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 June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _________
Commission File Number 0-20829
DIAMOND HOME SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3886872
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Church Street, Woodstock, Illinois 60098
(Address of principal executive offices, 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
July 31, 1997, the latest practicable date, was 8,952,375 shares.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION> Three Months Six Months
Ended Ended
June 30 June 30
1997 1996 1997 1996
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . $43,787 $41,389 $73,962 $68,482
Cost of sales. . . . . . . . . . 24,065 22,841 40,877 38,134
Gross profit. . . . . . . . . . . 19,722 18,548 33,085 30,348
Operating expenses:
Selling, general, and 18,688 14,974 31,874 25,906
administrative expense . . . .
Operating interest expense. . . 0 212 0 234
Amortization expense . . . . . 153 129 296 261
Operating income . . . . . . . 881 3,233 915 3,947
Interest income (expense), net. . 186 (30) 406 (96)
Income before income taxes . . . 1,067 3,203 1,321 3,851
Income tax provision . . . . . . 416 1,284 515 1,583
Net income . . . . . . . . . . . $651 $1,919 $806 $2,268
Net income Per Share . . . . . . $.07 $.30 $.09 $.36
Weighted average number of
common shares and equivalent
outstanding . . . . . . . . . 9,037 6,408 9,119 6,330
See accompanying notes.
</TABLE>
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . $12,954 $18,982
Accounts receivable . . . . . . . . . . . . 9,984 8,621
Finance company accounts receivable . . . . 7,537 5,312
Refundable income taxes . . . . . . . . . . 1,174 1,725
Deferred income taxes . . . . . . . . . . .
Prepaids and other current assets . . . . . 1,112 1,377
Total current assets . . . . . . . . . . . . 33,370 36,811
Net property and equipment . . . . . . . . . 3,102 1,607
Intangible assets, net . . . . . . . . . . . 16,812 16,961
Deferred income taxes . . . . . . . . . . . . 1,463 1,313
Other . . . . . . . . . . . . . . . . . . . . 2,913 2,101
Total assets . . . . . . . . . . . . . . . . $57,660 $58,793
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued $11,701 $13,767
liabilities . . . . . . . . . . . . . . .
Due to stockholders . . . . . . . . . . . . 554 554
Total current liabilities . . . . . . . . . . 12,255 14,321
Long-term liabilities:
Warranty and retention . . . . . . . . . . . 8,040 7,128
Due to stockholders . . . . . . . . . . . . 848 1,108
Total long-term liabilities . . . . . . . . . 8,888 8,236
Common stockholders' equity . . . . . . . . . 36,517 36,236
Total liabilities and common $57,660 $58,793
stockholders' equity . . . . . . . . . . .
See accompanying notes.
</TABLE>
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
June 30
(In thousands)
1997 1996
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $806 $2,268
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463 350
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (491)
Changes in operating assets and liabilities:
Accounts receivable and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . (996) (3,974)
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,066) 3,679
Warranty and retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 912 961
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . (846) 2,793
Investing activities:
Consumer finance loans originated, net of collections . . . . . . . . . . . . . . . . . . (2,225) (15,840)
Advances to "captive" insurance company and other . . . . . . . . . . . . . . . . . . . . . . . (512)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,660) (219)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,397) (16,059)
Financing activities:
Issuance of Common Stock, net of offering expenses . . . . . . . . . . . . . . . . . . . . . . . 33,484
Common Stock special dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,600)
Preferred Stock redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,400)
Payments on notes receivable from officers for 270
treasury stock and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (795)
Payments due to stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (260) (4,387)
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . (785) 19,097
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . (6,028) 5,831
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 18,982 4,715
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,954 $10,546
Supplemental cash flow disclosure:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0 $738
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $90 $1,883
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
six-month period ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997. For
further information, refer to the consolidated financial statements included
in the Company's 1996 Annual Report on Form 10-K.
