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 thirteen week period ended December 2, 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 January 4, 2001, there were 16,373,148 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
December 2, 2000
INDEX
Page
PART I Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - December 2, 2000 and February 26, 2000 2
Consolidated Statements of Operations - Thirteen and Forty Weeks
ended December 2, 2000 and Thirteen and Thirty-nine Weeks
ended November 27, 1999 3
Consolidated Statements of Stockholders' Equity (Deficit) - Forty
Weeks ended December 2, 2000 4
Consolidated Statements of Cash Flows - Forty Weeks
ended December 2, 2000 and Thirty-nine Weeks
ended November 27, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II Other Information
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
1
DESA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 2, February 26,
2000 2000
-------------- --------------
(in thousands) (in thousands)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 728 $ 173
Accounts receivable, net of allowances of ($2,016) at 88,019 32,921
December 2, 2000 and ($907) at February 26, 2000
Inventories:
Raw materials 604 209
Work-in-process 13,082 9,756
Finished goods 48,375 50,192
--------- ---------
62,061 60,157
Deferred tax assets 1,743 1,743
Other current assets 3,456 2,003
--------- ---------
Total current assets 156,007 96,997
Property, plant and equipment:
Land 526 525
Buildings and improvements 6,414 6,294
Machinery and equipment 42,355 39,361
Furniture and fixtures 1,106 1,090
--------- ---------
50,401 47,270
Less accumulated depreciation 34,494 30,574
--------- ---------
15,907 16,696
Goodwill, net 95,261 93,818
Other assets 19,393 22,266
--------- ---------
Total assets $ 286,568 $ 229,777
========= =========
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 42,013 $ 37,040
Accrued interest 6,880 5,233
Other accrued liabilities 25,621 13,225
Current portion of long-term debt 64,975 23,500
--------- ---------
Total current liabilities 139,489 78,998
Long-term debt 255,235 265,846
Other liabilities 15,403 15,629
--------- ---------
Total liabilities 410,127 360,473
Commitments and contingencies
Series C redeemable preferred stock, $.01 par value; authorized--
40,000 shares; issued and outstanding--23,805 shares at December 2,
2000 and 22,461 shares at February 26, 2000 (liquidation preference -
$25,018,000 at December 2, 2000 and $22,882,000 at February 26, 2000) 21,475 19,937
Stockholders' equity (deficit):
Common stock, $.01 par value; authorized-- 50,000,000 shares; issued and
outstanding-- 16,373,149 shares at December 2, 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 December 2, 2000
and February 26, 2000 1 1
Capital in excess of par value 103,334 98,075
Carryover predecessor basis adjustment (32,309) (32,309)
Accumulated deficit (213,056) (214,518)
Accumulated other comprehensive income (3,168) (2,037)
--------- ---------
Total stockholders' equity (deficit) (145,034) (150,633)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 286,568 $ 229,777
========= =========
See accompanying notes
2
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
Thirteen Weeks Thirteen Weeks Forty Weeks Thirty-nine Weeks
Ended Ended Ended Ended
December 2, 2000 November 27, 1999 December 2, 2000 November 27, 1999
----------------- ----------------- ---------------- ------------------
Net sales $144,317 $156,763 $325,558 $317,480
Cost of sales 92,690 100,983 214,664 210,783
-------- -------- -------- --------
Gross profit 51,627 55,780 110,894 106,697
Operating costs and expenses:
Selling 24,146 25,363 59,549 54,557
General and administrative 5,176 4,252 14,213 11,300
Other 1,724 1,613 5,185 4,677
-------- -------- -------- --------
31,046 31,228 78,947 70,534
-------- -------- -------- --------
Operating profit 20,581 24,552 31,947 36,163
Interest expense 8,313 7,589 24,925 21,551
-------- -------- -------- --------
Income before provision for income taxes 12,268 16,963 7,022 14,612
Provision for income taxes 5,668 7,727 3,230 6,788
-------- -------- -------- --------
Net income 6,600 9,236 3,792 7,824
Less dividends and accretion on preferred stock 777 699 2,330 2,047
-------- -------- -------- --------
Income applicable to common stockholders $ 5,823 $ 8,537 $ 1,462 $ 5,777
======== ======== ======== ========
See accompanying notes
3
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
(Unaudited)
Carryover Accumulated
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 income:
Net Income 3,792 3,792
Net change in
foreign currency
translation adjustment (1,131) (1,131)
------------
Comprehensive income 2,661
------------
Accretion of preferred stock (194) (194)
Dividends on preferred stock (2,136) (2,136)
Issuance of common stock 9 5,259 5,268
----------------------------------------------------------------------------------- ------------
Balance at
December 2, 2000 $164 $1 $103,334 ($32,309) ($213,056) ($3,168) ($145,034)
=================================================================================== ============
See accompanying notes
