================================================================================
FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
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 July 31,
1999, the latest practicable date, was 8,507,375 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales ........................................... $ 66,362 $ 65,615 $ 122,965 $ 94,491
Cost of sales ....................................... 43,804 41,951 81,338 58,140
--------- --------- --------- ---------
Gross profit ........................................ 22,558 23,664 41,627 36,351
Operating expenses:
Selling, general, and administrative expense
22,540 21,602 41,754 33,891
Restructuring expense .......................... -- -- 1,313 --
Operating interest expense ..................... 106 68 209 123
Amortization expense ........................... 691 274 1,435 434
--------- --------- --------- ---------
Operating income (loss) ............................. (779) 1,720 (3,084) 1,903
Interest expense .................................... 1,125 752 2,253 752
Interest income and other ........................... 150 130 309 256
--------- --------- --------- ---------
Income (loss) before income taxes ................... (1,754) 1,098 (5,028) 1,407
Income taxes ........................................ (662) 475 (1,848) 599
--------- --------- --------- ---------
Net income (loss) ................................... ($ 1,092) $ 623 ($ 3,180) $ 808
========= ========= ========= =========
Net income (loss) per share:
Basic .......................................... ($ 0.13) $ 0.07 ($ 0.37) $ 0.09
========= ========= ========= =========
Diluted ........................................ ($ 0.13) $ 0.07 ($ 0.37) $ 0.09
========= ========= ========= =========
Weighted average number of common shares outstanding:
Basic .......................................... 8,507 8,507 8,507 8,507
========= ========= ========= =========
Diluted ........................................ 8,507 8,507 8,507 8,507
========= ========= ========= =========
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
JUNE 30, December 31,
1999 1998
---------- -------------
(Unaudited)
(In thousands)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents ..................................................................... $ 2,855 $ 5,104
Accounts receivable, net ...................................................................... 24,698 22,138
Inventories, net .............................................................................. 16,459 15,771
Refundable income taxes ....................................................................... 1,792 1,297
Prepaids and other current assets ............................................................ 2,083 3,994
Deferred income taxes ......................................................................... 2,043 1,500
-------- --------
Total current assets ............................................................................. 49,930 49,804
Finance company accounts receivable, net ......................................................... 9,239 10,011
Net property, plant and equipment ................................................................ 20,416 20,812
Intangible assets, net ........................................................................... 37,517 38,981
Other ............................................................................................ 6,749 6,521
-------- --------
Total assets ..................................................................................... $123,851 $126,129
======== ========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities
Due to bank and current portion of long-term debt ............................................. $ 46,343 $ 10,225
Accounts payable and accrued liabilities ...................................................... 23,355 22,181
Deferred revenue .............................................................................. 1,195 1,621
-------- --------
Total current liabilities ........................................................................ 70,893 34,027
Long-term liabilities:
Long-term debt ................................................................................ 9,105 44,705
Warranty and retention ........................................................................ 10,094 10,851
Deferred income taxes ......................................................................... 514 267
Other .......................................................................................... 1,979 1,867
-------- --------
Total long-term liabilities ...................................................................... 21,692 57,690
Common stockholders' equity ...................................................................... 31,266 34,412
-------- --------
Total liabilities and common stockholders' equity ................................................ $123,851 $126,129
======== ========
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
----------------------------------
(In thousands)
1999 1998
---- ----
<S> <C> <C>
Net income (loss)......................................................................... ($3,180) $808
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: ............................................................
Depreciation and amortization..................................................... 2,815 852
Deferred income taxes............................................................. (296) (495)
Other............................................................................. 220 134
Changes in operating assets and liabilities:
Accounts receivable and other assets........................................... (761) (2,626)
Inventories.................................................................... (688) (455)
Accounts payable and accrued expenses.......................................... 1,174 (99)
Deferred revenues.............................................................. (426) (17)
Warranty and retention......................................................... (757) 566
--------------- ----------------
Net cash provided by (used in) operating activities................................... (1,899) (1,332)
Investing activities:
Acquisition of Reeves Southeastern Corporation, net of cash acquired................ -- (30,938)
Consumer finance loans originated, net of collections................................ (772) (1,885)
Other 861 (2,230)
Capital expenditures, net............................................................ (991) (1,509)
--------------- ----------------
Net cash used in investing activities................................................ (902) (36,562)
Financing activities:
Advances under revolving credit agreement, net...................................... 2,621 500
Proceeds on (payments of) term debt and capital leases.............................. (1,731) 30,000
Borrowings on finance company bank line of credit, net............................... (100) 1,720
Payments on notes receivable from officers for treasury stock and other.............. 34 57
Payments due to stockholders......................................................... (272) (288)
--------------- ----------------
Net cash provided by (used in) financing activities.................................. 552 31,989
Net increase (decrease) in cash and cash equivalents................................. (2,249) (5,905)
Cash and cash equivalents at beginning of period..................................... 5,104 9,966
--------------- ----------------
Cash and cash equivalents at end of period........................................... $2,855 $4,061
=============== ================
Supplemental cash flow disclosure:
Interest paid....................................................................... $2,090 $127
=============== ================
Income taxes paid................................................................... $6 $1,006
=============== ================
Investing and financing activities exclude the following non-cash transactions:
Acquisition of Reeves Southeastern Corporation through notes payable................ $-- $11,413
=============== ================
See accompanying notes.
</TABLE>
<PAGE>
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 six-month periods ended June 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements included in the Company's 1998 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.
These condensed consolidated financial statements include
Diamond Home Services, Inc. (the "Company") and its subsidiaries Diamond
Exteriors, Inc.(R) ("Exteriors"), Reeves Southeastern Corporation ("Reeves"),
Marquise Financial Services, Inc. ("Marquise"), and Solitaire Heating and
Cooling, Inc. d/b/a KanTel(TM) ("KanTel").