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. CONSUMER FINANCING
The following summarized condensed financial information for Marquise
Financial, the Company's consumer finance subsidiary, is before elimination
of intercompany transactions in consolidation:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Assets:
Cash . . . . . . . . . . . . . . . . . . . . . $0 $50
Financing receivables . . . . . . . . . . . . . 7,537 5,312
Other assets . . . . . . . . . . . . . . . . . 503 349
$8,040 $5,711
Liabilities and stockholder's equity:
Due to Diamond Exteriors, Inc. . . . . . . . . $7,772 $5,623
Other . . . . . . . . . . . . . . . . . . . . . 15 50
Total liabilities . . . . . . . . . . . . . . . 7,787 5,673
Total stockholder's equity . . . . . . . . . . 253 38
Total liabilities and stockholder's equity . . $8,040 $5,711
Results of operations for the three months and six months ended June 30, 1997
and 1996, respectively:
</TABLE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Financing income . . . . . . . . . . . . $335 $454 $574 $493
General and administrative expenses (1) . 643 490 992 667
Loss before tax benefit . . . . . . . . . 308 36 418 174
Income tax benefit . . . . . . . . . . . 120 15 163 70
Net loss . . . . . . . . . . . . . . . . $188 $21 $255 $104
(1) Includes interest expense paid to Diamond and provision for credit
losses.
</TABLE>
Cash flow for the six months ended June 30, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
Six Months Ended June 30
1997 1996
(Unaudited)
<S> <C> <C>
Cash at beginning of period . . . . . . . . . . $50 $0
Net cash used in operating activities . . . . (255) (104)
Net cash used in investing activities . . . . (1,944) (16,444)
Net cash provided by financing activities . . 2,149 17,152
Cash at end of period . . . . . . . . . . . . $ 0 $604
</TABLE>
At June 30, 1997, Marquise Financial had approximately $1.1 million in
approved but not funded loan commitments.
3. Earnings per Share
At June 30, 1997 and 1996, the Company had 9,007,375 and 9,074,900
common shares, respectively, outstanding. During the second quarter 1997,
the Company purchased for treasury stock 72,300 common shares.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which establishes new standards for
reporting and presenting earnings per share and which is required to be
adopted in the fourth quarter 1997; earlier adoption is not permitted. At
that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive
effect of stock options will be excluded. The impact is not sufficient to
change the reported primary earnings per share for the second quarter and six
months ended June 30, 1997 and 1996. Similarly, the impact of Statement 128
on the calculation of fully diluted earnings per share will be negligible.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Second Quarter 1997 Compared to Second Quarter 1996
Net Sales
Net sales increased $2.4 million, or 5.8%, from $41.4 million for the
second quarter 1996 to $43.8 million for the second quarter 1997.
Approximately 34.7% of the increase in net sales was attributable to roofing
and gutter products and services, net sales of which increased $831 thousand
to $26.3 million for the second quarter 1997. Approximately 48.2% of the
increase in net sales was attributable to garage door and entry door products
and services, net sales of which increased $1.2 million to $6.4 million for
the second quarter 1997. Approximately 27.9% of the increase in net sales
was attributable to fencing and other products and services, net sales of
which increased $668 thousand to $10.4 million for the second quarter of
1997. The foregoing increases in net sales were partially offset by a
decrease in credit participation fee income, primarily from Sears and its
affiliates on installed sales financed by Sears and its affiliates and other
third-party finance companies, of $139 thousand to $420 thousand and a
decrease in interest income of $119 thousand to $335 thousand on receivables
financed by the Company's consumer finance subsidiary, Marquise Financial.
The second quarter increase in net sales was due primarily to: i) an increase
in higher priced proprietary products partially offset by a decrease in the
number of installations, and ii) an increase in the number of leads generated
and the average number of sales associates during the comparative periods
from 698 to 852, partially offset by a decrease in credit participation fee
income and finance interest income. Backlog, defined as jobs sold but not
installed, was $20.2 million and $18.0 million at June 30, 1997 and 1996
respectively.