4
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Forty Weeks Thirty-nine Weeks
Ended Ended
December 2, 2000 November 27, 1999
---------------- ------------------
Cash flows from operating activities
Net income $ 3,792 $ 7,824
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 3,920 3,767
Amortization 4,866 4,478
Equity in undistributed earnings of joint venture (153) (158)
Change in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable, net (50,912) (57,918)
Inventories 3,457 (15,342)
Other current assets (1,320) (598)
Accounts payable 2,728 23,242
Accrued interest 1,683 5,417
Other accrued liabilities 6,434 11,990
Income taxes payable 3,413 6,470
Other liabilities (309) 161
-------- --------
Net cash used in operating activities (22,401) (10,667)
-------- --------
Investing activities
Capital expenditures (2,131) (3,069)
Dividends received from joint venture 179 139
Net cash paid for acquisition of businesses (11,196) --
Other 16 (825)
-------- --------
Net cash used in investing activities (13,132) (3,755)
-------- --------
Financing activities
Net proceeds from working capital loan 35,281 17,762
Net proceeds from Guaranteed Line of Credit 13,450 --
Decrease in note payable (1,878) (202)
Proceeds from term loans 6,000 --
Principal payments of term loans (11,401) (2,775)
Principal payments of acquisition loans (10,624) --
Issuance of common stock 5,268 25
Payment of debt financing costs (23) (703)
-------- --------
Net cash provided by financing activities 36,073 14,107
Effect of exchange rate changes on cash 15 --
-------- --------
Increase (decrease) in cash and cash equivalents for the period 555 (315)
Cash and cash equivalents at beginning of period 173 888
-------- --------
Cash and cash equivalents at end of period $ 728 $ 573
======== ========
See accompanying notes
5
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The interim consolidated financial statements for the periods presented herein
have not been audited by independent auditors. 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 accounting principles generally accepted in the
United States 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 accounting principles generally accepted in the United States 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., Heath Company Limited and Desico,
S.A. De C.V. 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 accounting principles
generally accepted in the United States 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.
6
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 December 2, 2000 and February 26, 2000, and for the thirteen and
forty weeks ended December 2, 2000 and thirteen and thirty-nine weeks ended
November 27, 1999.
Summarized consolidated balance sheet information (in thousands):
December 2, February 26,
2000 2000
----------------------------
Assets:
Current assets $ 261,251 $ 205,265
Net fixed assets 15,907 16,696
Goodwill, net 94,180 92,713
Other assets 19,393 22,266
--------- ---------
$ 390,731 $ 336,940
========= =========
Liabilities and stockholders' deficit:
Current liabilities $ 138,276 $ 78,554
Long-term debt 125,600 134,004
9 7/8% Senior Subordinated Notes 130,000 130,000
Other liabilities 15,403 15,629
Stockholders' deficit (18,548) (21,247)
--------- ---------
$ 390,731 $ 336,940
========= =========
Summarized consolidated statements of operations information (in thousands):
December 2, November 27, December 2, November 27,
2000 1999 2000 1999
(Thirteen (Thirteen (Forty Weeks) (Thirty-nine
Weeks) Weeks) Weeks)
-------------------------------------------------------- ------------------
Net Sales $144,317 $156,763 $325,558 $317,480
Income before
income taxes $ 12,259 $ 16,963 $ 6,983 $ 14,612
Income applicable
to common stockholders $ 6,591 $ 9,236 $ 3,753 $ 7,824
7
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Financing Arrangements
Outstanding borrowings consist of the following (in thousands):
December 2, 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) 29,001 37,500
Bank of America and various banks Term B Loan (C) 45,435 47,750
Bank of America and various banks Term C Loan (D) 5,413 --
Bank of America and various banks Working Capital Loan
Commitment (E) 60,660 25,379
Bank of America and various banks Acquisition Loan (F) 14,500 18,750
Bank of America and various banks Acquisition B Loan (G) 21,751 28,125
Note payable related to acquisition of Heath (H) -- 1,842
Guaranteed Line of Credit (I) 13,450 --
-------- --------
Total outstanding borrowings 320,210 289,346
Less current portion of long-term debt 64,975 23,500
-------- --------
Total long-term debt $255,235 $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. The Senior Subordinated 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 9.54% in year to date fiscal
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 9.79% in year to date fiscal
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 which commenced in
May 2000 and extend 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
9.68% in year to date fiscal 2001. Once repaid, the Term C Loan may not
be reborrowed.