2. CONSUMER FINANCING
The following summarized condensed financial information for
Marquise, the Company's finance subsidiary, is before elimination of
inter-company transactions in consolidation:
<TABLE>
JUNE 30, 1999 December 31, 1998
--------------------------- ---------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash...................................................... $94,000 $343,000
Financing receivables, net................................ 9,239,000 10,011,000
Other assets.............................................. 1,235,000 1,237,000
=========================== =================================
Total assets.............................................. $10,568,000 $11,591,000
=========================== =================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Due to Bank............................................... $4,425,000 $4,525,000
Due to Diamond Exteriors, Inc............................. 5,792,000 6,724,000
Other..................................................... 65,000 74,000
--------------------------- ---------------------------------
Total liabilities......................................... 10,282,000 11,323,000
Total stockholder's equity................................ 286,000 268,000
=========================== =================================
Total liabilities and stockholder's equity................ $10,568,000 $11,591,000
=========================== =================================
</TABLE>
<PAGE>
Results of operations for the three months and six months ended June
30, 1999 and 1998, respectively:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- -------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Financing income............................... $374,000 $412,000 $768,000 $787,000
General and administrative expenses (1)........ 373,000 509,000 848,000 966,000
---------------- ---------------- ---------------- ----------------
Income (loss) before tax benefit............... 1,000 (97,000) (80,000) (179,000)
Income taxes................................... -- (39,000) (30,000) (72,000)
================ ================ ================ ================
Net income (loss).............................. $1,000 ($58,000) ($50,000) ($107,000)
================ ================ ================ ================
(1) Includes interest expense paid to the Company and provision for credit
losses.
</TABLE>
Cash flow for the six months ended June 30, 1999 and 1998,
respectively:
<TABLE>
Six Months Ended June 30,
-----------------------------------------------
1999 1998
--------------- -------------------
(Unaudited)
<S> <C> <C>
Cash at beginning of period.................................. $343,000 $23,000
Net cash used in operating activities........................ 11,000 (16,000)
Net cash provided by (used in) investing activities.......... 772,000 (1,885,000)
Net cash provided by financing activities.................... (1,032,000) 1,952,000
------------------
===================
Cash at end of period........................................ $94,000 $74,000
================== ===================
</TABLE>
At June 30, 1999, Marquise had approximately $200 thousand in
approved but not funded loan commitments.
3. ACQUISITIONS
On April 20, 1998, the Company purchased all the outstanding
shares of Reeves for an aggregate consideration of $42,621,000 consisting of: 1)
$30,000,000 cash at closing; 2) $3,413,000 non-interest bearing notes payable in
installments through June 2000; 3) $7,708,000 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.
On November 16, 1998 the Company acquired certain net assets and the
telephone lead-taking operation and telemarketing business of H.I., Inc., a
related party, for an aggregate purchase price of $2,398,000 (including $100
thousand in transaction costs) consisting of $1,498,000 net cash at closing and
$900 thousand in 5% contingent convertible subordinated notes due October 2005.
Based on the terms of the transactions, the acquisitions are
accounted for as a purchase, in accordance with Accounting Principles Board
Opinion No. 16. Accordingly, the accompanying consolidated statements of
<PAGE>
operations include Reeves's and KanTel's results of operations since the date of
acquisition. The Company revalued the basis of Reeves's and KanTel's acquired
assets and assumed liabilities to fair value at the date of purchase. The
purchase prices of Reeves and KanTel are 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
amortized over a period of 40 years for Reeves and 7 years for KanTel. The
allocation of the acquisition purchase prices is as follows:
Purchase price $43,419,000
Transaction costs 1,600,000
-----------------
Total purchase price $45,019,000
=================
Fair value of assets acquired $63,072,000
Goodwill 10,661,000
Liabilities assumed (28,714,000)
-----------------
Total $45,019,000
=================
The following unaudited pro forma information for the three months
and six months ended June 30, 1998 reflects the results of the Company's
operation as if the acquisitions had occurred at the beginning of the period
presented adjusted, in the case of Reeves, for 1) the effect of the recurring
charges related to the acquisition, primarily the amortization of goodwill and
other intangible assets, 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>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $66,362,000 $74,040,000 $122,965,000 $125,020,000
Net income (loss) ($1,092,000) 885,000 ($3,180,000) 735,000
Net income (loss)
per share - diluted ($.13) $.10 ($.37) $.09
</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 acquisitions 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. RECEIVABLES
Based on recent discussions with the Sears, the Company has been
advised by Sears that there is a dispute in the amount of credit participation
fee income due to the Company. At June 30, 1999, the Company had recorded $2.8
million ($1.2 million non-current) in earned but not paid credit participation
<PAGE>
fee income. The dispute relates to an interpretation in the Sears license
agreement as to how much, if any, of the unpaid credit participation fee income
is due to the Company in the event of, among other things, an early termination
of the license agreement or in the event of the non-renewal of the license
agreement. The Company is in discussions with Sears to understand and clarify
the points of the dispute. The Company continues to believe that its
interpretation and practices are supportable. However, there can be no assurance
that once the discussions and negotiations are concluded that the Company's
interpretation of the agreement or actual negotiations will support the current
carrying value of the credit participation fee receivable. The Company's best
estimate, as at June 30, 1999, of the amount of the dispute is approximately
$1.7 million.
5. INVENTORIES
The components of inventories at June 30, 1999 and December 31, 1998
are as follows:
JUNE 30, December 31,
1999 1998
---------------- ----------------
Raw materials $564,000 $449,000
Work in progress 795,000 861,000
Finished goods 15,100,000 14,461,000
================ =================
Total $16,459,000 $15,771,000
================ =================
6. DEBT
On June 30, 1999, the Company was in default on the restrictive
covenant to its $42 million secured syndicated bank credit facility (also, the
"Bank Group") with regard to minimum cash flow, as defined. The Company is
negotiating to obtain a waiver to this default. The Company has been advised by
the Bank Group that its $42 secured syndicated bank credit facility has been
reassigned to the workout section of each of the participating banks. The
contemplated conditions to obtaining a waiver include: 1) a $4 million
prepayment of the $18 million term notes by September 15, 1999; 2) the net
proceeds from the sale of assets, as defined, to reduce the $18 million term
notes which amounts can be used to reduce the prepayments required in 1) above;
3) a $2.5 million reduction to the borrowing base availability (at June 30,
1999, the Company had $3.7 million in excess borrowing base availability); and,
4) as a condition precedent, a definitive agreement for the sale of at least
$4.6 million of the Marquise accounts receivable. The Company has initiated
several cash stimulation programs to commence to address the foregoing
requirements. Notwithstanding the Company's inability to predict with certitude
whether it can meet the foregoing contemplated requirements within the specified
time period, the Bank Group to date has not agreed to adjust the third quarter
cash flow restrictive covenant which requires a cumulative cash flow of $7
million or to adjust its end of year restrictive covenants. Based on the
operating results of the Company, specifically its installed home improvement
business, for the first six months and July 1999, it is not likely that the
Company will be in compliance with these restrictive covenants. While the Bank
Group has informally expressed its intentions, as it has in the past, to work
with the Company, there can be no assurance that at the conclusion of the
<PAGE>
negotiations the Company will be able to negotiate terms and conditions that it
can reasonably attain for the immediate future periods; and, therefore, will
continue to be dependent on the ongoing forbearance of the Bank Group.
