================================================================================
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, 1998
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
30, 1998, the latest practicable date, was 8,507,375 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 Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales...................................... $76,505 $48,301 $170,996 $122,263
Cost of sales.................................. 50,013 27,056 108,153 67,933
-------------- --------------- --------------- --------------
Gross profit................................... 26,492 21,245 62,843 54,330
Operating expenses:
Selling, general, and administrative expense 24,104 19,050 57,995 50,924
Operating interest expense................. 83 -- 206 --
Amortization expense....................... 316 151 750 447
-------------- --------------- --------------- --------------
Operating income............................... 1,989 2,044 3,892 2,959
Interest expense............................... 1,039 -- 1,791 --
Interest income and other...................... 147 170 403 576
-------------- --------------- --------------- --------------
Income before income taxes..................... 1,097 2,214 2,504 3,535
Income tax provision........................... 531 864 1,130 1,379
-------------- --------------- --------------- --------------
Net income..................................... $566 $1,350 $1,374 $2,156
============== =============== =============== ==============
Net income per share:
Basic..................................... $.07 $.16 $.16 $.24
============== =============== =============== ==============
Diluted................................... $.07 $.16 $.16 $.24
============== =============== =============== ==============
Weighted average number of common shares outstanding:
Basic..................................... 8,507 8,702 8,507 8,957
============== =============== =============== ==============
Diluted................................... 8,508 8,702 8,508 8,957
============== =============== =============== ==============
See accompanying notes.
</TABLE>
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, 1998 December 31, 1997
-------------------- -------------------
(Unaudited)
(In thousands)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents..................................... $ 3,696 $9,966
Accounts receivable, net...................................... 23,733 6,630
Inventories, net.............................................. 16,368 --
Refundable income taxes....................................... 375 986
Prepaids and other current assets............................ 3,605 1,959
Deferred income taxes......................................... 2,489 872
-------------------- -------------------
Total current assets............................................ 50,266 20,413
Finance company accounts receivable, net........................ 11,056 8,758
Net property, plant and equipment............................... 18,229 5,546
Intangible assets, net.......................................... 37,210 16,514
Deferred income taxes........................................... 852 1,892
Other........................................................... 7,846 3,466
-------------------- ------------------
Total assets.................................................... $125,459 $56,589
==================== ===================
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt............................. $ 7,022 $ --
Due to bank................................................... 4,525 2,050
Accounts payable and accrued liabilities...................... 22,219 10,070
Deferred revenue.............................................. 729 --
Due to stockholders........................................... 554 554
-------------------- -------------------
Total current liabilities....................................... 35,049 12,674
Long-term liabilities:
Long-term debt................................................ 41,674 --
Warranty and retention........................................ 10,290 9,161
Deferred income taxes......................................... 790 --
Due to stockholders........................................... 108 544
Other........................................................ 1,862 --
-------------------- -------------------
Total long-term liabilities..................................... 54,724 9,705
Common stockholders' equity..................................... 35,686 34,210
-------------------- -------------------
Total liabilities and common stockholders' equity............... $125,459 $56,589
==================== ===================
See accompanying notes.
</TABLE>
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
-------------------------
(In thousands)
1998 1997
<S> <C> <C>
Net income................................................................................. $1,374 $2,156
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization........................................................ 1,550 694
Deferred income taxes................................................................ (577) 28
Other................................................................................ 227 --
Changes in operating assets and liabilities:
Accounts receivable and other assets............................................... (4,405) (2,362)
Inventories........................................................................ (938) --
Accounts payable and accrued expenses.............................................. (1,449) (267)
Deferred revenues.................................................................. (356) --
Warranty and retention............................................................. 1,129 1,572
------------ -----------
Net cash used in operating activities................................................... (3,445) 1,821
Investing activities:
Acquisition of Reeves Southeastern Corporation, net of cash acquired.................. (30,938) --
Consumer finance loans originated, net of collections.............................. (2,298) (2,019)
Advances to "captive" insurance company and other...................................... 630 (731)
Capital expenditures, net.............................................................. (2,460) (3,887)
------------ -----------
Net cash used in investing activities.................................................. (35,066) (6,637)
Financing activities:
Advances under revolving credit agreement, net........................................ 100 --
Proceeds on issuance of term debt...................................................... 30,000 --
Borrowings on finance company bank line of credit, net................................. 2,475 --
Purchases of treasury stock............................................................ -- (4,688)
Payments on notes receivable from officers for treasury stock and other................ 102 356
Payments due to stockholders........................................................... (436) (422)
------------ -----------
Net cash provided by (used in) financing activities.................................... 32,241 (4,754)
Net decrease in cash and cash equivalents.............................................. (6,270) (9,570)
Cash and cash equivalents at beginning of period....................................... 9,966 18,982
------------ -----------
Cash and cash equivalents at end of period............................................. $3,696 $9,412
============ ===========
Supplemental cash flow disclosure:
Interest paid......................................................................... $1,089 --
============ ===========
Income taxes paid..................................................................... $1,241 $1,362
============ ===========
Investing and financing activities exclude the following non-cash
transactions:
Acquisition of Reeves Southeastern Corporation through notes payable................. $11,413 --
============ ===========
See accompanying notes.
</TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month and nine-month periods ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. For further information, refer to the
consolidated financial statements included in the Company's 1997 Annual Report
on Form 10-K and Form 8-K/A filed May 13, 1998.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. CONSUMER FINANCING
The following summarized condensed financial information for
Marquise Financial, the Company's finance subsidiary, is before elimination of
inter-company transactions in consolidation:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
----------------------- -----------------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash..................................................... $239,000 $23,000
Financing receivables, net............................... 11,056,000 8,758,000
Other assets............................................. 1,064,000 1,046,000
----------------------- -----------------------
Total assets............................................. $12,359,000 $9,827,000
======================= =======================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Due to Bank.............................................. $4,525,000 $2,050,000
Due to Diamond Exteriors, Inc............................ 7,438,000 7,388,000
Other.................................................... 52,000 147,000
----------------------- -----------------------
Total liabilities........................................ 12,015,000 9,585,000
Total stockholder's equity............................... 344,000 242,000
======================= =======================
Total liabilities and stockholder's equity............... $12,359,000 $9,827,000
======================= =======================
</TABLE>
Results of operations for the three months and nine months ended September 30,
1998 and 1997, respectively:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Financing income.................................... $407,000 $326,000 $1,194,000 $900,000
General and administrative expenses (1)............. 505,000 689,000 $1,472,000 1,681,000
------------- -------------- --------------- ---------------
Loss before tax benefit............................. 98,000 363,000 277,000 781,000
Income tax benefit.................................. 42,000 142,000 114,000 305,000
------------- -------------- --------------- ---------------
Net loss............................................ $56,000 $221,000 163,000 $476,000
============= ============== =============== ===============
(1) Includes interest expense paid to Diamond Home Services, Inc. (the
"Company") and provision for credit losses.
