UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 3, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 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 (I.R.S. Employer
of incorporation) Identification No.)
236 Public Square, Suite 103, Franklin, TN 37064
(Address of principal executive offices) (Zip Code)
(270) 781-9600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Title of Each Class Name of Exchange on Which Registered
Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of May 14, 2001, the aggregate market value of the Common Stock of the
registrant held by non-affiliates of the registrant was $1,436,856.
Number of shares of the registrant's Common Stock at May 14, 2001: 16,373,148
Number of shares of the registrant's Nonvoting Common Stock at May 14, 2001:
90,604
DESA HOLDINGS CORPORATION
FISCAL 2001 FORM 10-K ANNUAL REPORT
Table of Contents
PART I
Item 1. Business 2
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 10
Item 6. Selected Consolidated Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 18
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19
PART III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and Management 25
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 26
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT
SIGNATURES
1
CERTAIN IMPORTANT FACTORS This Annual Report on Form 10-K contains statements
that constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Annual Report on Form 10-K and include statements regarding the
strategies, beliefs or current expectations of Desa Holdings Corporation (with
its consolidated subsidiaries, the "Company") and its management. Readers are
cautioned that any such forward looking statements are not guarantees of future
performance and involve risks and uncertainties, which could cause actual
results to differ materially from those in the forward looking statements. 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 accompanying information
contained in this Annual Report on Form 10-K, including under the headings
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," identifies other important factors that could cause such
differences. The Company undertakes no obligation to release publicly the result
of any revision to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
PART I
Item 1. Business.
(a) GENERAL DEVELOPMENTS OF THE BUSINESS
DESA Holdings Corporation ("Holdings") was incorporated under the laws of the
State of Delaware in 1993 and through its consolidated subsidiaries, is a
leading designer, manufacturer and marketer of zone heating/home comfort
products and specialty products in the United States. The Company has developed
leading market positions in (i) vent-free indoor heaters, (ii) vent-free hearth
products, (iii) outdoor heaters, (iv) consumer powder-actuated fastening
systems, (v) electric chain saws, (vi) motion sensor lighting and (vii)
doorbells.
The Company sells its products through multiple consumer and commercial channels
of distribution including the leading home centers, mass merchants, warehouse
clubs, hardware cooperatives, specialty heating distributors, construction and
industrial equipment dealers, farm supply outlets and natural gas utilities
under brand names well recognized by its customers. The Company's strategy is to
aggressively target the fastest growing retailers/distributors in each channel
and service these customers through a multi-brand approach to capture the
largest possible share of a given product market. In addition, the Company
places a high emphasis on new product development and product line extensions.
At the beginning of fiscal 2001, the Company reorganized into three operating
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 manufactured or sold in all
geographic areas other than the United States and Canada.
On April 3, 2000, DESA International, Inc. ("DESA") acquired the assets of Trine
Products Company ("Trine") located in The Bronx, New York for consideration of
approximately $11 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.
2
(b) FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
The Company has two reportable business segments, zone heating division and
specialty products division. For additional information about the segments, see
Note 12 of Notes to Consolidated Financial Statements included in Item 14 of
Part III of this report.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
ZONE HEATING DIVISION
Zone heating division (56% of Fiscal 2001 Net Sales) includes indoor room
heaters, hearth products (gas logs, fireplaces and stoves) and outdoor heaters
sold in the United States. The Company is a leading manufacturer of vent-free
indoor and outdoor zone heating products in the United States. The Company
markets its zone heating products under well-known brand names such as Reddy
Heater(R), Remington(R), Vanguard(R), Master(R), Comfort Glow(R), Glowarm(R) and
Outdoor Leisure (R).
The zone heating market includes a broad range of products that are used to heat
limited areas as distinguished from central heating systems that are used to
heat entire buildings. The zone heating market is currently estimated to be
approximately $1 billion in size, with hearth products (i.e., vented gas hearth,
vent-free gas hearth, wood fireplaces, wood stoves/inserts, pellet
stoves/inserts) accounting for more than half of the total market; indoor gas
heaters, outdoor heaters, and accessories comprise the remainder of this
segment.
The Company's zone heating division is organized into four primary product
categories:
o Indoor vent-free
o Vent-free hearth
o Vented hearth
o Outdoor heating products
INDOOR VENT-FREE - Indoor vent-free heating appliances include vent-free liquid
propane gas and natural gas space heaters that provide economical supplemental
heat to a specific area as distinguished from central heating systems that are
used to heat entire buildings. Vent-free products utilize a more efficient
burner system that avoids the need for outside venting.
The Company's space heaters are generally wall-mounted and provide heat to the
surrounding area. Residential space heaters come in either vented or vent-free
versions. Vented heaters require a discharging of emissions outside of the
dwelling, while vent-free heaters utilize a more efficient burner system that
avoids the need for outside venting. Vent-free heaters are generally smaller and
more physically attractive than their vented counterparts. The Company has been
the market leader in vent-free gas heaters since 1983.
The Company offers a wide variety of models of vent-free gas heaters ranging in
output from 5,000 to 30,000 BTU/hour for use with natural gas or liquefied
propane gas. Key applications of these products include use in family rooms,
dens, kitchens and commercial offices. The Company's indoor vent-free heaters
are sold at retail prices that are significantly lower than vented gas heaters.
Vent-free heaters are classified into two different types: infrared and blue
flame. Infrared models employ ceramic plaque burners that glow red-orange while
in use and they produce radiant heat that warms people or objects in the room.
Blue flame models have a stainless steel burner hidden behind a darkened glass
front. When burning, a line of blue flame is visible across the width of
the heater. These models produce convection heat that warms the air and
distributes the heat throughout the room. Enhanced blue-flame models are
available for heavy-duty garage and
3
workshop applications. Optional accessories such as floor bases and fan
accessories are also available.
VENT-FREE HEARTH - Vent-free hearth products include gas logs, fireplaces and
stoves that are utilized for both decorative and economic heating. Vent-free
products utilize a more efficient burner system that avoids the need for outside
venting.
In 1993, the Company pioneered the introduction of vent-free gas technology to
hearth products with the introduction of a heat efficient vent-free decorative
gas log. Vent-free gas logs are an aesthetically attractive, economical and
efficient source of heat that are used primarily by individuals who enjoyed the
ambiance of a fireplace but wanted to avoid the trouble and inconvenience
associated with burning wood. The Company's vent-free logs utilize an efficient
burner system similar to vent-free heaters, and are thus less expensive to
install and operate than their vented counterparts.
Management estimates that the Company's products account for approximately 44%
of the vent-free hearth products sold in the United States, with no other
competitor accounting for more than 14%.
VENTED HEARTH - Vented hearth products include gas logs, fireplaces and stoves
that are utilized for both decorative and economic heating. Unlike vent-free
products, vented heaters require a discharging of emissions outside of the
dwelling.
The Company entered the vented hearth market in August 1998 by acquiring
Fireplace Manufacturers Inc. ("FMI"), a manufacturer of direct vent gas
fireplaces and gas logs, and wood burning metal fireplaces. The Company's vented
hearth products are primarily manufactured in Santa Ana, California. Management
estimates the vented hearth market in the United States at approximately $400
million.
OUTDOOR HEATING PRODUCTS - Outdoor heating products consist of portable units
which generate heat by either using a fan to discharge heated air to a specific
area (forced air heaters) or emitting heat throughout the surrounding area
without the assistance of a fan (convection heaters). Forced air heaters are
fueled by kerosene, propane or natural gas, while convection heaters are fueled
only with propane or natural gas. Outdoor heaters are used in both residential
and commercial applications. Residential applications include heating otherwise
unheated garages, workshops and outdoor work areas. Commercial applications
include heating factories, warehouses, construction sites and agricultural
areas.
SPECIALTY PRODUCTS DIVISION
The specialty products division (41% of Fiscal 2001 Net Sales) includes
specialty tools and home security lighting products sold in the United States
and all products sold in Canada. Specialty products division includes
powder-actuated fastening systems (tools and accessories) used to fasten wood to
concrete or steel and stapling/rivet tools, electrical products such as chain
saws and portable generators, chimes (wired and wireless) and motion sensor
lighting products. These products are marketed under well-known brand names such
as Remington(R), Master(R), Powerfast(R), Trine(R), Heath/Zenith(R) and
JourneyMan (R). These products are sold to both Do-it-yourself ("DIY") and
commercial customers.
Specialty products division is organized into four main product categories:
o Motion Sensor lighting
o Specialty Fastening Systems Products
o Electrical Products
o Chimes (doorbells)
4
MOTION SENSOR LIGHTING - The Company's motion sensor lighting products, marketed
under the Heath/Zenith (R) and JourneyMan (R) brands, are comprised of two
primary product categories: Motion Sensor Security Lighting and Motion Sensor
Decorative Lighting. The Company's primary focus is to de-emphasize promotional
products and to emphasize its high quality, high margin products that are made
with metal fixtures and hoods, and which contain such value-added features as
Pulse Count, Dual BriteTM and Range Boost. The security lighting products
include halogen and traditional PAR (flood) lighting fixtures. Decorative
lighting products include cast aluminum lanterns and solid brass lanterns.
Management estimates that the North American residential motion sensor lighting
market to be in excess of $125 million.
The Company designs and manufactures its products through its Hong Kong based
subsidiary, Heath Company Ltd., which provides purchasing, engineering, contract
manufacturing, administration and assembly. The Company uses subcontractors in
China who assemble products according to predetermined specifications and ship
assembled products to Heath Ltd. The Company owns all the tooling utilized in
the production of its products. Finished products are shipped to the Company's
warehouse in Manchester, Tennessee and a public warehouse in Reno, Nevada and
distributed throughout North America directly to customers.
SPECIALTY FASTENING SYSTEMS - Specialty fastening systems include
powder-actuated tools, power loads and fasteners. Powder-actuated tools utilize
a powder load to drive nails for fastening wood to concrete or steel. The charge
is activated using either a trigger on the tool or by striking the tool with a
hammer. The energy discharged propels a piston inside the tool that in turn
drives the nail. The Company sells two powder-actuated tools targeted at the DIY
market and seven tools targeted at the commercial market. Sales of powder loads
and fasteners account for over 50% of this product category's revenues.
The Company manufactures and packages the fasteners (pins) for sale with its
powder-actuated tool product line. Powder-actuated tools are sourced from a
manufacturing joint venture with Continental/Midland, Inc. and loads are
purchased from a third party. Powerfast(R) stapling products are sourced from
Asian manufacturers.
The Company is the market leader in the U.S. retail powder-actuated tool market
that includes the commercial and DIY markets. The Company estimates that it has
an 85% market share.
ELECTRICAL PRODUCTS - The Company assembles electric chain saws from components
made to its specifications by third-party suppliers. Electric generators are
assembled on a chassis by connecting gasoline engines purchased from Honda and
Briggs & Stratton with an alternator purchased from a European supplier. The
Company assembles and markets a line of electric chain saws that are used
primarily by homeowners for light-duty pruning and trimming. The Company offers
several models including an extended reach polesaw.
Management estimates the domestic electric chain saw market is approximately $45
million in size, and that the Company is the market leader with a 72% share. The
electric chain saw market is mature and industry volume has been reasonably
stable over the past five years. The Company traditionally maintains a modest
presence in the portable electric generator market.
CHIMES - Chimes include door chimes (both wired and wireless), push buttons,
transformers, bells, buzzers and accessories. The products are primarily
imported from the Far East and are either ready to ship or require some assembly
and packaging in the U.S. The Company uses subcontractors in China who
manufacture and assemble products according to predetermined specifications.
Finished products are shipped to the Company's warehouse in Manchester,
Tennessee and a public warehouse in Reno, Nevada and distributed throughout
North America directly to customers.
Management estimates the U.S. wired and wireless doorbell market to be in excess
of $65 million. The Company has a 76% market share and is the market leader in
the wireless segment
5
of the U.S. doorbell industry. The Company offers a diverse line of products and
utilizes a proprietary sound chip to differentiate itself. The wireless control
systems industry is a diverse industry that includes products ranging from home
automation systems to garage door openers to wireless doorbells. The Company
also competes in the wired doorbell segment of the U.S. doorbell industry and is
the market leader with a 49% share.
SALES, MARKETING AND DISTRIBUTION
SALES - The Company has organized its domestic sales force by channels of
distribution and product categories in order to optimize the effectiveness of
its selling efforts. The Company's management believes that such a structure
enhances the Company's relationships with key channel participants by (i)
enabling the sales force to develop specific customer insights regarding
specialized needs and (ii) creating a sense of partnership through customized
attention and focus.
DESA Sales Channel of Distribution Products Marketed Approximate Number
Organization of Sales
Representatives
- ------------------------------------------------------------------------------------------------------
General Consumer Mass Merchants Indoor Heating 100
Hardware Co-ops Hearth Products
Home Centers Outdoor Heating
Warehouse Clubs
Catalog Showrooms
Agricultural Supply
Auto Parts Retailers
Specialty Heating Utilities Indoor Heating 25-35
Propane Marketers Hearth Products
Specialty Distributors Outdoor Heating
Appliance Distributors
Construction Equipment Distributors Outdoor Heating 50-60
Equipment Renters Generators
Specialty Products Mass Merchants Specialty Fastening Systems 125
Hardware Co-ops Electrical Products
Home Centers Warehouse Home Security
Stores
Catalog Showrooms
Agricultural Supply
MARKETING - The Company's marketing staff utilizes a variety of traditional and
innovative programs to increase consumer awareness and augment sales. The
Company uses limited national advertising and relies instead on local customer
advertising through newspapers and circular flyers. The Company has also created
a broad national network of independent, factory-trained service centers to
provide local support to customers and end-users.
DISTRIBUTION - The Company's significant customers include all of the major home
center accounts. The Company's consumer channels, which include home centers,
mass merchants, warehouse clubs and hardware co-ops, are the largest channel for
The Company's products. Other channels, include specialty heating, farm,
construction, heating-ventilation-air conditioning (HVAC), electrical wholesale
distribution and industrial.
6
INTERNATIONAL
In fiscal 2001, $18.6 million or 5% of the Company's gross sales were generated
in international markets such as Canada, Europe, Mexico and the Far East. The
Company believes that the international category represents a significant
opportunity for increased sales in the future, and during fiscal 2001 the
Company renewed its focus on global markets. During fiscal 2001, the Company
established Desico S.A. de C.V., a manufacturing and sales office in Monterey,
Mexico. Desico began manufacturing and selling to the Mexican market during
third quarter of fiscal 2001.
Also, during fiscal 2001, the Company established a selling office in the United
Kingdom and initiated a manufacturing subsidiary in the Europe Economic
Community. The Company expects to begin manufacturing in the second quarter of
fiscal 2002.
The Company's strategy for the international markets has been to export
customized versions of its products to accommodate local electrical
requirements, government regulation and user preferences for its exported
products. With the renewed focus on global markets, the Company has begun to
develop products specifically for international markets.
COMPETITION
Each of the business segments in which the Company manufactures and sells
products is highly competitive. Although competitive factors vary by product
line, competition in all product lines is based primarily on product quality,
product innovation, customer service and price. The Company also believes that a
manufacturer's relationship with its distributors and principal customers is a
key factor in the business segments in which the Company competes.
The Company competes with a number of manufacturers in the heating products
industry. Within this industry, there are several manufacturers of gas heaters
and numerous producers of gas logs, pre-engineered fireplaces and solid fuel
heaters. The Company also competes with a number of manufacturers in the
specialty tool industry. The Company believes that it is a market leader in the
outdoor heating appliance, vent-free indoor gas heating and hearth and DIY
powder-actuated fastener, doorbell and electric chain saw markets and believes
that its experience, well-recognized brand names, comprehensive product
offerings and strong customer relationships give it a competitive advantage with
respect to these products.