Accordingly, the Company has reclassified all $38.3 million of its outstanding
debt to the Bank Group to current portion of long-term debt on its balance
sheet. In addition, given the Company's financial condition and continuing
operating losses of its installed home improvement business, the Company has
retained special legal counsel and is in the process of retaining financial and
operating crisis consultants to advise the Company of all its financial,
operating and legal alternatives as it attempts to stabilize its current
situation.
7. Segment Data
With the acquisition of Reeves in April 1998, the Company operates
in two industry segments and solely in the U.S.: installed home improvements,
and manufacturing and wholesale distribution. The industry segments are defined
as follows:
Installed Home Improvements
Selling, furnishing and arranging the installation of roofing systems, gutters,
fencing, doors and related installed exterior home improvement products;
financing of installed home improvements; and lead-taking and telemarketing
operations.
Manufacturing and Wholesale Distribution
Manufacturing of chain-link fencing; wholesale distribution of chain-link, wood,
PVC and ornamental fencing and related products; installation, maintenance and
monitoring of perimeter security products and services.
Inter-segment sales are generally recorded at market. Income (loss)
from operations by segment consists of net sales less operating costs and
expenses including costs of borrowed funds, income and general corporate
expenses that are traceable to the business segment.
Income from operations and earnings before interest, income taxes,
depreciation and amortization for the installed home improvement segment for
1999 includes a pretax charge of $1,313,000 for restructuring and related
expenses.
<PAGE>
<TABLE>
Three Months ended June 30, Six Months ended June 30,
---------------------------------------- -----------------------------------
1999 1998 1999 1998
--------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales
Installed Home Improvements $31,823,000 $41,131,000 $60,701,000 $70,007,000
Manufacturing and Distribution 34,539,000 24,484,000 62,264,000 24,484,000
--------------------- ------------------ ----------------- -----------------
66,362,000 65,615,000 122,965,000 94,491,000
Inter-segment sales:
Manufacturing and Distribution 1,690,000 1,560,000 2,588,000 1,560,000
Eliminations (1,690,000) (1,560,000) (2,588,000) (1,560,000)
--------------------- ------------------ ----------------- -----------------
Net Sales 66,362,000 65,615,000 122,965,000 94,491,000
===================== ================== ================= =================
Pre-tax income
Installed Home Improvements (3,042,000) 120,000 (5,550,000) 429,000
Manufacturing and Distribution 1,288,000 978,000 522,000 978,000
--------------------- ------------------ ----------------- -----------------
(1,754,000) 1,098,000 (5,028,000) 1,407,000
===================== ================== ================= =================
Depreciation and amortization expense
Installed Home Improvements 617,000 282,000 1,264,000 545,000
Manufacturing and Distribution 767,000 307,000 1,551,000 307,000
--------------------- ------------------ ----------------- -----------------
1,384,000 589,000 2,815,000 852,000
===================== ================== ================= =================
Additions to property, plant, and equipment
Installed Home Improvements 250,000 1,144,000 605,000 1,509,000
Manufacturing and Distribution 204,000 -- 386,000 --
--------------------- ------------------ ----------------- -----------------
454,000 1,144,000 991,000 1,509,000
===================== ================== ================= =================
Earnings (Loss) before interest, income
taxes, depreciation and amortization
Installed Home Improvements (2,562,000) 402,000 (4,286,000) 974,000
Manufacturing and Distribution 3,317,000 2,037,000 4,326,000 2,037,000
--------------------- ------------------ ----------------- -----------------
$755,000 $2,439,000 $40,000 $3,011,000
===================== ================== ================= =================
</TABLE>
The Company's results of operations may fluctuate from year to
year or quarter to quarter due to a variety of factors. The Company expects
lower levels of sales and profitability during the period from mid-November
through mid-March, impacting the first and fourth quarters of each year. The
Company believes that this seasonality is caused by 1) 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; and 2) reduced demand for commercial and industrial
fencing and related products.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
RESULTS OF OPERATIONS
SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998
Net Sales
Net sales increased $747 thousand, or 1.1%, from $65.6 million
for the second quarter 1998 to $66.4 million for the second quarter 1999.
Installed Home Improvements
Installed home improvement product sales decreased $9.3
million, or 22.6%, from $41.1 million for the second quarter of 1998 to $31.8
million for the second quarter of 1999. Net sales attributable to roofing and
gutter products and services decreased $7.4 million, or 28.6%, to $18.6 million
in the second quarter 1999. Net sales attributable to fencing products and
services decreased $1.1 million, or 12.7%, to $7.4 million in the second quarter
of 1999. Net sales attributable to garage doors, entry doors, and other products
and services decreased $568 thousand, or 10.0%, to $5.1 million in the second
quarter 1999. Credit participation fee income decreased $166 thousand to $391
thousand in the second quarter 1999. Finance interest income decreased $41
thousand to $371 thousand on receivables financed by the Company's finance
subsidiary, Marquise. Backlog, defined as jobs sold but not installed, increased
$6.5 million from $11.3 million at the end of March 1999 to $17.8 million at the
end of the second quarter 1999. Backlog increased $4.0 million from $12.0
million at the end of March 1998 to $16.0 million at the end of the second
quarter 1998. The decrease in installed sales and increase in backlog was
attributable to the continuing effects of the restructuring and related
activities in this segment as they relate to poor operating efficiencies
measured in reduced close ratios, increased cancellations, reduced credit
approvals, delays in scheduling installers and insufficient numbers of certified
installers in certain markets.
<PAGE>
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution sales increased $10.1
million, or 41.1%, from $24.5 million for the ten weeks ended June 30, 1998 to
$34.5 million for the second full quarter (13 weeks) 1999. Manufacturing and
wholesale distribution sales are comprised of the following major product lines:
<TABLE>
Three months ending June 30,
1999 1998
<S> <C> <C>
Chain link and accessories $21,698,000 $17,077,000
Wood 6,547,000 4,488,000
Ornamental/specialty 3,192,000 1,929,000
Gate operators and access control 1,927,000 903,000
Security systems 2,642,000 1,647,000
Other 223,000 --
--------------------- -------------------------
36,229,000 26,044,000
Less: inter-segment sales 1,690,000 1,560,000
===================== =========================
$34,539,000 $24,484,000
===================== =========================
</TABLE>
Backlog, defined as orders placed but not delivered, increased
$1.0 million from $3.6 million at the end of March 1999 to $4.6 million at the
end of the second quarter 1999.
