UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fourteen week period ended June 3, 2000
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 333-44969-01
DESA HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 61-1251518
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2701 Industrial Drive, Bowling Green, KY 42101
(Address of principal executive offices) (Zip Code)
(270) 781-9600
(Registrant's telephone number, including area code)
Indicate by check 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 [ ]
As of June 30, 2000, there were 16,333,070 shares of Registrant's Common Stock,
$.01 par value per share, and 90,604 shares of the Registrant's Nonvoting Common
Stock, $.01 par value per share, outstanding.
DESA HOLDINGS CORPORATION
FORM 10-Q
June 3, 2000
INDEX
Page
PART I Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - June 3, 2000 and February 26, 2000 3
Consolidated Statements of Operations - Fourteen Weeks ended
June 3, 2000 and Thirteen Weeks ended May 29, 1999 4
Consolidated Statements of Stockholders' Equity (Deficit) -
Fourteen Weeks ended June 3, 2000 5
Consolidated Statements of Cash Flows - Fourteen Weeks ended
June 3, 2000 and Thirteen Weeks ended May 29, 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II Other Information 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
DESA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
June 3, February 26,
2000 2000
--------------- --------------
(in thousands) (in thousands)
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 854 $ 173
Accounts receivable, net 44,782 32,921
Inventories:
Raw materials 681 209
Work-in-process 13,175 9,756
Finished goods 69,615 50,192
--------- ---------
83,471 60,157
Deferred tax assets 1,743 1,743
Other current assets 2,961 2,003
--------- ---------
Total current assets 133,811 96,997
Property, plant and equipment:
Land 526 525
Buildings and improvements 6,397 6,294
Machinery and equipment 40,692 39,361
Furniture and fixtures 1,090 1,090
--------- ---------
48,705 47,270
Less accumulated depreciation 31,560 30,574
--------- ---------
17,145 16,696
Goodwill, net 94,284 93,818
Other assets 21,310 22,266
--------- ---------
Total assets $ 266,550 $ 229,777
========= =========
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 46,421 $ 37,040
Accrued interest 7,026 5,233
Other accrued liabilities 8,037 13,225
Current portion of long-term debt 52,303 23,500
--------- ---------
Total current liabilities 113,787 78,998
Long-term debt 267,950 265,846
Other liabilities 15,881 15,629
--------- ---------
Total liabilities 397,618 360,473
Commitments and contingencies
Series C redeemable preferred stock, $.01 par value; authorized--
40,000 shares; issued and outstanding--22,461 shares at June 3,
2000 and at February 26, 2000 (liquidation preference - $23,606,000
at June 3, 2000 and $22,882,000 at February 26, 2000) 20,002 19,937
Stockholders' equity (deficit):
Common stock, $.01 par value; authorized--50,000,000 shares; issued and
outstanding-- 16,333,070 shares at June 3, 2000 and 15,562,656 shares
at February 26, 2000 164 155
Nonvoting common stock, $.01 par value; authorized--3,000,000
shares; issued and outstanding--90,604 shares at June 3, 2000
and February 26, 2000 1 1
Capital in excess of par value 103,074 98,075
Carryover predecessor basis adjustment (32,309) (32,309)
Accumulated deficit (219,809) (214,518)
Accumulated other comprehensive loss (2,191) (2,037)
--------- ---------
Total stockholders' equity (deficit) (151,070) (150,633)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 266,550 $ 229,777
========= =========
See accompanying notes
3
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
Fourteen Weeks Thirteen Weeks
Ended Ended
June 3, 2000 May 29, 1999
-------------- ---------------
Net sales $ 70,619 $ 62,793
Cost of sales 49,627 44,451
-------- --------
Gross profit 20,992 18,342
Operating costs and expenses:
Selling 15,142 12,635
General and administrative 4,416 3,602
Other 1,734 1,524
-------- --------
21,292 17,761
-------- --------
Operating (loss) profit (300) 581
Interest expense 8,192 6,628
-------- --------
Loss before benefit for income taxes (8,492) (6,047)
Benefit for income taxes (3,990) (2,659)
-------- --------
Net loss (4,502) (3,388)
Plus dividends and accretion on preferred stock 789 663