The Company's competitors offer a number of products that directly compete with
or can be utilized as substitutes for the products manufactured by the Company.
No assurance can be given that the future sales of such competitive products
will not adversely affect the market for the Company's products. In addition,
certain of the Company's competitors, particularly in the specialty tool
industry, are larger and better capitalized than the Company.
SIGNIFICANT CUSTOMERS
Significant customers include Home Depot and Lowe's, the two largest home
centers in the world, who accounted for 31% and 16% of net sales in fiscal year
2001, respectively. Ace and TruServ, leaders in the hardware co-op market; Sears
and Wal-Mart, major mass merchandisers; Sam's and Costco, major warehouse clubs;
and W.W. Grainger, a major industrial supply company are also major customers.
Consistent with industry practices, the Company does not operate under a
long-term written supply contract with any of its customers.
7
TRADEMARKS, PATENTS AND LICENSES
The success of the Company's various businesses depends in part on the Company's
ability to exploit certain proprietary designs, trademarks and brand names on an
exclusive basis in reliance upon the protections afforded by applicable
copyright, patent and trademark laws and regulations. The loss of certain of the
Company's rights to such designs, trademarks and brand names or the inability of
the Company to protect effectively or enforce such rights could adversely affect
the Company.
BACKLOG
The Company's backlog consists of cancelable orders and is dependent upon trends
in consumer demand throughout the year. Customer order patterns vary from year
to year, largely because of annual differences in consumer end-product demand,
marketing strategies, overall economic conditions and weather conditions. Orders
for the Company's products are generally subject to cancellation until shipment.
As a result, comparison of backlog as of any date in a given year with the
backlog at the same date in a prior year is not necessarily indicative of sales
trends. Moreover, the Company does not believe that backlog is necessarily
indicative of the Company's future results of operations or prospects. The
Company's backlog of orders was approximately $8.7 million at March 3, 2001
compared to $16.7 million at February 26, 2000.
The Company's warranty policy is to accept returns of products with defects in
materials or workmanship. The Company will also accept returns of incorrectly
shipped goods where the Company has been notified on a timely basis. During
fiscal years 2001 and 2000, warranty costs amounted to approximately 2.0% and
2.0%, respectively, of sales.
RAW MATERIALS
The Company purchases raw materials and components from a variety of vendors and
generally most items are available from multiple sources. Major raw materials
and components include coil steel, valves, burners, controls, paint, motors,
fans, electrical parts, loads and packaging materials. Management believes that
the materials used in the production of the Company's products are available at
competitive prices from an adequate number of alternative suppliers and does not
believe that the loss of any single supplier would have a material adverse
effect on the Company's business.
ENVIRONMENTAL LIABILITY
The Company is subject to various evolving federal, state and local
environmental laws and regulations governing, among other things, emissions to
air, discharge to waters and the generation, handling, storage, transportation,
treatment and disposal of hazardous and non-hazardous substances and wastes.
These laws and regulations provide for substantial fees and sanctions for
violations and, in many cases could require the Company to remediate a site to
meet applicable legal requirements. A Phase I environmental audit of the
Company's manufacturing facilities was completed on August 9, 1997 (February 14,
2000 for the Company's Bronx, NY facility) and did not identify any material
matters. The Company believes, although there can be no assurance, that
liabilities relating to environmental matters will not have a material adverse
effect on its future financial position or results of operations.
EMPLOYEES
The Company's zone heating products operation is seasonal. As a result, the
number of workers employed by the Company at any particular time varies. The
work force is accustomed to seasonal layoffs of two to four months. In 2001,
total employment averaged 1,408 with a low of 1,105 employees in March and a
peak of 1,697 employees in October.
8
The hourly labor force in Bowling Green, Kentucky is represented by the Sheet
Metal Workers International Association (AFL-CIO) under a three-year contract
expiring in June 2001. The hourly labor force in The Bronx, New York is
represented by the United Steelworkers of America (AFL-CIO) under a three-year
year contract expiring August 2001. The Company considers its labor relations to
be good. The Manchester and Shelbyville, Tennessee and Santa Ana, California
facilities are non-union plants.
The hourly labor force in Bowling Green, Kentucky is covered by a defined
benefit pension plan. All other employees are covered by a defined contribution
plan (401K). All workers are covered by self-insured medical plans.
Item 2. Properties.
The principal executive offices for the Company are located at 236 Public
Square, Suite 103, Franklin, Tennessee 37064, telephone: (615) 599-6501.The
Bowling Green, Kentucky facilities serve as the administrative services offices
for all divisions. The Company's zone heating products are primarily
manufactured in Bowling Green, Kentucky and Santa Ana, California. The Company
also leases warehouse space in Bowling Green, Kentucky and Manchester, Tennessee
as needed. The manufacturing facilities in Manchester, Tennessee and The Bronx,
New York produce the specialty products sold by the Company. In addition to
these manufacturing facilities, the Company leases sales offices and warehouse
locations in Toronto, Canada, Rotterdam, Holland and Hong Kong, China.
Location Square Footage Ownership Function
- ----------------------------------------------------------------------------------------------------------
Franklin, Tennessee 2,000 Leased Corporate Headquarters
Bowling Green, Kentucky 225,000 Owned Corporate and zone heating
28 acres Administrative offices,
Manufacturing, Engineering,
Distribution
Bowling Green, Kentucky 450,000 Leased Specialty products administrative
21 acres offices, Distribution
Shelbyville, Tennessee 123,000 Leased Manufacturing
14 acres
The Bronx, New York 42,000 Leased Manufacturing, Distribution
Santa Ana, California 101,125 Leased Manufacturing, Distribution
Manchester, Tennessee 107,850 Leased Manufacturing, Distribution
7 acres
Toronto, Canada 9,400 Leased Sales offices, Distribution
Rotterdam, Holland 5,200 Leased Sales offices, Distribution
Hong Kong, China 9,100 Leased Procurement, Distribution
Management believes its facilities are in good condition and are adequate for
its operating needs for the foreseeable future without significant modifications
or capital investment. Manufacturing
9
operations in the Shelbyville facility will be moved to Bowling Green during
first quarter fiscal 2002. Management is reviewing alternatives for utilization
of the Shelbyville facility.
Item 3. Legal Proceedings.
The Company is a party to various litigation in the normal course of its
business activities, none of which is expected to have a material adverse effect
on the Company. Although the Company has not experienced significant product
liability claims to date, the Company carries occurrence-based product liability
insurance coverage with a $101 million limit, $250,000 self insured retention
("SIR") and an aggregate annual capped SIR exposure to the Company of $1
million.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2001.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
There is no established public trading market for the Company's Common Stock or
the Nonvoting Common Stock.
There are 82 holders of the Company's Common Stock and one holder of the
Company's Nonvoting Common Stock as of May 14, 2001. The Company has not paid
any dividends on any class of common equity in the last two years and is
prohibited from doing so by the terms of the senior credit facility.
Item 6. Selected Consolidated Financial Data.
Set forth below are selected historical consolidated financial data of the
Company. The summary historical consolidated financial data as of March 3, 2001
and February 26, 2000, and for each of the years in the three year period ended
March 3, 2001 have been derived from our audited consolidated financial
statements. The summary historical consolidated financial data as of February
28, 1998 and March 1, 1997 and for the two year period ended February 28, 1998
have been derived from our audited consolidated financial statements which are
not included elsewhere herein. The information presented below is qualified in
its entirety by, and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and notes thereto included elsewhere in this
Annual Report.
10
Fiscal Year
-------------------------------------------------------------------
2001(1)(11) 2000 1999 (10) 1998(2)(9) 1997
----------- ---- --------- ---------- ----
(in Thousands)
Statement of Income Data(12):
Net sales(3) $ 403,092 $ 393,924 $ 317,237 $ 224,169 $ 209,105
Cost of sales 267,651 264,293 214,369 145,770 131,168
-----------------------------------------------------------------
Gross profit 135,441 129,631 102,868 78,399 77,937
Operating costs and expenses 101,660 91,799 73,043 50,191 45,257
-----------------------------------------------------------------
Operating profit 33,781 37,832 29,825 28,208 32,680
Interest expense 32,598 28,853 27,864 17,327 14,509
-----------------------------------------------------------------
Income before provision for income
taxes and extraordinary item 1,183 8,979 1,961 10,881 18,171
Income taxes 488 4,909 947 5,430 7,621
-----------------------------------------------------------------
Income before extraordinary item 695 4,070 1,014 5,451 10,550
Extraordinary item(4) -- -- -- 2,308 --
-----------------------------------------------------------------
Net income 695 4,070 1,014 3,143 10,550
Less dividends and accretion on
preferred stock 3,136 2,769 2,480 607 --
-----------------------------------------------------------------
Net income (loss) available for
common stockholders $ (2,441) $ 1,301 $ (1,466) $ 2,536 $ 10,550
=================================================================
Ratio of earnings to fixed
charges(5) 1.0x 1.3x 1.1x 1.6x 2.1x
Other Data(12):
EBITDA(6) $ 44,909 $ 48,307 $ 38,412 $ 32,920 $ 37,216
EBITDA margin(7) 11.1% 12.3% 12.1% 14.7% 17.8%
Capital expenditures 3,771 5,529 4,462 5,475 2,770
Depreciation 4,528 4,425 3,589 2,456 2,432
Amortization 6,600 6,050 4,998 2,256 2,104
Net cash provided by operating 1,314 14,590 2,307 1,146 18,398
activities
Net cash used in investing activities (14,991) (5,434) (45,233) (45,980) (2,882)
Net cash provided by (used in) 15,900 (9,871) 43,012 40,590 (10,599)
financing activities
Balance Sheet Data (at period end):
Cash and cash equivalents 2,388 173 888 794 5,058
Working capital (deficit)(8) 6,631 16,361 26,929 26,703 (8,789)
Total assets 233,896 228,139 202,638 155,244 91,761
Long-term debt (less current
portion) 249,163 265,846 285,138 261,105 130,600
Redeemable preferred stock 23,057 19,937 17,207 14,661 --
Stockholders' equity (deficit) (150,057) (152,271) (152,652) (162,799) (84,977)
- ----------------------
(1) 53-week fiscal year.
(2) The Company was party to a recapitalization in November 1997 which impacted
interest expense, stockholders' equity (deficit) and long term debt.
(3) Net sales constitute gross sales net of an accrual for returns and
allowances and cash discounts.
(4) Extraordinary items relate to the write-off of unamortized deferred
financing costs at the time the Company refinanced its existing debt
obligations and other expenditures related to the recapitalization
transactions in fiscal year 1998.
11
(5) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest expense,
amortization of deferred financing cost and a portion of rent expense from
operating leases which the Company believes is a reasonable approximation
of the interest factor included in the rent.
(6) EBITDA is defined as income before income taxes plus interest expense and
depreciation as well as amortization of 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. EBITDA as presented may not be comparable to similarly titled
measures used by other companies, depending upon the non-cash charges
included. When evaluating EBITDA, investors should also consider other
factors which may influence operating and investing activities, such as
changes in operating assets and liabilities and purchases of property and
equipment.
(7) EBITDA margin is defined as EBITDA divided by net sales.
(8) The Company's business is subject to a pattern of seasonal fluctuation. As
such, the Company's needs for working capital tend to peak in the second
and third fiscal quarters.
(9) Includes Heath/Zenith data for the period from February 4, 1998 (date of
acquisition) to February 28, 1998.
(10) Includes FMI and Universal Heating Inc. data for the period from August 19,
1998 (date of acquisitions) through February 27, 1999.
(11) Includes Trine data for the period from April 7, 2000 (date of acquisition)
forward.
(12) During fiscal 2001, the Company changed its method of accounting for
inventories from the last in, first out ("LIFO") method to the first-in,
first out ("FIFO") method. As a result of this change, all periods have
been restated to conform to the FIFO method of inventory valuation. See
footnote 1 to the Consolidated Financial Statements contained in Part IV
hereof.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
The following discussion should be read in conjunction with "Selected
Consolidated Financial Data" and the audited Consolidated Financial Statements
of the Company and the notes thereto included elsewhere in this Annual Report.
The Company is organized in 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
(approximately 56% of net sales), (b) specialty products division, which
includes specialty tools and home security products sold in the United States
and all products sold in Canada (approximately 41% of net sales) and (c)
international division, which includes zone heating and specialty products sold
in all geographic areas other than the United States and Canada (approximately
3% of net sales).
12
Zone heating division and specialty products division are reportable segments.
Prior amounts have been reclassified to conform to the current year's
presentation:
Principally due to sales of zone heating products, the Company's business is
seasonal, as depicted by the following table that sets forth certain operating
results of the Company for each of the four consecutive fiscal quarters in the
periods ending March 3, 2001, February 26, 2000 and February 27, 1999 (dollars
in thousands).
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------------
Fiscal 2001
Total net sales $ 70,619 $110,622 $144,713 $ 77,138 $403,092
Operating profit (loss) $ (300) $ 11,666 $ 20,581 $ 1,834 $ 33,781
Fiscal 2000
Total net sales $ 67,793 $ 97,924 $156,763 $ 71,444 $393,924
Operating profit $ 581 $ 11,030 $ 24,552 $ 1,669 $ 37,832
Fiscal 1999
Total net sales $ 40,754 $ 75,416 $134,679 $ 66,388 $317,237
Operating profit (loss) $ (1,372) $ 8,746 $ 22,580 $ (129) $ 29,825
Approximately 60% to 70% of annual sales occur in the second and third fiscal
quarters (June-November) as the Company's zone heating customers place early
booking orders for shipment in anticipation of the winter selling season.
Approximately 44% of the Company's annual sales volume is booked in the
five-month period of March through July.
Results of Operations
The following table sets forth certain income statement information for the
Company for the fiscal years ended March 3, 2001, February 26, 2000 and February
27, 1999.
Fiscal Year Ended
------------------------------------------------------------------------------
Percentage Percentage Percentage
2001 of Net Sales 2000 of Net Sales 1999 of Net Sales
------------------------------------------------------------------------------
Net sales $403,092 100.0% $393,924 100.0% $317,237 100.0%
Cost of sales 267,651 66.4% 264,293 67.1% 214,369 67.6%
------------------------------------------------------------------------------
Gross profit 135,441 33.6% 129,631 32.9% 102,868 32.4%
Operating costs and 101,660 25.2% 91,799 23.3% 73,043 23.0%
expenses
------------------------------------------------------------------------------
Operating profit 33,781 8.4% 37,832 9.6% 29,825 9.4%
Interest expense 32,598 8.1% 28,853 7.3% 27,864 8.8%
------------------------------------------------------------------------------
Income before provision for 1,183 0.3% 8,979 2.3% 1,961 0.6%
income taxes
Provision for income taxes 488 0.1% 4,909 1.2% 947 0.3%
------------------------------------------------------------------------------
Net income $ 695 0.2% $ 4,070 1.0% $ 1,014 0.3%
==============================================================================
13
Year Ended March 3, 2001 Compared to the Year Ended February 26, 2000
Net Sales. Net sales for fiscal 2001 were $403.1 million, an increase of $9.2
million or 2.3% compared to fiscal 2000 sales of $393.9 million. Zone heating
product sales were $226.9 million, an increase of $18.1 million or 8.6% from
fiscal 2000. This increase is primarily due to an increased demand for all
categories of heating products. Specialty products had sales of $165.7 million,
a decrease of $7.4 million or 4.3% from fiscal 2000. This decrease is primarily
due to reduced demand for generators in fiscal 2001 compared to unusually high
demand in the prior year related to concerns of year 2000 computer problems.