Gross Profit
Gross profit increased $1.2 million, or 6.3%, from $18.5 million, or
44.8% of net sales, for the second quarter 1996 to $19.7 million, or 45.0% of
net sales, for the second quarter 1997. The increase in gross profit
resulted from an increase in proprietary product offerings and an increase in
balance of sales to higher margin products and services, partially offset by
a $258 thousand decrease in credit participation fee income and in finance
interest income. The license fee incurred to Sears increased $303 thousand,
or 7.0%, from $4.3 million, or 10.7% of net installed sales, for the second
quarter 1996 to $4.6 million, or 10.8% of net installed sales, for the second
quarter 1997. The increase in the license fee incurred to Sears for the
second quarter 1997 was due to the increase in sales and balance of sales,
primarily doors, to higher license fee products and services. Sears and the
Company entered into a three-year license agreement effective January 1,
1996. Among other things, the license agreement provides for a fixed license
fee, at the March 1995 license fee rate, to be charged during the term of the
license agreement. Gross profit before the Sears license fee, credit
participation fee and finance interest income increased $1.7 million, or
7.9%, from $21.9 million, or 54.2% of net installed sales, for the second
quarter 1996 to $23.6 million, or 54.9% of net installed sales, for the
second quarter 1997. 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 $3.7 million,
or 24.8%, from $15.0 million in the second quarter 1996 to $18.7 million in
the second quarter 1997 and, as a percentage of net sales, increased from
36.2% to 42.7%. The increase in selling, general and administrative expenses
resulted primarily from expenses associated with increased net sales, the
increased number of and the cost of recruiting and training new sales
associates and expenses related to the hiring of additional personnel to
support the expansion of the infrastructure of the Company's core sales and
installation business including the expansion of Marquise Financial. Direct
advertising expense increased $1.2 million, or 53.5%, from $2.2 million for
the second quarter 1996 to $3.4 million for the second quarter 1997; as a
percentage of net sales, direct advertising expense increased from 5.3% for
the second quarter 1996 to 7.6% for the second quarter 1997, reflecting
increased direct advertising placements and below plan lead generating
effectiveness of ad placements during the quarter. Selling commission
expense, including attendant payroll-related benefits, increased $461
thousand, or 11.1%, from $4.1 million in the second quarter 1996 to $4.6
million in the second quarter 1997; as a percentage of net installed sales,
selling commission expense increased from 10.3% to 10.7% in the second
quarter 1997. Sales representatives are compensated on a variable commission
basis depending upon the type and gross profit of product sold.
Performance-based compensation paid to officers and regional, sales and
production managers decreased $551 thousand, or 60.0%, from $917 thousand in
the second quarter 1996 to $366 thousand in the second quarter 1997,
primarily due to the decrease in operating income. The balance of selling,
general and administrative expenses, primarily sales lead-generation
activities, administrative, field operations and Marquise Financial payrolls
and related costs and general expenses, increased $2.7 million, or 34.7%,
from $7.7 million, or 18.7% of net sales, in the second quarter 1996 to $10.4
million, or 23.8% of net sales, in the second quarter 1997. The increase was
primarily due to increased expenses related to recruiting and training new
sales associates and support personnel and services required to manage the
Company's anticipated sales volume increases for the balance of the year and
beyond, expanding infrastructure and finance subsidiary, Marquise Financial.
The increase in selling, general and administrative expenses, as a percentage
of sales, is caused, in large part, by the aforementioned up-front
investments in infrastructure required to generate the anticipated sales and
installation activity for the balance of the year and beyond.