-------- --------
Loss applicable to common stockholders $ (5,291) $ (4,051)
======== ========
See accompanying notes
4
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
(Unaudited)
Carryover Cumulative
Nonvoting Capital in Predecessor Other Total
Common Common Excess of Basis Accumulated Comprehensive Stockholders'
Stock Stock Par Value Adjustment Deficit Loss Deficit
------------------------------------------------------------------------------------------------------
Balance at
February 26, 2000 $155 $1 $98,075 ($32,309) ($214,518) ($2,037) ($150,633)
Comprehensive loss:
Net Loss (4,502) (4,502)
Net change in
foreign currency
translation adjustment (154) (154)
----------
Comprehensive loss (4,656)
----------
Accretion of preferred stock (65) (65)
Dividends on preferred stock (724) (724)
Issuance of common stock 9 4,999 5,008
---------------------------------------------------------------------------------- ----------
Balance at
June 3, 2000 $164 $1 $103,074 ($32,309) ($219,809) ($2,191) ($151,070)
================================================================================== ==========
See accompanying notes
5
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Fourteen Weeks Thirteen Weeks
Ended Ended
June 3, 2000 May 29, 1999
---------------- ---------------
Cash flows from operating activities
Net loss $ (4,502) $ (3,388)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 986 959
Amortization 1,590 1,481
Equity in undistributed earnings of joint venture (51) (39)
Change in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable, net (6,250) (3,826)
Inventories (17,280) (16,110)
Other current assets (825) 26
Accounts payable 7,136 12,754
Accrued interest 1,794 3,273
Other accrued liabilities (2,084) (1,155)
Income taxes payable (4,452) (3,251)
Other liabilities 169 (49)
-------- --------
Net cash used in operating activities (23,769) (9,325)
-------- --------
Investing activities
Capital expenditures (438) (1,604)
Dividends received from joint venture 65 52
Net cash paid for acquisition of businesses (11,090) --
Other (1) (224)
-------- --------
Net cash used in investing activities (11,464) (1,776)
-------- --------
Financing activities
Increase in working capital loan 32,742 13,516
Decrease in note payable (1,842) --
Principal payments of term loans (2,868) (1,875)
Principal payments of acquisition loans (3,125) --
Proceeds from acquisition loans 6,000 --
Issuance of common stock 5,007 25
Payment of debt financing costs -- (688)
-------- --------
Net cash provided by financing activities 35,914 10,978
Effect of exchange rates on cash -- (2)
-------- --------
Decrease in cash and cash equivalents for the period 681 (125)
Cash and cash equivalents at beginning of period 173 888
-------- --------
Cash and cash equivalents at end of period $ 854 $ 763
======== ========
See accompanying notes
6
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The interim consolidated financial statements for the fourteen week period
ending June 3, 2000 and thirteen week period ending May 29, 1999 presented
herein have not been audited by independent public accountants. In the opinion
of management of DESA Holdings Corporation (with its consolidated subsidiaries,
"Company" or "Holdings"), all adjustments (consisting only of normal recurring
accruals) considered necessary to present fairly the results of operations for
the periods have been included. Interim results are not necessarily indicative
of results for a full year.
Sales of the Company's zone heating products follow seasonal patterns that
affect the Company's results of operations. Demand for the Company's zone
heating products has been historically highest in the third quarter, as
consumers prepare for winter. Consequently, the Company's net sales and the
Company's fiscal operating profit have also been historically highest during the
Company's fiscal third quarter. Management believes that the Company's results
of operations will continue to follow this pattern; there can be no assurance,
however, that third quarter results will always surpass those of the first and
second quarters, or that any improvement shown will be as great as that shown in
previous years. In particular, unusually warm weather in the fall may reduce
demand for zone heating products.
