions consistent with the Plan as the Committee shall impose
from time to time, including the following:
(A) A Stock Appreciation Right relating to a Nonqualified Stock
Option may be made part of such option at the time of its grant or at
any time thereafter up to six months prior to its expiration, and a
Stock Appreciation Right relating to an Incentive Stock Option may be
made part of such option only at the time of its grant.
(B) Each Stock Appreciation Right will entitle the holder to
elect to receive the appreciation in the Fair Market Value of the
shares subject thereto up to the date the right is exercised, subject
to paragraph (c) below. In the case of a right issued in relation to
a Stock Option, such appreciation shall be measured from not less than
the option price and in the case of a right issued independently of
any Stock Option, such appreciation shall be measured from not less
than 85% of the Fair Market Value of the Common Stock on the date the
right is granted. Payment of such appreciation shall be made in cash
or in Common Stock, or a combination thereof, as set forth in the
award, but no Stock Appreciation Right shall entitle the holder to
receive, upon exercise thereof, more than the number of shares of
Common Stock (or cash of equal value) with respect to which the right
is granted.
(C) Each Stock Appreciation Right will be exercisable at the
times and to the extent set forth therein, but no Stock Appreciation
Right may be exercisable later than the earlier of (i) the term of the
related option, if any, or (ii) fifteen years after it was granted.
Exercise of a Stock Appreciation Right shall reduce the number of
shares issuable under the Plan (and the related option, if any) by the
number of shares with respect to which the right is exercised.
(D) The number of shares subject to Stock Appreciation Rights
which may be granted during any calendar year to any one participant
shall not exceed three hundred thousand (300,000) shares.
8. STOCK AWARDS. Stock Awards will consist of Common Stock transferred to
participants without other payment therefor as additional compensation for
services rendered or to be rendered to the Company. Stock Awards shall be
subject to such terms and conditions as the Committee determines appropriate,
including, without limitation, restrictions on the sale or other disposition of
such shares and rights of the Company to reacquire such shares for no
consideration upon termination of the participant's employment within specified
periods. The Committee may require the participant to deliver a duly signed
stock power, endorsed in blank, relating to the Common Stock covered by such an
Award. The Committee may also require that the stock certificates evidencing
such shares be held in custody until the restrictions thereon shall have lapsed.
Except as otherwise provided in the written Stock Award, each participant shall
have, with respect to the shares of Common Stock subject to a Stock Award, all
of the rights of a holder of shares of Common Stock of the Company, including
the right to receive dividends and to vote the shares.
9. ADJUSTMENT PROVISIONS.
(A) If the Company shall at any time change the number of issued shares of
Common Stock without new consideration to the Company (such as by stock
dividend, stock split, recapitalization, reorganization, exchange of shares,
liquidation, combination or other change in corporate structure affecting the
Common Stock) or make a distribution of cash or property which has a substantial
impact on the value of issued Common Stock, the total number of shares available
for Awards under this Plan shall be appropriately adjusted and the number of
shares covered by each outstanding Award and the reference price or Fair Market
Value for each outstanding Award shall be adjusted so that the net value of such
Award shall not be changed.
(B) In the case of any sale of assets, merger, consolidation, combination
or other corporate reorganization or restructuring of the Company with or into
another corporation which results in the outstanding Common Stock being
converted into or exchanged for different securities, cash or other property, or
any combination thereof (an "Acquisition"), subject to the provisions of this
Plan and any limitation applicable to the Award:
(I) any Participant to whom a Stock Option has been granted
shall have the right thereafter and during the term of the Stock
Option, to receive upon exercise thereof the Acquisition Consideration
(as defined below) receivable upon the Acquisition by a holder of the
number of shares of Common Stock which might have been obtained upon
exercise of the Stock Option or portion thereof, as the case may be,
immediately prior to the Acquisition; and
(II) any Participant to whom a Stock Appreciation Right has been
granted shall have the right thereafter and during the term of such
right to receive upon exercise thereof the difference on the exercise
date between the aggregate Fair Market Value of the Acquisition
Consideration receivable upon such acquisition by a holder of the
number of shares of Common Stock which are covered by such right and
the aggregate reference price of such right.
The term "Acquisition Consideration" shall mean the kind and amount of
securities, cash or other property or any combination thereof receivable in
respect of one share of Common Stock upon consummation of an Acquisition.
(C) Notwithstanding any other provision of this Plan, the Committee may
authorize the issuance, continuation or assumption of Awards or provide for
other equitable adjustments after changes in the Common Stock resulting from any
other merger, consolidation, sale of assets, acquisition of property or stock,
recapitalization, reorganization or similar occurrence upon such terms and
conditions as it may deem equitable and appropriate.
(D) In the event that another corporation or business entity is being
acquired by the Company, and the Company assumes outstanding employee stock
options and/or stock appreciation rights and/or the obligation to make future
grants of options, rights or other stock based awards to employees of the
acquired entity, the aggregate number of shares of Common Stock available for
Awards under this Plan shall be increased accordingly.