Operating Interest Expense
Operating interest expense decreased from $212 thousand in the second
quarter 1996 to $0 in the second quarter 1997. Operating interest expense
incurred in the second quarter 1996 relates to bank borrowings required to
finance a portion of Marquise Financial receivables. The Company utilized a
portion of the proceeds from the June 1996 initial public offering to paydown
all bank borrowings. The Company has not incurred bank borrowings since its
June 1996 initial public offering.
Amortization of Intangibles
Amortization of intangibles increased from $129 thousand in the second
quarter 1996 to $153 thousand in the second quarter 1997. The amortization
expense relates primarily to goodwill incurred in connection with the
September 1994 stock repurchase from management.
Interest Income (Expense), Net
Net interest income increased $216 thousand from $30 thousand net
interest expense in the second quarter 1996 to $186 thousand net interest
income in the second quarter 1997, 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.
Income Tax Provision
The Company's income tax provision decreased from $1.3 million, or an
effective rate of 40.1%, for the second quarter 1996 to $416 thousand, or an
effective rate of 39.0%, for the second quarter 1997. The difference in the
effective income tax rate and the federal statutory rate (34%) is due
primarily to amortization of intangibles which are not deductible for income
tax purposes and the effect of state income taxes and, in the second quarter
1996, the effect on state income taxes pursuant to the tax agreement between
the Company and Globe which was terminated in June 1996.
FIRST SIX MONTHS 1997 COMPARED TO FIRST SIX MONTHS 1996
Net Sales
Net sales increased $5.5 million, or 8.0%, from $68.5 million for the
first six months 1996 to $74.0 million for the first six months 1997.
Approximately 41.9% of the increase in net sales was attributable to roofing
and gutter products and services, net sales of which increased $2.3 million
to $46.5 million for the first six months 1997. Approximately 46.0% of the
increase in net sales was attributable to garage door and entry door products
and services, net sales of which increased $2.5 million to $11.8 million for
the first six months 1997. Approximately 13.4% of the increase in net sales
was attributable to fencing and other products and services, net sales of
which increased $750 thousand to $14.3 million for the first six months 1997.
Interest income on receivables financed by the Company's consumer finance
subsidiary, Marquise Financial, increased $81 thousand to $574 thousand for
the first six months 1997. The foregoing increases in net sales were
partially offset by a decrease in credit participation fee income, primarily
from Sears and its affiliates on installed sales financed by Sears and its
affiliates and other third-party finance companies, of $171 thousand to $770
thousand. The first six months increase in net sales was due primarily to:
i) an increase in higher priced proprietary products, and ii) an increase in
the number of leads generated and the average number of sales associates
during the comparative periods from 637 to 756 partially offset by a decrease
in credit participation fee income and finance interest income.
Gross Profit
Gross profit increased $2.7 million, or 9.0%, from $30.4 million, or
44.3% of net sales, for the first six months 1996 to $33.1 million, or 44.7%
of net sales, for the first six months 1997. The increase in gross profit
resulted from an increase in proprietary product offerings and an increase in
the balance of sales to higher margin products and services, partially offset
by a $90 thousand decrease in credit participation fee income and in finance
interest income. The license fee incurred to Sears increased $727 thousand,
or 10.3%, from $7.2 million, or 10.6% of net installed sales, for the first
six months 1996 to $7.9 million, or 10.8% of net installed sales, for the
first six months 1997. The increase in the license fee incurred to Sears for
the first six months 1997 was due to the increase in net sales and the
balance of sales, primarily doors, to higher license fee products and
services. Sears and the Company entered into a three-year license agreement
effective January 1, 1996. Among other things, the license agreement
provides for a fixed license fee, at the March 1995 license fee rate, to be
charged during the term of the license agreement. Gross profit before the
Sears license fee, credit participation fee and finance interest income
increased $3.5 million, or 9.9%, from $36.1 million, or 53.8% of net
installed sales, for the first six months 1996 to $39.6 million, or 54.5% of
net installed sales, for the first six months 1997. The unit costs of