</TABLE>
Cash flow for the nine months ended September 30, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Nine Months Ended September 30
-------------------------------------------
1998 1997
--------------- -----------------
(Unaudited)
<S> <C> <C>
Cash at beginning of period............................ $0 $50,000
Net cash used in operating activities.................. (276,000) (476,000)
Net cash used in investing activities.................. (2,298,000) (1,039,000)
Net cash provided by financing activities.............. 2,813,000 1,465,000
--------------- -----------------
Cash at end of period.................................. $239,000 $0
=============== =================
</TABLE>
At September 30, 1998, Marquise Financial had approximately $2.0 million in
approved but not funded loan commitments.
3. ACQUISITION
On April 20, 1998, the Company consummated the purchase of all the
outstanding and voting shares in the capital of Reeves Southeastern Corporation
("Reeves") for an aggregate consideration of $42,900,000 consisting of: 1)
$30,000,000 cash at closing; 2) $3,700,000 non-interest bearing notes payable in
installments through June 2000; 3) $8,000,000 in 7% notes payable (to be paid
into an escrow account for future possible environmental expenses, as defined)
in installments through June 2005; and 4) $1,500,000 in transaction costs (the
"Acquisition"). In connection with the Acquisition, the Company replaced its $15
million unsecured bank line of credit with a $45 million secured bank line of
credit.
Based on the terms of the transaction, the acquisition is accounted for as
a purchase, in accordance with Accounting Principles Board Opinion No. 16 ("APB
No. 16"). Accordingly, the accompanying condensed consolidated statements of
income include Reeves's results of operations since the date of acquisition. The
Company revalued the basis of Reeves's acquired assets and assumed liabilities
to fair value at the date of purchase. The purchase price of Reeves is
calculated as the cash plus fair value of notes paid plus the Company's
transaction costs. The difference between the purchase price and the fair value
of identifiable tangible and intangible assets acquired and the liabilities
assumed and incurred is recorded as goodwill and will be amortized over a period
of 40 years. The Company has not completed its valuation of the Reeves
acquisition and the purchase price allocation is subject to change as additional
information concerning asset and liability valuation is completed. The
preliminary allocation of purchase price is as follows:
Purchase price $41,413,000
Transaction costs 1,500,000
-------------------
Total purchase price $42,913,000
===================
Fair value of assets acquired $48,832,000
Goodwill 21,366,000
Liabilities assumed (27,285,000)
-------------------
Total $42,913,000
===================
The following unaudited pro forma information reflects the results
of the Company's operation as if the acquisition had occurred at the beginning
of the period presented adjusted for 1) the effect of the recurring charges
related to the acquisition, primarily the amortization of goodwill, interest
expense on borrowings to finance the acquisition, and an increase in
depreciation expense due to the write-up to fair market value of fixed assets;
and 2) the elimination of compensation for prior management and directors,
certain benefit plans, and non-recurring charges.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------------ -------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $76,505,000 $79,225,000 $201,525,000 $214,201,000
Net income 566,000 1,778,000 1,301,000 3,233,000
Net income per share -- diluted $.07 $.20 $.15 $.36
</TABLE>
The pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results which actually would have
been attained if the Acquisition had been consummated on the dates indicated
above, nor does it purport to indicate or suggest what the results of the
operations of the Company will be for any future period.
4. INVENTORIES
The components of inventories at September 30 are as follows:
1998
----
Raw materials $616,000
Work in progress 628,000
Finished goods 15,124,000
=================
Total $16,368,000
=================
5. DEBT
In connection with the Reeves acquisition, in April 1998, the Company
replaced its $15,000,000 unsecured bank line of credit with a $42,000,000 (as
amended) secured syndicated bank credit facility. The credit facility, as
amended, is for a term of five years expiring April 2003. The credit facility
provides, among other things: 1) $30,000,000 in term notes (to be used solely
for the Reeves acquisition) with quarterly principal payments of $1,047,000
commencing in December 1998; and 2) a $15,000,000 revolving line of credit (to
be used for Reeves's working capital requirements and general corporate
purposes). In connection with the increase in interest rates discussed below,
the revolving line of credit was reduced to $12,000,000 in November 1998. In
November 1998 the interest rates for the term notes and revolving line of credit
were increased to provide for monthly interest payments at varying premiums over
LIBOR or bank prime rates, at borrower's option, based on EBITDA coverage
ratios. Through December 31, 1998, the interest rates are fixed as follows: 1)
Term Notes: LIBOR plus 3.00% or prime plus .75%; and 2) Revolving line of
credit: LIBOR plus 3.00% or prime plus .75%. The interest rates on the Term Note
and Revolving line were increased and the amount of the revolving line of credit
was reduced as discussed above until such time as the Company meets its minimum
EBITDA coverage ratio. The terms of the credit facility contain, among other
provisions, restrictive requirements for maintaining cash flow and debt coverage
ratios, minimum net worth, restrictions on incurring additional debt, dividends,
acquisitions and stock repurchases. Deferred loan fees and costs are amortized
over the term of the credit facility (5 years).
At September 30, 1998, debt consisted of:
Term notes $30,000,000
Revolver 7,278,000
7% Notes payable 8,000,000
0% Notes payable 3,487,000
Discount (284,000)
Capital leases 215,000
-----------------
48,696,000
Less: current portion (7,022,000)
=================
$41,674,000
=================
6. SUBSEQUENT EVENT
In October, 1998, the Company entered into an agreement to acquire
certain net assets and the business of KanTel, the telephone lead-taking
operation and telemarketing division of HI Inc., a related party, for an
aggregate purchase price of $2.7 million consisting of 1) $1.5 million in cash
and 2) $1.2 million in 5% convertible subordinated notes due October 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997
Net Sales
Net sales increased $28.2 million, or 58.4%, from $48.3 million for
the third quarter 1997 to $76.5 million for the third quarter 1998. Reeves
contributed $29.9 million to net sales for the third quarter 1998.
Installed Home Improvements
Installed home improvement product sales decreased $1.7 million, or
3.5%, from $48.3 million for the third quarter 1997 to $46.6 million for the
third quarter 1998. Net sales attributable to roofing and gutter products and
services increased $1.2 million, or 3.9%, to $31.2 million in the third quarter
1998. Net sales attributable to fencing products and services decreased $596
thousand, or 6.8%, to $8.1 million in the third quarter of 1998. Net sales
attributable to garage doors, entry doors, and other products and services
decreased $2.5 million, or 28.0%, to $6.3 million in the third quarter 1998.