This decrease is partially offset by increased home security product sales and
incremental sales from the acquisition of Trine in April 2000.
Cost of Sales. Cost of sales for fiscal 2001 were $267.7 million, an increase of
$3.4 million or 1.3% from fiscal 2000. This increase is primarily attributable
to increased sales volumes in the period. Cost of sales as a percentage of net
sales improved to 66.4% in fiscal 2001 from 67.1% in fiscal 2000. The
improvement is primarily due to a change in the mix of units sold and the impact
of the Company's focus on cost reduction programs. As a result, gross margins
improved to 33.6% in fiscal 2001 compared to 32.9% in 2000.
Operating Costs and Expenses. Operating costs and expenses for fiscal 2001 were
$101.7 million, an increase of $9.9 million or 10.7% from fiscal 2000. As a
percentage of sales, operating costs and expenses increased to 25.2% in fiscal
2001 from 23.3% in fiscal 2000. The increase as a percent of net sales is
primarily attributable to a sales program costs related to a change in the
product and customer mix, redundant costs related to the integration of Trine
and start-up costs related to certain international operations.
Operating Profit. Operating profit was $33.8 million in fiscal 2001, a decrease
of $4.1 million or 10.7% from fiscal 2000. Operating profit attributable to zone
heating products was $23.0 million or 9.2% higher than fiscal 2000. The increase
is primarily attributable to increased volume. Operating profit attributable to
specialty products was $13.0 million in fiscal 2001, a decrease of $3.6 million
or 21.5% from fiscal 2000. The decrease is primarily attributable to the
decrease in net sales due to the reduced demand for generators.
EBITDA. EBITDA for fiscal 2001 was $44.9 million, a decrease of $3.4 million or
10.7% from fiscal 2000. EBITDA is defined as income 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 fiscal 2001 was $32.6 million, an
increase of $3.7 million or 13.0% compared to fiscal 2000. The increase is
primarily associated with higher interest rates and higher levels of working
capital borrowing.
Income Taxes. The income tax rate for fiscal 2001 was 41.3% compared to 54.7% in
fiscal 2000. The decrease is due primarily to differences in the mix of taxable
income from domestic and foreign sources.
Net Income. Net income was $0.7 million in fiscal 2001 compared to $4.1 in
fiscal 2000. The decrease of $3.4 million or 83% is due primarily to higher
operating costs and expenses and interest offset by reduced income taxes.
14
Year Ended February 26, 2000 Compared to the Year Ended February 27, 1999
Net Sales. Net sales for fiscal 2000 were $393.9 million, an increase of $76.7
million or 24.2% compared to fiscal 1999 sales of $317.2 million. Zone heating
product sales were $208.9 million, an increase of $46.7 million or 28.8% from
fiscal 1999. This increase is primarily due to an increased demand for the
outdoor heating and hearth product lines and the acquisition of FMI in fiscal
1999.
Specialty products had sales of $173.1 million, an increase of $34.4 million or
24.8% from fiscal 1999. This increase is primarily due to an increased demand
for generators related to concerns of year 2000 computer problems and new
product sales. These increases were offset by a major customer adjusting their
decorative lighting inventories that resulted in lower fiscal 2000 demand for
related product lines.
Cost of Sales. Cost of sales for fiscal 2000 were $264.3 million, an increase of
$49.9 million or 23.3% from fiscal 1999. This increase is primarily attributable
to increased sales in the period. Cost of sales as a percentage of net sales
improved to 67.1% in fiscal 2000 from 67.6% in fiscal 1999. The improvement is
primarily due to lower manufacturing overhead per unit of zone heating product
and the Company's focus on cost reduction programs. As a result, gross margins
improved to 32.9% in fiscal 2000 compared to 32.4% in 1999.
Operating Costs and Expenses. Operating costs and expenses for fiscal 2000 were
$91.8 million, an increase of $18.8 million or 25.7% from fiscal 1999. This
increase is primarily attributable to the net sales increase. As a percentage of
sales, operating costs and expenses increased to 23.3% in fiscal 2000 from 23.0%
in fiscal 1999. This increase is primarily attributable to the benefits obtained
by the absorption of fixed administrative and engineering costs over a greater
unit volume of sales offset by inefficiencies encountered with the set-up of a
new distribution facility for zone heating products and increased customer sales
program costs.
Operating Profit. Operating profit was $37.8 million in fiscal 2000, an increase
of $8.0 million or 26.9% from fiscal 1999. Operating profit attributable to zone
heating products was $21.0 million or 29.9% higher than fiscal 1999. This is
mainly attributable to increased net sales and higher factory overhead
absorption offset by higher selling costs and shipping costs. Operating profit
attributable to specialty products was $16.6 million in fiscal 2000, an increase
of $4.3 million or 34.6% from fiscal 1999. This is primarily attributable to
increased sales offset by a change in sales mix related to generator sales.
EBITDA. EBITDA for fiscal 2000 was $48.3 million, an increase of $9.9 million or
25.8% from fiscal 1999. EBITDA is defined as income 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 measure of
liquidity as defined by generally accepted accounting principles.
15
Interest Expense. Interest expense for fiscal 2000 was $28.9 million, an
increase of $1.0 million or 3.6% compared to fiscal 1999. The increase is
primarily associated with higher interest rates.
Income Taxes. The income tax rate for fiscal 2000 was 54.7% compared to 48.4% in
fiscal 1999. The increase is due primarily to differences in the mix of taxable
income from domestic and foreign sources and goodwill amortization that is not
deductible for tax purposes.
Net Income. Net income was $4.1 million in fiscal 2000 compared to $1.0 in
fiscal 1999. The increase of $3.1 million or 301% is due primarily to higher
sales volume offset by related taxes and expenses.
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 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
fall and winter, weather conditions affecting the level of sales of heating
products, general economic conditions, and other factors beyond the Company's
control.
Cash provided by operating activities for fiscal 2001 was $1.3 million compared
to $14.6 million for fiscal 2000, a decrease of $13.3 million. Cash provided by
operating activities in fiscal 2001 was principally the result of decreased
inventory levels and current year income and offset by decreased current
liabilities. Net cash provided by operating activities was $2.3 million for
fiscal 1999.
Net cash used in investing activities was $15.0 million in fiscal 2001 compared
to net cash used of $5.4 million in fiscal 2000. Net cash used in investing
activities reflects the fiscal 2001 acquisition of Trine for approximately $11.5
million, and capital expenditures of $3.8 million and $5.5 million in fiscal
2001 and fiscal 2000, respectively. Cash used for investing activities in fiscal
1999 was $45.2 million.
Net cash provided by (used in) financing activities was $15.9 million in fiscal
2001, ($9.9) million in fiscal 2000 and $43.0 million in fiscal 1999. Net cash
provided by financing activities in fiscal 2001 primarily reflects the issuance
of $6.0 million of debt and $5.0 million of equity to acquire Trine, greater
working capital requirements and is offset by the repayment of debt. Fiscal 2000
primarily reflects the repayment of debt.
Credit Facility
Working Capital Loan Commitment. In November 1997, DESA entered into a $75.0
million senior secured revolving credit facility. The Working Capital Loan
Commitment will mature November 26, 2003. As of March 3, 2001, the Company has
$43.9 million outstanding under the Working Capital Loan Commitment. Borrowings
under the revolving credit facility are used to provide seasonal working capital
requirements of the Company. The Company can utilize letters of credit under the
Working Capital Loan Commitment up to $10,000,000. As of March 3, 2001, letters
of credit of $1.8 million are outstanding under the Working Capital Facility. In
accordance with the terms of the Credit Facility (hereinafter defined), the
ability of the Company to incur additional indebtedness is limited, as defined.
At May 23, 2001, the Company can incur additional indebtedness of $18.8
million.
The Working Capital Loan Commitment, together with Term A Loan, Term B Loan,
Term C Loan, Acquisition Loan and Acquisition B Loan (collectively, the "Credit
Facility") contain customary
16
covenants and events of default, including substantial restrictions on the
Company's ability to pay dividends or make distributions to stockholders. At
March 3, 2001, the Company did not comply with the interest coverage ratio, the
fixed charge ratio and the total leverage ratio (together, the "Covenants") for
fourth quarter fiscal 2001. On May 23, 2001, the Company entered into Amendment
and Waiver No. 7 to the Loan Documents and Amendment No. 3 to the Credit
Agreement (together, the "Amendment"), an amendment to the Credit Facility,
which waives the Company's failure to comply with the requirements of the
Covenants. The Amendment extended the maturity of the Guaranteed Line of Credit
(hereinafter defined) to November 23, 2003, amended the financial covenants and
their method of calculation, as defined and increased the interest rates on all
existing outstanding borrowings under the Credit Facility by 1/2%. In
conjunction with the Amendment, the Company sold 9,375,000 shares of common
stock on May 30, 2001 to current shareholders for an aggregate sale price of
$7,500,000.
Borrowings under the Credit Facility bear interest at a rate per annum equal (at
the Company's option) to a margin over either a base rate or LIBOR. The Credit
Facility is secured by substantially all assets of the Company (including the
capital stock of DESA) and its direct and indirect domestic subsidiaries and a
pledge of the capital stock of all the Company's direct and indirect
subsidiaries, subject to certain limitations with respect to foreign
subsidiaries.
The Credit Facility provides for a Clean-Up Period, as defined therein, 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 other loan advances outstanding shall not exceed $30,000,000 for any
Clean-Up Period. The Company completed this requirement prior to the filing of
this report for the Clean-Up period ending May 30, 2001.
Commencing in fiscal 1999, the required annual payments under the Term A and
Term B Term Loans are increased by 50% of any excess cash flows at the end of
the fiscal year, as defined therein. No excess cash flow payment was required in
fiscal 2001.
Guaranteed Line of Credit
On May 25, 1999, the Company entered into an agreement establishing a $15.0
million line of credit (the "Line of Credit"), which, pursuant to the Amendment,
matures on November 23, 2003. The Line of Credit is unsecured and is
unconditionally guaranteed by UBS Capital LLC, a shareholder of the Company.
Borrowings under the 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 Line of Credit contains customary covenants and events of default.
9 7/8% Senior Subordinated Notes
Holdings' subsidiary, DESA, is the issuer of 9 7/8% Senior Subordinated Notes
due December 15, 2007 in the amount of $130,000,000. The notes are fully and
unconditionally guaranteed by Holdings. 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.
Preferred Stock
Holdings' Preferred Stock bears cumulative dividends at the rate of 12% per
annum (payable semi-annually). Dividends will compound to the extent not paid.
Subject to restrictions imposed by the Indenture dated November 26, 1997 (the
"Indenture"), the Credit Facility and other documents relating to the Company's
indebtedness, Holdings may exchange the Preferred Stock for junior subordinated
notes (the "Exchange Notes") having substantially the same terms as the
Preferred Stock. The Indenture permits Holdings, under certain circumstances, to
exchange all
17
outstanding Preferred Stock for Exchange Notes in an aggregate principal amount
equal to the aggregate liquidation preference of the Preferred Stock so
exchanged. The Exchange Notes will require Holdings to make semi-annual interest
payments thereon at a rate of 12% per annum. Subject to compliance with the debt
agreements of the Company, such payments must be in cash. The Indenture
restricts, but does not prohibit, the Company from making such cash interest
payments. Under the Exchange Notes, Holdings may defer the payment of interest
payable on or before November 30, 2001, with any such deferred interest bearing
interest at 12% per annum, compounded semi-annually. Holdings will be required
to make a catch-up payment immediately prior to the first interest payment date
after the fifth anniversary of the date of issuance to the extent the aggregate
amount of such deferred interest exceeds an amount equal to one year's interest
on the originally issued Exchange Notes. The Indenture restricts, but does not
prohibit, the ability of Holdings to make such catch-up payment.
Management believes that cash flow from operations and availability under the
Working Capital Loan Commitment and 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 Company's ability
to fund its operations and make planned capital expenditures, to make scheduled
debt payments, to refinance indebtedness and to 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 7A. Quantitative and Qualitative Disclosure 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, Mexican 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
Mexico, purchases products in Europe, China, and Japan and sells the products
primarily in North America 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.
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. In
fiscal 1999, the Company entered into interest rate swap agreements with Bank of
America to manage its exposure to interest rate fluctuations. The interest rate
swap agreements provided for payment by the Company of fixed rates of interest
based on three month LIBOR. Notional principal amounts of these agreements
totaled $125 million, of which $75 million terminated in November 1999 and $50
million was canceled at the option of Bank of America in February 2000. There
are no interest rate swap agreements outstandng at March 3, 2001.
18
The following table summarizes the carrying amounts and estimated fair values of
the Company's remaining financial instruments at March 3, 2001 and February 26,
2000:
March 3, 2001 February 26, 2000
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------------
(in thousands)
Bank debt $156,587 $56,587 $157,504 $157,504
Senior subordinated notes 130,000 74,100 130,000 96,850
Guaranteed Line of Credit 13,450 13,450 -- --
Note payable -- -- 1,842 1,842
Foreign exchange contracts-
unrealized loss -- 23 -- 473
Based on the average outstanding amount of variable rate indebtedness of the
Company in fiscal years 2001 and 2000, a one percentage point change in the
interest rates for the Company's variable rate debt would have impacted the
Company's fiscal years 2001 and 2000 interest expense by an aggregate of
approximately $1.9 and $1.9 million, respectively.
Foreign Currency Exchange Rate Risk
The Company does not conduct a significant portion of its 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 covering
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. At March 3, 2001, the Company had forward
exchange contracts, with maturities ranging from May 2001 to October 2001, to
purchase approximately $4.0 million in foreign currency. Because the Company
does not have significant foreign sales, 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.
Item 8. Financial Statements and Supplementary Data.
Reference is made to the Consolidated Financial Statements and Supplementary
Data contained in Part IV hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
19
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth the name, age and position of each of the
Company's directors, directors designate, executive officers and other
significant employees. All of the Company's officers are elected annually and
serve at the discretion of the Board of Directors. The Board of Directors is
elected annually and serves until the next annual meeting of shareholders.
The Company's stockholders have entered into a Stockholders Agreement (the
"Stockholders Agreement") that obligates the Company and the stockholders to
take all necessary actions to include certain nominees of J. W. Childs Partners,
L.P. ("Childs") and its affiliates and associates ("JWC Holders") (who could
constitute a majority of the board of directors) and one nominee of UBS Capital
LLC on the Company's board of directors and to ensure that certain
representatives of the other Stockholders may attend meetings. The Stockholders
Agreement also restricts the Company's right to enter into agreements with JWC
Holders without the consent of the other stockholders.
Name Age Positions
- --------------------------------------------------------------------------------
Raymond B. Rudy 70 Chairman and Director
W. Michael Clevy 52 Chief Executive Officer, President, Director
John W. Childs 59 Director
Adam L. Suttin 33 Director
Michael Greene 39 Director
Joseph J. Incandela 54 Director
James E. Ashton 58 Director
Terry G. Scariot 52 Director
Stephen L. Clanton 49 Senior Vice President, Chief Financial Officer
Augusto H. Millan 51 President - International Division
David B. Schumacher 41 President - Zone Heating Division
James R. Wiese 51 President - Specialty Products Division
Raymond B. Rudy was appointed the Company's Chairman in April 1999. Mr. Rudy has
been a Managing Director of J.W. Childs Associates ("JWCA") since July 1995.
Prior to that time, he was Deputy Chairman and Director of Snapple Beverage
Corporation from 1992 until the company was sold in 1994. From 1987 to 1989, Mr.
