UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the thirteen week period ended August 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 333-44969-01
DESA HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2940760
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2701 Industrial Drive, Bowling Green, KY 42101
(Address of principal executive offices) (Zip Code)
(502) 781-9600
(Registrant's telephone number, including area code)
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X ]
As of September 30, 1998, there were 15,548,692 shares of Registrant's Common
Stock, $.01 par value per share, and 90,604 shares of the Registrant's Nonvoting
Common Stock, $.01 par value per share, outstanding.
DESA HOLDINGS CORPORATION
FORM 10-Q
August 29, 1998
INDEX
Page
PART I Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - August 29, 1998 and February 28, 1998 3
Consolidated Statements of Income - Thirteen Weeks and Twenty-six 4
Weeks ended August 29, 1998 and August 30, 1997
Consolidated Statements of Stockholders' Equity (Deficit) 5
Consolidated Statements of Cash Flows - Twenty-six Weeks ended 6
August 29, 1998 and August 30, 1997
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 13
Results of Operations
PART II Other Information
Item 2. Changes in Securities 20
Item 4. Submission of Matters to a Vote of Securities Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
DESA Holdings Corporation
Consolidated Balance Sheets
(in thousands, except number of shares)
February 28 August 29
1998 1998
----------------------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 794 $ 517
Accounts receivable, net 20,838 50,940
Inventories:
Raw materials 1,257 841
Work-in-process 8,908 10,583
Finished goods 30,191 47,395
--------------------------------
40,356 58,819
Deferred tax assets 3,730 4,156
Other current assets 1,440 2,086
--------------------------------
Total current assets 67,158 116,518
Property, plant and equipment:
Land 390 390
Buildings and improvements 5,241 5,273
Machinery and equipment 29,891 33,393
Furniture and fixtures 630 1,103
--------------------------------
36,152 40,159
Less accumulated depreciation 22,593 24,105
--------------------------------
13,559 16,054
Goodwill 63,430 82,574
Other assets 11,489 26,647
--------------------------------
Total assets $ 155,636 $ 241,793
================================
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 15,035 $ 38,930
Accrued interest 5,725 3,936
Other accrued liabilities 14,004 10,433
Income taxes payable 49 (3,782)
Current portion of long-term debt 5,250 6,000
--------------------------------
Total current liabilities 40,063 55,517
Long-term debt 261,105 322,952
Deferred tax liabilities 1,781 1,962
Other liabilities 433 641
--------------------------------
Total liabilities 303,382 381,072
Commitments
Series C redeemable preferred stock, $.01 par value; authorized--
40,000 shares; issued and outstanding-- 17,600 shares at February 28, 1998
and 18,850 shares at August 29, 1998 14,661 16,035
Stockholders' equity (deficit):
Common stock, $.01 par value; authorized-- 50,000,000 shares; issued and
outstanding-- 13,688,015 shares February 28, 1998 and 15,548,692 137 155
shares at August 29, 1998
Nonvoting common stock, $.01 par value; authorized-- 2,000,000
shares; issued and outstanding--90,604 shares at February 28, 1998
and August 29, 1998 1 1
Capital in excess of par value 85,926 97,984
Carryover predecessor basis adjustment (32,309) (32,309)
Retained earnings (deficit) (215,598) (220,044)
Cumulative other comprehensive income (564) (1,101)
--------------------------------
Total stockholders' equity (deficit) (162,407) (155,314)
--------------------------------
Total liabilities and stockholders' equity (deficit) $ 155,636 $ 241,793
================================
See accompanying notes
3
DESA Holdings Corporation
Consolidated Statements of Income
(in thousands)
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
August 30 August 29 August 30 August 29
1997 1998 1997 1998
-----------------------------------------------------------------------------
Net sales $ 65,635 $ 75,416 $ 90,389 $ 116,170
Cost of sales 41,398 50,332 58,058 79,941
---------------------------------------------------------------------------
Gross profit 24,237 25,084 32,331 36,229
Operating costs and expenses:
Selling 9,035 11,970 13,888 20,753
General and administrative 2,292 3,096 4,542 5,964
Other 753 1,272 1,672 2,138
---------------------------------------------------------------------------
12,080 16,338 20,102 28,855
---------------------------------------------------------------------------
Operating Profit 12,157 8,746 12,229 7,374