The unaudited consolidated financial statements have been prepared by the
Company in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
The consolidated balance sheet presented as of February 26, 2000, has been
derived from the consolidated financial statements that have been audited by the
Company's independent auditors. The consolidated financial statements and notes
thereto included herein should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K.
2. Summary of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, DESA International, Inc. ("DESA") and
all of its wholly-owned subsidiaries, including DESA Industries of Canada, Inc.,
DESA Europe BV, DESA Industries of V.I., Inc., and Heath Company Limited. All
significant intercompany accounts and transactions have been eliminated. DESA's
50% interest in a joint venture is accounted for using the equity method.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements; and
the reported amounts of revenues and expenses during the reported period. Actual
results can differ from those estimates.
7
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Summarized Financial Information of DESA International, Inc.
DESA is the issuer of the 9 7/8% Senior Subordinated Notes. The Company has not
presented separate financial statements and other disclosures concerning DESA
because management has determined that such information is not material to
holders of the Senior Subordinated Notes.
The following summarized consolidated financial information is being provided
for DESA as of June 3, 2000 and February 26, 2000, and for the fourteen weeks
ended June 3, 2000 and thirteen weeks ended May 29, 1999.
Summarized consolidated balance sheet information (in thousands):
June 3, February 26,
2000 2000
------------- -------------
Assets:
Current assets $ 239,220 $ 205,265
Net fixed assets 17,145 16,696
Goodwill, net 93,187 92,713
Other assets 21,310 22,266
--------- ---------
$ 370,862 $ 336,940
========= =========
Liabilities and stockholders' deficit:
Current liabilities $ 112,607 $ 78,554
Long-term debt 137,950 134,004
9 7/8% Senior Subordinated Notes 130,000 130,000
Other liabilities 16,187 15,629
Stockholders' deficit (25,882) (21,247)
--------- ---------
$ 370,862 $ 336,940
========= =========
Summarized consolidated statements of operations information (in thousands):
June 3, May 29,
2000 1999
(Fourteen Weeks) (Thirteen Weeks)
--------------------------------------
Net Sales 70,619 62,793
Loss before benefit for income taxes (8,492) (5,999)
Loss applicable to common stockholders (5,291) (4,358)
8
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Financing Arrangements
Outstanding borrowings consist of the following (in thousands):
June 3, February 26,
2000 2000
---------------------------
9 7/8% Senior Subordinated Notes due 2007 (A) $130,000 $130,000
Bank of America and various banks Term A Loan (B) 35,000 37,500
Bank of America and various banks Term B Loan (C) 47,423 47,750
Bank of America and various banks Term C Loan (D) 5,959 --
Bank of America and various banks Working Capital Loan
Commitment (E) 58,121 25,379
Bank of America and various banks Acquisition Loan (F) 17,500 18,750
Bank of America and various banks Acquisition B Loan (G) 26,250 28,125
Note payable related to acquisition of Heath (H) -- 1,842
-------- --------
Total outstanding borrowings 320,253 289,346
Less current portion of long-term debt 52,303 23,500
-------- --------
Total long-term debt $267,950 $265,846
======== ========
<FN>
(A) The Senior Subordinated Notes are payable on December 15, 2007 and
accrue interest at a rate of 9.875% per annum. Interest is payable
semi-annually on June 15 and December 15, commencing on June 15, 1998.
The Senior Notes can be redeemed prior to the mandatory redemption date
based upon the occurrence of certain events, as defined. DESA is the
issuer of the Senior Subordinated Notes, which are fully and
unconditionally guaranteed by Holdings.
(B) The Term A Loan is payable in quarterly installments through November
26, 2003, and accrues interest at the prime rate plus 2.00% or LIBOR
plus 3.00% at the option of DESA. Interest is payable on a quarterly
basis under the prime rate option or at the end of each LIBOR period.