Gross Profit
Gross profit decreased $1.1 million, or 4.7%, from $23.7
million, or 36.1% of net sales, for the second quarter 1998 to $22.6 million, or
34.0% of net sales, for the second quarter 1999.
Installed Home Improvements
Installed home improvement product gross profit decreased $3.8
million, or 21.4%, from $17.6 million, or 42.9% of installed home improvement
product sales, for the second quarter 1998 to $13.9 million, or 43.6% of
installed home improvement product sales, for the second quarter 1999. The
decrease in gross profit amount was attributable to the 22.6% decrease in sales
and $207 thousand decrease in credit participation fee income and finance
income. The increase in gross profit expressed as a percentage of installed home
improvement product sales was attributable to a shift in product mix to
higher-margin products and a price increase. The license fee incurred to Sears
decreased $847 thousand from $4.2 million in the second quarter 1998 to $3.3
million for the second quarter 1999, and, expressed as a percentage 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), increased from 10.4% for the second quarter 1998,
compared to 10.6% of net installed home improvement product sales for the second
quarter 1999. The decrease in license fee incurred to Sears in the second
quarter 1999 was due to an overall decrease in net installed home improvement
sales; and the percentage increase is attributable to fewer roofing repairs with
no license fees during the quarter. On January 1, 1996, Sears and the Company
<PAGE>
entered into an agreement which has been amended and extended through December
31, 2001. 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 $4.4 million, or 21.1%,
from $20.8 million, or 51.8% of net installed home improvement product sales,
for the second quarter 1998 to $16.4 million, or 52.8% of net installed home
improvement product sales, for the second quarter 1999. The unit costs of
material, installation labor and warranty expense remained relatively constant
during the quarterly period.
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution gross profit increased
$2.7 million, or 44.4%, from $6.0 million, or 23.1% of gross (before
inter-segment elimination) segment revenue, for the ten weeks ended June 30,
1998 to $8.7 million, or 24.0% of gross segment revenue, for the second full
quarter 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $938
thousand, or 4.5%, from $21.6 million in the second quarter 1998 to $22.6
million in the second quarter 1999 and, as a percentage of net sales, increased
from 32.9% to 34.0%. Reeves contributed $5.9 million and $4.2 million in
selling, general and administrative expense in the second quarter 1999 and the
ten weeks ended June 30, 1998, respectively.
Installed Home Improvements
Selling, general and administrative expenses for this segment
decreased $728 thousand, or 4.2%, from $17.4 million in the second quarter 1998
to $16.6 million in the second quarter 1999 and, as a percentage of installed
home improvement sales, increased from 42.2% to 52.3%. Selling expense
representing sales managers' and home consultants' direct compensation, direct
advertising expense and lead-taking costs decreased $25 thousand to $7.0 million
for the second quarter 1999; as a percentage of net installed sales, selling
expense increased from 17.4% to 22.5%. Selling compensation increased $380
thousand, or 11%, from $3.5 million in the second quarter 1998 to $3.9 million
in the second quarter 1999; as a percentage of net installed sales, selling
compensation increased from 8.7% to 12.4 %. The percentage increase in selling
compensation was attributable to the imbalance of fixed cost components in the
new compensation plan to below-plan net installed sales volume. The primary
purpose of the changes in selling compensation programs is to improve recruiting
and retention of home consultants and sales management. Effective May 1, 1999,
as part of the restructuring initiative, the compensation arrangement for home
consultants, sales managers, and field operations management has been changed to
include: 1) for selling compensation, minimum draws and fixed auto allowances
offset by lower commission rates; and 2) for field operations management,
increased quota incentive bonuses. Direct advertising expense decreased $730
thousand, or 26.1%, from $2.8 million for the second quarter 1998 to $2.1
million for the second quarter 1999; as a percentage of net installed sales,
direct advertising expense decreased from 6.9% for the second quarter 1998 to
6.7% for the second quarter 1999. Lead-taking costs increased $326 thousand, or
44.6% from $731 thousand for the second quarter 1998 to $1.1 million for the
second quarter 1999; as a percentage of net installed sales, lead-taking costs
increased from 1.8% to 3.4%. The increase was attributable to a 18% increase in
total leads or scheduled appointments, increased service levels (to reduce
incidence of abandoned calls), ongoing development of new scripts and database
maintenance.
General and administrative expenses representing administrative
support including training, customer service, home consultant support services,
field installations operations, and Marquise payrolls and Company benefits and
general expenses, decreased $808 thousand from $10.4 million for the second
quarter 1998 to $9.6 million for the second quarter 1999; as a percentage of net
segment sales, general and administrative expenses increased from 25.4% to
30.3%. Performance-based compensation paid to officers, field installation
managers and field operations staff, including KanTel, increased $186 thousand
from $183 thousand in the second quarter 1998 to $369 thousand in the second
quarter 1999. No performance-based compensation was paid to officers in the
second quarter 1999. Included in general and administrative expenses in the
second quarter 1999 are expenses approximating in the aggregate $840 thousand
for the "University of Diamond" training, customer service, and home consultant
services.
Manufacturing and Wholesale Distribution
Selling, general and administrative expenses for this segment
increased $1.7 million, or 39.4%, from $4.2 million for the ten weeks ended June
30, 1998 to $5.9 million in the second quarter 1999 and, as a percentage of
gross segment revenues, remained constant at 16.3%. Selling expenses
representing the operations, primarily payroll and related costs, and facilities
and equipment costs, of distribution centers increased $1.5 million, or 42.9%,
to $4.9 million in the second quarter of 1999. General and administrative
expenses increased $209 thousand, or 25.1%, to $1.0 million in the second
quarter of 1999.
Operating Interest Expense
Operating interest expense increased from $68 thousand in the
second quarter 1998 to $106 thousand in the second quarter 1999. 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 $417 thousand from $274
thousand in the second quarter 1998 to $691 thousand in the second quarter 1999.
The amortization expense relates primarily to goodwill incurred in connection
with the September 1994 stock repurchase from management and the amortization of
intangibles, including goodwill and covenants not to compete, related to the
Reeves acquisition in April 1998 and to a lesser extent the KanTel acquisition
in November 1998.
Interest Expense
<PAGE>
Interest expense increased from $752 thousand in the second
quarter 1998 to $1.1 million in the second quarter 1999. This increase reflects
the full quarter effect of interest expense incurred related to the debt
associated with the acquisition of Reeves and to a lesser extent to working
capital requirements related to Reeves, and an increase in the interest rate
spread; and, capitalized leases related to the Company's new information
technology systems.