Interest expense 3,858 6,745 7,162 13,237
---------------------------------------------------------------------------
Income before provision for income taxes 8,299 2,001 5,067 (5,863)
Provision for Income Taxes 3,483 878 2,130 (2,620)
---------------------------------------------------------------------------
Net Income 4,816 1,123 2,937 (3,243)
Less dividends on preferred stock 0 551 0 1,078
---------------------------------------------------------------------------
Income (loss) available for common stockholders $ 4,816 $ 572 $ 2,937 $ (4,321)
===========================================================================
See accompanying notes
4
DESA Holdings Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
Cumulative
Nonvoting Capital in Carryover Retained Other Total
Common Common Excess of Predecssor Earnings Comprehensive Shareholders'
Stock Stock Par Value Adjustment (Deficit) Income Equity
-------------------------------------------------------------------------------------------------------
Balance at
February 28, 1998 $137 $1 $85,926 ($32,309) ($215,598) ($564) ($162,407)
Comprehensive income:
Net Income (3,243) (3,243)
Foreign currency
translation adjustment (537) (537)
---------
Comprehensive income (3,780)
---------
Accretion of preferred stock (125) (125)
Dividends on preferred stock (1,078) (1,078)
Issuance of common stock 18 12,058 12,076
------------------------------------------------------------------------------ ---------
Balance at
August 29, 1998 $155 $1 $97,984 ($32,309) ($220,044) ($1,101) ($155,314)
============================================================================== =========
See accompanying notes
5
DESA Holdings Corporation
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Twenty-six Weeks Ended
August 30 August 29
1997 1998
-----------------------------
Operating activities
Net income $ 2,937 $ (3,243)
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation 1,357 1,512
Amortization 1,046 1,945
Deferred income taxes 0 (15)
Equity in undistributed earnings of joint venture (85) (78)
(Increase) decrease in operating assets:
Accounts receivable, net (35,176) (28,436)
Inventories (26,316) (14,558)
Other current assets (423) (529)
Increase (decrease) in operating liabilities:
Accounts payable 13,528 22,290
Accrued interest 485 (1,789)
Other accrued liabilities (445) (5,391)
Income taxes payable 275 (3,831)
Other liabilities 52 208
-------- --------
Net cash used in operating activities (42,765) (31,915)
-------- --------
Investing activities
Capital expenditures (2,860) (2,806)
Dividends received from joint venture 85 83
Net cash paid for acquisition of businesses 0 (39,635)
Other 120 (672)
-------- --------
Net cash used in investing activities (2,655) (43,030)
-------- --------
Financing activities Recapitalization transactions:
Increase in Working Capital Loan 0 33,722
Increase in revolving loan 47,576 0
Principal payments of Term Loans (6,855) (1,125)
Issuance of Common Stock 12 12,076
Increase in Acquisition Loans 0 30,000
-------- --------
Net cash provided by financing activities 40,733 74,673
Effect of exchange rates on cash (5) (5)
-------- --------
Decrease in cash and cash equivalents for the period (4,692) (277)
Cash and cash equivalents at beginning of period 5,058 794
-------- --------
Cash and cash equivalents at end of period $ 366 $ 517
======== ========
See accompanying notes
6
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The interim consolidated financial statements for the periods presented
herein have not been audited by independent public accountants. In the opinion
of management of Desa Holdings Corporation (the "Company"), all adjustments
necessary to present fairly the results of operations for the periods have been
included. Interim results are not necessarily indicative of results for a full
year.
The unaudited consolidated financial statements have been prepared by
the Company in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations.
The consolidated balance sheet presented as of February 28, 1998 has
been derived from the consolidated financial statements that have been audited
by the Company's independent accountants. The consolidated financial statements
and notes thereto included herein should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Registration Statement on Form S-4 (SEC File No. 333-44969-01).
Other than a small amount of goodwill and a $2 million note payable,
the Company has no assets, operations or cash flows independent of Desa
International, Inc. ("Desa") and, accordingly, separate financial statements for
Desa have not been provided as management believes that such financial
statements are not material to an investor.
