================================================================================
FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 April
30, 1999, the latest practicable date, was 8,507,375 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
------------------------------
1999 1998
---- ----
(In thousands, except
per share data)
Net sales...................................... $56,603 $28,876
Cost of sales.................................. 37,534 16,189
-------------- ---------------
Gross profit................................... 19,069 12,687
Operating expenses:
Selling, general, and administrative
expense ................................... 19,214 12,289
Restructuring expense...................... 1,313 --
Operating interest expense................. 103 55
Amortization expense....................... 744 160
-------------- ---------------
Operating income (loss)........................ (2,305) 183
Interest expense............................... 1,128 --
Interest income and other...................... 159 126
-------------- ---------------
Income (loss) before income taxes.............. (3,274) 309
Income taxes................................... (1,186) 124
-------------- ---------------
Net income (loss).............................. ($2,088) $185
============== ===============
Net income (loss) per share:
Basic..................................... ($0.25) $0.02
============== ===============
Diluted................................... ($0.25) $0.02
============== ===============
Weighted average number of common
shares outstanding:
Basic..................................... 8,507 8,507
============== ===============
Diluted................................... 8,507 8,507
============== ===============
See accompanying notes.
<PAGE>
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
MARCH 31, December 31,
1999 1998
-------------------- -------------------
(Unaudited)
(In thousands)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents..................................... $5,398 $5,104
Accounts receivable, net...................................... 21,044 22,138
Inventories, net.............................................. 16,196 15,771
Refundable income taxes....................................... 2,294 1,297
Prepaids and other current assets............................ 3,859 3,994
Deferred income taxes......................................... 1,985 1,500
-------------------- -------------------
Total current assets............................................ 50,776 49,804
Finance company accounts receivable, net........................ 9,632 10,011
Net property, plant and equipment............................... 20,662 20,812
Intangible assets, net.......................................... 38,103 38,981
Other........................................................... 6,333 6,521
-------------------- -------------------
Total assets.................................................... $125,506 $126,129
==================== ===================
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities
Due to bank and current portion of long-term debt............. $11,488 $10,225
Accounts payable and accrued liabilities...................... 24,443 22,181
Deferred revenue.............................................. 1,029 1,621
-------------------- -------------------
Total current liabilities....................................... 36,960 34,027
Long-term liabilities:
Long-term debt................................................ 43,134 44,705
Warranty and retention........................................ 10,878 10,851
Deferred income taxes......................................... 286 267
Other......................................................... 1,917 1,867
-------------------- -------------------
Total long-term liabilities..................................... 56,215 57,690
Common stockholders' equity..................................... 32,331 34,412
-------------------- -------------------
Total liabilities and common stockholders' equity............... $125,506 $126,129
==================== ===================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
-------------------------
(In thousands)
1999 1998
---- ----
<S> <C> <C>
Net income (loss).......................................................................... ($2,088) $185
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................................ 1,431 263
Deferred income taxes................................................................ (466) (467)
Other................................................................................ (149) --
Changes in operating assets and liabilities:
Accounts receivable and other assets............................................... 1,160 (1,752)
Inventories........................................................................ (425) --
Accounts payable and accrued expenses.............................................. 2,262 (453)
Deferred revenues.................................................................. (592) --
Warranty and retention............................................................. 27 194
------------ -----------
Net cash provided by (used in) operating activities..................................... 1,160 (2,030)
Investing activities:
Consumer finance loans originated, net of collections.................................. 379 (936)
Other (407) (288)
Capital expenditures, net.............................................................. (537) (365)
------------ -----------
Net cash used in investing activities.................................................. (565) (1,589)
Financing activities:
Advances under revolving credit agreement, net........................................ 100 --
Payments of term debt and capital leases............................................... (280) --
Borrowings on finance company bank line of credit, net................................. -- 1,250
Payments on notes receivable from officers for treasury stock and other................ 7 28
Payments due to stockholders........................................................... (128) (145)
------------ -----------
Net cash provided by (used in) financing activities.................................... (301) 1,133
Net increase (decrease) in cash and cash equivalents................................... 294 (2,486)
Cash and cash equivalents at beginning of period....................................... 5,104 9,966
------------ -----------
Cash and cash equivalents at end of period............................................ $5,398 $7,480
------------ -----------
Supplemental cash flow disclosure:
Interest paid......................................................................... $1,020 $55
============ ===========
Income taxes paid..................................................................... $2 $--
============ ===========
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 period ended March 31, 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>
March 31, 1999 December 31, 1998
----------------------- ----------------------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash..................................................... $921,000 $343,000
Financing receivables, net............................... 9,632,000 10,011,000
Other assets............................................. 1,250,000 1,237,000
----------------------- ----------------------------
Total assets............................................. $11,803,000 $11,591,000
======================= ============================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Due to Bank.............................................. $4,525,000 $4,525,000
Due to Diamond Exteriors, Inc............................ 6,871,000 6,724,000
Other.................................................... 120,000 74,000
----------------------- ----------------------------
Total liabilities........................................ 11,516,000 11,323,000
Total stockholder's equity............................... 287,000 268,000
----------------------- ----------------------------
Total liabilities and stockholder's equity............... $11,803,000 $11,591,000
======================= ============================
</TABLE>
<PAGE>
Results of operations for the three months ended March 31, 1999 and
1998, respectively:
<TABLE>
Three Months Ended March 31,
------------------------------------------------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Financing income.................................... $394,000 $375,000
General and administrative expenses (1)............. 475,000 457,000
------------------------ -----------------------
Loss before tax benefit............................. 81,000 82,000
Income tax benefit.................................. 30,000 33,000
------------------------ -----------------------
Net loss............................................ $51,000 $49,000
======================== =======================
(1) Includes interest expense paid to the Company and provision for credit
losses.