8
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(E) The Working Capital Loan Commitment is payable at any time at the
option of DESA 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 9.51% in year to date fiscal 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 Commitment
up to $10 million. As of December 2, 2000 and February 26, 2000,
letters of credit of $3.0 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 which
commenced in February 2000 and extend 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 9.78% in year to date fiscal 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 which
commenced in February 2000 and extend 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 9.82% in year to date 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 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.
(I) The Guaranteed Line of Credit loan, as extended, is payable at any time
at the option of DESA prior to May 31, 2002, and accrues interest at
the prime rate plus .25% or LIBOR plus 1.75%, 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
8.54% in year to date fiscal 2001.
</FN>
In accordance with the terms of the Credit Facility, the ability of the Company
to incur additional indebtedness is limited, as defined. At December 2, 2000,
the Company can incur additional indebtedness of $11.3 million.
9
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Comprehensive Income
Comprehensive income consisted of the following (in thousands):
December 2, November 27, December 2, November 27,
2000 1999 2000 1999
(Thirteen (Thirteen (Forty Weeks) (Thirty-nine
Weeks) Weeks) Weeks)
-------------------------------------------------------------------------------
Net income $ 6,600 $9,236 $ 3,792 $ 7,824
Net change in foreign
currency translation
adjustment (591) (425) (1,131) (727)
-------------------------------------------------------------------------------
Comprehensive
Income $ 6,009 $8,811 $ 2,661 $ 7,097
===============================================================================
As of December 2, 2000 and November 27, 1999 the accumulated 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 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 December 2, 2000 and November 27,
1999 are presented below (in thousands):
Specialty
Zone Heating Products
Division Division Other Total
-------------------------------------------------------------------
Thirteen weeks ended December 2, 2000:
Net sales $ 97,516 $ 41,954 $ 4,847 $ 144,317
Operating profit (loss) 17,551 2,920 110 20,581
Depreciation and amortization 2,302 860 58 3,220
Identifiable assets 159,430 115,132 12,006 286,568
Capital expenditures 322 553 192 1,067
Thirteen weeks ended November 27, 1999:
Net sales $ 97,508 $ 51,933 $ 7,322 $ 156,763
Operating profit (loss) 19,214 3,778 1,560 24,552
Depreciation and amortization 2,259 654 47 2,960
Identifiable assets 157,758 113,712 15,188 286,658
Capital expenditures 4 417 0 421
10
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Specialty
Zone Heating Products
Division Division Other Total
-------------------------------------------------------------------
Forty weeks ended December 2, 2000:
Net sales $ 185,111 $ 132,703 $ 7,744 $325,558
Operating profit (loss) 22,581 10,738 (1,372) 31,947
Depreciation and amortization 6,164 2,452 170 8,786
Identifiable assets 159,430 115,132 12,006 286,568
Capital expenditures 1,077 724 330 2,131
Thirty-nine weeks ended November 27, 1999:
Net sales $ 166,678 $ 140,062 $ 10,740 $317,480
Operating profit (loss) 20,752 14,866 545 36,163
Depreciation and amortization 6,165 1,930 150 8,245
Identifiable assets 157,758 113,712 15,188 286,658
Capital expenditures 1,930 1,139 0 3,069
6. Acquisition
On April 3, 2000, DESA acquired the assets of Trine Products Company ("Trine")
located in Bronx, New York for consideration of approximately $11.0 million. The
Company financed the acquisition through borrowings of $6.0 million and the sale
of common stock for $5.0 million. The Company accounted for such acquisition
using the purchase method and has preliminarily allocated the purchase price to
the net assets acquired based on estimated fair values. Pro forma results of
operations as if the acquisition had occurred on the first day of fiscal 2001
and fiscal 2000, respectively, would not differ materially from reported
results. The results of operations have been included in Holdings' results of
operations from the acquisition date.