2. Summary of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, Desa, and all of its
wholly-owned subsidiaries, including Desa Industries of Canada, Inc., Desa
Europe B.V. and Heath Company Limited. All significant intercompany accounts and
transactions have been eliminated. Desa's 50% interest in a joint venture is
accounted for using the equity method.
7
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results can differ from those estimates.
3. Financing Arrangements
Outstanding borrowings consist of the following (in thousands):
February 28, August 29,
1998 1998
---- ----
9 7/8% Senior Subordinated Notes Due 2007 (A) $130,000 $130,000
Term A Loan (B) 49,125 48,250
Term B Loan (C) 49,750 49,500
Working Capital Loan Commitment (D) 15,480 49,202
Acquisition Loan (E) 20,000 20,000
Acquisition B Loan (F) -- 30,000
Note payable related to acquisition of Heath/Zenith (G) 2,000 2,000
-------- --------
Total outstanding borrowings $266,355 $328,952
Less current portion of long-term debt 5,250 6,000
-------- --------
Total long-term debt $261,105 $322,952
======== ========
<FN>
(A) The Senior Subordinated Notes are payable on December 15, 2007 and
accrue interest at a rate of 9.875% per annum. Interest is payable
semi-annually on June 15 and December 15, commencing on June 15, 1998.
The Senior Notes can be redeemed prior to the mandatory redemption date
based upon the occurrence of certain events, as defined. Desa is the
issuer of the Senior Subordinated Notes, which are fully and
unconditionally guaranteed by the Company.
(B) The Term A Loan is payable in quarterly installments through November
26, 2003 and accrues interest at the prime rate plus 1.25% or LIBOR
plus 2.25% at the option of the Company. Interest is payable on a
quarterly basis under the prime rate option or at the end of each LIBOR
period. Once repaid, the Term A Loan may not be reborrowed. Term Loan
A, Term Loan B, the Working Capital Loan Commitment, the Acquisition
Loan and the Acquisition B Loan are all part of a credit facility
entered into by the Company and Desa with the lenders party thereto in
November 1997 (the "Credit Facility").
8
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(C) The Term B Loan is payable in quarterly installments through November
26, 2004, and accrues interest at the prime rate plus 1.625% or LIBOR
plus 2.625% at the option of the Company. Interest is payable on a
quarterly basis under the prime rate option or at the end of each LIBOR
period. Once repaid, the Term B Loan may not be reborrowed.
(D) The Working Capital Loan Commitment is payable at any time at the
option of the Company prior to November 26, 2003 and accrues interest
at the prime rate plus 1.25% or LIBOR plus 2.25%, at the option of the
Company. Interest is payable on a quarterly basis under the prime rate
option or at the end of each LIBOR period. The Company can utilize
letters of credit under the Working Capital Loan Commitment up to
$10,000,000. As of August 29, 1998, letters of credit of $9,008,218
were outstanding under the Working Capital Loan Commitment. Borrowings
are generally limited to specific percentages of eligible trade
receivables and inventory.
(E) The Acquisition Loan is payable in quarterly installments commencing in
February 2000 and extending through November 26, 2003 and accrues
interest, which is payable quarterly, at the prime rate plus 1.625% or
LIBOR plus 2.625% at the option of the Company. Once repaid, the
Acquisition Loan may not be reborrowed.
(F) The Acquisition B Loan has available borrowings of up to $30,000,000
and is payable in quarterly installments commencing in February 2000
and extending through November 26, 2003 and accrues interest, which is
payable quarterly, at the prime rate plus 1.625% or LIBOR plus 2.625%,
at the option of the Company. Once repaid, the Acquisition B Loan may
not be reborrowed. On August 19, 1998, the Acquisition B Loan was drawn
on to fund the Fireplace Manufacturers, Inc. and Universal Heating,
Inc. acquisitions. $30,000,000 was borrowed, of which $4,423,170 was
used to pay down the Working Capital Loan.
(G) The note payable is due on December 31, 2008 and accrues interest,
which is payable semi-annually beginning June 30, 1998, at a rate of
7.5% per annum. The Company may elect, upon written notice, to defer
any interest payments, in which event such interest payments shall
effectively convert to principal and accrue interest at a rate of 7.5%
per annum.