</TABLE>
Cash flow for the three months ended March 31, 1999 and 1998,
respectively:
<TABLE>
Three Months Ended March 31,
----------------------------------------
1999 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
Cash at beginning of period..................................... $343,000 $23,000
Net cash used in operating activities........................... (20,000) (82,000)
Net cash provided by (used in) investing activities............. 381,000 (815,000)
Net cash provided by financing activities....................... 217,000 1,183,000
-------------- -----------------
Cash at end of period........................................... $921,000 $309,000
============== =================
</TABLE>
At March 31, 1999, Marquise had approximately $600 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 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
<PAGE>
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
acquisition purchase price 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
ended March 31, 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.
Three Months Ended March 31,
1999 1998
---- ----
Revenues $56,603,000 $52,778,000
Net loss (2,088,000) (350,000)
Net loss per share - diluted ($0.25) ($0.04)
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.
<PAGE>
4. INVENTORIES
The components of inventories at March 31, 1999 and December 31,
1998 are as follows:
March 31, December 31,
1999 1998
------------------------------------
Raw materials $630,000 $449,000
Work in progress 854,000 861,000
Finished goods 14,712,000 14,461,000
------------------------------------
Total $16,196,000 $15,771,000
====================================
5. 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>
MARCH 31, March 31,
1999 1999
---------------- ----------------
Net sales
Installed Home Improvements $28,878,000 $28,876,000
Manufacturing and Distribution 27,725,000 --
---------------- ----------------
56,603,000 28,876,000
Inter-segment sales:
Manufacturing and Distribution 898,000 --
Eliminations (898,000) --
---------------- ----------------
Net Sales $56,603,000 $28,876,000
================ ================
Pre-tax income
Installed Home Improvements ($2,508,000) $309,000
Manufacturing and Distribution (766,000) --
---------------- ----------------
($3,274,000) $309,000
================ ================
Depreciation and amortization expense
Installed Home Improvements $647,000 $263,000
Manufacturing and distribution 784,000 --
---------------- ----------------
$1,431,000 $263,000
================ ================
Additions to property, plant, and equipment
Installed home improvements $355,000 $365,000
Manufacturing and distribution 182,000 --
---------------- ----------------
$537,000 $365,000
================ ================
Earnings (Loss) before interest, income
taxes, depreciation and amortization
Installed home improvements ($1,724,000) $446,000
Manufacturing and distribution 1,009,000 --
---------------- ----------------
($715,000) $446,000
================ ================
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 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 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
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
Net Sales
Net sales increased $27.7 million, or 96.0%, from $28.9 million for
the first quarter 1998 to $56.6 million for the first quarter 1999. Reeves
contributed $27.7 million to net sales for the first quarter 1999.
Installed Home Improvements
Installed home improvement product sales remained consistent,
totaling $28.9 million for the first quarter of both 1999 and 1998. Net sales
attributable to roofing and gutter products and services increased $85 thousand,
or 0.5%, to $18.7 million in the first quarter 1999. Net sales attributable to
fencing products and services decreased $71 thousand, or 1.8%, to $3.8 million
in the first quarter of 1999. Net sales attributable to garage doors, entry
doors, and other products and services decreased $172 thousand, or 3.0%, to $5.5
million in the first quarter 1999. Credit participation fee income increased
$138 thousand to $494 thousand in the first quarter 1999. Finance interest
income increased $22 thousand to $397 thousand on receivables financed by the
Company's finance subsidiary, Marquise. Backlog, defined as jobs sold but not
installed, decreased $2.6 million from $13.9 million at the end of December 1998
to $11.3 million at the end of the first quarter 1999. Backlog increased $1.2
million from $10.9 million at the end of December 1997 to $12.1 million at the
end of the first quarter 1998.