materials, installation labor and warranty expense remained relatively
constant during the six month period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $6.0 million,
or 23.0%, from $25.9 million in the first six months 1996 to $31.9 million in
the first six months 1997 and, as a percentage of net sales, increased from
37.8% to 43.1%. The increase in selling, general and administrative expenses
resulted primarily from expenses associated with increased net sales, the
increased number of and the cost of recruiting and training sales associates
and expenses related to the hiring of additional personnel to support the
expansion of the infrastructure of the Company's core sales and installation
business including the expansion of Marquise Financial. Direct advertising
expense increased $1.7 million, or 45.7%, from $3.7 million for the first six
months 1996 to $5.4 million for the first six months 1997; as a percentage of
net sales, direct advertising expense increased from 5.4% for the first six
months 1996 to 7.3% for the first six months 1997, reflecting increased
direct advertising placements and below plan lead generating effectiveness of
ad placements during the first six months. Selling commission expense,
including attendant payroll-related benefits, increased $831 thousand, or
11.8%, from $6.7 million in the first six months 1996 to $7.6 million in the
first six months 1997; as a percentage of net installed sales, selling
commission expense increased from 10.0% to 10.5% in the first six months
1997. Sales representatives are compensated on a variable commission basis
depending upon the type and gross profit of product sold. Performance-based
compensation paid to officers and regional, sales and production managers
decreased $776 thousand, or 61.1%, from $1.3 million in the first six months
1996 to $494 thousand in the first six months 1997, primarily due to the
decrease in operating income. The balance of selling, general and
administrative expenses, primarily sales lead-generation activities,
administrative, field operations and Marquise Financial payrolls and related
costs and general expenses, increased $4.3 million, or 30.4%, from $14.2
million, or 20.7% of net sales, in the first six months 1996 to $18.5
million, or 24.9% of net sales, in the first six months 1997. The increase
was primarily due to increased expenses relating to recruiting and training
new sales associates and support personnel and services required to manage
the Company's anticipated sales volume increases for the balance of the year
and beyond, expanding infrastructure and finance subsidiary, Marquise
Financial. The increase in selling, general and administrative expenses, as
a percentage of sales, is caused, in large part, by the aforementioned up-
front investments in infrastructure required to generate the anticipated
sales and installation activity for the balance of the year and beyond.
Operating Interest Expense
Operating interest expense decreased from $234 thousand in the first
six months 1996 to $ 0 in the first six months 1997. Operating interest
expense incurred in the first six months 1996 relates to bank borrowings
required to finance a portion of Marquise Financial receivables. The Company
utilized a portion of the proceeds from the June 1996 initial public offering
to paydown all bank borrowings. The Company has not incurred bank borrowings
since its June 1996 initial public offering.
Amortization of Intangibles
Amortization of intangibles increased from $261 thousand in the first
six months 1996 to $296 thousand in the first six months 1997. The
amortization expense relates primarily to goodwill incurred in connection
with the September 1994 stock repurchase from management.
Interest Income (Expense), Net
Net interest income increased $502 thousand from $96 thousand net
interest expense in the first six months 1996 to $406 thousand net interest
income in the first six months 1997, 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.
Income Tax Provision
The Company's income tax provision decreased from $1.6 million, or an
effective rate of 41.1%, for the first six months 1996 to $515 thousand, or
an effective rate of 39.0%, for the first six months 1997. The difference in
the effective income tax rate and the federal statutory rate (34%) is due
primarily to amortization of intangibles which are not deductible for income
tax purposes and the effect of state income taxes and, in the first six
months 1996, the effect on state income taxes pursuant to the tax agreement
between the Company and Globe which was terminated in June 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 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 the first six months of 1997, 1996 and 1995 were
approximately $1.7 million, $461 thousand and $341 thousand, respectively.