</FN>
In accordance with the terms of the Working Capital Loan Commitment,
the ability of the Company to incur additional indebtedness is limited,
as defined. At August 29, 1998, the Company had the ability to incur
additional indebtedness of $16.8 million.
4. Stockholders' Equity (Deficit)
Effective March 1998, the Company established the 1998 Stock Option
Plan which terminates in ten years and provides for the issuance of incentive
options or nonqualified stock
9
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
options for up to 1,462,222 shares of common stock, $.01 par value per share, of
the Company ("Common Stock"). The stock options may be granted to key employees
or eligible non-employees, as defined, as determined by the Compensation
Committee of the Board of Directors, and 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. The exercise price of
the incentive options must 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.
Effective March and July of 1998, the Compensation Committee awarded
incentive stock options to purchase an aggregate of 187,750 shares of Common
Stock to certain key employees at an option price of $6.50 per share. These
options 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.
5. Segment Information
The Company is organized into two primary product categories: (a) zone
heating products, which includes indoor room heaters, hearth products and
outdoor heaters, and (b) specialty products, which include specialty tools and
home security products.
Corporate expenses include corporate headquarters staff, a modest
portion of the cost of certain support functions, including accounting,
management information systems, human resources and treasury and the
amortization of deferred financing costs.
Identifiable assets are those assets of the Company that are identified
with the operations in each product segment. Corporate assets include primarily
cash, deferred income taxes and deferred financing costs.
10
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Operational results and other financial data for the two business
segments for the periods ended August 30, 1997 and August 29, 1998 are presented
below (in thousands):
Zone
Heating Specialty General
Products Products Corporate Total
-------- -------- --------- -----
Thirteen weeks ended August 30, 1997
Net sales $ 54,119 $ 11,516 -- $ 65,635
Operating profit 11,054 1,947 (844) 12,157
Depreciation and amortization 1,125 53 251 1,429
Identifiable assets 111,667 31,181 6,621 149,469
Capital expenditures 901 72 -- 973
Thirteen weeks ended August 29, 1998
Net sales 42,479 32,937 -- 75,416
Operating profit 5,873 3,863 (990) 8,746
Depreciation and amortization 1,396 465 385 2,246
Identifiable assets 136,639 88,343 16,811 241,793
Capital expenditures 1,228 132 48 1,408
Zone
Heating Specialty General
Products Products Corporate Total
-------- -------- --------- -----
Twenty-six weeks ended August 30, 1997
Net sales $ 67,494 $ 22,895 -- $ 90,389
Operating profit 11,197 3,062 (2,030) 12,229
Depreciation and amortization 1,694 201 508 2,403
Identifiable assets 111,667 31,181 6,621 149,469
Capital expenditures 2,648 212 -- 2,860
Twenty-six weeks ended August 29, 1998
Net sales 52,148 64,022 -- 116,170
Operating profit 3,043 6,334 (2,003) 7,374
Depreciation and amortization 1,778 926 753 3,457
Identifiable assets 136,639 88,343 16,811 241,793
Capital expenditures 2,491 249 66 2,806
11
6. Acquisitions
On August 19, 1998, the Company consummated two acquisitions. The
Company acquired all of the outstanding stock of Fireplace Manufacturers, Inc.
("FMI"), which then merged into Desa, for a net cash purchase price of
$21,984,798. The Company also entered into non-compete agreements with certain
executives of FMI covering a three year period for aggregate payments of
$3,050,000. The Company also acquired certain of the assets of Universal
Heating, Inc. through Desa U.S. Inc., which then merged into Desa, for a cash
purchase price of $12,332,548, including non-compete payments of $1,998,000. The
Company financed the two acquisitions through borrowings of $25,891,500 under
the Credit Facility (Term Loan B) and the issuance of Common Stock for
$12,075,500. The cash purchase prices set forth above exclude an aggregate of
$600,000 in fees and expenses incurred in connection with both acquisitions.
The Company accounted for such acquisitions using the purchase method.