Rudy was President of Best Foods Affiliates of CPC International. From 1984 to
1986, Mr. Rudy was Chairman, President and CEO of Arnold Foods Company, Inc. He
is Chairman of American Safety Razor Company and The Hartz Mountain Corporation,
Vice Chairman of Empire Kosher Poultry, Inc. and a director of Widmer Brothers
Brewing Company and American Safety Razor Company.
W. Michael Clevy joined DESA in September 1999 as a Director and became
President and Chief Executive Officer in November 1999. Prior to joining the
Company, he held positions with International Comfort Products Corporation,
Toronto, Ontario, Canada as President and Chief Executive Officer from 1995
until its acquisition by United Technologies Corporation in 1999 and as
President and Chief Operating Officer of the International Comfort Products
Corporation's U.S. operating subsidiary from 1994 to 1995. He is a director of
York International Corporation, Pameco Corporation, and Derlan Industries, Ltd.
John W. Childs has been President of JWCA since July 1995 and a Director of the
Company since 1997. Prior to that time, he was an executive at Thomas H. Lee
Company, from May 1987, most recently holding the position of Senior Managing
Director. He is a director of Big V Supermarkets, Inc., Quality Stores, Inc.,
Chevys, Inc., Pan Am International Flight Academy, Inc., Ross University, Bass
Pro Shops, Inc., The Hartz Mountain Corporation, American Safety Razor Company
and Edison Schools, Inc.
20
Adam L. Suttin has been a Managing Director of JWCA since January 1998, and has
been with JWCA since July 1995. Prior to that time, he was an executive at
Thomas H. Lee Company from August 1989, most recently holding the position of
Associate. He is a director of Quality Stores, Inc., American Safety Razor
Company, The NutraSweet Company, Ross University and Empire Kosher Poultry, Inc.
He has been a director of the Company since 1997.
Michael Greene is a Managing Director of UBS Capital, LLC, which is the private
equity subsidiary of the Union Bank of Switzerland. Mr. Greene has worked in
Union Bank of Switzerland's private equity and leveraged finance business since
he joined Union Bank of Switzerland in 1990. Mr. Greene serves on the board of
directors of CBP Resources, Inc. and Metrocall, Inc. He has been a director of
the Company since 1997.
Joseph J. Incandela, is Managing Director of Shields and Company, Inc., a Boston
based investment banking firm and was elected a Director of the Company in April
1999. He served as a Managing Director of the Thomas H. Lee Company, a Boston
based private equity investment company from 1992-1998. Mr. Incandela was CEO of
Darling International Corp., Chairman and CEO of Amerace Corp. and President and
CEO of Conductron Corp. during the period of 1983 through 1991. Prior to 1983
Mr. Incandela served as a General Manager of the Thomas & Betts Corporation's
Electronic Connector Products Division. Mr. Incandela serves on the board of
directors of Morgan Grenfell Smallcap Fund Inc. and Southern Energy Homes Corp.
Mr. Incandela has a Bachelor of Arts in Economics from Wagner College.
Dr. James E. Ashton was elected a Director of the Company in April 2000. He is
Chairman of Poco Graphite, Inc., a manufacturer of specialty graphite material
and President of Ashton and Associates, a management consulting company.
Previously, from 1998 to 2000 he was Chairman and Chief Executive officer of
Precision Partners, Inc. Prior to joining Precision Partners Inc., he was
Chairman and CEO of Fiberite, Inc., a manufacturer of composite materials. He is
on the board of Insilco Corporation and ThermaSys Corporation and holds a Ph.D.,
M.S. from Massachusetts Institute of Technology and an MBA from Harvard Business
School.
Terry G. Scariot joined AMCA International Consumer and Automotive Products
Division as Vice President - Finance in 1984 and was appointed Chief Financial
Officer of DESA International, Inc. in 1985 and held that position until March
1996 when he was appointed President and joined the Board of Directors. In
April, 1999 he was appointed President and Chief Executive Officer for the
Company and held those positions until November 1999. He has been a Director of
the Company since 1996. He is currently a partner in the investment firm
Remington Capital, L.L.C.
Stephen L. Clanton joined the Company as Senior Vice President, Chief Financial
Officer in December 1999. Prior to joining the Company, he was Senior Vice
President, Chief Financial Officer and Treasurer for International Comfort
Products Corporation, Toronto, Ontario, Canada, from 1996 to 1999 and Executive
Vice President and Chief Financial Officer for Falcon Products Inc., St. Louis,
Missouri, from 1988 to 1996.
Augusto H. Millan joined the Company as President, International Division in
December 1999. Prior to joining the Company he held positions with International
Comfort Products Corporation, Toronto, Ontario, Canada as Senior Vice President
and General Manager, International Sales and General Manager, Aftermarket Sales
from 1996 to 1999 and Vice President, Financial Operations from 1994 to 1996. He
is a non-executive Director of eAir LLC, a wholesaler of Air conditioning
products.
David B. Schumacher joined the Company as President - Zone Heating Division in
December 1999. Prior to joining the Company, he held positions with
International Comfort Products Corporation, Toronto, Ontario, Canada as Vice
President and General Manager, Commercial Products Group from 1997 to 1999, as
Senior Director, Product Marketing from 1995 to 1997 and Manager - Product
Marketing from 1993 to 1995.
21
James R. Wiese joined DESA as President - Specialty Products Division in
December 1999. Prior to joining the Company he held positions with International
Comfort Products Corporation, Toronto, Ontario, Canada as Senior Vice President
and General Manager, Residential Products Group 1996 to 1999, Senior Vice
President Planning and Logistics from 1995 to 1996, Senior Vice President,
Marketing from 1994 to 1995 and Vice President Sales from 1993 to 1994.
Item 11. Executive Compensation.
The following table sets forth compensation earned for all services rendered to
the Company during fiscal 2001, fiscal 2000 and fiscal 1999 as applicable, by
the Company's chief executive officer and the most highly compensated executive
officers other than the Company's chief executive officer (collectively, the
"Named Executive Officers").
Summary Compensation Table
Annual Compensation
----------------------------------------------- Long-Term
Compensation
Awards
--------------
All
Number of Other
Other Annual Securities Comp-
Name and Principal Fiscal Salary Bonus(1) Compensation Underlying ensation
Position at Year ($) ($) ($) Options ($)
March 3, 2001
- ---------------------------------------------------------------------------------------------------------------------
W. Michael Clevy 2001 462,115 -- 26,204 722,919 8,800
President and Chief 2000 124,942 34,400 -- -- --
Executive Officer 1999 -- -- -- -- --
Stephen L. Clanton 2001 218,077 -- 38,073 (2) 200,000 8,399
Senior Vice President and 2000 44,423 12,200 -- -- --
Chief Financial Officer 1999 -- -- -- -- --
Augusto H. Millan 2001 208,292 -- 11,509 175,000 8,000
President-- International 2000 45,015 12,300 -- -- --
Division 1999 -- -- -- -- --
David B. Schumacher 2001 218,077 -- 24,297 (3) 175,000 3,836
President-- Zone Heating 2000 38,769 10,700 -- -- --
Division 1999 -- -- -- -- --
James R. Wiese 2001 218,077 -- 21,599 175,000 8,198
President-- Specialty 2000 38,769 10,700 -- -- --
Products Division 1999 -- -- -- -- --
(1) Annual bonuses are indicated for the year in which they were earned and
accrued. Annual bonuses for any year are generally paid in the following
fiscal year.
(2) Includes $30,534 for vehicle allowance.
22
(3) Includes $18,398 for company car.
The Company granted the options set forth and described in the following table
to the Named Executive Officers in fiscal 2001:
Option/SAR Grants in Last Fiscal Year
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Number of % of Total Option Term
Securities Options/SARs -----------------------
Underlying Granted to Exercise for
Option/SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- --------------------------------------------------------------------------------------------------------------
W. Michael Clevy 721,249 44.5% 6.50 10/8/10 2,766,513 12,216,412
W. Michael Clevy 1,670 .1% 6.50 5/10/11 6,405 28,285
Stephen L. Clanton 200,000 12.3% 6.50 6/15/10 817,563 3,959,225
Augusto H. Millan 175,000 10.8% 6.50 6/15/10 715,368 3,464,322
David B. Schumacher 175,000 10.8% 6.50 6/15/10 715,368 3,464,322
James R. Wiese 175,000 10.8% 6.50 6/15/10 715,368 3,464,322
The following table sets forth the number of securities underlying the options
held by the Named Executive Officers at the end of fiscal 2001:
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
(e) Value of
Unexercised
(d) Number of Securities in-the-Money
Underlying Unexercised Options/SARs at
Options / SARs at Fiscal Fiscal Year-End ($)
(b) Shares Acquired on (c) Value Year-End (#) Exercisable / Exercisable /
(a) Names Exercise (#) Realized ($) Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------
W. Michael Clevy -- -- 288,500/434,419 --
Stephen L. Clanton -- -- 40,000/160,000 --
Augusto H. Millan -- -- 35,000/140,000 --
David B. Schumacher -- -- 35,000/140,000 --
James R. Wiese -- -- 35,000/140,000 --
23
Employment Arrangements with Executive Officers
Mr. Clevy is currently employed pursuant to an employment agreement that carries
a three-year term. Under this agreement, Mr. Clevy receives an annual salary of
$445,000. Pursuant to the employment agreement, the salary of Mr. Clevy will be
subject to annual increases at the discretion of the Board of Directors of the
Company. Mr. Clevy is eligible to receive an annual bonus based upon the
Company's performance against the Company's annual management plan, as approved
by the Board of Directors.
Director Compensation
No director received any compensation for his services as director in fiscal
year 2001 except Mr. Incandela who received a director's fee of $10,000 per year
plus $1,000 per meeting attended. Mr. Incandela has been granted options to
purchase 10,000 shares of the Company's common stock at $6.49 per share. The
options vest annually in equal installments in fiscal years 2000, 2001 and 2002.
Change of Control Arrangement
In the event of a change of control of the Company after which the employment of
Mr. Clevy with the Company is not continued, Mr. Clevy will be entitled to
change of control benefits unless the equity investment of Mr. Clevy in DESA
shall have tripled in value. Such benefits are comprised of twelve months of
salary or salary for the remainder of his employment agreement, whichever is
greater, fringe benefits and a pro-rated portion of any bonus for which he would
otherwise be eligible.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors of the Company is comprised
of Messrs. Rudy, Childs, Ashton, and Clevy. Mr. Clevy is an executive officer of
the Company. Mr. Rudy is a Managing Director of JWCA, Mr. Childs is President of
JWCA, and Mr. Ashton is Chairman and CEO of Precision Partners, Inc.
Board Compensation Committee Report on Executive Compensation
It is the Compensation Committee's responsibility to review, recommend and
approve the Company's compensation policies and programs, including all
compensation for the Chief Executive Officer and the other executive officers of
the Company. The Compensation Committee administers the Company's 1998 Stock
Option Plan. The Chief Executive Officer of the Company does not participate in
Committee decisions regarding his compensation.
The purpose of the 1998 Stock Option Plan is to encourage key employees,
officers and directors of the Company who render services of special importance
to, and who have contributed or are expected to contribute materially to the
success of, the Company to continue their association with the Company by
providing favorable opportunities for them to participate in the ownership of
the Company and in its future growth. The Compensation Committee made stock
option grants to Messrs. Clevy, Clanton, Schumacher, Wiese and Millan in fiscal
2001.
The Compensation Committee determined the salary levels of the Company's
executive officers, including the Chief Executive Officer, for fiscal 2001, as
well as the amounts of bonuses paid in fiscal 2001 for performance in fiscal
2000. The compensation policies implemented by the Compensation Committee, which
combine base salary and incentive compensation in the form of cash bonuses and
long-term stock options, are designed to achieve the operating and acquisition
strategies and goals of the Company. In particular, in determining bonuses paid
in 2001 in respect of 2000 and salary levels for fiscal 2001, the Compensation
Committee took into account
24
the past or expected future contributions of each executive officer to the
Company's strategic goals.
COMPENSATION COMMITTEE
RAYMOND B. RUDY, Chairman
W. MICHAEL CLEVY
JAMES E. ASHTON
JOHN W. CHILDS
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information regarding the beneficial ownership of
the Common Stock of the Company by each person known to the Company to be the
beneficial owner of more than five percent of the Common Stock of the Company,
each director of the Company, each Named Executive Officer and all directors and
executive officers of the Company as a group. Except as otherwise indicated, the
beneficial owners of the voting stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares. Such information is presented as of May 14, 2001, except as
otherwise indicated.
Shares
Beneficially
Name and Address Owned Percent
- --------------------------------------------------------------------------------
J.W. Childs Equity Partners, L.P.(1) 10,381,854 63.4%
One Federal Street
Boston, Massachusetts
UBS Capital LLC(2) 3,043,751 18.6
299 Park Avenue
New York, New York
John W. Childs(1)(3)(4) 10,801,578 66.0
One Federal Street
Boston, Massachusetts
Raymond B. Rudy(1)(3)(5) 10,410,401 63.6
One Federal Street
Boston, Massachusetts
Adam L. Suttin(1)(3)(6) 10,423,312 63.7
One Federal Street
Boston, Massachusetts
Michael Greene(2)(7) 3,043,751 18.6
299 Park Avenue
New York, New York
Joseph Incandela(8) 6,666 *
W. Michael Clevy(9) 519,270 3.2
James E. Ashton 38,462 *
Terry G. Scariot 0 *
Stephen L. Clanton(10) 101,539 *
David B. Schumacher(11) 42,692 *
James R. Wiese(12) 96,539 *
Augusto H. Millan(13) 50,385 *
All Directors and executive officers as a group (11
persons)(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13) 14,770,887 90.2%
* Less than 1.0%
25
(1) Includes 148,572 shares deemed beneficially owned by Childs pursuant to
warrants.
(2) Includes 43,504 shares deemed beneficially owned by UBS Capital LLC
pursuant to warrants.
(3) Includes all shares beneficially owned by Childs, as to which Messrs.
Childs, Rudy and Suttin may be deemed also to be beneficial owners.
(4) Includes 6,501 shares deemed beneficially owned by Mr. Childs pursuant to
warrants.
(5) Includes 336 shares deemed beneficially owned by Mr. Rudy pursuant to
warrants.
(6) Includes 585 shares deemed beneficially owned by Mr. Suttin pursuant to
warrants. Also includes 11,885 shares held in the Suttin Family Trust.
(7) All shares shown are beneficially owned by UBS Capital LLC. Mr. Greene may
also be deemed to be a beneficial owner.
(8) Includes 6,660 shares that Mr. Incandela has the right to acquire pursuant
to currently exercisable options.
(9) Includes [ ] shares that Mr. Clevy has the right to acquire pursuant to
currently exercisable options.
Item 13. Certain Relationships and Related Transactions
The Company pays JWCA an annual management fee of $189,000 in consideration of
JWCA's ongoing provision of certain consulting and management advisory services.
Payments under this management agreement may be made only to the extent
permitted by the Credit Facility and the Indenture. The management agreement is
for a five-year term expiring in November 2002 and automatically renewable for
successive extension terms of one year, unless JWCA or the Company shall give
notice of termination.
