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, 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 Identification No.)
incorporation or organization)
222 Church Street, Woodstock, Illinois 60098
(Address of principal executive offices, including zip code)
(815) 334-1414
(Registrant's telephone number, including area code)
-------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X ) No ( )
The number of shares of the registrant's common stock outstanding as of October
31, 1997, the latest practicable date, was 8,507,375 shares.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales........................ $48,301 $46,492 $122,263 $114,974
Cost of sales.................... 27,056 25,962 67,933 64,096
Gross profit..................... 21,245 20,530 54,330 50,878
Operating expenses:
Selling, general, and
administrative expense......... 19,050 16,245 50,924 42,151
Operating interest expense..... 0 0 0 234
Amortization expense........... 151 135 447 396
Operating income................. 2,044 4,150 2,959 8,097
Interest income (expense), net... 170 122 576 26
Income before income taxes....... 2,214 4,272 3,535 8,123
Income tax provision............. 864 1,681 1,379 3,264
Net income....................... $1,350 $2,591 $2,156 $4,859
Net income per share............. $.16 $.28 $.24 $.67
Weighted average number of common
shares and equivalent outstanding........ 8,702 9,198 8,957 7,296
See accompanying notes.
</TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
(Unaudited)
(In thousands)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........... $9,412 $18,982
Accounts receivable................. 11,182 8,621
Finance company accounts
receivable........................ 7,331 5,312
Refundable income
taxes............................. 1,419 1,725
Prepaids and other current assets.. 1,134 1,377
Deferred income taxes............... 616 794
Total current assets................. 31,094 36,811
Net property and equipment........... 5,249 1,607
Intangible assets, net............... 16,661 16,961
Deferred income taxes................ 1,463 1,313
Other................................ 3,033 2,101
Total assets.........................$57,500 $58,793
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities.........................$13,500 $13,767
Due to stockholders................. 554 554
Total current liabilities............ 14,054 14,321
Long-term liabilities:
Warranty and retention.............. 8,700 7,128
Due to stockholders................. 686 1,108
Total long-term liabilities.......... 9,386 8,236
Common stockholders' equity.......... 34,060 36,236
Total liabilities and common
stockholders'
equity.............................$57,500 $58,793
See accompanying notes.
</TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1997 1996
(In thousands)
<S> <C> <C>
Operating activities:
Net income................................................. $2,156 $4,859
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 694 599
Deferred income taxes.................................. 28 (529)
Changes in operating assets and liabilities:
Accounts receivable and other assets.................. (2,362) (5,927)
Accounts payable and accrued expenses................. (267) 1,653
Warranty and retention................................ 1,572 2,527
Net cash provided by operating activities................ 1,821 3,182
Investing activities:
Consumer finance loans originated, net of collections.... (2,019) (17,815)
Advances to "captive" insurance company and other........ (731) -
Capital expenditures..................................... (3,887) (273)
Net cash used in investing activities.................... (6,637) (18,088)
Financing activities:
Issuance of Common Stock, net of offering expenses....... - 33,147
Common Stock special dividend............................ - (8,600)
Preferred Stock redemption............................... - (1,400)
Payments on notes receivable from officers for treasury
stock and other....................................... 356 -
Purchases of treasury stock.............................. (4,688) -
Payments due to stockholders............................. (422) (4,440)
Net cash provided by (used in) financing activities...... (4,754) 18,707
Net increase (decrease) in cash and cash equivalents..... (9,570) 3,801
Cash and cash equivalents at beginning of period......... 18,982 4,715
Cash and cash equivalents at end of period............... $9,412 $8,516
Supplemental cash flow disclosure:
Interest paid.......................................... $0 $738
Income taxes paid...................................... $1,362 $3,061
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, 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 finance subsidiary, is before elimination of
intercompany transactions in consolidation:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
ASSETS:
Cash................................ $0 $50
Financing receivables............... 7,331 5,312
Other assets........................ 242 349
$7,573 $5,711
LIABILITIES AND STOCKHOLDER'S
EQUITY:
Due to Diamond Exteriors, Inc.......$7,088 $5,623
Other............................... 203 50
Total liabilities................... 7,291 5,673
Total stockholder's equity.......... 282 38
Total liabilities and
stockholder's equity...............$7,573 $5,711
</TABLE>
Results of operations for the three months and nine months ended September 30,
1997 and 1996, respectively:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept 30 Ended Sept 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
(Unaudited)
Financing income................$326 $726 $ 900 $1,219
General and administrative
expenses (1).................... 689 726 1,681 1,393
Loss before tax benefit......... 363 0 781 174
Income tax benefit.............. 142 0 305 70
Net loss........................$221 $0 $ 476 $104
(1) Includes interest expense paid to Diamond and provision for credit losses.
</TABLE>
Cash flow for the nine months ended September 30, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
Nine Months Ended Sept 30
1997 1996
(Unaudited)
<S> <C> <C>
Cash at beginning of period.......... $50 $0
Net cash used in operating
activities........................... (476) (104)
Net cash used in investing
activities........................... (1,039) (17,867)
Net cash provided by financing
activities........................... 1,465 18,151
Cash at end of period................ $0 $180
</TABLE>
At September 30, 1997, Marquise Financial had approximately $1.8 million in
approved but not funded loan commitments.
