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 March 31, 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
May 1, 1997, the latest practicable date, was 9,079,675 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 Ended
March 31,
------------------
1997 1996
(In thousands, except per share data)
<S> <C> <C>
Net Sales $30,175 $27,093
Cost of sales 16,812 15,293
Gross Profit 13,363 11,800
Operating expenses:
Selling, general, and
administrative expense 13,186 10,932
Operating interest expense 22
Amortization expense 143 132
Operating income 34 714
Interest income(expense), net 220 (66)
Income before income taxes 254 648
Income tax provision 99 299
Net Income $155 $349
Net income per share $.02 $.06
Weighted average number of common
shares and equivalent outstanding 9,192 6,250
See accompanying notes.
</TABLE>
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $13,551 $18,982
Accounts receivable 6,773 8,621
Finance company accounts receivable 6,841 5,312
Refundable income taxes 1,753 1,725
Prepaids and other current assets 1,437 1,377
Deferred income taxes 640 794
Total current assets 30,995 36,811
Net property and equipment 1,867 1,607
Intangible assets, net 16,934 16,961
Deferred income taxes 1,403 1,313
Other 2,851 2,101
Total assets $54,050 $58,793
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $8,437 $13,767
Due to stockholders 554 554
Total current liabilities 8,991 14,321
Long-term liabilities:
Warranty and retention 7,432 7,128
Due to stockholders 1,024 1,108
Total long-term liabilities 8,456 8,236
Common stockholders' equity 36,603 36,236
Total liabilities and common stockholders'
equity $54,050 $58,793
See accompanying notes.
</TABLE>
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
March 31
(in thousands)
1997 1996
<S> <C> <C>
Operating activities:
Net income $ 155 $ 349
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 224 197
Deferred income taxes 64 (35)
Changes in operating assets and liabilities:
Accounts receivable and other assets 1,436 (3,172)
Accounts payable and accrued expenses (5,366) (2,043)
Warranty and retention 340 354
Net cash used in operating activities (3,147) (4,350)
Investing activities:
Consumer finance loans originated, net (1,529) (6,881)
Capital expenditures (341) (120)
Advances to "captive" insurance company and other (542) (23)
Net cash used in investing activities (2,412) (7,024)
Financing activities:
Payments on notes receivable from officers for
treasury stock and other 212
Borrowings (Repayment) on bank line of credit, net 7,706
Payments due to stockholders (84) (1,001)
Net cash provided by financing activities 128 6,705
Net decrease in cash and cash equivalents (5,431) (4,669)
Cash and cash equivalents at beginning of period 18,982 4,715
Cash and cash equivalents at end of period $13,551 $ 46
Supplemental cash flow disclosure:
Interest paid $ $ 378
Income taxes paid $ 52 $ 94
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 period ended March 31, 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 these
estimates.
2. CONSUMER FINANCING
The following summarized condensed financial information for
Marquise Financial, the Company's consumer finance subsidiary, is before
eliminations of intercompany transactions in consolidation:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Assets:
Cash $ 282 $ 50
Financing receivables 6,841 5,312
Other assets 501 349
$7,624 $5,711
Liabilities and Stockholder's Equity:
Due to Diamond Exteriors, Inc. $7,622 $5,623
Other 31 50
Total liabilities 7,653 5,673
Total stockholder's equity (deficit) (29) 38
Total liabilities and stockholder's
equity $7,624 $5,711
Results of operations for the three months ended March 31, 1997 and 1996,
respectively:
Financing income $239 $39
General and administrative expenses 349 177
Loss before tax benefit 110 138
Income tax benefit 43 55
Net loss $67 $83
Cash flow for the three months ended March 31, 1997 and 1996,
respectively:
Cash at beginning of period $ 50 $
Net cash used in operating activities (67) (83)
Net cash used in investing activities (1,700) (6,885)
Net cash provided by financing activities 1,999 7,014
Cash at end of period $282 $46
</TABLE>
At March 31, 1997, Marquise Financial had approximately $ 2.5 million
in approved but not funded loan commitments.