The weighted average interest rate was 9.38% in first quarter 2001 and
8.03% in fiscal year 2000. Once repaid, the Term A Loan may not be
reborrowed.
(C) The Term B Loan is payable in quarterly installments through November
26, 2004, and accrues interest at the prime rate plus 2.25% or LIBOR
plus 3.25% at the option of DESA. Interest is payable on a quarterly
basis under the prime rate option or at the end of each LIBOR period.
The weighted average interest rate was 9.38% in first quarter 2001 and
8.52% in fiscal year 2000. Once repaid, the Term B Loan may not be
reborrowed.
(D) The Term C Loan is payable in quarterly installments and commenced in
May 2000 and extends through November 26, 2003, and accrues interest at
the prime rate plus 2.25% or LIBOR plus 3.25% at the option of DESA.
Interest is payable on a quarterly basis under the prime rate option or
at the end of each LIBOR period. The weighted average interest rate was
9.52% in first quarter 2001. Once repaid, the Term C Loan may not be
reborrowed.
(E) The Working Capital Loan Commitment is payable at any time at the
option of Holdings prior to November 26, 2003, and accrues interest at
the prime rate plus 2.00% or LIBOR plus 3.00%, at the option of DESA.
The weighted average interest rate was 9.88% in first quarter 2001 and
8.60% in fiscal year 2000. Interest is payable on a quarterly basis
under the prime rate option or at the end of each LIBOR period. DESA
can utilize letters of credit under the Working Capital Loan
9
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Commitment up to $10 million. As of June 3, 2000 and February 26, 2000,
letters of credit of $9.2 million and $1.5 million were outstanding
under the Working Capital Loan Commitment. Borrowings are generally
limited to specific percentages of eligible trade receivables and
inventory. Holdings pays commitment fees of 1/2 of 1% per annum on the
daily unutilized Working Capital Loan Commitment.
(F) The Acquisition Loan is payable in quarterly installments and commenced
in February 2000 and extends through November 26, 2003, and accrues
interest, which is payable quarterly, at the prime rate plus 2.25% or
LIBOR plus 3.25% at the option of DESA. The weighted average interest
rate was 9.50% in first quarter 2001 and 8.22% in fiscal year 2000.
Once repaid, the Acquisition Loan may not be reborrowed.
(G) The Acquisition B Loan is payable in quarterly installments and
commenced in February 2000 and extends through November 26, 2003 and
accrues interest, which is payable quarterly, at the prime rate plus
2.25% or LIBOR plus 3.25% at the option of DESA. The weighted average
interest rate was 9.44% in first quarter 2001 and 8.05% in fiscal year
2000. Once repaid, the Acquisition B Loan may not be reborrowed.
(H) The note payable is due on December 31, 2008 and accrues interest,
which is payable semi-annually beginning June 30, 1998, at a rate of
7.5% per annum. DESA may elect, upon written notice, to defer any
interest payments, in which event such interest payments shall
effectively convert to principal and accrue interest at a rate of 7.5%
per annum. In March 2000, the loan was fully satisfied through
reductions of principal for certain payments made under the terms of
the note.
</FN>
In accordance with the terms of the Credit Facility, the ability of the Company
to incur additional indebtedness is limited, as defined. At June 3, 2000, the
Company can incur additional indebtedness of $7.7 million.
4. Comprehensive Loss
Comprehensive loss consisted of the following (in thousands):
June 3, May 29,
2000 1999
(Fourteen (Thirteen
Weeks) Weeks)
----------------------------
Net loss $(4,502) $(3,388)
Net change in foreign currency
translation adjustment (154) (218)
------- -------
------- -------
Comprehensive loss $(4,656) $(3,606)
======= =======
As of June 3, 2000 and May 29, 1999 the cumulative other comprehensive loss
consisted solely of the Company's foreign currency translation adjustment.