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 thirteen and forty week period ended December 2, 2000 and the
thirteen and thirty-nine week period ended November 27, 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.
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 fiscal 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 $11.0 million. 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
Thirteen Week Period Ended December 2, 2000, Compared to the Thirteen Week
Period Ended November 27, 1999
Net sales. Net sales in the thirteen weeks ended December 2, 2000 ("third
quarter 2001") were $144.3 million, a decrease of 7.9% or $12.4 million compared
to the thirteen weeks ended November 27, 1999 ("third quarter 2000"). Zone
heating division had net sales of $97.5 million in third quarter 2001,
approximately the same level as third quarter 2000. Specialty products division
had net sales of $42.0 million in the third quarter 2001, a decrease of 19.2% or
$10.0 million from third quarter 2000, primarily due to a reduction in generator
sales from the prior year's sales level that had been inflated by consumer Y2K
concerns offset by the acquisition of Trine.
Cost of Sales. Cost of sales for third quarter 2001 was $92.7 million, a
decrease of $8.3 million or 8.2% from third quarter 2000. The decrease was
attributable to the lower unit sales for the period. Cost of sales was 64.2% of
net sales in third quarter 2001 compared to 64.4% for third quarter 2000.
Selling, General and Administrative Expenses. For third quarter 2001, selling,
general and administrative expenses were $31.0 million, a decrease of $.2
million or 0.6% from third quarter 2000. As a percentage of net sales, selling,
general and administrative expenses were 21.5% for third quarter 2001 compared
to 19.9% in third quarter 2000. The increase as a percent of net sales is
primarily attributable to a change in the product and customer mix related to
sales program costs, redundant costs related to the planned integration of Trine
and start-up costs related to certain international operations.
Operating Profit. Operating profit was $20.6 million for third quarter 2001
compared to $24.6 million for third quarter 2000, a decrease of $4.0 million.
Operating profit attributable to zone heating products was $17.6 million for
third quarter 2001, a decrease of $1.7 million or 8.7% from third quarter 2000.
The decrease is primarily the result of increased sales program costs related to
a change in the product and customer mix compared to third quarter 2000.
Specialty products operating profit was $2.9 million for the third quarter 2001,
a decrease of $.9 million or 22.7% from third quarter 2000. This decrease is
primarily attributable to the decrease in net sales and related margins in third
quarter 2001.
EBITDA. EBITDA for the third quarter 2001 was $23.8 million, a decrease of $3.7
million or 13.5% from third 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 accounting principles
generally accepted in the United States.
Interest Expense. Interest expense for third quarter 2001 was $8.3 million, an
increase of $.7 million from third quarter 2000. The increase is primarily
attributable to market interest rate increases and higher levels of working
capital borrowing during the quarter.
Income Taxes. The effective income tax rate was 46.2% for third quarter 2001, an
increase of 0.6% compared to the third quarter 2000 rate of 45.6%. The increase
is primarily due to a change in the mix of foreign and domestic income compared
to fiscal year 2000.
Net Income. Net income was $6.6 million for third quarter 2001 compared to net
income of $9.2 million for third quarter 2000, a decrease of $2.6 million. The
decrease is primarily attributable to lower sales volumes and related margins,
and interest.