Credit participation fee income increased $111 thousand to $632 thousand in the
third quarter 1998. Finance interest income increased $81 thousand to $407
thousand on receivables financed by the Company's finance subsidiary, Marquise
Financial. Backlog, defined as jobs sold but not installed, increased $2.6
million from $16.0 million at the end of June 1998 to $18.6 million at the end
of the third quarter 1998. Backlog decreased $3.2 million from $20.2 million at
the end of June 1997 to $17.0 million at the end of the third quarter 1997. The
decrease in installed sales was attributable to a $2.3 million decrease in door
category sales, primarily in security, storm, and entry doors, as Sears expanded
the sale of security and entry doors into many of its stores and permitted other
licensees to increase sales of these products. The increase in backlog compared
to the end of the second quarter 1998 was attributable to improved operating
efficiencies measured in close ratio, reduced cancellations and increased credit
approvals.
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution sales are comprised of the
following major product lines:
Chain link and accessories $20,284,000
Wood 4,714,000
Ornamental/specialty 2,524,000
Gate operators and access control 1,199,000
Security systems 2,620,000
-----------------
31,341,000
Less: inter-segment sales 1,452,000
=================
$29,889,000
=================
Manufacturing and wholesale distribution sales, after adjusting for
the planned discontinuation of a pipe and tube joint venture, was 1.4% lower
than the comparable prior period. The quarter was impacted by lower sales in the
Richmond, Virginia market and a general softness of sales in the northeast
markets, consistent with the Company's installed home improvement segment.
Gross Profit
Gross profit increased $5.2 million, or 24.7%, from $21.2 million, or
44.0% of net sales, for the third quarter 1997 to $26.5 million, or 34.6% of net
sales, for the third quarter 1998. Reeves contributed $7.2 million to gross
profit in the third quarter 1998 (on net sales, after inter-segment sales, of
$29.9 million).
Installed Home Improvements
Installed home improvement product gross profit decreased $1.9
million, or 9.3%, from $21.2 million, or 44.0% of installed home improvement
product sales, for the third quarter 1997 to $19.3 million, or 41.4% of
installed home improvement product sales, for the third quarter 1998. The
decrease in gross profit amount was attributable to reduced door sales, lower
sales volume in fencing products and services due to the decrease in lead count,
and overall lower average unit sales price as a result of expanded and lower
price points. The decrease in gross profit, expressed as a percentage of
installed home improvement product sales, resulted from a decrease in average
unit sales price as a result of expanded and lower price points, partially
offset by a $192 thousand increase in credit participation fee income and in
finance interest income. The license fee incurred to Sears decreased $332
thousand, or 6.5%, from $5.1 million, or 10.7% of net installed home improvement
product sales (which is defined as installed home improvement product sales or
segment sales excluding credit participation and finance interest income), for
the third quarter 1997 to $4.8 million, or 10.5% of net installed home
improvement product sales, for the third quarter 1998. The decrease in the
license fee amount and index incurred to Sears for the third quarter 1998 was
due to an overall decrease in net installed home improvement product sales and
to a shift in the balance of sales, primarily roofing repairs and pricing test
programs, to lower 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 decreased $2.5 million, or 9.8%, from $25.5 million,
or 53.7% of net installed home improvement product sales, for the third quarter
1997 to $23.0 million, or 50.5% of net installed home improvement product sales,
for the third quarter 1998. The decrease in gross profit amount and gross profit
index was attributable to lower sales volume, including the decrease of $2.3
million in door sales, and lower average unit sales prices. The unit costs of
materials, installation labor and warranty expense remained relatively constant
during the quarterly period.
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution gross profit was $7.2 million
or 23.0% of gross (before inter-segment elimination) manufacturing and wholesale
distribution revenue. Gross profit, as a percentage of segment sales,
approximated last year's index of 23.2%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $5.1 million,
or 26.5%, from $19.0 million in the third quarter 1997 to $24.1 million in the
third quarter 1998 and, as a percentage of net sales, decreased from 39.4% to
31.5%. Reeves contributed $5.4 million in selling, general and administrative
expense in the third quarter 1998.
Installed Home Improvements
Selling, general and administrative expenses for this segment
decreased $342 thousand, or 1.8%, from $19.0 million in the third quarter 1997
to $18.7 million in the third quarter 1998 and, as a percentage of installed
home improvement sales, increased from 39.4% to 40.2%. Direct advertising
expense increased $631 thousand, or 23.2%, from $2.7 million for the third
quarter 1997 to $3.4 million for the third quarter 1998; as a percentage of net
installed sales, direct advertising expense increased from 5.6% for the third
quarter 1997 to 7.4% for the third quarter 1998, reflecting substituting local
newspaper advertising placements for pay-per-lead ad placements, in addition to
below-plan lead generating effectiveness of ad placements, offset by improved
close ratios during the quarter. Selling commission expense, including attendant
payroll-related benefits, decreased $658 thousand, or 13.1%, from $5.0 million
in the third quarter 1997 to $4.4 million in the third quarter 1998; as a
percentage of net installed sales, selling commission expense decreased from
10.7% to 9.6% in the third quarter 1998. 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 $509 thousand to $248 thousand in the third
quarter, reflecting the decrease in net installed home improvement sales and
operating profit. 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
$214 thousand, or 2.0%, from $10.5 million, or 21.8% of net segment sales, in
the third quarter 1997 to $10.7 million, or 23.1% of net segment sales, in the
third quarter 1998. Included in general and administrative expenses were special
charges related to lead center activities approximating $100 thousand and
information technology project expenses approximating $350 thousand. Information
technology expenses are expected to continue into the fourth quarter before
expected benefits may be realized.
Manufacturing and Wholesale Distribution
Selling, general, and administrative expenses for this segment
includes selling expenses of $4.4 million representing the operations, primarily
payroll and related costs, and facilities and equipment costs, of 31
distribution centers and $1.0 million of general and administrative expenses.
Operating Interest Expense
Operating interest expense increased from $0 in the third quarter 1997
to $83 thousand in the third quarter 1998. The increase in operating interest
expense resulted from the Company's finance subsidiary's borrowings during the
quarter.
Amortization of Intangibles
Amortization of intangibles increased $165 thousand from $151 thousand
in the third quarter 1997 to $316 thousand in the third quarter 1998. The
amortization expense relates primarily to goodwill incurred in connection with
the September 1994 stock repurchase from management and the Reeves acquisition
in April 1998.
Interest Expense
Interest expense increased from $0 in the third quarter 1997 to $1.0
million in the third quarter 1998. This increase relates to interest expense
incurred related to working capital requirements and the debt associated with
the acquisition of Reeves.
Interest Income and Other
Interest income decreased $23 thousand from $170 thousand in the third
quarter 1997 to $147 thousand in the third quarter 1998, primarily due to
decreased interest income from lower invested cash balances.