10. NONTRANSFERABILITY.
(A) Each Award granted under the Plan to a participant shall not be
transferable by him otherwise than by law or by will or the laws of descent and
distribution, and shall be exercisable, during his lifetime, only by him. In
the event of the death of a participant while the participant is rendering
services to the Company, each Award theretofore granted to him shall be
exercisable during the period specified in the written Award (but not beyond the
stated duration of the Award) and then only: (i) by the executor or
administrator of the estate of the deceased participant or the person or persons
to whom the deceased participant's rights under the Award shall pass by will or
the laws of descent and distribution; and (ii) to the extent that the deceased
participant was entitled to do so at the date of his death.
(B) Notwithstanding Section 10(a), in the discretion of the Committee,
Awards granted hereunder may be transferred to members of the participant's
immediate family (which for purposes of this Plan shall be limited to the
participant's children, grandchildren and spouse), or to one or more trusts for
the benefit of such family members or partnerships in which such family members
and/or trusts are the only partners, but only if the Award expressly so
provides.
11. OTHER PROVISIONS. Awards under the Plan may also be subject to such
other provisions (whether or not applicable to the Award granted to any other
participant) as the Committee determines appropriate, including without
limitation, provisions for the installment purchase of Common Stock under Stock
Options, provisions for the installment exercise of Stock Appreciation Rights,
provisions to assist the participant in financing the acquisition of Common
Stock, provisions for the forfeiture of, or restrictions on resale or other
disposition of Shares acquired under any form of Award, provisions for the
acceleration of vesting and/or the payment of the value of Awards to
participants in the event of a change of control of the Company, provisions for
the forfeiture of, or provisions to comply with Federal and state securities
laws, or understandings or conditions as to the participant's employment in
addition to those specifically provided for under the Plan.
12. FAIR MARKET VALUE. For purposes of this Plan and any Awards awarded
hereunder, Fair Market Value of Common Stock shall be the mean between the
highest and lowest sale prices for the Company's Common Stock as reported in The
Wall Street Journal under the heading "NASDAQ National Market" (or equivalent
recognized source of quotations) on the date of calculation (or on the next
preceding trading date if Common Stock was not traded on the date of
calculation), provided, however, that if the Company's Common Stock is not at
any time listed for trading on the NASDAQ National Market System, Fair Market
Value shall mean the amount determined in good faith by the Committee as the
fair market value of the Common Stock of the Company.
13. WITHHOLDING. All payments or distributions made pursuant to the Plan
shall be net of any amounts required to be withheld pursuant to applicable
federal, state and local tax withholding requirements. If the Company proposes
or is required to distribute Common Stock pursuant to the Plan, it may require
the recipient to remit to it an amount sufficient to satisfy applicable federal,
state and local tax withholding requirements, if any, prior to the delivery of
any certificates for such Common Stock. The Committee may, in its discretion
and subject to such rules as it may adopt, permit an optionee or award holder to
pay all or a portion of the federal, state and local withholding taxes arising
in connection with (i) the exercise of a Stock Option, or (ii) the receipt of a
Stock Award, by electing to have the Company withhold shares of Common Stock
having a Fair Market Value equal to the amount to be withheld.
14. TENURE. A participant's right, if any, to continue to serve the
Company as an officer, employee, or otherwise, shall not be enlarged or
otherwise affected by his or her designation as a participant under the Plan,
nor shall this Plan in any way interfere with the right of the Company, subject
to the terms of any separate employment agreement to the contrary, at any time
to terminate such employment or to increase or decrease the compensation of the
participant from the rate in existence at the time of the grant of an Award.
15. DURATION, AMENDMENT AND TERMINATION. No Award shall be granted after
December 31, 2005; provided, however, that the terms and conditions applicable
to any Award granted prior to such date may thereafter be amended or modified by
mutual agreement between the Company and the participant or such other persons
as may then have an interest therein. Also, by mutual agreement between the
Company and a participant hereunder or under any other present or future plan of
the Company, Awards may be granted to such participant in substitution and
exchange for, and in cancellation of, any Awards previously granted such
participant under this Plan, or any other present or future plan of the
Company. The Board of Directors may amend the Plan from time to time or
terminate the Plan at any time provided, however, that no action authorized by
this paragraph shall change the terms and conditions of any existing Award
without the participant's consent. No amendment of the Plan shall, without
approval of the stockholders of the Company (i) result in any member of the
Committee losing his or her status as a disinterested person under Securities
and Exchange Commission Rule 16b-3 to the extent applicable; or (ii) result in
the Plan losing its status as a protected plan under Securities and Exchange
Commission Rule 16b-3 to the extent applicable.
16. GOVERNING LAW. This Plan and actions taken in connection herewith
shall be governed and construed in accordance with the laws of the State of
Illinois (regardless of the law that might otherwise govern under applicable
Illinois principles of conflict of laws).
17. STOCKHOLDER APPROVAL. The Plan was adopted by the Board of Directors
of the Company on April 8, 1996. The Plan and any Stock Options granted
hereunder shall be null and void if stockholder approval is not obtained within
twelve (12) months of the adoption of the Plan by the Board of Directors.
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