Capital expenditures for the next twelve months are expected to approximate
$3.0 million, primarily related to ongoing upgrading and maintenance of the
Company's information technology systems. Future requirements for capital
expenditures are expected to be funded by cash flow from operations. On
April 30, 1997, the Company announced a stock repurchase program to
repurchase up to 500,000 shares of its common stock. During the second
quarter 1997 the Company purchased 72,300 shares of its common stock for $795
thousand and in July and August 1997 (through August 12, 1997) purchased an
additional 55,000 shares and 325,000 shares for approximately $475 thousand
and $2.5 million, respectively. On August 12, 1997 the Company increased the
maximum number of shares it can purchase under the stock repurchase program
from 500,000 to 1.0 million shares. The Company believes that it has
sufficient operating cash flow, working capital base, available bank line of
credit as well as additional 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, for the
stock repurchase program announced in April 1997, and for the development and
expansion of complementary new products and services.
In November 1995, the Company commenced the operations of Marquise
Financial, its consumer finance subsidiary. Marquise's primary objective is
to support, along with other designated third-party finance companies, the
Company's requirement for providing financing to its core installation
businesses customers. In the fourth quarter 1996, as a follow-on objective
to expanding Marquise Financial's consumer financing markets and products,
Marquise introduced a new finance product -- fixed rate loans secured by
developed residential real estate -- to a segment of its creditworthy
customers that cannot obtain unsecured consumer loans. During the second
quarter 1997, Marquise Financial expanded its scope of operations, in part to
leverage its consumer finance infrastructure to i) purchase from third
parties portfolios of secured receivables, and ii) originate secured
receivables from customers of, and/or purchase individual secured receivables
originated by entities other than the Company and its affiliates. These
entities do not necessarily engage in business in any of the Company's
product lines. As a general proposition, these entities are all expected to
operate businesses related to installed home improvement products and
services, although from time to time Marquise Financial may also originate or
purchase receivables secured by commercial real estate. The outstanding
principal amount of individual receivables purchased by Marquise Financial
from entities other than the Company may significantly exceed the average
amount of all receivables owned by Marquise Financial. The Company is
continually mindful of the attendant risk in consumer financing and plans to
increase its consumer finance receivable portfolio at a measured pace
commensurate with its available resources and acceptable levels for losses on
finance receivables. Marquise Financial has been capitalized and funded with
the Company's excess operating cash flow and secured borrowings under the
Company's $15 million bank line of credit, which were subsequently paid down
with a portion of the proceeds from the Company's June 1996 initial public
offering. At June 30, 1997, Marquise Financial has approximately $7.5
million in net finance receivables. During the first six months of 1997,
Marquise Financial originated or purchased approximately $3.2 million of
fixed rate, secured loans. At June 30, 1997, Marquise had approximately $1.1
million in outstanding commitments of the fixed rate, secured loans. The
Company anticipates that its existing cash balances, the bank line of credit,
the sale of Marquise Financial's consumer loan finance receivables as market
conditions may warrant from time to time and excess cash flow from its core
installation operations will be sufficient to satisfy the Company's financing
cash requirements in the foreseeable future.
In December 1996 with an initial investment of approximately $450
thousand, the Company completed agreements with insurance companies with the
effect of establishing a captive insurance company. At June 30, 1997, the
investment in the captive insurance company has been increased to
approximately $660 thousand. The primary objective of this captive insurance
business is to provide the means for offering workers' compensation and
general liability insurance coverage, solely for Company installations, to
qualified installers as the Company seeks to maintain and expand its core
complement of independent installers. Premiums are immediately collected
through deductions to payments to installers; and the excess cash balances,
after administrative expenses, are invested, pursuant to agreement, with the
insurance companies. Losses are comprised of actual claims paid, reserves
for open claims and allowances for incurred but not reported claims. The
Company maintains individual and aggregate stop-loss reinsurance coverage at
levels deemed to be adequate by management of the Company. Premiums
collected in the first six months 1997 were approximately $140 thousand.