Income Tax Provision
The Company's income tax provision decreased from $864 thousand, or an
effective rate of 39.0%, for the third quarter 1997 to $531 thousand, or an
effective rate of 48.4%, for the third quarter 1998. The difference in the
effective income tax rate and the federal statutory rate (34%) is due primarily
to amortization of intangibles (which increased in 1998) which are not
deductible for income tax purposes and the effect of state income taxes.
FIRST NINE MONTHS 1998 COMPARED TO FIRST NINE MONTHS 1997
Net Sales
Net sales increased $48.7 million, or 39.9%, from $122.3 million for
the first nine months 1997 to $171.0 million for the first nine months 1998.
Reeves contributed $54.4 million to net sales in the first nine months 1998.
Installed Home Improvements
Installed home improvement product sales decreased $5.7 million, or
4.6%, from $122.3 million for the first nine months 1997 to $116.6 million for
the first nine months 1998. Net sales attributable to roofing and gutter
products and services decreased $695 thousand or 0.9% to $75.8 million for the
first nine months 1998. Net sales attributable to fencing products and services
decreased $1.6 million or 7.4% to $20.4 million for the first nine months 1998.
Net sales attributable to garage doors, entry doors, and other products and
services decreased $3.9 million or 17.9% to $17.7 million for the first nine
months 1998. Credit participation fee income increased $254 thousand to $1.5
million in the first nine months 1998. Interest income on receivables financed
by the Company's consumer finance subsidiary, Marquise Financial, increased $294
thousand to $1.2 million for the first nine months 1998. Backlog, defined as
jobs sold but not installed, increased $7.7 million from $10.9 million at the
end of December, 1997 to $18.6 million at the end of September 1998. Backlog
increased $2.2 million from $14.8 million at the end of December 1996 to $17.0
million at the end of September 1997. The decrease in installed sales was
attributable to a significant decrease, primarily in the second quarter 1998, in
lead production or number of in-home presentations, lower unit sales prices,
and, in this quarter, a $2.3 million decrease in security and entry door sales,
partially offset by improved operating efficiencies measured in close ratio,
reduced cancellations and increased credit approvals.
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution sales are comprised of the
following major product lines:
Chain link and accessories $37,245,000
Wood 9,210,000
Ornamental/specialty 4,566,000
Gate operators and access control 2,121,000
Security systems 4,243,000
-----------------
57,385,000
Less: inter-segment sales 3,012,000
-----------------
$54,373,000
=================
Manufacturing and wholesale distribution sales, after adjusting for
the planned discontinuation of a pipe and tube joint venture, were 2.8% lower
than the comparable prior period. The period was impacted by lower sales in the
Richmond, Virginia market and lower wood sales in the second quarter.
Gross Profit
Gross profit increased $8.5 million, or 15.7%, from $54.3 million, or
44.4% of net sales, for the first nine months 1997 to $62.8 million, or 36.8% of
net sales, for the first nine months 1998. Reeves, acquired in April, 1998,
contributed $13.2 million to gross profit in the first nine months 1998.
Installed Home Improvements
Installed home improvement product gross profit decreased $4.7
million, or 8.7%, from $54.3 million, or 44.4% of installed home improvement
product sales, for the first nine months 1997 to $49.6 million, or 42.5% of
installed home improvement product sales, for the first nine months 1998. The
decrease in gross profit amount was attributable to lower sales volume due
primarily to the decrease, in the second quarter, in lead count, and, in the
third quarter, to a $2.3 million decrease in door sales, in addition to the
decrease in average unit sales price during the period as a result of expanded
and lower price points during the period. The decrease in gross profit,
expressed as a percentage of installed home improvement product sales, resulted
from a decrease in average unit sales price as a result of expanded and lower
price points, partially offset by a $548 thousand increase in credit
participation fee income and in finance interest income. The license fee
incurred to Sears decreased $1.2 million, or 8.9%, from $13.0 million, or 10.7%
of net installed home improvement product sales, for the first nine months 1997
to $11.8 million, or 10.4% of net installed home improvement product sales, for
the first nine months 1998. The decrease in the license fee incurred to Sears
for the first nine months 1998 was due to an overall decrease in net installed
home improvement product sales and to a shift in the balance of sales, primarily
roofing repairs and pricing test programs, to lower 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 decreased $6.4
million, or 9.8%, from $65.1 million, or 54.2% of net installed home improvement
product sales, for the first nine months 1997 to $58.7 million, or 51.5% of net
installed home improvement product sales, for the first nine months 1998. The
decrease in gross profit amount and gross profit index was attributable to lower
sales volume, including the decrease of $2.3 million in door sales in the third
quarter, and lower average unit sales prices. The unit costs of materials,
installation labor and warranty expense remained relatively constant during the
nine month period.
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution gross profit was $13.2
million or 23.0% of gross (before inter-segment elimination) manufacturing and
wholesale distribution revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $7.1 million,
or 13.9%, from $50.9 million in the first nine months 1997 to $58.0 million in
the first nine months 1998 and, as a percentage of net sales, decreased from
41.6% to 33.9%. Reeves, acquired in April, 1998, contributed $9.6 million in
selling, general and administrative expense in the first nine months 1998.
Installed Home Improvements
Selling, general and administrative expenses for this segment
decreased $2.5 million, or 5.0%, from $50.9 million in the first nine months
1997 to $48.4 million in the first nine months 1998 and, as a percentage of
installed home improvement sales, decreased from 41.6% to 41.5%. Direct
advertising expense decreased $622 thousand, or 7.7%, from $8.0 million for the
first nine months 1997 to $7.4 million for the first nine months 1998; as a
percentage of net segment sales, direct advertising expense decreased from 6.6%
for the first nine months 1997 to 6.4% for the first nine months 1998,
reflecting below-plan lead generating effectiveness of ad placements offset by
improved close ratios during the first nine months. Selling commission expense,
including attendant payroll-related benefits, decreased $1.4 million, or 11.4%,
from $12.6 million in the first nine months 1997 to $11.2 million in the first
nine months 1998; as a percentage of net segment sales, selling commission
expense decreased from 10.2% to 9.6% in the first nine months 1998. 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 $756 thousand to
$494 thousand in the first nine months, reflecting the decrease in net installed
home improvement sales and operating profit. 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 $276 thousand, or 1.0%, from $29.0
million, or 23.7% of net segment sales, in the first nine months 1997 to $29.3
million, or 25.1% of net segment sales, in the first nine months 1998. Included
in general and administrative expenses were special charges related to the
Reeves acquisition and lead center activities aggregating $550 thousand and
information technology project expenses approximating $800 thousand. Information
technology expenses are expected to continue into the fourth quarter before
expected benefits may be realized.