The Company pays UBS Capital LLC an annual management fee of $51,000 in
consideration of UBS Capital LLC's ongoing provision of certain consulting and
management advisory services. Payments under this management agreement may be
made only to the extent permitted by the Credit Facility and the Indenture. The
management agreement is for a five-year term expiring in November 2002 and
automatically renewable for successive extension terms of one year, unless UBS
Capital LLC or the Company shall give notice of termination.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements
DESA HOLDINGS CORPORATION
Report of Independent Auditors F-1
Consolidated Balance Sheets at March 3, 2001 and February 26, 2000 F-2
26
DESA HOLDINGS CORPORATION
Consolidated Statements of Income for the fiscal years ended
March 3, 2001, February 26, 2000 and February 27,1999 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
fiscal years ended March 3, 2001, February 26, 2000 and February
27, 1999 F-5
Consolidated Statements of Cash Flows for the fiscal years ended
March 3, 2001, February 26, 2000 and February 27, 1999 F-6
Notes to Consolidated Financial Statements for the fiscal years
ended March 3, 2001, February 26, 2000 and February 27, 1999 F-8
(a)(2) Financial Statement Schedules
SCHEDULE II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and
therefore have been omitted.
(a) (3) Exhibits
Exhibit No. Description of Document
2.1 Recapitalization Agreement, dated as of October 8, 1997, among J.W. Childs *
Equity Partners, L.P., the Company and each Stockholder of the Company named therein
2.2 Stock Purchase Agreement, dated as of January 12, 1998, by and among Heath *
Holding Corp., its Shareholders and Optionholders and the Company
2.3 Agreement and Plan of Reorganization, dated May 13, 1998 by and among the **
Company, FMI Acquisition, Inc., Fireplace Manufacturers, Inc et al.
3.1 Articles of Incorporation of DESA International, Inc. *
3.1A Articles of Incorporation of the Company *
3.2 By-laws of DESA International, Inc. *
3.2A By-laws of the Company *
4.1 Indenture, dated as of November 26, 1997, by and among the Company, DESA *
International, Inc., and Marine Midland Bank relating to $130,000,000 of
the Company's 9 7/8% Senior Subordinated Notes Due 2007
4.2 Registration Rights Agreement, dated as of November 26, 1997 by and among *
the Company, DESA International, Inc., NationsBanc Montgomery Securities,
Inc. and UBS Securities LLC
4.3 Purchase Agreement, dated as of November 21, 1997, by and among the *
Company, DESA International, Inc., NationsBanc Montgomery Securities, Inc.
and UBS Securities LLC
4.4 Global Note Payable to CEDE & Co. *
4.5 Company Guarantee *
10.1 Credit Agreement, dated as of November 26, 1997 by and among the Company, *
DESA International, Inc., NationsBank, N.A., UBS Securities LLC
and NationsBanc Montgomery Securities, Inc.
27
Exhibit No. Description of Document
10.2 Management Incentive Plans of the Company, dated March 1, 1997 *
10.3 Sales Compensation and Incentive Plan of the Company for fiscal year 1998 *
10.4 Services Agreement between the Company and Hamilton Ryker Company *
10.5 Services Agreement between the Company and Manpower Services *
10.6 Representative Manufacturer's Representative Agreement *
10.15 Intellectual Property Agreement between the Company and Worgas Bruciatori *
SRL dated December 1, 1996
10.16 Intellectual Property Agreement between the Company and Valor Limited dated *
May 21, 1996
10.17 Intellectual Property Agreement between the Company and Remington Arms *
Company dated August 29, 1969
10.18 Intellectual Property Agreement between the Company and Remington Arms *
Company dated January 29, 1988
10.19 Lease Agreement between the Company and Shelbyville Industrial Spec. *
Building - WRS Partnership
10.20 Agreement to produce and sell finished goods between the Company and *
Tangible/Shinn Fu
10.21 Agreement to produce and sell finished goods between the Company and BYSE *
10.22 Agreement to produce and sell finished goods between the Company and NU- *
TEC
10.23 Agreement to produce and sell finished goods between the Company and *
International Pin
10.24 Agreement to produce and sell finished goods between the Company and *
Kingsman Industries
10.25 Agreement to produce and sell finished goods between the Company and Sealey *
10.26 Agreement to produce and sell finished goods between the Company and *
Hudson Manufacturing
10.27 Agreement to produce and sell finished goods between the Company and *
Sengoka Works, Ltd
10.28 Employment Agreement, dated as of November 26, 1997, between the Company *
and Robert H. Elman
10.29 Employment Agreement, dated as of November 26, 1997, between the Company *
and John M. Kelly
10.30 Employment Agreement, dated as of November 26, 1997, between the Company *
and Terry G. Scariot
10.31 The Company's 1998 Stock Option Plan ***
10.32 The Company's Stockholders Agreement dated as of November 26, 1997 among ***
the Company and the persons named therein
10.33 The Company's Amended and Restated Stockholders Agreement dated as of ****
October 9, 1998 among the Company and the persons named therein
10.34 The Company's Purchase Agreement dated as of October 9, 1998 among the ****
Company and the persons named therein
10.35 Preferred Stock Tagalong Agreement dated as of October 9, 1998 among the ****
Company and the persons named therein
10.36 Form of Warrant ****
10.37 Amendment and Waiver No. 4 to the Loan Documents dated as of May 25, 1999 *****
by and among the Company, DESA International, Inc., NationsBank, N.A., UBS
Securities LLC, Banc of America Securities LLC et al.
28
Exhibit No. Description of Document
10.38 Employment agreement, dated as of November 10, 1999 between the Company and ******
W. Michael Clevy
10.39 Amendment and Waiver No. 5 to the Loan Documents dated as of April #
7, 2000 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.).
10.40 Amendment No. 1 to the Credit Agreement dated as of July 28, 2000 to the #
Credit Agreement dated as of May 26, 1999 between DESA International,
Inc. and Bank of America, N.A. (formerly NationsBank, N.A.).
10.41 Amendment and Waiver 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 Security LLC,
Banc of America LLC (formerly NationsBanc Montgomery Securities LLC) and Bank
of America, Securities N.A.(formerly NationsBank N.A.).
10.42 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.).
10.43 Amendment and Waiver No. 7 to the Loan Documents dated as of May 23, 2001 to Filed
the Credit Agreement dated as of November 26, 1997 by and among the Company, herewith
DESA International, Inc., the Lender Parties party thereto, UBS Security LLC,
Banc of America LLC (formerly NationsBanc Montgomery Securities LLC) and Bank
of America, Securities N.A. (formerly NationsBank N.A.).
10.44 Amendment No. 3 to the Credit Agreement dated as of May 23, 2001 to the Credit Filed
Agreement dated as of May 26, 1999 between DESA International, Inc. and Bank of herewith
America N.A. (formerly NationsBank, N.A.).
18 Independent auditors' letter relating to change in accounting principle, Filed
dated April 13, 2001. herewith
* Incorporated by reference to the Company's Registration Statement on
Form S-4 filed on August 5, 1998 (File No. 333-44969)
** Incorporated by reference to the Company's Statement on Schedule 13D in
respect of the common stock of Fireplace Manufacturers, Inc. filed on
June 5, 1998
*** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended August 29, 1998
**** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended November 28, 1998
***** Incorporated by reference to the Company's Annual Report on Form 10-K
for the period ended February 27, 1999
****** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended November 27, 1999
# Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended September 2, 2000
## Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended December 2, 2000
29
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during fourth quarter, 2001.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy materials have been sent tosecurity holders.
30
Consolidated Financial Statements
DESA Holdings Corporation
Fiscal years ended March 3, 2001,
February 26, 2000, and February 27, 1999
with Report of Independent Auditors
DESA Holdings Corporation
Consolidated Financial Statements
Fiscal years ended March 3, 2001,
February 26, 2000, and February 27, 1999
Contents
Report of Independent Auditors.......................................... F-1
Consolidated Balance Sheets............................................. F-2
Consolidated Statements of Income....................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)............... F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-8
Report of Independent Auditors
Board of Directors and Stockholders
DESA Holdings Corporation
We have audited the accompanying consolidated balance sheets of DESA Holdings
Corporation as of March 3, 2001 and February 26, 2000, and the related
consolidated statements of income, stockholders' equity (deficit), and cash
flows for each of the three fiscal years in the period ended March 3, 2001. Our
audits also included the financial statement schedule listed in the Index at
Item 14 (a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of DESA Holdings
Corporation at March 3, 2001 and February 26, 2000, and the consolidated results
of its operations and its cash flows for each of the three fiscal years in the
period ended March 3, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in fiscal 2001
the Company changed its method of accounting for inventories.
/s/ Ernst & Young LLP
Nashville, Tennessee
April 13, 2001, except for Note 15, as to
which the date is May 30, 2001
F-1
DESA Holdings Corporation
Consolidated Balance Sheets
March 3, February 26,
2001 2000
------------------------
(In Thousands, Except
Number of Shares)
Assets
Current assets:
Cash and cash equivalents $ 2,388 $ 173
Accounts receivable, net 41,894 32,921
Inventories:
Raw materials 486 209
Work-in-process 10,938 9,756
Finished goods 37,869 47,443
------------------------
49,293 57,408
Deferred tax assets 3,274 2,854
Other current assets 6,376 2,003
------------------------
Total current assets 103,225 95,359
Property, plant and equipment:
Land 525 525
Buildings and improvements 6,561 6,294
Machinery and equipment 43,336 39,361
Furniture and fixtures 1,273 1,090
------------------------
51,695 47,270
Less accumulated depreciation (35,084) (30,574)
------------------------
16,611 16,696
Goodwill, net 95,312 93,818
Other assets, net 18,748 22,266
------------------------
Total assets $ 233,896 $ 228,139
========================
F-2
March 3, February 26,
2001 2000
------------------------
(In Thousands, Except
Number of Shares)
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 28,701 $ 37,040
Accrued interest 3,195 5,233
Other accrued liabilities 13,824 13,225
Current portion of long-term debt 50,874 23,500
------------------------
Total current liabilities 96,594 78,998
Long-term debt 249,163 265,846
Deferred tax liabilities 903 789
Other liabilities 14,236 14,840
------------------------
Total liabilities 360,896 360,473
Commitments and contingencies
Series C redeemable preferred stock, $.01 par value;
authorized--40,000 shares at March 3, 2001 and
February 26, 2000; issued and outstanding--25,245
shares at March 3, 2001 and 22,461 shares at February
26, 2000 (liquidation preference--$25,759 at
March 3, 2001 and $22,882 at February 26, 2000) 23,057 19,937
Stockholders' equity (deficit):
Common stock, $.01 par value; authorized--
50,000,000 shares at March 3, 2001 and February 26,
2000; issued and outstanding--16,373,148 shares at
March 3, 2001 and 15,562,656 shares at February 26,
2000 164 155
Nonvoting common stock, $.01 par value; authorized--
3,000,000 shares at March 3, 2001 and February 26,
2000; issued and outstanding--90,604 shares at
March 3, 2001 and February 26, 2000 1
Capital in excess of par value 103,334 98,075
Accumulated deficit (250,906) (248,465)
Accumulated other comprehensive loss (2,650) (2,037)
------------------------
Total stockholders' equity (deficit) (150,057) (152,271)
------------------------
Total liabilities and stockholders' equity (deficit) $ 233,896 $ 228,139
========================
See accompanying notes
F-3
DESA Holdings Corporation
Consolidated Statements of Income
Fiscal year ended
March 3, February 26, February 27,
2001 2000 1999
-----------------------------------------------
(In Thousands)
Net sales $ 403,092 $ 393,924 $ 317,237
Cost of sales 267,651 264,293 214,369
-----------------------------------------------
Gross profit 135,441 129,631 102,868
Operating costs and expenses:
Selling 77,238 69,821 54,084
General and administrative 18,102 15,890 13,597
Other 6,320 6,088 5,362
-----------------------------------------------
101,660 91,799 73,043
-----------------------------------------------
Operating profit 33,781 37,832 29,825
Interest expense 32,598 28,853 27,864
-----------------------------------------------
Income before provision for income taxes 1,183 8,979 1,961
Provision for income taxes 488 4,909 947
-----------------------------------------------
Net income 695 4,070 1,014
Less dividends and accretion on preferred stock 3,136 2,769 2,480
-----------------------------------------------
Income (loss) available to common stockholders $ (2,441) $ 1,301 $ (1,466)
===============================================
See accompanying notes.
F-4
DESA Holdings Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
Accumulated
Nonvoting Capital in Other Total
Common Common Excess of Accumulated Comprehensive Stockholders'
Stock Stock Par Value Deficit Loss Equity (Deficit)
-------------------------------------------------------------------------------
(In Thousands)
-------------------------------------------------------------------------------
Balance at February 28, 1998 $ 137 $ 1 $ 85,926 $ (248,299) $ (564) $ (162,799)
Comprehensive income:
Net income -- -- -- 1,014 -- 1,014
Foreign currency translation adjustment -- -- -- -- (463) (463)
-------------
Comprehensive income -- -- -- -- -- 551
Accretion of preferred stock -- -- -- (253) -- (253)
Dividends on preferred stock -- -- -- (2,227) -- (2,227)
Issuance of common stock 18 -- 12,058 -- -- 12,076
-------------------------------------------------------------------------------
Balance at February 27, 1999 155 1 97,984 (249,765) (1,027) (152,652)
-------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- 4,070 -- 4,070
Foreign currency translation adjustment -- -- -- -- (1,010) (1,010)
-------------
Comprehensive income -- -- -- -- -- 3,060
Accretion of preferred stock -- -- -- (259) -- (259)
Dividends on preferred stock -- -- -- (2,511) -- (2,511)
Issuance of common stock -- -- 91 -- -- 91
-------------------------------------------------------------------------------
Balance at February 26, 2000 155 1 98,075 (248,465) (2,037) (152,271)
-------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- 695 -- 695
Foreign currency translation adjustment -- -- -- -- (613) (613)
-------------
Comprehensive income -- -- -- -- -- 82
Accretion of preferred stock -- -- -- (258) -- (258)
Dividends on preferred stock -- -- -- (2,878) -- (2,878)
Issuance of common stock 9 -- 5,259 -- -- 5,268
-------------------------------------------------------------------------------
Balance at March 3, 2001 $ 164 $ 1 $ 103,334 $ (250,906) $ (2,650) $ (150,057)
===============================================================================
See accompanying notes.
F-5
DESA Holdings Corporation
Consolidated Statements of Cash Flows
Fiscal year ended
March 3, February 26, February 27,
2001 2000 1999
------------------------------------------
(In Thousands)
Operating activities
Net income $ 695 $ 4,070 $ 1,014
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,528 4,425 3,589
Amortization 6,600 6,050 4,998
Deferred income taxes (307) 1,155 51
Equity in undistributed earnings of joint venture (217) (233) (170)
Change in operating assets and liabilities, net of
acquisitions:
Accounts receivable, net (3,699) (2,531) (7,888)
Inventories 13,826 (13,353) (671)
Other current assets (5,378) (683) 212
Accounts payable (10,591) 11,808 8,592
Accrued interest (2,002) 2,318 (2,512)
Other accrued liabilities (2,605) 1,443 (5,025)
Income taxes payable 954 -- (49)
Other liabilities (490) 121 166
------------------------------------------
Net cash provided by operating activities 1,314 14,590 2,307
------------------------------------------
Investing activities
Capital expenditures (3,771) (5,529) (4,462)
Dividends received from joint venture 230 185 170
Cash paid for acquisitions, net of cash acquired (11,466) -- (40,957)
Other 16 (90) 26
------------------------------------------
Net cash used in investing activities (14,991) (5,434) (45,223)
------------------------------------------
F-6
DESA Holdings Corporation
Consolidated Statements of Cash Flows (continued)
Fiscal year ended
March 3, February 26, February 27,
2001 2000 1999
------------------------------------------
(In Thousands)
Financing activities
Principal payments Term Loans $(12,915) $ (8,375) $ (5,250)
Proceeds from Term Loans 6,000 -- --
Proceeds from Acquisition Loans -- -- 30,000
Principal payments Acquisition Loans (12,500) (3,125) --
Decrease in note payable (1,878) (456) --
Net proceeds from working capital loan 18,498 2,697 7,202
Proceeds from Guaranteed Line of Credit 13,450 -- --
Proceeds from issuance of common stock 5,268 91 12,076
Payment of debt financing costs (23) (703) (1,016)
-----------------------------------------
Net cash provided by (used in) financing activities 15,900 (9,871) 43,012
Effect of exchange rate changes on cash (8) -- (2)
-----------------------------------------
Increase (decrease) in cash and cash equivalents
for the year 2,215 (715) 94
Cash and cash equivalents at beginning of year 173 888 794
-----------------------------------------
Cash and cash equivalents at end of year $ 2,388 $ 173 $ 888
=========================================
See accompanying notes.