Interest Income and Other
Interest income increased $20 thousand from $130 thousand in
the second quarter 1998 to $150 thousand in the second quarter 1999, primarily
due to finance income on Reeves's trade receivables partially offset by
decreased interest income from lower Company invested cash balances.
Income Taxes
The Company's income taxes decreased from $475 thousand, or an
effective rate of 43.3%, for the second quarter 1998 to an income tax benefit of
$662 thousand, or an effective rate of 37.7%, for the second quarter 1999. The
difference in the effective income tax rate and the federal statutory rate (34%)
is due primarily to amortization of certain intangibles (which increased in
1999) which are not deductible for federal income tax purposes and the effect of
state income taxes.
FIRST SIX MONTHS 1999 COMPARED TO FIRST SIX MONTHS 1998
Net Sales
Net sales increased $28.5 million, or 30.1%, from $94.5 million
for the first six months 1998 to $123.0 million for the first six months 1999.
Reeves, acquired in April, 1998, contributed $62.3 million to net sales in the
first six months 1999, compared to $24.5 million for the ten weeks ended June
30, 1998.
Installed Home Improvements
Installed home improvement product sales decreased $9.3
million, or 13.3%, from $70.0 million for the first six months 1998 to $60.7
million for the first six months 1999. Net sales attributable to roofing and
gutter products and services decreased $7.4 million or 16.5% to $37.3 million
for the first six months 1999. Net sales attributable to fencing products and
services decreased $1.1 million or 10.3% to $11.1 million for the first six
months 1999. Net sales attributable to garage doors, entry doors, and other
products and services decreased $741 thousand or 6.5% to $10.6 million for the
first six months 1999. Credit participation fee income decreased $28 thousand to
$885 thousand in the first six months 1999. Interest income on receivables
financed by the Company's consumer finance subsidiary, Marquise, decreased $19
thousand to $768 thousand for the first six months 1999. Backlog, defined as
jobs sold but not installed, increased $3.9 million from $13.9 million at the
end of December, 1998 to $17.8 million at the end of the first six months 1999.
Backlog increased $5.1 million from $10.9 million at the end of December 1997 to
<PAGE>
$16.0 million at the end of the second quarter 1998. The decrease in installed
sales and increase in backlog occurred primarily in the second quarter 1999 and
was attributable to the continuing effects of the restructuring and related
activities in this segment as they relate to poor operating efficiencies
measured in reduced close ratios, increased cancellations, reduced credit
approvals, delays in scheduling installers and insufficient numbers of certified
installers in certain markets.
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution sales for the first
six months 1999 and the ten weeks ending June 30, 1998 are comprised of the
following major product lines:
<TABLE>
SIX MONTHS ENDED Ten Weeks Ended
JUNE 30, 1999 June 30, 1998
------------- ----------------
<S> <C> <C>
Chain link and accessories $40,134,000 $17,077,000
Wood 9,754,000 4,488,000
Ornamental/specialty 5,005,000 1,929,000
Gate operators and access control 3,695,000 903,000
Security systems 6,041,000 1,647,000
Other 223,000 --
------------------- -----------------
64,852,000 26,044,000
Less: inter-segment sales 2,588,000 1,560,000
=================== =================
$62,264,000 $24,484,000
=================== =================
</TABLE>
Backlog, defined as orders placed but not delivered, increased
$1.5 million from $3.1 million at the end of December 1998 to $4.6 million at
the end of June 1999.
Gross Profit
Gross profit increased $5.3 million, or 14.5%, from $36.4
million, or 38.5% of net sales, for the first six months 1998 to $41.6 million,
or 33.9% of net sales, for the first six months 1999. Reeves contributed $15.2
million to gross profit in the first six months 1999, compared to $6.0 million
for the ten weeks ended June 30, 1998.
Installed Home Improvements
Installed home improvement product gross profit decreased $3.9
million, or 13.0%, from $30.3 million, or 43.3% of installed home improvement
product sales, for the first six months 1998 to $26.4 million, or 43.5% of
installed home improvement product sales, for the first six months 1999. The
decrease in gross profit amount was attributable to a 13.3% decrease in sales
and $56 thousand decrease in credit participation fee income and in finance
interest income. The increase in gross profit, expressed as a percentage of
installed home improvement product sales, resulted from a shift in product mix
and price increases. The license fee incurred to Sears decreased $860 thousand,
or 12.1%, from $7.1 million, or 10.4% of net installed home improvement product
<PAGE>
sales, for the first six months 1998 to $6.2 million, or 10.6% of net installed
home improvement product sales, for the first six months 1999. The decrease in
the license fee incurred to Sears for the first six months 1999 was due to an
overall decrease in net installed home improvement product sales; and the
percentage increase to a shift in the balance of sales. Effective January 1,
1996, Sears and the Company entered into a three-year license agreement which
has been amended and extended through December 31, 2001. 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 $4.7 million, or 13.3%, from $35.7 million, or 52.3% of net
installed home improvement product sales, for the first six months 1998 to $31.0
million, or 52.5% of net installed home improvement product sales, for the first
six months 1999. The decrease in gross profit amount was attributable to a 13.6%
decrease in net installed home improvement product sales; and, the increase in
gross profit index was attributable to a shift in product mix and increases in
unit prices. The unit costs of materials, installation labor and warranty
expense remained relatively constant during the six month period.
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution gross profit increased
$9.2 million, or 153.5%, from $6.0 million in the ten weeks ended June 30, 1998
to $15.2 million in the first full six months 1999 and, as a percentage of gross
(before inter-segment elimination) segment revenue, increased from 23.1% to
23.5%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $7.9
million, or 23.2%, from $33.9 million in the first six months 1998 to $41.8
million in the first six months 1999 and, as a percentage of net sales,
decreased from 35.9% to 34.0%. Reeves contributed $11.7 million and $4.2 million
in selling, general and administrative expense in the first six months 1999 and
the ten weeks ended June 30, 1998, respectively.