Manufacturing and Wholesale Distribution
Selling, general, and administrative expenses for this segment
includes selling expenses of $7.8 million representing the operations, primarily
payroll and related costs, and facilities and equipment costs, of 31
distribution centers and $1.8 million of general and administrative expenses.
Operating Interest Expense
Operating interest expense increased from $0 in the first nine months
1997 to $206 thousand in the first nine months 1998. The increase in operating
interest expense resulted from the Company's finance subsidiary's borrowings
during the first nine months.
Amortization of Intangibles
Amortization of intangibles increased $303 thousand from $447 thousand
in the first nine months 1997 to $750 thousand in the first nine months 1998.
The amortization expense relates primarily to goodwill incurred in connection
with the September 1994 stock repurchase from management and the Reeves
acquisition in April 1998.
Interest Expense
Interest expense increased from $0 in the first nine months 1997 to
$1.8 million in the first nine months 1998. This increase relates to interest
expense incurred related to working capital requirements and the debt associated
with the acquisition of Reeves.
Interest Income and Other
Interest income decreased $173 thousand from $576 thousand in the
first nine months 1997 to $403 thousand in the first nine months 1998, primarily
due to decreased interest income from lower invested cash balances.
Income Tax Provision
The Company's income tax provision decreased from $1.4 million, or an
effective rate of 39.0%, for the first nine months 1997 to $1.1 million, or an
effective rate of 45.1%, for the first nine months 1998. The difference in the
effective income tax rate and the federal statutory rate (34%) is due primarily
to amortization of intangibles (which increased in 1998) which are not
deductible for income tax purposes and the effect of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the growth of
the Company, to fund the September 1994 stock repurchase from management, to
fund the operations of the Company's finance subsidiary, Marquise Financial,
and, more recently, to fund new information technology systems and the
acquisition of Reeves. The Company's primary sources of liquidity have been cash
flow from operations, borrowings under its bank credit facilities, and, in June
1996, the net proceeds of its initial public offering. The Company's home
improvement installation business is not capital intensive. Capital expenditures
for first nine months 1998 and years 1997 and 1996 were approximately $2.5
million, $3.9 million, and $461 thousand, respectively. Capital expenditures for
1998 are expected to approximate $3.0 million, primarily related to ongoing new
equipment purchases and software development for the Company's information
technology systems and major plant repairs. Future requirements for new
information technology and other capital expenditures are expected to be funded
by cash flow from operations and operating leases. 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 1,000,000 shares. During the
second and third quarters 1997 the Company purchased 572,300 shares of its
common stock for $4.7 million.
On April 20, 1998, the Company acquired all of the issued and
outstanding stock of Reeves for approximately $43 million, including transaction
expenses. In October, 1998, the Company announced it had entered into an
agreement to purchase KanTel, a lead-taking and telemarketing operation, for
approximately $2.7 million in cash and convertible subordinated notes. The
acquisition will be financed with cash from operations, and is expected to close
in mid-November 1998.
The Company believes that it has sufficient operating cash flow,
working capital base, and available bank lines of credit to meet all of its
obligations for the foreseeable future, including ongoing funding for Marquise
Financial, for the stock repurchase program announced in 1997, for investments
in information technology, and for the acquisition, development, and expansion
of complementary new products and services and markets.
In November 1995, the Company commenced the operations of Marquise
Financial. 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. 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 arising from installed 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
borrowings under the Company's former $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. In December 1997, Marquise Financial obtained
a $10 million secured line of credit and, at September 30, 1998, had borrowed
$4.5 million. At September 30, 1998, Marquise Financial has approximately $11.1
million in net finance receivables. During 1998, Marquise Financial originated
or purchased approximately $5.0 million of fixed rate, secured loans. At
September 30, 1998, Marquise had approximately $8.1 million in outstanding
commitments of the fixed rate, secured loans. At September 30, 1998, the Company
was not in compliance with its minimum EBITDA coverage ratio and such
non-compliance has been waived. However, in November 1998 the Company's interest
rates on the Term Note and revolving line of credit were increased and the
revolving line of credit was reduced to $12,000,000 until such time as the
Company's minimum EBITDA coverage ratio is back in compliance. The Company
anticipates that its existing cash balances, the bank lines 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, 1998, the
investment in the captive insurance company approximated $1.2 million. The
primary objective of this captive insurance business is to provide the means for
offering workers' compensation and general liability insurance coverage,
primarily 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 from 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 1998 and year 1997 were
approximately $365 thousand and $525 thousand, respectively. The Company has
identified a third-party insurance company who can now offer similar coverage
and on more competitive terms to our installers. The Company is in the process
of assessing the termination of the captive insurance company and transferring
the business to a third-party insurance company.
From its inception in June 1993, the Company has generated cash flow
from operations of approximately $19.8 million. Cash flows from operations have
been used to fund and leverage the Company's investing activities, including
Reeves acquisition, Marquise Financial consumer lending activities, and capital
expenditures; and its financing activities, including the repurchase of 40.2% of
common stock in September 1994 from management, and repurchase of 6.3% of common
stock in 1997. At September 30, 1998, the Company had approximately $27.4
million in cash and cash equivalents and trade receivables and net working
capital of $15.7 million. At September 30, 1998, the Company had $10.2 million
in unused bank lines of credit and $53.9 million total debt including $41.8
million under its bank lines of credit.
YEAR 2000 STATE OF READINESS
General State of Readiness
The Company's year 2000 (Y2K) project plan addresses four primary
areas:
o All major computer software and hardware systems have been identified and
are being tested for Y2K readiness;
o All critical and strategic vendors and partners have been identified by
communications with these vendors on Y2K readiness;
o All of the Company's material facilities are being inventoried for
potential computer chip date related issues;
o Any products manufactured, sold and installed by the Company are being
identified and evaluated for any possible issues.
In terms of examining both information technology systems and
non-information technology systems for Y2K compliance, the project is
approximately 60% complete at this time, with the bulk of the work anticipated
to be complete by the end of January 1999. Subsequent integration testing and
implementation of any mitigation plans are expected to be complete by the end of
the first quarter 1999. The Company's program for purchasing hardware and
software, which began early in 1997, has addressed many Y2K concerns. This I/T
initiative has replaced substantially all key software with new industry
standard software (Oracle ERP applications and Vantive), and has installed new
hardware components (Compaq and Bay Networks). The Company's key subsidiary,
Reeves, is in the process of upgrading its AS/400 BPCS system to a Y2K certified
revision of the software. This is expected to be complete and fully tested by
the end of January 1999.
A major area of concern at this time is the Reeves subsidiary,
Foreline Security Corp. With $11 million in annual sales, Foreline installs,
services and maintains highly sophisticated electronic date-sensitive equipment
used in its integrated security systems and solutions and security monitoring
services. The Company has not yet completely determined the Y2K compliance of
the equipment Foreline installed, services, or monitors.