5. Segment Information
In March 2000, the Company reorganized into three divisions. Each division is
comprised of dedicated operational resources required to support their specific
product and geographic categories, and shared administrative resources for
certain corporate functions. The divisions are: (a) zone heating division, which
includes indoor room heaters, hearth products and outdoor heaters sold in the
United States, (b) specialty products division, which includes specialty tools
and home security products sold in the United States and
10
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
all products sold in Canada and (c) international division, which includes zone
heating and specialty products sold in all geographic areas other than the
United States and Canada. Zone heating division and specialty products division
are reportable segments.
Identifiable assets are those assets of the Company that are identified with the
operations in each segment. Prior amounts have been reclassified to conform to
the current year's presentation. Operating results and other financial data for
the business segments for the periods ended June 3, 2000 and May 29, 1999 are
presented below (in thousands):
Specialty
Zone Heating Products
Division Division Other Total
----------------------------------------------------
Fourteen weeks ended June 3, 2000:
Net sales $ 23,869 $ 46,034 $ 716 $ 70,619
Operating profit (loss) (3,752) 4,312 (860) (300)
Depreciation and amortization 1,750 770 56 2,576
Identifiable assets 136,228 122,592 7,730 266,550
Capital expenditures 364 74 0 438
Thirteen weeks ended May 29, 1999:
Net sales 20,406 41,580 807 62,793
Operating profit (loss) (4,161) 5,454 (712) 581
Depreciation and amortization 1,764 624 52 2,440
Identifiable assets 116,365 101,642 4,977 222,984
Capital expenditures 850 754 0 1,604
6. Acquisition
On April 3, 2000, DESA acquired the assets of Trine Products Company ("Trine")
located in Bronx, New York for consideration of approximately $11.1 million,
subject to an adjustment for the final determination of acquired working
capital. The Company financed the acquisition through borrowings of $6.0 million
and the issuance of common stock for $5.0 million. The Company accounted for
such acquisition using the purchase method.
11
DESA HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report on Form 10-Q of DESA Holdings Corporation (the "Company"),
which includes its consolidated subsidiaries unless the context indicates
otherwise, contains statements that constitute forward looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Those statements appear in a number of places in this report and include
statements regarding the strategies, plans, beliefs or current expectations of
the Company and its management and other statements that are not historical
facts. Readers are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those set forth in such forward
looking statements as a result of various factors. Such factors include, but are
not limited to, the Company's vulnerability to adverse general economic and
industry conditions because of its leverage, the Company's ability to obtain
future financing on acceptable terms, the Company's ability to integrate
acquired companies and to complete acquisitions on satisfactory terms, the
demand and price for the Company's products relative to production costs and the
seasonality of the Company's business. The Company undertakes no obligation to
release publicly the results of any revisions to these forward looking
statements that may be made to reflect errors or circumstances that occur after
the date hereof.
The following discussion of the Company's results of operations and financial
condition for the fourteen week period ended June 3, 2000 and the thirteen week
period ended May 29, 1999, should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto contained herein, as
well as for the fiscal year ended February 26, 2000, included in the Company's
Annual Report on Form 10-K.
Overview
In March 2000, the Company reorganized into three divisions. Each division is
comprised of dedicated operational resources required to support their specific
product and geographic categories, and shared administrative resources for
certain corporate functions. The divisions are: (a) zone heating division, which
includes indoor room heaters, hearth products and outdoor heaters sold in the
United States, (b) specialty products division, which includes specialty tools
and home security products sold in the United States and all products sold in
Canada and (c) international division, which includes zone heating and specialty
products sold in all geographic areas other than the United States and Canada.
The Company records sales upon shipment of products to its customers. Net sales
constitute gross sales net of an accrual for returns and allowances and cash
discounts.
Sales of the Company's zone heating products follow seasonal patterns that
affect the Company's results of operations. Demand for the Company's zone
heating products has been historically highest in the third quarter, as
consumers prepare for winter. Consequently, the Company's net sales and the
Company's fiscal operating profit have also been historically highest during the
Company's fiscal third quarter. Management believes that the Company's results
of operations will continue to follow this pattern; there can be no assurance,
however, that third quarter results will always surpass those of the first and
second quarters, or that any improvement shown will be as great as that shown in
previous years. In particular, unusually warm weather in the fall may reduce
demand for zone heating products.