In June 1996, the Company issued 2,824,950 shares of Common Stock
(including underwriters' over-allotment option) at $13 per share in its
initial public offering. Proceeds from the offering, net of underwriting
commissions and related expenses totaling $3.8 million, were $33.0 million.
A portion of the offering proceeds was used to pay a $8.6 million special
dividend to pre-offering stockholders, repay all borrowings aggregating $11.9
million under the bank line of credit (used to finance Marquise Financial
receivables) and repay $3.2 million of notes to senior managers related to
the September 1994 stock repurchase.
From its inception in June 1993, the Company has generated cash flow
from operations of approximately $18.7 million. The Company used $12.5
million of cash in connection with the repurchase of 40.2% of its Common
Stock in September 1994, $3.1 million for capital expenditures and $5.0
million for the initial funding of Marquise Financial's consumer financing
activities. At June 30, 1997, the Company had approximately $22.9 million in
cash and cash equivalents and trade receivables and net working capital of
$21.1 million. At June 30, 1997, the Company had available $15 million in
bank line of credit and $1.4 million total debt to management stockholders.
At June 30, 1997, 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 by
rainy weather, each of which limits the Company's ability to install exterior
home improvement products.
Certain statements contained herein which are not of a historical
nature, including without limitation, statements addressing the beliefs,
plans, objectives, estimates or expectations of the Company or future results
or events constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, including, but not limited to,
general economic and business conditions, matters related to the Sears
license, warranty exposure, the Company's reliance on sales associates and on
the availability of qualified independent installers, and conditions in the
installed home improvement industry. There can be no assurance that actual
results, performance or achievements of the Company will not differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. The Company provides cautionary
statements, detailed in Securities and Exchange Commission filings, including
without limitation the Company's 1996 Annual Report on Form 10-K, which
identify specific factors that could cause actual results or events to differ
materially from those described in the forward-looking statements. The
Company undertakes no obligation to update publicly any forward-looking
statement whether as a result of new information, future events or otherwise.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 15, 1997, the Company held its Annual Meeting of Shareholders.
The only matter voted on by the shareholders was the election of directors to
the Board of Directors. By a majority of shares represented at the Annual
Meeting, the shareholders elected directors to serve one-year terms as
follows: Messrs. C. Stephen Clegg, James F. Bere, Jr., James M. Gillespie,
Jacob Pollock and George A. Stinson.
Shares were voted as follows:
Number of Shares of Common Stock
Election of Directors For Withheld
James F. Bere, Jr. 8,016,656 148,100
Stephen Clegg 8,016,706 148,050
James M. Gillespie 8,016,856 147,900
Jacob Pollock 7,992,356 172,400
George A. Stinson 8,016,556 148,200
ITEM 5. OTHER INFORMATION
Effective July 21, 1997, the membership of the Board of Directors was
expanded to six and William R. Griffin was elected a director of the Company.
ITEM. 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(99.1) Press release regarding election of William R. Griffin
as a director and the resignation of Frank Cianciosi.
(99.2) Press release regarding increase in the number of shares
of stock which can be purchased under the stock
repurchase program.
(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 Officer)
Date: August 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,954,000
<SECURITIES> 0
<RECEIVABLES> 17,521,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,370,000
<PP&E> 3,853,000
<DEPRECIATION> 751,000
<TOTAL-ASSETS> 57,660,000
<CURRENT-LIABILITIES> 12,255,000
<BONDS> 0
0
0
<COMMON> 10,000
<OTHER-SE> 36,507,000
<TOTAL-LIABILITY-AND-EQUITY> 57,660,000
<SALES> 73,962,000
<TOTAL-REVENUES> 73,962,000
<CGS> 40,877,000
<TOTAL-COSTS> 73,047,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (406,000)
<INCOME-PRETAX> 1,321,000
<INCOME-TAX> 515,000
<INCOME-CONTINUING> 806,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 806,000
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
EXHIBIT 99.1
DIAMOND HOME SERVICES ANNOUNCES NEW DIRECTOR AND
RETIREMENT OF VICE-PRESIDENT OF SALES
Woodstock, IL (July 29, 1997) Diamond Home Services, Inc. (Nasdaq: DHMS)
today announced the appointment of William R. Griffin as a new outside director.