This process is less than ten percent completed.
The Company is in the process of gathering information from
material vendors and service providers as to their Y2K compliance. The Company
expects to have initial responses to its inquiries by year end 1998. Among the
Company's material service providers and vendors are Sears Credit (which
provides financing for most of Diamond Exteriors's customers), AT&T (which
provides voice telecommunication services), MCI WorldCom (which provides data
telecommunication service) and ABC Supply Co. (which supplies a substantial
amount of the material used in installations by Diamond Exteriors).
Costs
To date, costs have been minimal. Reeves's Y2K costs are less than
$100 thousand, with a total estimated cost of $125 thousand (excluding
Foreline). Y2K costs for Foreline are harder to predict at this time due to the
early stages of the assessment phase. Potential expenditures are not expected to
exceed $100 thousand. The rest of the Company's costs are approximately $50
thousand, with total estimated cost of $150 thousand.
Risks and Contingency Plans
Due to the low-tech nature of the installed home improvement
industry, the risk to the Company and its subsidiaries of Y2K non-compliance is
not expected to be great. With the exception of some numerically controlled
machinery in Reeves, and of the security systems installed, monitored and
serviced by Foreline, there are few date-sensitive machines under the Company's
control that would impact the Company's daily business. The computer systems are
being upgraded at Reeves. Diamond Exteriors has replaced or is in the process of
replacing all key systems as part of an I/T initiative. This is expected to be
complete by the first quarter 1999. The major exposure comes from critical
vendors to the Company. The Company is still in the process of identifying its
critical vendors and service providers. Unless one or more of the Company's
material vendors or suppliers is not Y2K compliant, the Company's most likely
worst-case scenario is that an undetermined number of the instruments installed
and/or supplied by Foreline are not Y2K compliant. The Company has not yet
developed contingency plans with respect to each of its critical vendors and
service providers, should that vendor's or supplier's failure to be Y2K
compliant by December 31, 1999 render it unable in all material respects to
comply with its obligations to the Company. The Company expects to have
contingency plans by the third quarter 1999.
Certain statements contained herein, including without limitation, statements
addressing the beliefs, plans, objectives estimates or expectations of the
Company or future results or events constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known or unknown risks, including, but not
limited to, general economic and business conditions, matters related to the
licensing agreement between Diamond Exteriors, Inc. and Sears, Roebuck and Co.,
the extent of Year 2000 issues and Company's ability to respond to those issues,
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, including, without limitation, the fencing
and perimeter security products business. There can be no assurance that the
actual future results, performance, or achievements expressed or implied by such
forward-looking statements will occur. Users of forward-looking statements are
encouraged to review Item 7 of the Company's 1997 annual report on Form 10-K,
its filings on Form 10-Q, management's discussion and analysis in the Company's
1997 annual report to stockholders, the Company's filings on Form 8-K, and other
federal securities law filings for a description of other important factors that
may affect the Company's business, results of operations and financial
condition.
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
(a) As of September 30, 1998, the Company was not in compliance with
the EBITDA coverage ratio required under the terms of the Company's syndicated
secured bank credit facility (the "Credit Agreement"). Such non-compliance has
been waived by the lenders as of September 30, 1998; provided, however, that the
effectiveness of the waiver is subject to and contingent upon the Company and
the lenders entering into an amendment to the Credit Agreement no later than
December 31, 1998 modifying certain financial covenants of the Company.
ITEM 6. EXHIBITS
(a) Exhibits
(10.1) First Amendment to Credit Agreement.
(10.2) Second Amendment to Credit Agreement.
(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 16, 1998
By:_________________________
Richard G. Reece
Vice President and
Chief Financial Officer
(For the Registrant and as
Principal Financial Officer)
EXHIBIT 10.1
DIAMOND HOME SERVICES, INC.
FIRST AMENDMENT TO CREDIT AGREEMENT
Harris Trust and Savings Bank Bank of America National Trust and Savings
Chicago, Illinois Association
Chicago, Illinois
LaSalle National Bank
Chicago, Illinois
Ladies and Gentlemen:
Reference is hereby made to that certain Credit Agreement dated as of
April 20, 1998, as amended by that certain letter agreement dated as of April
23, 1998 (such Credit Agreement as so amended being hereinafter referred to as
the "Credit Agreement"), and currently in effect by and among, Diamond Home
Services, Inc., a Delaware corporation (the "Company"), and you (the "Lenders").
All capitalized terms used herein without definition shall have the same
meanings herein as such terms have in the Credit Agreement.
The Company has requested that the Lenders (i) amend a certain
definition contained in the Credit Agreement and (ii) waive a certain financial
covenant contained in the Credit Agreement, and the Lenders are willing to do so
under the terms and conditions set forth in this Amendment.
1. AMENDMENT.
Subject to the satisfaction of the conditions precedent set forth in
Section 3 below, the Credit Agreement shall be and hereby is amended as follows:
1.01. The portion of the first sentence up to the term "provided" in the
definition of "Applicable Margin" appearing in Section 5.1 of the Credit
Agreement is hereby amended and as so amended shall be restated to read as
follows:
"`Applicable Margin' means, with respect to Loans,
Reimbursement Obligations, and the Revolving Credit Commitment
fees and letter of credit fees payable under Section 2.1
hereof, from the date of this Agreement through the first
Pricing Date the rate per annum specified below: Applicable
Margin for Base Rate Loans and Reimbursement Obligations: 0.75%
Applicable Margin for Eurodollar Loans 2.50%
Applicable Margin for Revolving Credit Commitment fee: 0.375%
Applicable Margin for letter of credit fee: 2.00%"
2. WAIVER.
The Company is currently not in compliance with Section 8.26(a) of the
Credit Agreement (which requires the Company maintain a certain minimum EBITDA)
for its fiscal quarter ending on or about June 30, 1998. In accordance with the
request of the Company, subject to satisfaction of the conditions precedent set
forth in Section 3 below, the Lenders hereby waive compliance with such Section
8.26(a). The foregoing does not waive compliance with Section 8.26(b) or any
other terms, conditions and provisions of the Credit Agreement.
3. CONDITIONS PRECEDENT.
The effectiveness of this Amendment is subject to its acceptance by the
Lenders and the Material Subsidiaries in the spaces provided for that purpose
below (the date of such acceptance being hereinafter referred to as the
"Effective Date"). Without limiting the generality of the foregoing, the
modifications to the Credit Agreement effected by this Amendment shall be
effective as of (but not before) the Effective Date.
4. REPRESENTATIONS.
In order to induce the Lenders to execute and deliver this Amendment,
the Company hereby represents to the Lenders that as of the date upon which this
Amendment becomes effective, after giving effect to this Amendment, the Company
is in full compliance with all of the terms and conditions of the Credit
Agreement, as amended hereby, and no Default or Event of Default shall have
occurred and be continuing under the Credit Agreement.