Manufacturing and Wholesale Distribution
Manufacturing and wholesale distribution sales are comprised of the
following major product lines:
Chain link and accessories $18,436,000
Wood 3,207,000
Ornamental/specialty 1,813,000
Gate operators and access control 1,768,000
Security systems 3,399,000
-----------------
28,623,000
Less: inter-segment sales (898,000)
-----------------
$27,725,000
=================
Manufacturing and wholesale distribution sales were 16% higher than
the comparable prior period. The quarter was impacted by higher sales in all
<PAGE>
major products and a significant improvement in the New York market. Backlog,
defined as orders placed but not delivered, was approximately $3.6 million at
March 31, 1999.
Gross Profit
Gross profit increased $6.4 million, or 50.3%, from $12.7 million,
or 43.9% of net sales, for the first quarter 1998 to $19.1 million, or 33.7% of
net sales, for the first quarter 1999. Reeves contributed $6.6 million to gross
profit in the first quarter 1999 on net sales, including inter-segment sales, of
$28.6 million.
Installed Home Improvements
Installed home improvement product gross profit decreased $173
thousand, or 1.4%, from $12.7 million, or 43.9% of installed home improvement
product sales, for the first quarter 1998 to $12.5 million, or 43.3% of
installed home improvement product sales, for the first quarter 1999. The
decrease in gross profit amount and the decrease in gross profit expressed as a
percentage of installed home improvement product sales were attributable to an
increase in total allowances and a decrease in total jobs installed, primarily
"furnished and installed" jobs directed by Sears, Roebuck and Co., partially
offset by higher average sales prices and increases in credit participation fee
income and finance interest income. The license fee incurred to Sears remained
constant at $2.9 million, or 10.4% 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 first
quarter 1998, compared to 10.5% of net installed home improvement product sales
for the first quarter 1999. On January 1, 1996, Sears and the Company entered
into an agreement which has been extended through June 30, 1999. 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 $319 thousand, or 2.1%, from $14.9 million, or 52.9%
of net installed home improvement product sales, for the first quarter 1998 to
$14.6 million, or 52.0% of net installed home improvement product sales, for the
first 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 was $6.6
million or 22.9% of gross (before inter-segment elimination) manufacturing and
wholesale distribution revenue. Gross profit, as a percentage of segment sales,
improved over the year-ago quarter index of 22.2%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $6.9
million, or 56.4%, from $12.3 million in the first quarter 1998 to $19.2 million
in the first quarter 1999 and, as a percentage of net sales, decreased from
42.6% to 33.9%. Reeves contributed $5.8 million in selling, general and
administrative expense in the first quarter 1999.
<PAGE>
Installed Home Improvements
Selling, general and administrative expenses for this segment
increased $1.2 million, or 9.8%, from $12.3 million in the first quarter 1998 to
$13.5 million in the first quarter 1999 and, as a percentage of installed home
improvement sales, increased from 42.7% to 46.9%. Direct advertising expense
increased $490 thousand, or 38.4%, from $1.3 million for the first quarter 1998
to $1.8 million for the first quarter 1999; as a percentage of net installed
sales, direct advertising expense increased from 4.5% for the first quarter 1998
to 6.3% for the first quarter 1999, reflecting partial carry-over into January
1999 of advertising placements for high-cost pay-per-lead ad placements and
reduced close ratios, partially offset by above-plan lead generating
effectiveness of ad placements. Selling commission expense, including attendant
payroll-related benefits, decreased $138 thousand, or 4.9%, from $2.8 million in
the first quarter 1998 to $2.7 million in the first quarter 1999; as a
percentage of net installed sales, selling commission expense decreased from
9.9% to 9.5% in the first quarter 1999. Sales representatives were 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 remained relatively constant at $100 thousand. 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 minimum draws and fixed auto allowances
offset by lower commission rates. The purpose of the change is to improve
recruiting and retention of field personnel. The balance of selling, general and
administrative expenses, primarily sales lead-generation activities,
administrative, field operations and Marquise payrolls and related costs and
general expenses, increased $852 thousand, or 10.4%, from $8.1 million, or 28.1%
of net segment sales, in the first quarter 1998 to $9.0 million, or 32.2% of net
segment sales, in the first quarter 1999. Included in general and administrative
expenses in the first quarter 1999 are information technology-related expenses
approximating $450 thousand not included in the first quarter 1998. Information
technology expenses are expected to continue into the second quarter before
expected benefits may be realized.