Installed Home Improvements
Selling, general and administrative expenses for this segment
increased $428 thousand, or 1.4%, from $29.7 million in the first six months
1998 to $30.1 million in the first six months 1999 and, as a percentage of
installed home improvement sales, increased from 42.4% to 49.9%. Selling
expenses representing sales managers' and home consultants' direct compensation,
direct advertising expense and lead-taking costs increased $397 thousand to
$11.6 million for the first six months 1999; and, as a percentage of net
installed sales, selling expense increased from 16.4% to 19.6%. Selling
compensation increased $241 thousand, or 4.1%, from $5.9 million in the first
six months 1998 to $6.1 million in the first six months 1999; as a percentage of
net installed sales, selling compensation increased from 8.6% to 10.4%. The
percentage increase in selling compensation was attributable to the second
quarter 1999 imbalance of fixed costs components in the new compensation plan to
below-plan net installed sales. The primary purpose of the changes in selling
<PAGE>
compensation programs is to improve recruiting and retention of home consultants
and sales management. Effective May 1, 1999, as part of the restructuring
initiative, the compensation arrangement for home consultants, sales managers,
and field operations management has been changed to include: 1) for selling
compensation, minimum draws and fixed auto allowances offset by lower commission
rates; and 2) for field operations management, increased quota incentive
bonuses. Direct advertising expense decreased $252 thousand, or 6.2%, from $4.1
million for the first six months 1998 to $3.8 million for the first six months
1999; as a percentage of net installed sales, direct advertising expense
increased from 6.0% for the first six months 1998 to 6.5% for the first six
months 1999. Lead-taking costs increased $408 thousand, or 33.7% from $1.2
million for the first six months 1998 to $1.6 million for the first six months
1999; as a percentage of net installed sales, lead-taking costs increased from
1.8% to 2.7%. The increase was attributable to 18% increase in total leads or
scheduled appointments during the first six months, and, commencing in the
second quarter 1999, increased service levels, development of new scripts and
database maintenance.
General and administrative expense representing administrative
support including training, customer service, home consultant support services,
field installations operations, and Marquise payrolls and Company benefits and
general expenses, increased $117 thousand, or 6.3% from $18.6 million for the
first six months 1998 to $18.7 million for the first six months 1999; as a
percentage of net segment sales, general and administrative expenses increased
from 26.6% to 30.8%. Performance-based compensation paid to officers, field
installation managers and field operations staff, including KanTel, increased
$77 thousand from $686 thousand in the first six months 1998 to $763 thousand in
the first six months 1999. No performance-based compensation was paid to
officers in the first six months 1999. Included in general and administrative
expenses in the first six months 1999 are expenses approximating in the
aggregate $1.1 million for the "University of Diamond" training, customer
service, and, commencing in the second quarter, home consultant services.
Manufacturing and Wholesale Distribution
Selling, general, and administrative expenses for the first six
months 1999 for this segment includes selling expenses of $9.5 million
representing the operations, primarily payroll and related costs, and facilities
and equipment costs, of 31 distribution centers and $2.2 million of general and
administrative expenses. For the ten weeks ended June 30, 1998, selling,
general, and administrative expenses consisted of $3.4 million in selling
expenses and $832 thousand in general and administrative expenses.
Restructuring Expense
During the first six months 1999, the Company recorded a $1.3
million pre-tax charge for restructuring and related activities in its installed
home improvements segment, comprised of a $759 thousand charge for severance and
employee retention incentive bonuses, a $314 thousand charge for restructuring
consultancy and related expenses, and a $240 thousand charge for out-of-pocket
expenses related to restructuring implementation. The first six months 1999
restructuring charge was approximately $300 thousand higher than initial
estimates necessitated by the need to both hold to and accelerate the
restructuring timetable.
<PAGE>
Operating Interest Expense
Operating interest expense increased from $123 thousand in the
first six months 1998 to $209 thousand in the first six months 1999. The
increase in operating interest expense resulted from the Company's finance
subsidiary's borrowings during the first six months.
Amortization of Intangibles
Amortization of intangibles increased $1.0 million from $434
thousand in the first six months 1998 to $1.4 million in the first six months
1999. The amortization expense relates primarily to goodwill incurred in
connection with the September 1994 stock repurchase from management and the
amortization of intangibles, including goodwill and covenants not to compete,
related to the Reeves acquisition in April 1998 and to a lesser extent the
KanTel acquisition in November 1998.
Interest Expense
Interest expense increased from $752 thousand in the first six
months 1998 to $2.3 million in the first six months 1999. This increase reflects
the full six month effect of interest expense incurred related to the debt
associated with the acquisition of Reeves, and an increase in the interest rate
spread; and, capitalized leases related to the Company's new information
technology systems.
Interest Income and Other
Interest income increased $53 thousand from $256 thousand in
the first six months 1998 to $309 thousand in the first six months 1999.
Income Taxes
The Company's income taxes decreased from $599 thousand, or an
effective rate of 42.6%, for the first six months 1998 to a credit of $1.8
million, or an effective rate of 36.8%, for the first six months 1999. 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.
<PAGE>
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, and, more recently, to fund new information technology systems,
acquisitions, and 1999 restructuring and operating losses of its installed home
improvement business. 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
manufacturing and wholesale distribution businesses require minimal levels of
capital expenditures while its installed home improvement businesses are not
capital intensive. Capital expenditures for first six months 1999 and years 1998
and 1997 were approximately $1.0 million, $3.8 million, and $4.3 million,
respectively. Capital expenditures for 1999 are expected to approximate $2.2
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 capital
leases. During 1997, the Company announced a stock repurchase program to
repurchase up to 1,000,000 shares of its common stock. During the second and
third quarters 1997 the Company purchased 572,300 shares of its common stock for
$4.7 million. The Company's bank credit facilities impose certain restrictions
on the repurchase of common stock.
On April 20, 1998, the Company acquired all of the issued and
outstanding stock of Reeves for approximately $42.6 million, including
transaction expenses. In November, 1998, the Company acquired certain net assets
and the business of KanTel, the lead-taking and telemarketing operation of H.I.