Sales of the Company's specialty products do not follow a significant seasonal
pattern and are not affected by weather patterns. Historically, these sales have
followed a relatively level quarterly pattern.
On April 3, 2000, DESA acquired the assets of Trine Products Company ("Trine")
located in Bronx, New York for consideration of approximately $11.1 million,
subject to an adjustment for the final determination of acquired working
capital. The Company financed the acquisition through borrowings of $6.0 million
and the issuance of common stock for $5.0 million. Trine's annual sales for
their most recent year-end (June 30, 1999) were approximately $25 million. Trine
produces a complete line of door chimes, and accessories for residential and
commercial applications. Trine products are sold through mass merchants, home
centers, retail chains and hardware cooperatives.
12
Results of Operations
Fourteen Week Period Ended June 3, 2000, Compared to the Thirteen Week Period
Ended May 29, 1999
Net sales. Net sales in the fourteen weeks ended June 3, 2000 ("first quarter
2001") were $70.6 million, an increase of 12.5% or $7.8 million compared to the
thirteen weeks ended May 29, 1999 ("first quarter 2000"). Zone heating division
had net sales of $23.9 million in first quarter 2001, an increase of 17.0% or
$3.5 million from the first quarter 2000. This increase is primarily due to
increased indoor heating and hearth product sales volumes. Specialty products
division had net sales of $46.0 million in the first quarter 2001, an increase
of 10.7% or $4.5 million over first quarter 2000, due to an increase in home
security product sales and the acquisition of Trine, offset by a reduction in
generator sales.
Cost of Sales. Cost of sales for first quarter 2001 was $49.6 million, an
increase of $5.2 million or 11.6% from first quarter 2000. The increase was
attributable to the higher unit sales for the period. Cost of sales was 70.3% of
net sales in first quarter 2001 compared to 70.8% for first quarter 2000.
Selling, General and Administrative Expenses. For first quarter 2001, selling,
general and administrative expenses were $21.3 million, an increase of $3.5
million or 19.9% from first quarter 2000. The proportional increase is primarily
attributable to selling costs associated with the net sales increase. As a
percentage of net sales, selling, general and administrative expenses were 30.2%
for first quarter 2001 compared to 28.3% in first quarter 2000. The increase as
a percent of sales is primarily the result of the timing of sales related costs,
a change in the product and customer mix related to sales program costs compared
to first quarter 2000, and higher administrative costs compared to first quarter
2000.
Operating Profit. The operating loss was $.3 million for first quarter 2001
compared to an operating profit of $.6 million for first quarter 2000, a
decrease of $.9 million. Operating loss attributable to zone heating products
was $3.8 million for first quarter 2001, a reduction of $.4 million or 9.8% from
first quarter 2000. The reduction is primarily the result of increased sales and
favorable changes in sales mix. Specialty products operating profit was $4.3
million for the first quarter 2001, a decrease of $1.1 million or 21% from first
quarter 2000. This decrease is primarily attributable to incremental costs
related to the inclusion of Trine and increased sales program costs.
EBITDA. EBITDA for the first quarter 2001 was $2.3 million, a decrease of $.7
million or 24.6% from first quarter 2000. EBITDA is defined as income (loss)
before income taxes plus interest expense and depreciation as well as
amortization expense associated with intangibles and deferred charges. EBITDA is
presented because it is a widely accepted financial indicator of a leveraged
company's ability to service and/or incur indebtedness and because management
believes that EBITDA is a relevant measure of the Company's ability to generate
cash without regard to the Company's capital structure or working capital needs.
However, EBITDA should not be considered as an alternative to net income as a
measure of a company's operating results or to cash flows from operating
activities as a measure of liquidity as defined by generally accepted accounting
principles.