3. EARNINGS PER SHARE
At March 31, 1997 and 1996, the Company had 9,079,675 and 6,249,950
common shares, respectively, issued and outstanding. The increase in
common shares relates to the Company s June 1996 initial public offering.
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 application of Statement No.
128 will not change the reported primary earnings per share for the first
quarter ended March 31, 1997 and 1996. Similarly, the impact of Statement
No. 128 on the calculation of fully diluted earnings per share is expected
to be negligible.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
Net Sales
Net sales increased $3.1 million, or 11.4%, from $27.1 million for the
first quarter 1996 to $30.2 million for the first quarter 1997.
Approximately 47.5% of the increase in net sales was attributable to
roofing and gutter products and services, net sales of which increased $1.5
million to $20.2 million for the first quarter 1997. Approximately 44.4%
of the increase in net sales was attributable to garage door and entry door
products and services, net sales of which increased $1.4 million to $5.5
million for the first quarter 1997. Approximately 2.6% of the increase in
net sales was attributable to fencing and other products and services, net
sales of which increased $82 thousand to $3.9 million for the first quarter
of 1997. The balance, 5.5% of the increase in net sales, was due to credit
participation fee income of $350 thousand, primarily from Sears and its
affiliates, on installed sales financed by Sears and its affiliates and
other third-party finance companies, and interest income of $239 thousand
on receivables financed by the Company's consumer finance subsidiary,
Marquise Financial. The first quarter increase in net sales was due
primarily to: (i) increased number of installations, (ii) increased
average number of sales associates during the comparative periods from 655
to 761; and (iii) increased finance income. Backlog, defined as jobs sold
but not installed, was $12.9 million and $13.0 million at March 31, 1997
and March 31, 1996, respectively.
Gross Profit
Gross profit increased $1.6 million, or 13.2%, from $11.8 million, or
43.5% of net sales, for the first quarter 1996 to $13.4 million, or 44.3%
of net sales, for the first quarter 1997. The increase in gross profit
resulted from an increased number of installations, an increase in balance
of sales to higher margin products and services and an increase in finance
interest income. The license fee incurred to Sears increased $424
thousand, or 15.2%, from $2.8 million, or 10.5% of net installed sales, for
the first quarter 1996 to $3.2 million, or 10.9% of net installed sales,
for the first quarter 1997. The increase in the license fee incurred to
Sears for the first quarter 1997 was due to the increase in sales volume
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 $1.8 million, or 12.8%, from $14.2 million, or 53.1% of
net installed sales, for the first quarter 1996 to $16.0 million, or 54.0%
of net installed sales, for the first 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 $2.3 million,
or 20.6%, from $10.9 million in the first quarter 1996 to $13.2 million in
the first quarter 1997 and, as a percentage of net sales, increased from
40.3% to 43.7%. The 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 $303 thousand,
or 20.2%, from $1.5 million for the first quarter 1996 to $1.8 million for
the first quarter 1997; as a percentage of net sales, direct advertising
expense increased from 5.5% for the first quarter 1996 to 6.0% for the
first quarter 1997, reflecting below plan lead generating effectiveness of
ad placements during the quarter and, to a lesser extent, advertising price
increases. Selling commission expense, including attendant payroll-related
benefits, increased $370 thousand, or 14.0%, from $2.6 million in the first
quarter 1996 to $3.0 million in the first quarter 1997; as a percentage of
net installed sales, selling commission expense increased from 9.9% in the
first quarter 1996 to 10.2% in the first 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 $225 thousand, or 63.7%, from $353 thousand in the first quarter
1996 to $128 thousand in the first 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 28.1%, from
$6.4 million, or 23.6% of net sales, in the first quarter 1996 to $8.2
million, or 27.2% of net sales, in the first quarter 1997. The increase
was primarily due to increased expenses relating to support personnel and
services required to manage the Company's anticipated sales volume
increases for the balance of the year, 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 installation activity for the balance of the
year during the first quarter, a period of seasonally slow sales.