5. MISCELLANEOUS.
5.01. Except as specifically amended herein or waived hereby, the Credit
Agreement shall continue in full force and effect in accordance with its
original terms. Reference to this specific Amendment need not be made in the
Credit Agreement, the Notes, or any other instrument or document executed in
connection therewith, or in any certificate, letter or communication issued or
made pursuant to or with respect to the Credit Agreement, any reference in any
of such items to the Credit Agreement being sufficient to refer to the Credit
Agreement as amended hereby.
5.02. This Amendment may be executed in any number of counterparts, and
by the different parties on different counterpart signature pages, all of which
taken together shall constitute one and the same agreement. Any of the parties
hereto may execute this Amendment by signing any such counterpart and each of
such counterparts shall for all purposes be deemed to be an original. This
Amendment shall be governed by the internal laws of the State of Illinois.
5.03. The Company agrees to pay all reasonable out-of-pocket costs and
expenses incurred by the Lenders in connection with the preparation, execution
and delivery of this Amendment and the documents and transactions contemplated
hereby, including the reasonable fees and expenses of counsel for the Agent with
respect to the foregoing.
Dated as of August __, 1998.
DIAMOND HOME SERVICES, INC.
By /s/ Diamond Home Services, Inc.
Its
Accepted and agreed to in Chicago, Illinois as of the date and year
last above written.
HARRIS TRUST AND SAVINGS BANK
By /s/ Harris Trust and Savings Bank
Its Vice President
LASALLE NATIONAL BANK
By /s/ LaSalle National Bank
Its
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
(successor by merger to Bank of America Illinois)
By /s/ Bank of America National Trust and
and Savings Association
Its
GUARANTORS' CONSENT
The undersigned, the Material Subsidiaries of the Company, have
heretofore executed and delivered to the Lenders a Guaranty dated April 20, 1998
and hereby consent to the Amendment to the Credit Agreement as set forth above
and confirm that their Guaranty and all of the undersigned's obligations
thereunder remain in full force and effect. The undersigned further agree that
the consent of the undersigned to any further amendments to the Credit Agreement
shall not be required as a result of this consent having been obtained.
DIAMOND ACQUISITION CORP.
By /s/ Diamond Acquisition Corp.
Name
Title
REEVES SOUTHEASTERN CORPORATION
By /s/ Reeves Southeastern Corporation
Name
Title
FORELINE SECURITY CORPORATION
By /s/ Foreline Security Corporation
Name
Title
DIAMOND EXTERIORS, INC.
By /s/ Diamond Exteriors, Inc.
Name
Title
ARQUISE FINANCIAL SERVICES, INC.
y /s/ Marquise Financial Services, Inc.
Name
Title
REEVES SOUTHEASTERN REALTY, INC.
By /s/ Reeves Southeastern Realty, Inc.
Name
Title
EXHIBIT 10.2
DIAMOND HOME SERVICES, INC.
SECOND AMENDMENT TO CREDIT AGREEMENT
Harris Trust and Savings Bank Bank of America National Trust and
Chicago, Illinois Savings Association
Chicago, Illinois
LaSalle National Bank
Chicago, Illinois
Ladies and Gentlemen:
Reference is hereby made to that certain Credit Agreement dated as of
April 20, 1998, as amended by that certain letter agreement dated as of April
23, 1998 and that certain First Amendment dated as of August 13, 1998 (such
Credit Agreement as so amended being hereinafter referred to as the "Credit
Agreement"), and currently in effect by and among, Diamond Home Services, Inc.,
a Delaware corporation (the "Borrower"), and you (the "Banks"). All capitalized
terms used herein without definition shall have the same meanings herein as such
terms have in the Credit Agreement.
The Borrower has requested that the Banks (i) modify the interest rate
applicable to Loans outstanding under the Credit Agreement, (ii) waive the
Borrower's noncompliance with the minimum quarterly earnings covenant contained
in the Credit Agreement and (iii) reduce the amount of the Revolving Credit
Commitments in the Credit Agreement, and the Banks are willing to do so under
the terms and conditions set forth in this Amendment.
1. AMENDMENT.
Subject to the satisfaction of the conditions precedent set forth in
Section 3 below, the Credit Agreement shall be and hereby is amended (effective
as of November 16, 1998) as follows:
1.01. The portion of the first sentence up to the term "provided" in the
definition of "Applicable Margin" appearing in Section 5.1 of the Credit
Agreement is hereby amended and as so amended shall be restated to read as
follows:
"`Applicable Margin' means, with respect to Loans, Reimbursement Obligations,
and the Revolving Credit Commitment fees and letter of credit fees payable
under Section 2.1 hereof, from November 16, 1998 through the first Pricing
Date the rate per annum specified below:
Applicable Margin for Base Rate Loans and Reimbursement
Obligations: 0.75%
Applicable Margin for Eurodollar Loans 3.00%
Applicable Margin for Revolving Credit Commitment fee: 0.375%
Applicable Margin for letter of credit fee: 2.00%"
1.02. The Revolving Credit Commitments shall be reduced from $15,000,000
to $12,000,000 (herein, the "Revolver Reduction"). In accordance with Section
1.13 of the Credit Agreement, the Revolver Reduction shall be allocated ratably
among the Banks in proportion to their respective Revolver Percentages.
1.03. Section 8.9 of the Credit Agreement shall be amended by inserting
the following sentence immediately at the end thereof:
"Notwithstanding anything in this Section to the contrary, the
Borrower shall not make any Acquisition on or any time after
November 16, 1998 other than the KanTel Acquisition. For
purposes hereof, the "KanTel Acquisition" means the
acquisition by the Borrower during the fourth quarter of 1998
of the business and related assets of KanTel, the telephone
operations and telemarketing division of HI, Inc. based in
Lawrence, Kansas, for approximately $2,700,000."
1.04. The Revolving Credit Commitment amounts of "$5,000,000",
"$5,000,000", and "$5,000,000" appearing on the signature pages of Harris Trust
and Savings Bank, LaSalle National Bank and Bank of America Illinois,
respectively, at the end of the Credit Agreement shall be amended to state the
following new amounts, respectively: "$4,000,000", "$4,000,000", and
"$4,000,000".
2. WAIVER.
The Borrower is currently not in compliance with Section 8.26(b) of the
Credit Agreement by virtue of the Borrower's failure to maintain EBITDA at not
less than $4,500,000 for its fiscal quarter ending on or about September 30,
1998. The Borrower has requested that the Banks waive such noncompliance.
Accordingly, subject to satisfaction of the conditions precedent set forth in
Section 3 below, and subject as well to the satisfaction of the conditions
subsequent set forth below in this Section, the Banks hereby waive (subject to
satisfaction of such conditions, but upon such satisfaction, such waiver to be
effective as of September 30, 1998) compliance with such Section 8.26(b).