13
Forty Week Period Ended December 2, 2000, Compared to the Thirty-nine Week
Period Ended November 27, 1999
Net sales. Net sales in the forty weeks ended December 2, 2000 ("year to date
2001") were $325.6 million, an increase of 2.5% or $8.1 million compared to the
thirty-nine weeks ended November 27, 1999 ("year to date 2000"). Zone heating
division had net sales of $185.1 million in year to date 2001, an increase of
11.1% or $18.4 million from the year to date 2000. This increase is primarily
due to increased indoor heating and hearth product sales volumes. Specialty
products division had net sales of $132.7 million in the year to date 2001, a
decrease of 5.3% or $7.4 million from year to date 2000, primarily due to an
increase in home security product sales and the acquisition of Trine offset by a
reduction in generator sales from the prior year's sales that had been inflated
by consumer Y2K concerns.
Cost of Sales. Cost of sales for year to date 2001 was $214.7 million, an
increase of $3.9 million or 1.8% from year to date 2000. The increase was
attributable to the higher unit sales for the period. Cost of sales was 65.9% of
net sales in year to date 2001 compared to 66.4% for year to date 2000. The
improvement in cost of sales as a percent of net sales is primarily attributable
to the replacement of generator unit sales with heating and other specialty
product unit sales that are typically sold at higher margins.
Selling, General and Administrative Expenses. For year to date 2001, selling,
general and administrative expenses were $78.9 million, an increase of $8.4
million or 11.9% from year to date 2000. The proportional increase is primarily
attributable to direct selling costs associated with the net sales increase. As
a percentage of net sales, selling, general and administrative expenses were
24.2% for year to date 2001 compared to 22.2% in year to date 2000. The increase
as a percent of net sales is primarily the result of a change in the product and
customer mix related to sales program costs compared to year to date 2000.
Operating Profit. The operating profit was $31.9 million for year to date 2001
compared to $36.2 million for year to date 2000, a decrease of $4.3 million.
Operating profit attributable to zone heating products was $22.6 million for
year to date 2001, an increase of $1.8 million or 8.8% from year to date 2000.
The increase is primarily the result of increased sales and favorable changes in
product mix offset by the timing of sales related costs and costs related to a
change in customer mix. Specialty products operating profit was $10.7 million
for year to date 2001, a decrease of $4.1 million or 27.8% from year to date
2000. This decrease is primarily attributable to the decline in net sales,
redundant costs related to the planned integration of Trine and a change in the
product and customer mix related to sales program costs.
EBITDA. EBITDA for the year to date 2001 was $40.7 million, $3.7 million or 8.2%
lower than year to date 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 accounting principles generally accepted in the United
States.
Interest Expense. Interest expense for year to date 2001 was $24.9 million, an
increase of $3.4 million from year to date 2000. The increase is primarily
attributable to higher levels of working capital borrowing in support of
increased sales and market interest rate increases.
Income Taxes. The effective income tax rate was 46.0% for year to date 2001, a
decrease of 0.5% compared to the year to date 2000 rate of 46.5%. The decrease
is primarily due to a change in the mix of foreign and domestic income and
offset by an increase in non-deductible goodwill during fiscal year 2001.
Net Income. Net income was $3.8 million for year to date 2001 compared to a net
income of $7.8 million for year to date 2000, a decrease of $4.0 million. The
decrease is primarily attributable to higher selling, general and administrative
expenses and interest, offset by increased sales volumes and related margins.
14
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, borrowings under its revolving credit
facilities and the Guaranteed Line of Credit. 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 year to date 2001 was $22.4 million
compared to net cash used of $10.7 million for year to date 2000. This increased
use of cash in year to date 2001 was primarily due to lower net income and an
increased use of cash for working capital purposes.
Net cash used in investing activities was $13.1 million for year to date 2001,
compared to $3.8 million in year to date 2000. The use of cash in investing
activities in year to date 2001 reflects the acquisition of Trine for $11.2
million. Net cash provided by financing activities in year to date 2001 was
$36.1 million, compared to $14.1 million for year to date 2000. Cash provided by
financing activities in year to date 2001 reflects the proceeds of a term loan
and sale of common stock related to the Trine acquisition and increases in the
working capital loan and the Guaranteed Line of Credit associated with the net
increase in working capital offset by required principal payments on term loans
and acquisition loans.