Operating Interest Expense
Operating interest expense decreased from $22 thousand in the first
quarter 1996 to $ 0 in the first quarter 1997. Operating interest expense
incurred in the first 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 $132 thousand in the first
quarter 1996 to $143 thousand in the first quarter 1997. 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 $286 thousand from $66 thousand net
interest expense in the first quarter 1996 to $220 thousand net interest
income in the first 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. $800
thousand and $3.2 million of notes payable to senior managers were repaid
in March and June 1996, respectively.
Income Tax Provision
The Company's income tax provision decreased from $299 thousand, or an
effective rate of 46.1%, for the first quarter 1996 to $99 thousand, or an
effective rate of 39.0%, for the first 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 first
quarter 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 consumer 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 1995, 1996 and the first three
months of 1997 were approximately $888 thousand, $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. 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
business 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. In 1997, the
Company anticipates that Marquise Financial's business will expand in at
least two additional ways. First, Marquise Financial may purchase from
third parties portfolios of secured receivables. Secondly, Marquise
Financial may originate secured receivables from customers of entities
other than the Company and its affiliates. The entities may not
necessarily engage in business in any of the Company's product lines;
however, as a general proposition, they are all expected to operate
businesses related to installed home improvement products and services.
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 was subsequently paid down with a portion of the proceeds from the
Company's June 1996 initial public offering. At March 31, 1997, Marquise
Financial had approximately $6.8 million in net finance receivables.
During the first quarter of 1997, Marquise Financial loaned approximately
$1.8 million in secured finance receivables. At March 31, 1997, Marquise
had approximately $2.5 million in outstanding commitments of the fixed rate
loans secured by developed residential real estate. 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 entered into agreements with insurance companies with
the effect of establishing a captive insurance company. At March 31, 1997,
the investment in the captive insurance company had been increased to an
aggregate amount of approximately $570 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
quarter 1997 were not significant.
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 $16.4 million. The Company used $12.5
million of cash in connection with the repurchase of 40.2% of its Common
Stock in September 1994, $2.3 million for capital expenditures and $5.0
million for the initial funding of Marquise Financial's consumer financing
activities. At March 31, 1997, the Company had approximately $20.3 million
in cash and cash equivalents and trade receivables and net working capital
of $22.0 million. At March 31, 1997, the Company had available $15 million
in bank line of credit and $1.6 million total debt to management
stockholders. At March 31, 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 historically
has experienced 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 5. OTHER INFORMATION
On April 30, 1997, the Board of Directors of the Company approved
a stock repurchase program to repurchase up to 500,000 shares of common
stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(99) Press release regarding 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.
/s/ Richard G. Reece
Date: May 14, 1997 By: --------------------------
Richard G. Reece
Vice President and
Chief Financial Officer
(For the Registrant and as
Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 13,551,000
<SECURITIES> 0
<RECEIVABLES> 13,614,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,995,000
<PP&E> 2,534,000
<DEPRECIATION> 667,000
<TOTAL-ASSETS> 54,050,000
<CURRENT-LIABILITIES> 8,991,000
<BONDS> 0
0
0
<COMMON> 10,000
<OTHER-SE> 36,593,000
<TOTAL-LIABILITY-AND-EQUITY> 54,050,000
<SALES> 30,175,000
<TOTAL-REVENUES> 30,175,000
<CGS> 16,812,000
<TOTAL-COSTS> 30,141,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (220,000)
<INCOME-PRETAX> 254,000
<INCOME-TAX> 99,000
<INCOME-CONTINUING> 155,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 155,000
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
EXHIBIT 99
DIAMOND HOME SERVICES, INC.
ANNOUNCES STOCK REPURCHASE PROGRAM
WOODSTOCK, Ill. (April 30, 1997) - Diamond Home Services, Inc.
(Nasdaq/NM:DHMS) today announced that its Board of Directors has authorized
the repurchase of up to 500,000 of the Company's outstanding common shares.
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.
C. Stephen Clegg, Chairman, President and Chief Executive Officer,
said, "The decision to buy back the Company's stock underscores
management's confidence in the Company's future and is an opportunity to
further build and maximize shareholder value."
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 installed
home improvement products and services directly to consumers, primarily
under the "SEARS" brand 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.