3. EARNINGS PER SHARE
At September 30, 1997 and 1996, the Company had 8,507,375 and 9,074,900
common shares outstanding, respectively. During the second and third quarter
1997, the Company repurchased in the open market 72,300 and 500,000 common
shares, respectively, which shares are being held as treasury stock.
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 third quarter and nine months ended September 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
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
Net Sales
Net sales increased $1.8 million, or 3.9%, from $46.5 million for the third
quarter 1996 to $48.3 million for the third quarter 1997. Approximately 5.8% of
the increase in net sales was attributable to roofing and gutter products and
services, net sales of which increased $105 thousand to $30.0 million for the
third quarter 1997. Approximately 81.7% of the increase in net sales was
attributable to garage door and entry door products and services, net sales of
which increased $1.5 million to $7.8 million for the third quarter 1997.
Approximately 42.6% of the increase in net sales was attributable to fencing and
other products and services, net sales of which increased $770 thousand to $9.5
million for the third 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 afilliates on installed sales financed by Sears and its
affiliates and other third-party finance companies, of $164 thousand to $521
thousand and a decrease in interest income of $400 thousand to $326 thousand on
receivables financed by the Company's finance subsidiary, Marquise Financial.
The third quarter 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 752 to 809, partially offset by a decrease in credit participation
fee income and finance interest income. Backlog, defined as jobs sold but not
installed, was $17.0 million and $18.0 million at September 30, 1997 and 1996
respectively.
Gross Profit
Gross profit increased $715 thousand, or 3.5%, from $20.5 million, or 44.1%
of net sales, for the third quarter 1996 to $21.2 million, or 44.0% of net
sales, for the third quarter 1997. The decrease in gross profit, expressed as a
percentage of net sales, resulted from a $564 thousand decrease in credit
participation fee income and in finance interest income, partially offset by an
increase in proprietary product offerings and an increase in balance of sales to
higher margin products and services. The license fee incurred to Sears
increased $222 thousand, or 4.5%, from $4.9 million, or 10.8% of net installed
sales, for the third quarter 1996 to $5.1 million, or 10.7% of net installed
sales, for the third quarter 1997. The increase in the license fee incurred to
Sears for the third quarter 1997 was due to an overall increase in sales and to
a shift in 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 $1.5
million, or 6.2%, from $24.0 million, or 53.2% of net installed sales, for the
third quarter 1996 to $25.5 million, or 53.7% of net installed sales, for the
third 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 $2.8 million, or
17.3%, from $16.2 million in the third quarter 1996 to $19.0 million in the
third quarter 1997 and, as a percentage of net sales, increased from 34.9% to
39.4%. 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 $625 thousand , or 29.7%, from $2.1 million for the third quarter 1996
to $2.7 million for the third quarter 1997; as a percentage of net sales, direct
advertising expense increased from 4.5% for the third quarter 1996 to 5.6% for
the third 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 $432 thousand, or 9.4%, from $4.6 million in the third quarter 1996 to
$5.0 million in the third quarter 1997; as a percentage of net installed sales,
selling commission expense increased from 10.2% to 10.7% in the third 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 field, sales and production managers decreased
$81 thousand, or 9.7%, from $838 thousand in the third quarter 1996 to $757
thousand in the third 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 $1.8
million, or 21.7%, from $8.7 million, or 18.7% of net sales, in the third
quarter 1996 to $10.5 million, or 21.8% of net sales, in the third 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, expanding
infrastructure and finance subsidiary, Marquise Financial. The increase in
selling, general and administrative expenses, as a percentage of sales, was
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.
Amortization of Intangibles
Amortization of intangibles increased from $135 thousand in the third
quarter 1996 to $151 thousand in the third 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 $48 thousand from $122 thousand in the third
quarter 1996 to $170 thousand in the third 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 $1.7 million, or an
effective rate of 39.3%, for the third quarter 1996 to $864 thousand, or an
effective rate of 39.0%, for the third 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.
FIRST NINE MONTHS 1997 COMPARED TO FIRST NINE MONTHS 1996
Net Sales
Net sales increased $7.3 million, or 6.3%, from $115.0 million for the
first nine months 1996 to $122.3 million for the first nine months 1997.
Approximately 32.9% of the increase in net sales was attributable to roofing and
gutter products and services, net sales of which increased $2.4 million to $76.5
million for the first nine months 1997. Approximately 54.9% of the increase in
net sales was attributable to garage door and entry door products and services,
net sales of which increased $4.0 million to $19.7 million for the first nine
months 1997. Approximately 21.1% of the increase in net sales was attributable
to fencing and other products and services, net sales of which increased $1.5
million to $23.8 million for the first nine months of 1997. The foregoing
increases in net sales were partially offset by a decreases 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 $335 thousand to $1.3 million and in interest income on
receivables financed by the Company's consumer finance subsidiary, Marquise
Financial, of $319 thousand to $900 thousand for the first nine months 1997.