F-7
DESA Holdings Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Company Operations
DESA Holdings Corporation with it's consolidated subsidiaries (the "Company") is
engaged in the manufacturing and marketing of various consumer product lines,
including zone heating products and specialty products primarily throughout the
United States and Europe. Two significant customers, which operate in the
hardware homecenter industry, accounted for 31% and 16% of net sales,
respectively in fiscal year 2001, 25% and 13% of net sales, respectively, in
fiscal year 2000, and 29% and 11% of net sales, respectively, in fiscal year
1999. The receivable balances from these two customers collectively represented
39% of the Company's accounts receivable at March 3, 2001 and February 26, 2000.
Sales of the Company's zone heating products follow seasonal patterns that
affect the 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.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to February 28. The
fiscal years for the consolidated financial statements included herein ended on
March 3, 2001 (53 weeks), February 26, 2000 (52 weeks), and February 27, 1999
(52 weeks).
F-8
DESA Holdings Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, DESA International, Inc. ("DESA") and
all of DESA's wholly-owned subsidiaries, including DESA Industries of Canada,
Inc., DESA Europe B.V., DESA Industries of V.I., Inc., Heath Company Limited
("Heath"), 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.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market on the first-in, first out
("FIFO") method.
During the fourth quarter of fiscal 2001, the Company changed its method of
accounting for inventories from the last in, first out ("LIFO") method to the
FIFO method. As a result of this change, the accompanying consolidated financial
statements have been retroactively restated in accordance with Accounting
Principles Board Opinion No. 20, "Accounting Changes". The impact on accumulated
deficit as of the beginning of fiscal 1999 (the earliest year presented) of the
retroactive restatement was to increase the deficit by $392,000. The effect of
this change on net income previously reported for prior years is summarized as
follows:
2000 1999
----------------------
Net Income on the LIFO method $ 4,994 $ 1,336
Adjustment for effect of a change in
accounting principle that is applied
retroactively (924) (322)
----------------------
Net income as adjusted $ 4,070 $ 1,014
======================
F-9
DESA Holdings Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
The new method of accounting for inventories was adopted to more accurately
measure operating results, to more accurately present financial position by
reflecting more recent costs at the balance sheet date, and to match the
accounting with the way in which the Company physically manages its inventories.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and betterments
are capitalized whereas maintenance and repairs are expensed as incurred. Upon
disposition, the asset cost and related accumulated depreciation are removed
from the accounts, and any resulting gain or loss is included in operations.
Depreciation of plant and equipment is determined on the straight-line basis
over the following estimated useful lives:
Buildings and improvements 33 years
Machinery and equipment 5-12 years
Furniture and fixtures 5-10 years
Revenue Recognition
The Company records sales upon shipment of products to its customers.
Shipping and Handling Costs
The Company records all amounts billed to a customer in a sale transaction
related to shipping and handling as revenue earned for the goods provided.
Shipping and handling costs are included in selling expenses in the accompanying
consolidated statements of income. Shipping and handling costs in fiscal 2001,
fiscal 2000 and fiscal 1999 were 2.9%, 2.8% and 2.9% of net sales, respectively.
Warranty Costs
The Company warrants its products against defects in design, materials and
workmanship generally for six months to two years, depending on the product. A
provision for estimated future costs related to warranty expense is recorded on
an accrual basis when products are shipped.
F-10
DESA Holdings Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes using the liability method. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes and are determined based on tax rates
expected to be in effect when the taxes are actually paid or refunds received.
Financing Costs
Financing costs are included in other non-current assets and are amortized using
the interest method over the life of the related debt instrument. At year-end
2001 and 2000, deferred financing costs totaled $12,871,000 and $12,847,000 and
accumulated amortization totaled $5,197,000 and $3,537,000.
Goodwill
Goodwill is amortized on the straight-line basis over 15 to 40 years and is
recorded at cost less accumulated amortization. The Company reviews the
recoverability of its goodwill if the facts and circumstances suggest that it
may be impaired. The review is performed by comparing the unamortized carrying
value to anticipated undiscounted future cash flows of the related assets. Any
impairment is charged to expense when such determination is made. Accumulated
amortization at March 3, 2001 and February 26, 2000 was $11,899,000 and
$9,090,000, respectively, and amortization expense for fiscal years 2001, 2000,
and 1999 was $2,809,000, $2,281,000, and $1,981,000, respectively.
Foreign Currency Translation
All assets, liabilities and results of operations are measured in the primary
currency ("functional currency") in which each entity conducts its business.
Assets and liabilities denominated in a currency other than the functional
currency are remeasured and stated in the functional currency based on current
or historical exchange rates. Gains or losses arising therefrom are included in
net income. Adjustments resulting from translating foreign functional currency
assets and liabilities into U.S. dollars, based on current exchange rates, are
recorded in a separate component of stockholders' equity (deficit) called
"Accumulated other comprehensive loss" and are included in determining
comprehensive income. Revenues and
F-11
DESA Holdings Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
expenses are translated into U.S. dollars at average monthly exchange rates. The
Canadian dollar has been determined to be the functional currency for DESA's
Canadian subsidiary, the Netherlands guilder for its European subsidiary, the
Hong Kong dollar for its Hong Kong subsidiary, and the Mexican peso for its
Mexican subsidiary.
Derivative Financial Instruments
The Company utilizes forward exchange foreign currency contracts to reduce
foreign exchange risks that arise from exchange rate movements between the dates
that foreign currency transactions for the purchase of inventories are entered
into and the date they are consummated. Gains and losses related to qualifying
hedges of foreign currency risk exposure are deferred and recorded as
adjustments to the carrying amounts of the related assets when the hedge
transactions occur.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense totaled
approximately $4,843,000, $3,345,000, and $2,785,000 for the fiscal years ended
March 3, 2001, February 26, 2000, and February 27, 1999, respectively.
Impact of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133, as amended, must first be applied
in the first quarter of fiscal years that begin after June 15, 2000. Upon
adoption on March 4, 2001, the Company began recognizing all derivatives on the
consolidated balance sheets at fair value. Derivatives that are not hedges will
be adjusted to fair value through income. If the derivative is a hedge, changes
in the fair value of derivatives will generally offset the change in fair value
of the hedged assets, liabilities or firm commitments and be recognized in other
comprehensive income until the hedged item is recognized in operations. The
ineffective portion of a derivative's change in fair value will immediately be
recognized in operations. The adoption of FAS 133 on March 4, 2001 did not have
a significant effect on the earnings and financial position of the Company.
F-12
DESA Holdings Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
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.
Reclassifications
Certain reclassifications have been made to prior year financial statements to
conform to the fiscal 2001 presentation. These reclassifications had no effect
on net income (loss) available to common stockholders as previously reported.
2. Acquisitions
On April 3, 2000, DESA acquired the assets of Trine Products Company ("Trine")
located in Bronx, New York for an aggregate purchase price of approximately $11
million. The acquisition was financed through the sale by the Company of 769,231
shares of common stock to certain of the Company's investors and borrowings of
$6,000,000 under the Credit Facility as amended (Term Loan C). The Company
accounted for such acquisition using the purchase method and has 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 for Trine have been included in the
consolidated statements of income from the acquisition date forward.
3. Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of $919,000
and $907,000 at March 3, 2001 and February 26, 2000, respectively.
F-13
DESA Holdings Corporation
Notes to Consolidated Financial Statements
4. Financing Arrangements
Outstanding borrowings consist of the following (in thousands):
March 3, February 26,
2001 2000
-----------------------
9 7/8% Senior Subordinated Notes due 2007 (A) $130,000 $130,000
Credit Facility:
Bank of America and various banks Term A Loan (B) 27,500 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) 5,400 --
Bank of America and various banks
Working Capital Loan Commitment (E) 43,877 25,379
Bank of America and various banks Acquisition Loan (F) 13,750 18,750
Bank of America and various banks Acquisition B Loan (G) 20,625 28,125
Guaranteed Line of Credit (H) 13,450 --
Note payable -- 1,842
---------------------
Total outstanding borrowings 300,037 289,346
Less current portion of long-term debt 50,874 23,500
---------------------
Total long-term debt $249,163 $265,846
=====================
DESA has issued $130 million of Senior Subordinated Notes to qualified
institutional investors, as defined in Rule 144A under the Securities Act of
1933. Also, the Company has a Credit Facility with Bank of America and various
banks consisting of Term Loans, a Working Capital Loan, and Acquisition Loans.
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 are unsecured and
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 DESA
Holdings Corporation ("Holdings").
F-14
DESA Holdings Corporation
Notes to Consolidated Financial Statements
4. Financing Arrangements (continued)
B. The Term A Loan is payable in quarterly installments through November 26,
2003 and accrues interest at the prime rate plus 2.0% or LIBOR plus 3.0% 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 9.58% and 8.03% in 2001 and 2000, respectively. 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 9.82% and 8.52% in 2001 and 2000, respectively. 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 9.65% in
fiscal 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
DESA prior to November 26, 2003 and accrues interest at the prime rate plus
2.0% or LIBOR plus 3.0%, at the option of DESA. The weighted average
interest rate was 9.50% and 8.60% in 2001 and 2000, respectively. 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 March 3, 2001 and February
26, 2000, letters of credit of $1,836,000 and $1,497,000, respectively,
were outstanding under the Working Capital Loan Commitment. Borrowings are
generally limited to specific percentages of eligible trade receivables and
inventory. DESA pays commitment fees of 1/2 of 1% per annum on the daily
unutilized Working Capital Loan Commitment.
F-15
DESA Holdings Corporation
Notes to Consolidated Financial Statements
4. Financing Arrangements (continued)
F. The Acquisition Loan is payable in quarterly installments that 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 9.77%
and 8.22% in 2001 and 2000, respectively. Once repaid, the Acquisition Loan
may not be reborrowed.
G. The Acquisition B Loan is payable in quarterly installments that 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 9.85%
and 8.05% in 2001 and 2000, respectively. Once repaid, the Acquisition B
Loan may not be reborrowed.
H. The Guaranteed Line of Credit loan, as extended, is payable at any time at
the option of DESA prior to November 23, 2003, 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 8.30% in
fiscal 2001. The line is unsecured and is unconditionally guaranteed by a
shareholder of the Company.
In accordance with the terms of the Credit Facility, the ability of the Company
to incur additional indebtedness is limited, as defined. At March 3, 2001, the
Company can incur additional indebtedness of $18.8 million.
The Credit Facility and Senior Subordinated Notes includes various restrictive
covenants which, among other things, prohibit payment of dividends to common
stockholders, set maximum limits on capitalized lease obligations and capital
expenditures, limit the ability to incur additional indebtedness, require
minimum consolidated EBITDA (as defined) levels, and set consolidated interest
coverage, fixed charge coverage and leverage ratios. At March 3, 2001, the
Company failed to comply with the interest coverage ratio, the fixed charge
ratio and the total leverage ratio covenants required by the Credit Facility.
See Note 15, "Subsequent Events". Substantially all of the Company's
consolidated assets are pledged under the Credit Facility.
F-16
DESA Holdings Corporation
Notes to Consolidated Financial Statements
4. Financing Arrangements (continued)
The Credit Facility requires a Clean-Up Period, as defined, under the Working
Capital Loan Commitments 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 other loan advances
outstanding shall not exceed $30,000,000. The Company has already complied with
the requirements of the Clean-Up Period occurring between January 1, 2001 and
May 30, 2001.
The required annual payments under the Term A and Term B Loans are increased by
50% of any excess cash flows at the end of the fiscal year, as defined. An
excess cash flow payment of $910,000 was required in fiscal 2000 which was
applied against the next scheduled principal payments. No excess cash flow
payments were required in fiscal 2001.
Holdings has fully and unconditionally guaranteed the Credit Facility and the
Senior Subordinated Notes.
Cash payments for interest for the fiscal years ended March 3, 2001, February
26, 2000, and February 27, 1999 were $34,166,000, $26,564,000, and $30,514,000,
respectively.
The following table shows the required future repayments under the Company's
financing arrangements (in thousands):
Fiscal years ending:
2002 $ 50,874
2003 37,738
2004 55,349
2005 26,076
2006 --
Thereafter 130,000
-----------
$ 300,037
===========
F-17
DESA Holdings Corporation
Notes to Consolidated Financial Statements
5. Financial Instruments
The Company's financial instruments recorded on the consolidated balance sheets
include cash and cash equivalents, accounts receivable, accounts payable and
debt obligations. Due to their short-term maturity, the carrying amounts of cash
and cash equivalents, accounts receivable and accounts payable approximate fair
market value.
The following table summarizes the carrying amounts and estimated fair values of
the Company's remaining financial instruments at March 3, 2001 and February 26,
2000 (in thousands):
March 3, 2001 February 26, 2000
---------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------
Bank debt $156,587 $156,587 $157,504 $157,504
Senior subordinated notes 130,000 74,100 130,000 96,850
Guaranteed Line of Credit 13,450 13,450 -- --
Note payable -- -- 1,842 1,842
Foreign exchange contracts-
unrealized loss -- 23 -- 473
Methods and assumptions used in estimating fair values are as follows:
Bank Debt: The carrying amounts of variable rate bank borrowings for revolving
loans and term loans approximate their fair values.
Senior Subordinated Notes: The fair value of fixed rate borrowings are estimated
based on quoted market prices.
Guaranteed Line of Credit: The carrying amount of the Guaranteed Line of Credit
approximates fair value because the effective rate of interest approximates the
rate at which Holdings could borrow money under similar terms.
F-18
DESA Holdings Corporation
Notes to Consolidated Financial Statements
5. Financial Instruments (continued)
Note Payable: The carrying amount of the note payable approximates fair value
because the effective rate of interest approximates the rate at which Holdings
could borrow funds with similar remaining maturities.
Foreign exchange contracts: The fair value of the foreign exchange contracts
reflect the estimated amount that would be paid if such contracts were
terminated based on quoted market prices.
Derivative Financial Instruments
In fiscal 1999, the Company entered into interest rate swap agreements with Bank
of America to manage its exposure to interest rate fluctuations. The interest
rate swap agreements effectively converted interest rate exposure from variable
to fixed rates of interest. The interest rate swap agreements provided for the
payment by the Company of fixed rates of interest based on three month LIBOR.
Notional principal amounts of these agreements totaled $125 million, of which
$75 million terminated in November 1999 and $50 million was canceled at the
option of Bank of America in February 2000. There was no payment or receipt upon
the cancellation of the swap contract. There are no interest rate swap
agreements outstanding at March 3, 2001.
Foreign Exchange Contracts
At March 3, 2001, the Company had forward exchange foreign currency contracts,
with maturities ranging from May 2001 to October 2001, to purchase approximately
$4.0 million in foreign currencies to cover future payments to component
suppliers.
F-19
DESA Holdings Corporation
Notes to Consolidated Financial Statements
6. Series C Redeemable Preferred Stock
The Company is authorized to issue 40,000 shares of $.01 par value Preferred
Stock which have no voting rights, except under limited conditions, as defined.