It also announced the retirement of Frank Cianciosi, Vice-President of Sales.
William R. Griffin is the former President and Chief Executive Officer of Roto-
Rooter, Inc., the largest repair plumbing company in the U.S. and a leading
provider of repair service contracts in Florida and Arizona. Mr. Griffin was
employed by Roto-Rooter from 1980 through September 1996. Roto-Rooter, Inc. was
a publicly-held company traded on Nasdaq for the years 1985 through September
1996.
"ALl of the directors and members of senior management are delighted to have
someone with Bill's related business experience serve as a director of Diamond
Home Services," Mr. C. Stephen Clegg, Diamond Home Services' Chairman, President
and CEO stated. "During Bill's 16 years at Roto-Rooter, its sales grew from $12
million to over $200 million profitably. Much of the growth came from
acquisitions, new product and service introductions and in-house training
programs to motivate, improve and retain the necessary skill levels required for
the various job requirements. I am convinced that Bill Griffin's advice and
counsel based on his background, experience and reputation among the investment
community will service Diamond well in the years to come," Mr. Clegg said.
In other news, Diamond Homes Services announced the retirement of Frank
Cianciosi, Vice-President of Sales, effective June 27, 1997. Mr. Cianciosi was
one of the founding shareholders of Diamond and, until January 1997, was also a
Regional President of the Company. "Frank's contributions to the Company, since
its formation in June 1993, were many and invaluable. We are all grateful to
Frank and wish him and his wife, Patty, all the very best in retirement," Mr.
Clegg said.
Diamond Home Services, Inc. is a leading national marketer and contractor of
installed home improvement products, including roofing systems, gutters, doors
and fencing. The Company markets its home improvement products and services
directly to consumers primarily under the "SEARS" name. Through its finance
subsidiary, Marquise Financial Services Inc., the Company also offers financing
to its customers. The Company has 75 sales offices located in major cities
across the U.S., providing the Company with a presence in markets covering
approximately 80% of the owner-occupied households in the U.S.
EXHIBIT 99.2
DIAMOND HOME SERVICES, INC.
INCREASES STOCK REPURCHASE PROGRAM TO 1,000,000 SHARES
Woodstock, IL (August 12, 1997) - Diamond Home Services, Inc. (Nasdaq: DHMS)
today announced that the number of shares of the Company's common stock that it
is authorized to purchase has been increased by the Board of Directors from
500,000 to 1,000,000.
Share purchases are authorized to be made by the Company from time to time in
open market or privately negotiated transactions as, in the opinion of
management, market conditions warrant. The repurchased shares will be added to
the Company's treasury shares and will be available for general corporate
purposes. Since the Company's announcement on April 30, 1997, to purchase up to
500,000 shares, the Company has purchased a total of 452,300 shares at prices
ranging between $7 5/8 and $11.00.
"The decision to purchase stock and further increase the level of the stock
repurchase program underscores management's confidence in the Company's
leadership position in the home improvement industry and is another opportunity
to continue to build shareholder value for the future," C. Stephen Clegg,
Chairman, President and CEO stated.
Diamond Home Services, Inc. is a leading national marketer and contractor of
installed home improvement products, including roofing systems, gutters, doors
and fencing. The Company markets its home improvement products and services
directly to consumers primarily under the "SEARS" name. Through its finance
subsidiary, Marquise Financial Services, Inc., the Company also offers financing
to its customers. The Company has 74 sales offices located in major cities
across the U.S., providing the Company with a presence in markets covering
approximately 80% of the owner-occupied households in the U.S.