Inc., a related party, for approximately $2.4 million in cash and convertible
subordinated notes. In connection with the Reeves acquisition, the Company
obtained a $42 million, as amended, secured syndicated bank credit facility
(also, the "Bank Group"). On June 30, 1999, the Company was in default on the
restrictive covenant to its $42 million secured syndicated bank credit facility
with regard to minimum cash flow, as defined. (It should be noted that entire
shortfall in the minimum cash flow requirement is solely attributable to the
Company's installed home improvement business.) The Company is negotiating to
obtain a waiver to this default. The Company has been advised by the Bank Group
that its $42 secured syndicated bank credit facility has been reassigned to the
workout section of each of the participating banks. The contemplated conditions
to obtaining a waiver include: 1) a $4 million prepayment of the $18 million
term notes by September 15, 1999; 2) the net proceeds from the sale of assets,
as defined, to reduce the $18 million term notes which amounts can be used to
reduce the prepayments required in 1) above; 3) a $2.5 million reduction to the
borrowing base availability (at June 30, 1999, the Company had $3.7 million in
excess borrowing base availability); and, 4) as a condition precedent, a
definitive agreement for the sale of at least $4.6 million of the Marquise
accounts receivable. The Company has initiated several cash stimulation programs
to commence to address the foregoing requirements. Notwithstanding the Company's
inability to predict with certitude whether it can meet the foregoing
contemplated requirements within the specified time period, the Bank Group to
date has not agreed to adjust the third quarter cash flow restrictive covenant
which requires a cumulative cash flow of $7 million or to adjust its end of year
restrictive covenants. Based on the operating results of the Company,
<PAGE>
specifically its installed home improvement business, for the first six months
and July 1999, it is not likely that the Company will be in compliance with
these restrictive covenants. While the Bank Group has informally expressed its
intentions, as it has in the past, to work with the Company, there can be no
assurance that at the conclusion of the negotiations the Company will be able to
negotiate terms and conditions that it can reasonably attain for the immediate
future periods; and, therefore, will continue to be dependent on the ongoing
forbearance of the Bank Group. Accordingly, the Company has reclassified all
$38.3 million of its outstanding debt to the Bank Group to current portion of
long-term debt on its balance sheet. In addition, the Company is in preliminary
discussions with Sears, its licensor in respect to Diamond Exteriors's installed
home improvement businesses, to explore the feasibility of accelerating payment
of credit participation accounts receivable - one of the Company's cash
stimulation programs - and other financial accommodations with a view to
alleviating the cash flow constraints resulting from the operating losses of the
installed home improvement business. As these discussions are preliminary and
exploratory, there can be no assurance that the Company will obtain such
financial accommodations from Sears or in amounts and on terms sufficient for
the Company's purposes. Given the Company's current financial condition and
continuing operating losses of its installed home improvement business, the
Company has retained special legal counsel and is in the process of retaining
financial and operating crisis consultants to advice the Company of all its
financial, operating and legal alternatives as it attempts to stabilize its
current situation.
The Company believes that it has sufficient operating cash flow
from its working capital base and bank lines of credit to meet all of its
obligations for the foreseeable future if it is able to obtain financial
accommodations from its bank lenders and Sears, which may include additional
advances and forbearance on the Company's current obligations. There can be no
assurance, however, that the bank lenders or Sears will agree to this
forbearance or additional advances or other financial accommodations. Given the
Company's installed home improvement segment's first six months and July 1999
operating losses, the Company has had, by necessity, and will continue to have
to moderate its capital spending, acquisition, and expansion activities (both of
complementary new products and into new markets), and further reduce operating
costs. [If the Company is unable to obtain financial accommodations or timely
reduce its operating costs, it may not be able to pay all of its obligations and
may have to consider other alternatives, including relief under the Bankruptcy
Code.] It is not likely the Company will activate its stock repurchase program
announced in 1997.
In November 1995, the Company commenced the operations of
Marquise. Marquise's primary objective is to support, along with other
designated third-party finance companies, the Company's requirement for
providing financing to its installed home improvement businesses' customers. 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 has been capitalized and funded with the
Company's excess operating cash flow and borrowings under the Company's bank
lines of credit. In December 1997, Marquise obtained a $10 million secured line
of credit and, at June 30, 1999, had borrowed $4.4 million. Pursuant to the
terms of Marquise's bank line of credit, the credit line will not be extended by
the existing bank and the amounts borrowed are now due. Marquise is in the
process of selling its consumer finance loans in order to fully repay its bank
loan. Marquise is attempting to obtain a new bank line of credit, on terms
similar to the previous bank line, for its consumer lending business. At June
<PAGE>
30, 1999, Marquise has approximately $9.2 million in net finance receivables. At
June 30, 1999, Marquise had approximately $200 thousand in outstanding
commitments of the fixed rate, secured loans. Marquise is dependent on the
Company's existing cash balances, bank lines of credit, and the sale of
Marquise's consumer loan finance receivables as market conditions may warrant
from time to time as well as expected excess cash flow from its installed home
improvement businesses if it is to continue to satisfy the Company's consumer
financing cash requirement at historical levels.
From its inception in June 1993, the Company has generated cash
flow from operations of approximately $25.1 million. Cash flows from operations
have been used to fund and leverage the Company's investing activities,
including acquisitions, Marquise consumer lending activities, and capital
expenditures; and its financing activities, including the repurchase of 42.2% of
common stock in September 1994 from management, and repurchase of 6.3% of common
stock in 1997. At June 30, 1999, the Company had approximately $27.5 million in
cash and cash equivalents and trade receivables and negative working capital of
$21.0 million after reclassification of $28.3 million of long-term Bank Group
debt to current liabilities. At June 30, 1999, the Company had $55.4 million in
total debt including $42.7 million borrowed under its bank lines of credit.
Through July 31, 1999, the Company was fully borrowed under its available bank
lines of credit.
The Nasdaq National Market has minimum maintenance standards
for continued listing including, among others, a $4 million Net Tangible Asset
threshold. At June 30, 1999, the Company's Net Tangible Assets were
approximately $6 million. If the Company continues to incur losses in the third
and fourth quarters 1999, there can be no assurance that the Company's common
stock will continue to be listed and traded on the Nasdaq.
YEAR 2000 STATE OF READINESS
Please refer to the Company's 1998 Management's Discussion and
Analysis of Financial Condition and Results of Operations included in its 1998
Annual Report to Shareholders for a detailed description of the Company's
approach to and organization of the Year 2000 ("Y2K") problem. The information
provided below constitutes a "Year 2000 Readiness Disclosure" for purposes of
the Year 2000 Information Readiness and Disclosure Act.
The Company expects to implement successfully the systems and
programming changes necessary to address Y2K internal IT and non-IT readiness
issues, as well as third-party readiness issues. While the Company does not
believe that the costs associated with preparing for Y2K readiness will have a
material adverse affect on the Company's results of operations and financial
condition, there can be no assurances that there will be no delay in, or
increased costs associated with, the implementation of such changes required for
readiness.