Such Preferred Stock has a mandatory redemption date on November 30, 2009 at its
liquidation value of $1,000 per share plus accrued and unpaid dividends. The
liquidation value is adjustable based upon the occurrence of certain future
events, as defined. Such Preferred Stock was initially recorded on the
consolidated balance sheets at $14,598,000 and is being accreted to its face
value over its term. The accretion is shown as a reduction to retained earnings
(deficit) on the consolidated statements of stockholders' equity (deficit).
The holders of Preferred Stock are entitled to receive cumulative dividends at a
rate of 12% per annum. Such dividends are payable as and when declared by the
Company's Board of Directors in cash or via the issuance of additional shares of
Preferred Stock at a value of $1,000 per share if a cash dividend is not
declared prior to any May 31 or November 30 before its redemption. In fiscal
2001, 2000 and 1999, the Company issued 2,784, 2,471, and 2,390 shares of
Preferred Stock, all as dividends-in-kind. At March 3, 2001 and February 26,
2000, accrued dividends (included in other accrued liabilities) on such
Preferred Stock were $515,000 or $20.39 per share and $421,000 or $18.74,
respectively.
7. Income Taxes
Significant components of the Company's deferred tax liabilities and assets are
as follows (in thousands):
March 3, February 26,
2001 2000
--------------------------
Deferred tax liabilities:
Depreciation and amortization $ 1,040 $ 1,167
Inventory reserves (493) (87)
--------------------------
Total gross deferred tax liabilities 547 1,080
F-20
DESA Holdings Corporation
Notes to Consolidated Financial Statements
7. Income Taxes (continued)
Deferred tax assets:
Allowance for doubtful accounts 172 362
Accrued expenses 2,245 2,292
Net operating loss carryforwards 230 913
Other--net 501 199
--------------------------
Total gross deferred tax assets 3,148 3,766
Valuation allowance (230) (621)
--------------------------
Net deferred tax (assets) $(2,371) $(2,065)
==========================
Shown in consolidated balance sheets as:
Current deferred tax (assets) $(3,274) $(2,854)
Noncurrent deferred tax liability 903 789
--------------------------
Net deferred tax (assets) $(2,371) $(2,065)
==========================
The Company has state net operating loss carryforwards of $13 million which
expire in 2001 and 2002. The Federal minimum tax credit carryforward acquired in
the acquisition of Heath is subject to limitations imposed by the Internal
Revenue Code.
Management has evaluated the need for a valuation allowance against the deferred
tax assets and has determined that all of the deductible temporary differences,
except $230,000, will be utilized as charges against reversals of future taxable
temporary differences and future taxable income. Accordingly, the Company has
recorded a $230,000 valuation allowance to reserve for all of the state net
operating loss carryforwards acquired in the Heath acquisition which may not be
realized during the carryforward period. If this net operating loss carryforward
is realized, the reduction of the valuation allowance will be credited against
the goodwill from the Heath acquisition.
F-21
DESA Holdings Corporation
Notes to Consolidated Financial Statements
7. Income Taxes (continued)
The provision for income taxes consists of the following (in thousands):
Fiscal Year
2001 2000 1999
------------------------------------------
Current:
Federal $ 983 $ 2,367 $ 438
State and local 169 936 --
Foreign (357) 451 458
------------------------------------------
795 3,754 896
Deferred:
Federal (391) 1,188 25
State and local 84 (33) 26
------------------------------------------
(307) 1,155 51
------------------------------------------
$ 488 $ 4,909 $ 947
==========================================
Included in earnings before income tax expense for the years ended March 3,
2001, February 26, 2000, and February 27, 1999 are foreign earnings of
$2,374,000, $706,000, and $2,739,000, respectively.
Undistributed earnings of the Company's foreign subsidiaries included in
accumulated deficit amounted to approximately $9,471,000 and $7,207,000 at March
3, 2001 and February 26, 2000, respectively. Approximately $9,079,000 of those
earnings are considered to be permanently reinvested and, accordingly, no
provision for U.S. federal and state income taxes has been provided thereon.
Upon distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes (net of foreign tax credits)
and withholding taxes payable to the various foreign countries. In the event
that these permanently reinvested earnings are distributed, it is estimated that
U.S. federal and state income taxes, net of foreign tax credits, of
approximately $3,123,000 would be due.
F-22
DESA Holdings Corporation
Notes to Consolidated Financial Statements
7. Income Taxes (continued)
The effective income tax rate differs from the statutory rate as follows (in
thousands):
Fiscal Year
2001 2000 1999
---------------------------------
Federal income tax at statutory rate $ 414 $ 3,142 $ 686
State income tax, net of federal benefit 92 579 6
Foreign income taxes (benefit) (1,188) 204 (502)
Goodwill amortization 892 787 599
Other--net 278 197 157
---------------------------------
Provision for income taxes $ 488 $ 4,909 $ 946
=================================
Cash payments for income taxes for the years ended March 3, 2001, February 26,
2000, and February 27, 1999 were $1,114,915, $2,914,112, and $1,883,000,
respectively.
8. Stockholders' Equity (Deficit)
Warrants Issued with Series C Redeemable Preferred Stock
The Warrants issued in conjunction with the Series C Redeemable Preferred Stock
entitle the holders to purchase 463,232 shares of the Company's nonvoting common
stock for $.01 per share and are exercisable at any time prior to their
expiration on November 30, 2009. Such Warrants have been recorded at their fair
value at the time of issuance of $3,002,000 as an addition to capital in excess
of par value and a reduction to the carrying value of the Preferred Stock.
Stock Option Plans
In March 1998, the Company adopted the 1998 Stock Option Plan (the "Plan"). The
Plan terminates in ten years from its date of inception and provides for the
issuance of incentive options or nonqualified stock options for 1,462,222 shares
of common stock. The stock options may be granted to key employees, as defined,
as determined by the Compensation Committee of the Board of Directors. The term
of the options cannot exceed ten years from the grant date, except for employees
who own stock possessing more than 10% of the combined voting power of all
classes of stock of the Company, for whom the term of the options is five years.
F-23
DESA Holdings Corporation
Notes to Consolidated Financial Statements
8. Stockholders' Equity (Deficit) (continued)
The exercise price of the incentive options shall be equal to or greater than
the fair market value of the common stock on the date of grant, except for
employees who own stock possessing more than 10% of the combined voting power of
all classes of stock, for whom the exercise price cannot be less than 110% of
the fair market value of the common stock on the date of grant.
The exercise price of the nonqualified options is determined by the Compensation
Committee of the Board of Directors.
The following is a summary of the Company's incentive options under the 1998
Stock Option Plan:
Number of
Shares
----------------
Outstanding at February 28, 1998 --
Granted at $6.49 per share 1,367,527
Canceled at $6.49 per share (13,000)
----------------
Outstanding at February 27, 1999 1,354,527
Granted at $6.50 per share 91,750
Exercised at $6.50 per share (3,855)
Canceled at $6.49 per share (619,133)
----------------
Outstanding at February 26, 2000 823,289
Granted at $6.50 per share 901,000
Exercised at $6.50 per share (2,800)
Canceled at $6.50 per share (602,948)
----------------
Outstanding at March 3, 2001 1,118,541
================
165,133, 10,946 and 0 of the options were exercisable at March 3, 2001, February
26, 2000 and February 27, 1999, respectively. All options outstanding at March
3, 2001 have an exercise price of either $6.49 or $6.50 per share.
F-24
DESA Holdings Corporation
Notes to Consolidated Financial Statements
8. Stockholders' Equity (Deficit) (continued)
Of the above options issued, 66% vest as follows: 20% of the options vest on the
first anniversary of the effective date of the grant and 20% on each subsequent
anniversary of the effective date, and 34% vest as follows: 5% at the end of
year one, 10% at the end of year two, 60% at the end of year three, 80% at the
end of year four and 100% at the end of year five.
The Company also issues options under an executive option agreement. The
agreement provides for non-qualified options to acquire an aggregate number of
shares equal to 4% of the outstanding common stock equivalents of the Company,
on a fully diluted basis. 40% of the options vest on the first anniversary of
the effective date and 20% on each subsequent anniversary. At March 3, 2001,
there were 722,919 options granted, of which, 288,500 options were exercisable.
The Company accounts for its stock based compensation awards following the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations for stock issued to
employees. APB 25 requires compensation expense to be recognized only if the
market price of the underlying stock exceeds the exercise price on the date of
grant. The Company's stock based awards consist of stock options with an
exercise price equal to market price on the date of grant. As such, the Company
has not recorded compensation expense in connection with these awards.
The weighted average fair value of an option granted for the years ended March
3, 2001, February 26, 2000 and February 27, 1999 was $1.67, $1.96 and $2.42,
respectively. The fair value of the options was estimated at the date of grant
using a minimum value method and the following assumptions:
Fiscal Year
2001 2000 1999
-----------------------------------------
Risk-free interest rate 5.92% 5.94% 5.32%
Average life 5 Years 6 years 5 years
Dividend yield 0% 0% 0%
F-25
DESA Holdings Corporation
Notes to Consolidated Financial Statements
8. Stockholders' Equity (Deficit) (continued)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Pro forma net income
(loss) available for common stockholders is as follows (in thousands):
Fiscal Year
2001 2000 1999
----------------------------------
Pro forma net (loss) income available
for common stockholders $(2,452) $1,224 $(1,602)
Shares Reserved for Issuance
At March 3, 2001, 337,026 shares of common stock were reserved for the future
grant of stock options. At March 3, 2001 and February 26, 2000, 90,604 shares of
common stock were reserved for issuance upon conversion of the nonvoting common
stock. At March 3, 2001 and February 26, 2000, 463,232 shares of nonvoting
common stock were reserved for issuance upon exercise of outstanding warrants.
9. Pension Plans
All eligible salaried employees are covered by a defined contribution plan
("401k"). After an employee has been employed for six months, the Company
contributes 0% to 2 1/2% of their salary (0% to 2% of salary prior to September
1, 1999). The Company matches an additional 50% of participant contributions up
to a maximum contribution of 3% (the Company matched an additional 50% of
participant contributions up to a maximum contribution of 1% prior to September
1, 1999). The cost of these plans was $677,000, $632,000, and $366,000 for the
fiscal years ended March 3, 2001, February 26, 2000, and February 27, 1999,
respectively.
The Company has two defined benefit pension plans covering substantially all of
its industrial employees. The defined benefits are calculated at the initial
application date as the present value of benefits credited with respect to
service before that date. The Company's funding policy is consistent with the
requirements of federal laws and regulations.
F-26
DESA Holdings Corporation
Notes to Consolidated Financial Statements
9. Pension Plans (continued)
Assets of the 401k and defined benefit pension plans are invested in securities
of governmental agencies, common stocks, insurance contracts and mutual funds.
The following table sets forth the funded status of the Company's defined
benefit plans and the amount recognized in the Company's consolidated balance
sheets as of March 3, 2001 and February 26, 2000 (in thousands):
2001 2000
--------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 3,146 $ 2,805
Benefit obligation assumed 707 --
Service cost 155 130
Interest cost 288 201
Actuarial loss (gain) (31) 73
Benefits paid (115) (63)
--------------------
Benefit obligation at end of year 4,150 3,146
Change in plan assets
Fair value of plan assets at beginning of year 3,159 2,983
Plan assets acquired 735 --
Actual return on plan assets 292 89
Employer contributions 100 150
Benefits paid (115) (63)
--------------------
Fair value of plan assets at end of year 4,171 3,159
Reconciliation of funded status of the plan
Funded status of the Plan 21 13
Unrecognized net actuarial loss 432 434
Unrecognized net transition liability 6 12
Unrecognized prior service cost 204 268
--------------------
Net prepaid asset $ 663 $ 727
====================
F-27
DESA Holdings Corporation
Notes to Consolidated Financial Statements
9. Pension Plans (continued)
Fiscal Year
2001 2000 1999
-------------------------------
Weighted average assumptions
Discount rate 7.75% 7.75% 7.25%
Expected return on plan assets 9.00 9.00 9.00
A summary of the Company's net periodic pension cost related to the defined
benefit plans for fiscal years 2001, 2000, and 1999 is as follows (in
thousands):
Fiscal Year
2001 2000 1999
---------------------------
Service cost--benefits earned during the year $ 155 $ 130 $ 120
Interest cost on projected benefit obligation 288 201 170
Expected return on plan assets (305) (253) (218)
Net amortization and deferral 27 44 33
---------------------------
Net pension cost $ 165 $ 122 $ 105
===========================
10. Lease Commitments
The Company leases certain machinery and equipment for periods up to five years,
expiring between 2002 and 2006, and office and manufacturing facilities for
periods up to ten years, expiring between 2002 and 2011, under operating lease
agreements. Total rent expense for fiscal years 2001, 2000, and 1999 was
approximately $4,585,000, $4,808,000, and $3,299,000, respectively. Certain of
the leases contain renewal and escalation options for periods up to ten years
after the initial term of the lease.
F-28
DESA Holdings Corporation
Notes to Consolidated Financial Statements
10. Lease Commitments (continued)
Future minimum lease payments under all noncancellable operating leases at March
3, 2001 are as follows (in thousands):
Fiscal years ending:
2002 $ 3,688
2003 3,050
2004 2,657
2005 2,339
2006 2,075
Thereafter 6,289
------------
Total minimum lease payments $ 20,098
============
11. Other Assets
Other assets as of March 3, 2001 and February 26, 2000 consist of the following,
net of related amortization (in thousands). Accumulated amortization at March 3,
2001 and February 26, 2000 was $11,578 and $7,777, respectively:
2001 2000
-----------------------------
Non-compete agreements $ 1,665 $ 2,797
Trademarks and intellectual property 8,505 9,205
Deferred financing costs 7,674 9,310
Other 904 954
-----------------------------
$ 18,748 $ 22,266
=============================
F-29
DESA Holdings Corporation
Notes to Consolidated Financial Statements
12. Segment Information
The Company is organized in 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.
Operational results and other financial data of the business segments for the
years ended March 3, 2001, February 26, 2000, and February 27, 1999 are
presented below (in thousands):
Zone
Heating Specialty
Products Products Other Total
-----------------------------------------------
Year ended March 3, 2001
Net sales $ 226,935 $ 165,694 $10,463 $403,092
Operating profit (loss) 22,971 13,047 (2,237) 33,781
Depreciation and amortization 7,717 3,148 263 11,128
Segment assets 124,888 98,045 10,963 233,896
Capital expenditures 2,343 933 495 3,771
Year ended February 26, 2000
Net sales 208,885 173,135 11,904 393,924
Operating profit 21,034 16,610 188 37,832
Depreciation and amortization 7,702 2,565 208 10,475
Segment assets 122,981 96,288 8,870 228,139
Capital expenditures 3,800 1,617 112 5,529
F-30
DESA Holdings Corporation
Notes to Consolidated Financial Statements
12. Segment Information (continued)
Zone
Heating Specialty
Products Products Other Total
-----------------------------------------------
Year ended February 27, 1999
Net sales $ 162,212 $ 138,706 $ 16,319 $ 317,237
Operating profit 16,196 12,336 1,293 29,825
Depreciation and amortization 5,277 3,028 282 8,587
Segment assets 109,542 84,108 8,988 202,638
Capital expenditures 3,382 1,080 -- 4,462
Financial information relating to the Company's operations by geographic area is
as follows (in thousands):
Net Sales
-----------------------------------------------------
Fiscal Year Ended
March 3, 2001 February 26, 2000 February 27, 1999
-----------------------------------------------------
United States $ 384,464 $ 374,419 $ 294,581
Foreign 18,628 19,505 22,656
-----------------------------------------------------
Consolidated $ 403,092 $ 393,924 $ 317,237
=====================================================
Long-Lived Assets
-----------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999
-----------------------------------------------------
United States $ 129,372 $ 132,134 $ 122,086
Foreign 1,299 646 679
-----------------------------------------------------
Consolidated $ 130,671 $ 132,780 $ 122,765
=====================================================
Geographic sales data indicates the location from which products are shipped.