Manufacturing and Wholesale Distribution
Selling, general, and administrative expenses for this segment
includes selling expenses of $4.6 million representing the operations, primarily
payroll and related costs, and facilities and equipment costs, of 32
distribution centers and $1.1 million of general and administrative expenses.
Restructuring Expense
During the first quarter 1999, the Company recorded a $1.3 million
pre-tax charge for restructuring and related activities in its installed home
improvements segment. The $1.3 million charge was 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 quarter 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>
At March 31, 1999, the allowance for restructuring expense was
approximately $800 thousand.
Operating Interest Expense
Operating interest expense increased from $55 in the first quarter
1998 to $103 thousand in the first 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 $584 thousand from $160
thousand in the first quarter 1998 to $744 thousand in the first 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
Interest expense increased from $0 in the first quarter 1998 to
$1.1 million in the first quarter 1999. This increase relates to 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
capitalized leases related to the Company's new information technology systems.
Interest Income and Other
Interest income increased $33 thousand from $126 thousand in the
first quarter 1998 to $159 thousand in the first quarter 1999, primarily due to
finance income on Reeves's trade receivables partially offset by decreased
interest income from lower invested cash balances.
Income Tax Provision
The Company's income tax provision decreased from $124 thousand, or
an effective rate of 40.1%, for the first quarter 1998 to an income tax benefit
of $1.2 million, or an effective rate of 36.2%, for the first 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.
<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 and acquisitions. 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 three months 1999 and years 1998 and 1997 were
approximately $537 thousand, $3.8 million, and $4.3 million, respectively.
Capital expenditures for 1999 are expected to approximate $3.2 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 secured syndicated bank credit facility.
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,
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.
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's customers. In the fourth quarter
1996, as a follow-on objective to expanding Marquise'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 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 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
<PAGE>
principal amount of individual receivables purchased by Marquise from entities
other than the Company may significantly exceed the average amount of all
receivables owned by Marquise. 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 March 31, 1999, had
borrowed $4.5 million. At March 31, 1999, Marquise has approximately $9.6
million in net finance receivables. At March 31, 1999, Marquise had
approximately $600 thousand in outstanding commitments of the fixed rate,
secured loans. The Company anticipates that its existing cash balances, the bank
lines of credit, the sale of Marquise's consumer loan finance receivables as
market conditions may warrant from time to time and excess cash flow from its
installed home improvement businesses will be sufficient to satisfy the
Company's consumer financing cash requirements in the foreseeable future.
From its inception in June 1993, the Company has generated cash
flow from operations of approximately $28.2 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 March 31, 1999, the Company had approximately $26.4 million in
cash and cash equivalents and trade receivables and net working capital of $15.3
million. At March 31, 1999, the Company had $54.6 million in total debt
including $41.4 million borrowed under its bank lines of credit.
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. 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 Company's target is to ensure that all applications are Y2K
compliant by June 30, 1999. The assessment, planning, and preparation phases are
substantially complete. As of April 30, 1999, the implementation phase is
approximately 85% complete and costs incurred through March 31, 1999 approximate
$250,000. 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.
<PAGE>
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
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.
The Company is working to identify and analyze 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.
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 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 including 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,
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
<PAGE>
costs related thereto, 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 6. EXHIBITS
(a) Exhibits
(27) Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter.
<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: May 13, 1999
By:_________________________
Richard G. Reece
Vice President and
Chief Financial Officer
(For the Registrant and as
Principal Financial Officer)
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<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 5,398,000 7,480,000
<SECURITIES> 0 0
<RECEIVABLES> 21,044,000 7,554,000
<ALLOWANCES> 0 0
<INVENTORY> 16,196,000 0
<CURRENT-ASSETS> 51,876,000 19,411,000
<PP&E> 23,366,000 6,833,000
<DEPRECIATION> 2,704,000 1,025,000
<TOTAL-ASSETS> 126,606,000 57,648,000
<CURRENT-LIABILITIES> 36,589,000 13,471,000
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<OTHER-SE> 32,321,000 34,413,000
<TOTAL-LIABILITY-AND-EQUITY> 126,606,000 57,648,000
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<TOTAL-REVENUES> 56,603,000 28,876,000
<CGS> 37,534,000 16,189,000
<TOTAL-COSTS> 58,908,000 28,693,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 969,000 (126,000)
<INCOME-PRETAX> (3,274,000) 309,000
<INCOME-TAX> (1,186,000) 124,000
<INCOME-CONTINUING> (2,088,000) 185,000
<DISCONTINUED> 0 0
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<NET-INCOME> (2,088,000) 185,000
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