The assessment, planning, and preparation phases are substantially
complete. As of July 31, 1999, the implementation phase is approximately 90%
complete and costs incurred through June 30, 1999 approximate $300,000. Total
costs for Y2K readiness are estimated to range from $300,000 to $400,000. The
Company's programs for purchasing hardware and software, which began in early
1997, have addressed many Y2K issues. The Company's IT initiatives have replaced
substantially all key software with new industry software, such as Oracle ERP
applications and Vantive for lead-taking activities, and have installed new
hardware such as Compaq and Bay Networks. Reeves, a key subsidiary, has
completed the upgrading of its AS/400 BPCS system to a Y2K-certified revision of
the software.
The low-tech nature of the Company's products and services minimizes
the risk of Y2K compliance except for the Company's Foreline subsidiary. The
cost of the readiness program for security products is not significant nor are
<PAGE>
future readiness product costs, including customer satisfaction, expected to be
significant.
The Company has developed a Y2K process for dealing with key
suppliers, third-party finance companies, distributors and other business
partners. As part of its Y2K readiness, the Company is preparing to replace
suppliers or eliminate suppliers from consideration, which to date it has not
done, for new business if the supplier is not prepared for Y2K.
While the Company is essentially complete with its Year 2000
implementation plan, the Company's efforts for the remainder of the project will
be devoted to ongoing identification and analysis of the most likely worst-case
scenarios for third-party relationships affected by Y2K. These scenarios could
include possible infrastructure collapse, for example, the failure of power and
water supplies, transportation disruptions, unforeseen product shortages due to
hoarding of products and failure of communications and financial systems - any
of which could have a material effect on the Company's ability to deliver its
products and services to its customers. While the Company has contingency plans
for most issues under its control, infrastructure problems outside its control,
such as product supplies and third-party financing could result in delays in
delivering its product and services. The Company would expect that most
utilities and service providers would be able to restore service within days
although more pervasive system problems for suppliers and finance companies
could last for two to four weeks or more depending on the completion of the
systems and the effectiveness of their contingency plans. If the Company
encounters unforeseen complications or issues not previously addressed in the
comprehensive plan, additional resources will be committed to complete the
project by Fall 1999. Since the use of additional services is considered
unlikely, no estimates as to their costs have been made at this time.
There is no assurance, despite its Y2K readiness efforts, that the
Company will be successful in its efforts to identify and address all Y2K
issues. Even if the Company were to complete all its assessment efforts,
implement remediation plans believed to be adequate and develop contingency
plans believed to be adequate, problems may not be identified or corrected in
time to prevent adverse consequences to the Company. The foregoing discussions
regarding estimated completion dates, costs, risks and other forward-looking
statements regarding Y2K are based on the Company's best estimates given
information that is currently available and is subject to change. Actual results
may differ materially from these estimates.
SEASONALITY
The Company's results of operations may fluctuate from year to
year or quarter to quarter due to a variety of factors. The Company expects
lower levels of sales and profitability during the period from mid-November
through mid-March, impacting the first and fourth quarter of each year. The
Company believes that this seasonality is caused by 1) 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; and, 2) reduced demand for commercial and industrial
fencing and related products.
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, as
amended. Such forward-looking statements involve known or unknown risks,
<PAGE>
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., warranty exposure, the Company's reliance on home consultants
and on the availability of qualified independent installers, lead activity and
costs related thereto, the outcome of discussions with the Bank Group, other
potential lenders, and Sears regarding forbearance and possible additional
extensions of credit, and conditions in the installed home improvement industry.
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 most recent annual report on Form 10-K, its filings on Form 10-Q,
management's discussion and analysis in the Company's most recent 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
No material changes from the disclosures in the Company's Form
10-K for the fiscal year ended December 31, 1998.
<PAGE>
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Please see the discussion in Part I, Item 2, under "Liquidity
and Capital Resources" regarding the Company's default on its secured syndicated
bank facilities and regarding Marquise.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 13, 1999, the Company held its Annual Meeting of
Shareholders. By a majority of shares represented at the Annual Meeting, the
shareholders elected directors to serve one-year terms as follows: Messrs. C.
Stephen Clegg, James F. Bere, Jr., James M. Gillespie, Jacob Pollock, William R.
Griffin and George A. Stinson.
Shares were voted as follows:
Number of Shares of Common Stock
--------------------------------
Election of Directors For Withheld
- --------------------- --- --------
James F. Bere, Jr. 8,116,936 28,695
Stephen Clegg 8,116,936 28,695
James M. Gillespie 8,116,936 28,695
Jacob Pollock 8,116,936 28,695
William R. Griffin 8,116,936 28,695
George A. Stinson 8,116,936 28,695
Also at the Annual Meeting of Shareholders, a vote of the
shareholders of the Company present in person or by proxy was taken by ballot to
increase the number of shares of the Company's common stock reserved under the
Incentive Stock Option Plan by 500,000 shares.
Shares were voted as follows:
Number of Shares of Common Stock
--------------------------------
For Against Abstain
--- ------- -------
To increase the number of
shares reserved 6,346,258 804,648 994,725
<PAGE>
ITEM 6. EXHIBITS
(a) Exhibits
(27) Financial Data Schedule.
(b) A report on Form 8-K was filed on July 8, 1999
announcing the execution of the amendment and extension
through December 31, 2001 of the licensing agreement between
Diamond Exteriors and Sears, Roebuck and Co. dated January
1, 1996.
<PAGE>
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: August 16, 1999 By:_________________________
Richard G. Reece
Vice President and
Chief Financial Officer
(For the Registrant and as
Principal Financial Officer)
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<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998<F1>
<CASH> 2,855,000 4,061,000
<SECURITIES> 0 0
<RECEIVABLES> 24,698,000 22,726,000
<ALLOWANCES> 0 0
<INVENTORY> 16,459,000 17,761,000
<CURRENT-ASSETS> 49,930,000 48,474,000
<PP&E> 24,444,000 18,973,000
<DEPRECIATION> 4,028,000 1,328,000
<TOTAL-ASSETS> 123,851,000 126,271,000
<CURRENT-LIABILITIES> 70,893,000 34,907,000
<BONDS> 0 0
0 0
0 0
<COMMON> 10,000 10,000
<OTHER-SE> 31,256,000 35,065,000
<TOTAL-LIABILITY-AND-EQUITY> 123,851,000 126,271,000
<SALES> 122,965,000 94,491,000
<TOTAL-REVENUES> 122,965,000 94,491,000
<CGS> 81,338,000 58,140,000
<TOTAL-COSTS> 126,049,000 92,588,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,944,000 496,000
<INCOME-PRETAX> (5,028,000) 1,407,000
<INCOME-TAX> (1,848,000) 599,000
<INCOME-CONTINUING> (3,180,000) 808,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,180,000) 808,000
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Restated
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