F-31
DESA Holdings Corporation
Notes to Consolidated Financial Statements
13. Related Party Transactions
Pursuant to the 1998 acquisition of a majority of the outstanding shares of the
Company by J.W. Childs Associates L.P. and UBS Capital Management Inc. (the
"Advisors"), the Company entered into management agreements with the Advisors
which provide for aggregate annual management fees of $240,000 as consideration
for ongoing consulting and management advisory services. Under these agreements,
the Advisors were paid an aggregate of $299,000, $88,000, and $284,000 in fiscal
years 2001, 2000, and 1999, respectively. Payments may be made to the extent
permitted by the Credit Facility and Indenture to the 9 7/8% Senior Subordinated
Notes. The agreements extend for a period of five years upon which they shall
automatically extend for successive periods of one year each, unless terminated
by the Company or the Advisors.
14. Litigation
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business and have not been formally adjudicated. In the
opinion of management after consultation with legal counsel, settlement of these
actions when ultimately concluded will not have a material adverse effect on the
results of operations, cash flows or financial condition of the Company.
15. Subsequent Events
On May 23, 2001, the Company entered into Amendment and Waiver No. 7 to the Loan
Documents and Amendment No. 3 to the Credit Agreement (together, the
"Amendment"), an amendment to their Credit Facility, which waives the Company's
failure to comply with the requirements of the interest coverage ratio, the
fixed charge ratio and the total leverage ratio at March 3, 2001.
As part of the Amendment, the Company's interest rates on all existing
outstanding borrowings under the Credit Facility were increased by 1/2%. In
addition, the Amendment extended the maturity of the Guaranteed Line of Credit
to November 23, 2003 and modified the financial covenants and their method of
calculation. In conjunction with the Amendment, the Company sold 9,375,000
shares of common stock on May 30, 2001 to current shareholders for an aggregate
sale price of $7,500,000.
F-32
DESA Holdings Corporation
Notes to Consolidated Financial Statements
16. Parent Guarantee of Subsidiary Debt
DESA's obligations under the 9 7/8% Senior Subordinated Notes ("Notes") are
fully and unconditionally guaranteed by Holdings. The Company's condensed
consolidating financial information is provided below:
Condensed Consolidating Balance Sheet
As of March 3, 2001
(in thousands)
Parent DESA Combined
Guarantor International, Non-Guarantor Consolidating
(Holdings) Inc. Subsidiaries Adjustments Consolidated
- --------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ -- $ 1,844 $ 544 -- $ 2,388
Accounts receivable, net -- 142,566 13,102 $(113,774) 41,894
Inventories:
Raw materials -- 486 -- -- 486
Work-in-process -- 10,938 -- -- 10,938
Finished goods -- 31,370 6,499 -- 37,869
-----------------------------------------------------------------------------
-- 42,794 6,499 -- 49,293
Other current assets -- 8,346 1,304 -- 9,650
-----------------------------------------------------------------------------
Total current Assets -- 195,550 21,449 (113,774) 103,225
Property, plant and equipment -- 50,223 1,472 -- 51,695
Less accumulated depreciation -- 34,621 463 -- 35,084
-----------------------------------------------------------------------------
-- 15,602 1,009 -- 16,611
Investment in subsidiaries (23,425) 13,137 -- 10,288 --
Other assets 1,073 112,614 416 (43) 114,060
-----------------------------------------------------------------------------
Total Assets $ (22,352) $ 336,903 $ 22,874 $(103,529) $ 233,896
=============================================================================
Liabilities and stockholders'
equity (deficit):
Current liabilities:
Accounts payable $ 104,090 $ 30,051 $ 8,334 $(113,774) $ 28,701
Accrued interest -- 3,195 -- -- 3,195
Other accrued liabilities 515 11,925 1,384 -- 13,824
Current portion of long-term
debt -- 50,874 -- -- 50,874
-----------------------------------------------------------------------------
Total current liabilities 104,605 96,045 9,718 (113,774) 96,594
Long-term debt -- 249,163 -- -- 249,163
Other liabilities -- 15,120 19 -- 15,139
Series C redeemable preferred
stock 23,057 -- -- -- 23,057
Stockholders' equity (150,014) (23,425) 13,137 10,245 (150,057)
-----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ (22,352) $ 336,903 $ 22,874 $(103,529) $ 233,896
=============================================================================
F-33
DESA Holdings Corporation
Notes to Consolidated Financial Statements
16. Parent Guarantee of Subsidiary Debt (continued)
Condensed Consolidating Statement of Income
Fiscal 2001
(in thousands)
Parent DESA Combined
Guarantor International, Non-Guarantor Consolidating
(Holdings) Inc. Subsidiaries Adjustments Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 386,667 $ 68,221 $ (51,796) $ 403,092
Cost of sales -- 259,932 59,515 (51,796) 267,651
-----------------------------------------------------------------------------
Gross profit -- 126,735 8,706 -- 135,441
Operating costs and expenses:
Selling -- 72,227 5,011 -- 77,238
General, administrative and
other (679) 24,685 416 -- 24,422
Undistributed earnings of
subsidiaries (30) (3,620) -- 3,650 --
-----------------------------------------------------------------------------
(709) 93,292 5,427 3,650 101,660
-----------------------------------------------------------------------------
Operating profit 709 33,443 3,279 (3,650) 33,781
Interest expense 14 32,584 -- -- 32,598
-----------------------------------------------------------------------------
Income before provision for
income taxes 695 859 3,279 (3,650) 1,183
Provision for income taxes -- 829 (341) -- 488
-----------------------------------------------------------------------------
Net income $ 695 $ 30 $ 3,620 $ (3,650) $ 695
=============================================================================
Condensed Consolidating Statement of Cash Flows
Fiscal 2001
(in thousands)
Parent DESA Combined
Guarantor International, Non-Guarantor Consolidating
(Holdings) Inc. Subsidiaries Adjustments Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by $ (3,390) $ 3,582 $ 1,122 $ -- $ 1,314
operating activities
Net cash used by investing
activities -- (14,256) (735) -- (14,991)
Net cash provided by financing
activities 3,390 12,510 -- -- 15,900
Effect of exchange rate changes
on cash -- -- (8) -- (8)
-----------------------------------------------------------------------------
Increase in cash and cash -- 1,836 379 -- 2,215
equivalents for the year
Cash and cash equivalents at
beginning of year -- 8 165 -- 173
-----------------------------------------------------------------------------
Cash and cash equivalents at end
of year $ -- $ 1,844 $ 544 $ -- $ 2,388
=============================================================================
F-34
DESA Holdings Corporation
Notes to Consolidated Financial Statements
16. Parent Guarantee of Subsidiary Debt (continued)
Condensed Consolidating Balance Sheet
As of February 26, 2000
(in thousands)
Parent DESA Combined
Guarantor International, Non-Guarantor Consolidating
(Holdings) Inc. Subsidiaries Adjustments Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ -- $ 8 $ 165 $ -- $ 173
Accounts receivable, net -- 139,199 8,887 (115,165) 32,921
Inventories:
Raw materials -- 209 -- -- 209
Work-in-process -- 9,756 -- -- 9,756
Finished goods -- 38,811 8,632 -- 47,443
-----------------------------------------------------------------------------
48,776 8,632 -- 57,408
Other current assets -- 4,346 511 -- 4,857
-----------------------------------------------------------------------------
Total current Assets -- 192,329 18,195 (115,165) 95,359
Property, plant and equipment -- 45,258 2,012 -- 47,270
Less accumulated depreciation -- 29,208 1,366 -- 30,574
-----------------------------------------------------------------------------
16,050 646 16,696
Investment in subsidiaries (22,885) 10,146 -- 12,739 --
Other assets 1,105 114,853 126 -- 116,084
-----------------------------------------------------------------------------
Total Assets $ (21,780) $ 333,378 $ 18,967 $(102,426) $ 228,139
=============================================================================
Liabilities and stockholders'
equity (deficit):
Current liabilities:
Accounts payable $ 108,268 $ 36,767 $ 7,170 $(115,165) $ 37,040
Accrued interest 23 5,210 -- -- 5,233
Other accrued liabilities 421 11,332 1,472 -- 13,225
Current portion of long-term
debt -- 23,500 -- -- 23,500
-----------------------------------------------------------------------------
Total current liabilities 108,712 76,809 8,642 (115,165) 78,998
Long-term debt 1,842 264,004 -- -- 265,846
Other liabilities -- 15,450 179 -- 15,629
Series C redeemable preferred
stock 19,937 -- -- -- 19,937
Stockholders' equity (152,271) (22,885) 10,146 12,739 (152,271)
-----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ (21,780) $ 333,378 $ 18,967 $(102,426) $ 228,139
=============================================================================
F-35
DESA Holdings Corporation
Notes to Consolidated Financial Statements
16. Parent Guarantee of Subsidiary Debt (continued)
Condensed Consolidating Statement of Income
Fiscal 2000
(in thousands)
Parent DESA Combined
Guarantor International, Non-Guarantor Consolidating
(Holdings) Inc. Subsidiaries Adjustments Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 377,151 $ 65,113 $ (48,340) $ 393,924
Cost of sales -- 254,073 58,560 (48,340) 264,293
-----------------------------------------------------------------------------
Gross profit -- 123,078 6,553 -- 129,631
Operating costs and expenses:
Selling -- 65,557 4,264 -- 69,821
General, administrative and
other 33 21,482 463 -- 21,978
Undistributed earnings of
subsidiaries (4,260) (1,107) -- 5,367 --
-----------------------------------------------------------------------------
(4,227) 85,932 4,727 5,367 91,799
-----------------------------------------------------------------------------
Operating profit (loss) 4,227 37,146 1,826 (5,367) 37,832
Interest expense 157 28,696 -- -- 28,853
-----------------------------------------------------------------------------
Income before provision for
income taxes 4,070 8,450 1,826 (5,367) 8,979
Provision for income taxes -- 4,190 719 -- 4,909
-----------------------------------------------------------------------------
Net income $ 4,070 $ 4,260 $ 1,107 $ (5,367) $ 4,070
=============================================================================
Condensed Consolidating Statement of Cash Flows
Fiscal 2000
(in thousands)
Parent DESA Combined
Guarantor International, Non-Guarantor Consolidating
(Holdings) Inc. Subsidiaries Adjustments Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by $ 365 $ 14,778 $ (553) $ -- $ 14,590
operating activities
Net cash used provided by investing
activities -- (5,270) (164) -- (5,434)
Net cash used by financing
activities (365) (9,506) -- -- (9,871)
Effect of exchange rate changes
on cash -- -- -- -- --
-----------------------------------------------------------------------------
Increase (decrease) in cash and -- 2 (717) -- (715)
cash equivalents for the
year
Cash and cash equivalents at
beginning of year -- 6 882 -- 888
-----------------------------------------------------------------------------
Cash and cash equivalents at end
of year $ -- $ 8 $ 165 $ -- $ 173
=============================================================================
F-36
DESA Holdings Corporation
Notes to Consolidated Financial Statements
16. Parent Guarantee of Subsidiary Debt (continued)
Condensed Consolidating Statement of Income
Fiscal 1999
(in thousands)
Parent DESA Combined
Guarantor International, Non-Guarantor Consolidating
(Holdings) Inc. Subsidiaries Adjustments Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 296,722 $ 73,511 $ (52,996) $ 317,237
Cost of sales -- 202,021 65,344 (52,996) 214,369
-----------------------------------------------------------------------------
Gross profit -- 94,701 8,167 -- 102,868
Operating costs and expenses:
Selling -- 49,954 4,130 -- 54,084
General, administrative and
other 33 18,438 488 -- 18,959
Undistributed earnings of
subsidiaries (1,211) (2,324) -- 3,535 --
-----------------------------------------------------------------------------
(1,178) 66,068 4,618 3,535 73,043
-----------------------------------------------------------------------------
Operating profit 1,178 28,633 3,549 (3,535) 29,825
Interest expense 164 27,700 -- 27,864
-----------------------------------------------------------------------------
Income before provision for
income taxes 1,014 933 3,549 (3,535) 1,961
Provision for income taxes -- (278) 1,225 -- 947
-----------------------------------------------------------------------------
Net income $ 1,014 $ 1,211 $ 2,324 $ (3,535) $ 1,014
=============================================================================
Condensed Consolidating Statement of Cash Flows
Fiscal 1999
(in thousands)
Parent DESA Combined
Guarantor International, Non-Guarantor Consolidating
(Holdings) Inc. Subsidiaries Adjustments Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by $(13,979) $ 16,077 $ 209 $ -- $ 2,307
operating activities
Net cash (used) by investing
activities (97) (45,029) (97) -- (45,223)
Net cash provided by financing
activities 14,076 28,936 -- -- 43,012
Effect of exchange rate
changes on cash -- -- (2) -- (2)
-----------------------------------------------------------------------------
Increase in cash and cash -- (16) 110 -- 94
equivalents for the year
Cash and cash equivalents at
beginning of year -- 22 772 -- 794
-----------------------------------------------------------------------------
Cash and cash equivalents at end
of year $ -- $ 6 $ 882 $ -- $ 888
=============================================================================
F-37
SCHEDULE II - Valuation and Qualifying Accounts
DESA Holdings Corporation
COL. A COL. B COL. C COL. D COL. E
-------------------------------------
Additions
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Charged (credited) Charged to Other Deductions - Balance at
Description Beginning of Period to Costs and Expenses Accounts-Describe Describe End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended March 3, 2001:
Deducted from assets accounts:
Allowance for doubtful accounts $ 907,000 $ (110,000) $ 1,397,000 (3) $ 1,275,000 (1) $ 919,000
Year Ended February 26, 2000:
Deducted from assets accounts:
Allowance for doubtful accounts 1,628,000 (608,000) 113,000 (1) 907,000
Year Ended February 27, 1999:
Deducted from assets accounts:
Allowance for doubtful accounts $ 1,517,000 $ 49,000 $ 202,000 (2) $ 140,000 (1) $ 1,628,000
- ----------------------------------------------------
(1) Uncollectible accounts written off, net of recovery.
(2) Part of net assets acquired from FMI.
(3) Part of net assets acquired from Trine Products Company.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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: /s/ W. Michael Clevy
Name: W. Michael Clevy
Title: Chief Executive Officer and President
and Director
Dated: June 1, 2001
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
Signature Title Date
/s/ W. Michael Clevy Chief Executive Officer and
W. Michael Clevy President and Director June 1, 2001
(Principal Executive Officer)
/s/ Raymond B. Rudy Chairman June 1, 2001
Raymond B. Rudy
/s/ John W. Childs Director June 1, 2001
John W. Childs
/s/ Adam L. Suttin Director June 1, 2001
Adam L. Suttin
/s/ Michael Greene Director June 1, 2001
Michael Greene
/s/ Joseph J. Incandela Director June 1, 2001
Joseph J. Incandela
/s/ James E. Ashton Director June 1, 2001
James E. Ashton
/s/ Terry G. Scariot Director June 1, 2001
Terry G. Scariot
/s/ Stephen L. Clanton Senior Vice President, Chief
Stephen L. Clanton Financial Officer
(Principal Accounting and June 1, 2001
Financial Officer)
31