Notwithstanding anything in this Amendment to the contrary, the waiver given in
this Section is subject to, and its effectiveness is contingent upon, the
effectiveness no later than December 31, 1998 of an amendment to the Credit
Agreement which is in form and substance mutually acceptable to the Banks and
the Borrower and, among other things, modifies the financial covenants contained
in Sections 8.22, 8.23, 8.24, 8.25 and 8.26 of the Credit Agreement in a manner
mutually satisfactory to the Borrower and the Banks (it being understood that
the ability of the Banks to enter into such amendment is subject to their
internal credit approvals). If such amendment does not take effect before such
date, this waiver shall immediately have no further force and effect, and an
Event of Default shall immediately exist under Section 9.1(b) of the Credit
Agreement by virtue of the Borrower's noncompliance with such Section 8.26(b).
The foregoing does not waive compliance with such Section 8.26(b) unless such
conditions have been satisfied and also does not waive compliance with any other
terms, conditions and provisions of the Credit Agreement.
3. AMENDMENT FEE.
In consideration of the agreements made in this Amendment, the
Borrower hereby agrees to pay the Agent for the ratable account of the Banks an
Amendment Fee of $225,000. Such fee shall be deemed fully earned and payable
upon the effectiveness of this Amendment. $56,250 of this fee shall be due and
payable on the earlier of (i) the date of the Borrower's acceptance of this
Amendment or (ii) November 18, 1998. The $168,750 balance of the fee shall be
due and payable on the earlier of (i) December 31, 1998 or (ii) the
effectiveness of the Amendment referred to in Section 2 above. The Borrower's
failure to pay this Amendment Fee when due shall constitute an Event of Default.
4. CONDITIONS PRECEDENT.
The effectiveness of this Amendment is subject to:
(a) The acceptance of this Amendment by the Banks and the
Material Subsidiaries in the spaces provided for that purpose below.
(b) The payment to the Agent for the ratable account of the
Banks of the $56,250 portion of the Amendment Fee referred to above
which is due and payable concurrent with the Borrower's acceptance
hereof.
Upon the satisfaction of such conditions precedent, (i) this Amendment (except
for Section 2 hereof) shall take effect as of November 16, 1998 and (ii) Section
2 hereof shall take effect as of September 30, 1998.
5. REPRESENTATIONS.
In order to induce the Banks to execute and deliver this Amendment, the
Borrower hereby represents to the Banks that as of the date upon which this
Amendment becomes effective, after giving effect to this Amendment, the Borrower
is in full compliance with all of the terms and conditions of the Credit
Agreement, as amended hereby, and no Default or Event of Default shall have
occurred and be continuing under the Credit Agreement.
6. MISCELLANEOUS.
6.01. The Borrower acknowledges and agrees that all of the Collateral
Documents to which it is a party remain in full force and effect for the benefit
and security of, among other things, the Revolving Credit as modified hereby.
The Borrower further acknowledges and agrees that all references in such
Collateral Documents to the Revolving Credit shall be deemed a reference to the
Revolving Credit as so modified. The Borrower further agrees to execute and
deliver any and all instruments or documents as may be required by the Agent or
Required Banks to confirm any of the foregoing.
6.02. Except as specifically amended herein or waived hereby, the Credit
Agreement shall continue in full force and effect in accordance with its
original terms. Reference to this specific Amendment need not be made in the
Credit Agreement, the Notes, or any other instrument or document executed in
connection therewith, or in any certificate, letter or communication issued or
made pursuant to or with respect to the Credit Agreement, any reference in any
of such items to the Credit Agreement being sufficient to refer to the Credit
Agreement as amended hereby.
6.03. This Amendment may be executed in any number of counterparts, and
by the different parties on different counterpart signature pages, all of which
taken together shall constitute one and the same agreement. Any of the parties
hereto may execute this Amendment by signing any such counterpart and each of
such counterparts shall for all purposes be deemed to be an original. This
Amendment shall be governed by the internal laws of the State of Illinois.
6.04. The Borrower agrees to pay all reasonable out-of-pocket costs and
expenses incurred by the Banks in connection with the preparation, execution and
delivery of this Amendment and the documents and transactions contemplated
hereby, including the reasonable fees and expenses of counsel for the Agent with
respect to the foregoing.
Dated as of November 13, 1998.
DIAMOND HOME SERVICES, INC.
By /s/ Diamond Home Services, Inc.
Its
Accepted and agreed to in Chicago, Illinois as of the date and year
last above written.
HARRIS TRUST AND SAVINGS BANK
By /s/ Harris Trust and Savings Bank
Its Vice President
LASALLE NATIONAL BANK
By /s/ LaSalle National Bank
Its
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
(successor by merger to Bank of America Illinois)
By /s/ Bank of America National Trust
and Savings Association
Its
GUARANTORS' CONSENT
The undersigned, the Material Subsidiaries of the Borrower, have
heretofore executed and delivered to the Banks a Guaranty and certain other
Collateral Documents and hereby consent to this Amendment to the Credit
Agreement as set forth above and confirm that their Guaranty and such Collateral
Documents and all of the undersigned's obligations thereunder remain in full
force and effect. The undersigned further agree that the consent of the
undersigned to any further amendments to the Credit Agreement shall not be
required as a result of this consent having been obtained.
DIAMOND ACQUISITION CORP.
By /s/ Diamond Acquisition Corp.
Name
Title
REEVES SOUTHEASTERN CORPORATION
By /s/ Reeves Southeastern Corporation
Name
Title
FORELINE SECURITY CORPORATION
By /s/ Foreline Security Corporation
Name
Title
DIAMOND EXTERIORS, INC.
By /s/ Diamond Exteriors, Inc.
Name
Title___________________________________
MARQUISE FINANCIAL SERVICES, INC.
By /s/ Marquise Financial Services, Inc.
Name
Title
REEVES SOUTHEASTERN REALTY, INC.
By /s/ Reeves Southeastern Realty, Inc.
Name
Title
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<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 3,696,000 9,412,000
<SECURITIES> 0 0
<RECEIVABLES> 23,733,000 11,182,000
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<INVENTORY> 16,368,000 0
<CURRENT-ASSETS> 50,266,000 31,094,000
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<DEPRECIATION> 1,696,000 831,000
<TOTAL-ASSETS> 125,459,000 57,500,000
<CURRENT-LIABILITIES> 35,049,000 14,054,000
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0 0
0 0
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<INCOME-PRETAX> 2,504,000 3,535,000
<INCOME-TAX> 1,130,000 1,379,000
<INCOME-CONTINUING> 1,374,000 2,156,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,374,000 2,156,000
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