Interest Expense. Interest expense for first quarter 2001 was $8.2 million, an
increase of $1.6 million from first quarter 2000. The increase is primarily
attributable to market interest rate increases and higher levels of working
capital borrowing in support of increased sales.
Income Tax. The income tax rate was 47% for first quarter 2001, an increase of
3% compared to the first quarter 2000 rate of 44%. The increase is primarily due
to an increase in non-deductible goodwill during fiscal year 2001.
Net Loss. The net loss was $4.5 million for first quarter 2001 compared to a net
loss of $3.4 million for first quarter 2000, an increase of $1.1 million. The
increase is primarily attributable to higher selling, general and administrative
expenses and interest, offset by increased sales volumes and related margins.
Liquidity and Capital Resources
The Company's primary cash needs have been for working capital, capital
expenditures and debt service requirements. The Company's sources of liquidity
have been cash flows from operations and borrowings under its
13
revolving credit facilities. The Company's business is subject to a pattern of
seasonal fluctuation. The Company's needs for working capital and the
corresponding debt levels tend to peak in the second and third fiscal quarters.
The amount of sales generated during the second and third fiscal quarters
generally depends upon a number of factors, including the level of retail sales
for heating products during the prior winter, current fall weather conditions
affecting the level of sales of heating products, general economic conditions,
and other factors beyond the Company's control.
Net cash used in operating activities for first quarter 2001 was $23.8 million
compared to net cash used of $9.4 million for first quarter 2000. This increased
use of cash in first quarter 2001 was primarily due to higher sales and
production in first quarter 2001 that resulted in increased accounts receivable
and inventory, offset by higher accounts payable.
Net cash used in investing activities was $11.5 million for first quarter 2001,
compared to $1.8 million in first quarter 2000. The use of cash for investing
activities reflects the acquisition of Trine for $11.1 million. Net cash
provided by financing activities in first quarter 2001 was $35.9 million,
compared to $11.0 million for first quarter 2000. Cash provided by financing
activities reflects the proceeds of a term loan and sale of common stock related
to the Trine acquisition, and an increase in the working capital loan associated
with the net increase in working capital.
The Credit Facility provides for commitments in an aggregate amount of up to
$207.2 million. Borrowings outstanding under the Credit Facility were $190.3
million on June 3, 2000. Outstanding letters of credit and foreign currency
contracts established to facilitate merchandise purchases were $9.2 million and
$4.5 million, respectively, on June 3, 2000. The Company had the ability to
incur additional indebtedness of $7.7 million at June 3, 2000 under the Credit
Facility. The Company is in compliance with all its covenants under the Credit
Facility.
The Company expects that capital expenditures during fiscal 2001 will be
approximately $5.0 million. Capital expenditures are expected to be funded from
internally generated cash flows and by borrowings under the Credit Facility.
Management believes that cash flow from operations, availability under the
Credit Facility and the J.W. Childs guaranteed facility will provide adequate
funds for the Company's foreseeable working capital needs, planned capital
expenditures and debt service obligations. Additionally, the Company reviews
potential acquisitions and relationships from time to time and may be required
to seek additional debt to fund any acquisition. The Credit Facility requires a
Clean-Up Period, as defined, under the Working Capital Loan Commitment, for a
period of 30 consecutive days occurring between January 1 and May 30 in each
calendar year commencing January 1, 1998. During the Clean-Up Period, the sum of
Working Capital advances, Letter of Credit advances and Swing Line loan advances
outstanding shall not exceed $30,000,000 for any Clean-Up Period. As of June 3,
2000, approximately $28.1 million of working capital borrowings have been
classified as current as a result of the Clean-Up requirement. Such amount may
be reborrowed after compliance with the Clean-Up Period. The Company's ability
to fund its operations, make planned capital expenditures, make scheduled debt
payments, make desired acquisitions, refinance indebtedness and remain in
compliance with all of the financial covenants under its debt agreements depends
on its future operating performance and cash flow, which in turn, are subject to
prevailing economic conditions and to financial, business and other factors,
some of which are beyond its control.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to the Company's operations result primarily from changes
in interest rates. The Company also has limited foreign currency risk associated
with its Canadian, European, and Hong Kong operations. A portion of the
Company's operations consists of purchasing and sales activities in foreign
jurisdictions. The Company manufactures its products in the United States and
Hong Kong, purchases products in Europe, China, and Japan and sells the products
primarily in the United States, Canada, and Europe. As a result, the Company's
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in the foreign markets in
which the Company operates. The Company employs established policies and
procedures to manage its exposure to fluctuations in interest rates and the
value of the foreign currencies. Interest rate and foreign currency transactions
are used only to the extent considered necessary to meet the Company's
objectives. The Company does not utilize derivative financial instruments for
trading or other speculative purposes. There have been no material changes in
the market risk to which the Company is exposed since the end of the Company's
preceding fiscal year.