The Credit Facility provides for commitments in an aggregate amount of up to
$191.1 million. Borrowings outstanding under the Credit Facility were $176.8
million on December 2, 2000. Outstanding letters of credit and foreign currency
contracts established to facilitate merchandise purchases were $3.0 million and
$2.7 million, respectively, at December 2, 2000. The Company had the ability to
incur additional indebtedness of $11.3 million at December 2, 2000 under the
Credit Facility. At December 2, 2000, DESA failed to meet the interest coverage
ratio covenant under the Credit Facility. On January 16, 2001, Holdings entered
into Amendment and Waiver No. 6 to the Loan Documents (the "Amendment"), an
amendment to their Credit Facility, which waives Holdings' failure to comply
with the requirements of the interest coverage ratio at December 2, 2000. The
Amendment also modified the interest coverage ratio covenant for the measurement
period ended March 3, 2001 and extended the maturity of the Guaranteed Line of
Credit.
The Company entered into an agreement for a $15.0 million Guaranteed Line of
Credit on May 25, 1999. The Guaranteed Line of Credit matures on May 31, 2002
and is guaranteed by UBS Capital LLC, a shareholder of the Company. Borrowings
under the Guaranteed Line of Credit bear interest at an annual rate equal to
either (at the Company's option) a margin over a base rate or a margin over
LIBOR. The Guaranteed Line of Credit contains customary covenants and events of
default.
The Company expects that capital expenditures during fiscal 2001 will not exceed
$4.0 million. Capital expenditures are expected to be funded from internally
generated cash flows and from borrowings under the Credit Facility.
Management believes that cash flow from operations, availability under the
Credit Facility and the Guaranteed Line of Credit 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. 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 million. As of December 2, 2000, approximately $30.7 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
15
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 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.
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
December 2, 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 of
the Company's remaining financial instruments at December 2, 2000 and February
26, 2000 (bracketed amount represents an asset):
December 2, 2000 February 26, 2000
Carrying Amount Fair Value Carrying Amount Fair Value
----------------------------------------------------------------------------
(in thousands)
Bank debt $176,760 $176,760 $157,504 $157,504
Senior subordinated notes 130,000 84,500 130,000 96,850
Guaranteed Line of Credit 13,450 13,450 -- --
Note payable -- -- 1,842 1,842
Foreign exchange contracts -- 77 -- 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
16
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.
17
PART II Other Information
Item 2. Changes in Securities and Use of Proceeds
During November 2000, options representing 583 shares were issued to employees
at an aggregate exercise price of $3,790. These shares are exempt from
registration under Section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities
At December 2, 2000, DESA failed to meet the interest coverage ratio covenant
under the Credit Facility. On January 16, 2001, Holdings entered into Amendment
and Waiver No. 6 to the Loan Documents, an amendment to their Credit Facility,
which waives Holdings' failure to comply with the requirements of the interest
coverage ratio at December 2, 2000. The Amendment also modified the interest
coverage ratio covenant for the measurement period ended March 3, 2001 and
extended the maturity of the Guaranteed Line of Credit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment No. 6 to the Loan Documents dated as of
January 16, 2001 to the Credit Agreement dated as of
November 26, 1997 by and among the Company, DESA
International, Inc., the Lender Parties party
thereto, UBS Securities LLC, Banc of America
Securities LLC (formerly NationsBanc Montgomery
Securities LLC) and Bank of America, N.A. (formerly
NationsBank, N.A.).
10.2 Amendment No. 2 to the Credit Agreement dated as of
January 16, 2001 to the Credit Agreement dated as of
May 26, 1999 between DESA International, Inc. and
Bank of America N.A. (formerly NationsBank, N.A.).
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the period for which this report
is made.
18
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: January 16, 2001 /s/ Stephen L. Clanton
Stephen L. Clanton
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
19