The first nine 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 701 to 803 partially offset by a decrease in credit
participation fee income and finance interest income.
Gross Profit
Gross profit increased $3.4 million, or 6.8%, from $50.9 million, or 44.3%
of net sales, for the first nine months 1996 to $54.3 million, or 44.4% of net
sales, for the first nine months 1997. The increase in gross profit, expressed
as a percentage of net sales, 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 $654 thousand decrease in credit participation
fee income and in finance interest income. The license fee incurred to Sears
increased $1.0 million, or 7.9%, from $12.0 million, or 10.6% of net installed
sales, for the first nine months 1996 to $13.0 million, or 10.6% of net
installed sales, for the first nine months 1997. The increase in the license fee
incurred to Sears for the first nine months 1997 resulted from the increase in
net sales and from the shift in 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 $5.1 million, or 8.4%, from $60.0 million, or 53.5% of net
installed sales, for the first nine months 1996 to $65.1 million, or 54.2% of
net installed sales, for the first nine months 1997. The unit costs of
materials, installation labor and warranty expense remained relatively constant
during the nine month period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $8.8 million, or
20.8%, from $42.1 million in the first nine months 1996 to $50.9 million in the
first nine months 1997 and, as a percentage of net sales, increased from 36.7%
to 41.6%. 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 from
expenses related to the hiring of additional personnel to support the expansion
of the infrastructure of the Company's core sales and installation business
including the expansion of Marquise Financial. Direct advertising expense
increased $2.2 million, or 38.5%, from $5.8 million for the first nine months
1996 to $8.0 million for the first nine months 1997; as a percentage of net
sales, direct advertising expense increased from 5.1% for the first nine months
1996 to 6.6% for the first nine months 1997, reflecting increased direct
advertising placements and below plan lead generating effectiveness of ad
placements during the first nine months. Selling commission expense, including
attendant payroll-related benefits, increased $1.2 million, or 10.8%, from $11.4
million in the first nine months 1996 to $12.6 million in the first nine months
1997; as a percentage of net installed sales, selling commission expense
increased from 10.1% to 10.2% in the first nine 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 field, sales and production managers decreased $850 thousand,
or 40.5%, from $2.1 million in the first nine months 1996 to $1.2 million in the
first nine 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 $6.2 million, or
26.9%, from $22.8 million, or 19.9% of net sales, in the first nine months 1996
to $29.1 million, or 23.7% of net sales, in the first nine 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, 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 nine
months 1996 to $ 0 in the first nine months 1997. Operating interest expense
incurred in the first nine months 1996 related 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 $396 thousand in the first nine
months 1996 to $447 thousand in the first nine 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 $550 thousand from $26 thousand in the first
nine months 1996 to $576 thousand in the first nine 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 $3.3 million, or an
effective rate of 40.2%, for the first nine months 1996 to $1.4 million, or an
effective rate of 39.0%, for the first nine 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 nine 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, 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 nine months of 1997, and years 1996 and 1995 were approximately $3.9
million, $461 thousand and $888 thousand, respectively. Capital expenditures
for the next twelve months are expected to approximate $2.0 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 and on August 12, 1997 the Company increased the number of shares
it is authorized to repurchase by 500,000 to 1.0 million shares. During the
second and third quarters 1997 the Company purchased 572,300 shares of its
common stock for $4.7 million. 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 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 or
otherwise acquire or originate loans that do not constitute obligations existing
from home improvements. The outstanding principal amount of individual
receivables purchased by Marquise Financial from entities other than the Company
may significantly exceed the average amount of all receivables owned by Marquise
Financial. The Company is continually mindful of the risks associated with
consumer financing and plans to increase its consumer finance receivable
portfolio at a measured pace commensurate with its available resources and
acceptable levels for losses on finance receivables. Marquise Financial has
been capitalized and funded with the Company's excess operating cash flow and
secured borrowings under the Company's $15 million bank line of credit, which
were subsequently paid down with a portion of the proceeds from the Company's
June 1996 initial public offering. At September 30, 1997, Marquise Financial
has approximately $7.3 million in net finance receivables. During the first
nine months of 1997, Marquise Financial originated or purchased approximately
$4.7 million of fixed rate, secured loans. At September 30, 1997, Marquise had
approximately $1.8 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 September 30, 1997, the investment
in the captive insurance company has been increased to approximately $635
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 nine months 1997
were approximately $525 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 $3.7 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 $21.4 million. The Company used $12.5
million of cash in connection with the repurchase of 40.2% of its Common Stock
in September 1994, $6.1 million for capital expenditures and $5.0 million for
the initial funding of Marquise Financial's consumer financing activities. At
September 30, 1997, the Company had approximately $20.6 million in cash and cash
equivalents and trade receivables and net working capital of $17.0 million. At
September 30, 1997, the Company had available $15 million in bank line of credit
and $1.2 million total debt to management stockholders. At September 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. 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(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.
/S/ Richard G. Reece
Date: November 12, 1997 By:_________________________
Richard G. Reece
Vice President and
Chief Financial Officer
(For the Registrant and as
Principal Financial Officer)
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,412,000
<SECURITIES> 0
<RECEIVABLES> 18,513,000
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