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Interest Rate Risk
The Company's interest rate risk management objective is to limit the impact of
interest rate changes on its earnings and cash flow and to lower its overall
borrowing cost. To achieve its objectives, the Company regularly evaluates the
amount of its variable rate debt as a percentage of its aggregate debt. The
Company manages its exposure to interest rate fluctuations in its variable rate
debt through periodic review of the cost of interest rate swap agreements and
interest rate cap agreements relative to the perceived interest rate risk. At
June 3, 2000, the Company did not have an interest rate swap or interest rate
cap agreement in place.
The following table summarizes the carrying amounts and estimated fair values
the Company's remaining financial instruments at June 3, 2000 and February 26,
2000 (bracketed amount represents an asset):
June 3, 2000 February 26, 2000
Carrying Fair Value Carrying Fair Value
Amount Amount
------------------------------------------------------------------
(in thousands)
Bank debt $190,253 $190,253 $157,504 $157,504
Senior subordinated notes 130,000 100,750 130,000 96,850
Note payable -- -- 1,842 1,842
Foreign exchange contracts -- 603 -- 473
Based on the average outstanding amount of variable rate indebtedness of the
Company in FY 2000 a one percentage point change in the interest rates for the
Company's variable rate debt would have impacted the Company's fiscal 2000
interest expense by an aggregate of approximately $1.9 million.
Foreign Currency Exchange Rate Risk
The Company does not conduct a significant portion of its manufacturing or sales
activity in foreign markets. The Company's reported financial results could be
affected, however, by factors such as changes in foreign currency exchange rates
in the markets where it operates. When the U.S. dollar strengthens against such
foreign currencies, the reported U.S. dollar value of local currency operating
profits generally decreases; when the U.S. dollar weakens against such foreign
currencies, the reported U.S. dollar value of local currency operating profits
generally increases. The Company utilizes foreign exchange forward contracts to
mitigate the short-term effect of movements in currency exchange rates on the
Company's foreign currency based inventory purchases. The Company regularly
hedges by entering into foreign exchange forward contracts, approximately 85% to
95% of its budgeted (future) net foreign currency purchase transactions over a
period of four quarters. Gains and losses related to qualifying hedges of
foreign currency risk exposures are recorded when the related inventory is
purchased. Because the Company does not have significant foreign operations, the
Company does not believe it is necessary to enter into any other derivative
financial instruments to reduce its exposure to foreign currency exchange rate
risk.
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PART II Other Information
Item 2. Changes in Securities and Use of Proceeds
On March 19, 2000, options representing 1,183 common shares were exercised and
shares were issued to employees at an aggregate sale price of $7,700. On April
7, 2000, 769,231 shares were issued to certain employees and shareholders at an
aggregate sale price of $5,000,000. These shares are exempt from registration
under Section 4(2) of the Securities Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the period for which this report
is made.
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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.
DESA HOLDINGS CORPORATION
By:
Dated: July 13, 2000 /s/ Stephen L. Clanton
Stephen L. Clanton
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
17