The following summarizes the fair value of the assets acquired and liabilities
assumed at August 19, 1998 for the two acquisitions (in thousands):
Current assets $ 5,080
Property, plant and equipment 1,202
Other assets 10,385
Non-compete agreements 5,048
Goodwill 18,837
Current liabilities (2,585)
-------
37,967
The following supplemental pro forma information is presented as if the
acquisitions had been completed as of March 2, 1997 and as of March 1, 1998:
Twenty-six weeks ended
August 30, 1997 August 29, 1998
--------------- ---------------
(dollars in thousands)
Net Sales $ 135,143 $ 128,877
Income from operations before extraordinary item 14,079 8,446
Income before extraordinary item 700 (5,880)
Net income 424 (3,647)
12
DESA HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
This quarterly report on Form 10-Q of Desa Holdings Corporation (the
"Company," which includes its consolidated subsidiaries unless the context
indicates otherwise) contains statements which constitute forward looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Those statements appear in a number of places in this report
and include statements regarding the strategies, plans, beliefs or current
expectations of the Company and its management and other statements that are not
historical facts. Readers are cautioned that any such forward looking statements
are not guaranties of future performance and involve risks and uncertainties,
and that actual results may differ materially from those set forth in such
forward looking statements as a result of various factors. Such factors include,
but are not limited to, the Company's vulnerability to adverse general economic
and industry conditions because of its leverage, the Company's ability to obtain
future financing on acceptable terms, the Company's ability to integrate
acquired companies and to complete acquisitions on satisfactory terms, the
demand and price for the Company's products relative to production costs, the
seasonality of the Company's business and uncertainties regarding the resolution
of Year 2000 problems. The Company undertakes no obligation to release publicly
the results of any revisions to these forward looking statements that may be
made to reflect errors or circumstances that occur after the date hereof.
The following discussion of the Company's results of operations and
financial condition for the thirteen and twenty-six week periods ending August
29, 1998 and August 30, 1997 should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto contained herein, as
well as for the fiscal year ended February 28, 1998 included in the Company's
Registration Statement on Form S-4 (SEC File No. 333-44969-01).
Overview
The Company is organized into two primary product categories: (a) zone
heating products, which includes indoor room heaters, hearth products and
outdoor heaters, and (b) specialty products, which include specialty tools and
home security products. The Company records sales upon shipment of products to
its customers. Net sales constitute gross sales net of an accrual for returns
and allowances and cash discounts.
Sales of the Company's zone heating products follow seasonal patterns
that affect the Company's results of operations. Demand for the Company's zone
heating products has been historically highest in the third quarter, as
consumers prepare for winter. Consequently, the Company's net sales and
operating profit have also been historically highest during the 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
13
shown in previous years. In particular, unusually warm weather in the fall may
reduce demand for zone heating products.
The Company's net sales and operating profit of zone heating products
in the first half of its fiscal year may be adversely affected by warm weather
during the preceding winter, which can result in inventory carryover by the
Company's customers. Last winter was unusually warm and, consequently, net sales
and operating profit of zone heating products for the first two quarters of the
current fiscal year were lower than in similar periods in the previous fiscal
year.
Sales of the Company's specialty products do not follow a significant
seasonal pattern and are not affected by weather patterns. Historically, these
sales have followed a relatively level quarterly pattern.
Acquisitions
On August 19, 1998, the Company consummated the acquisitions of FMI and
the worldwide rights (except in China) to distribute Universal Heating, Inc.'s
and its affiliates ("UHI") indoor heating products. FMI is a Santa Ana,
California, based manufacturer of wood-burning metal fireplaces, decorative gas
appliances with refractory-lined fireboxes, direct vent gas fireplaces, and
related chimney flues. UHI, based in Yorba Linda, California, is a privately
held manufacturer of indoor gas heating products. The aggregate purchase price
for the acquisitions was $37,967,346 including non-compete payments. These
acquisitions were accounted for under the purchase method of accounting.
The Company financed these acquisitions with the proceeds of a
$25,891,500 advance under its senior credit facility and $12,075,500 of the
proceeds from the issuance of approximately 1,860,677 additional shares of the
Common Stock by the Company. The additional equity was sold to existing
stockholders of the Company at a per share price of approximately $6.49.
In August 1998, the Company became party to an agreement to negotiate
in good faith for the purpose of entering into a joint venture to manufacture
various products in China. Pursuant to the terms of the joint venture under
negotiation, UHI intends to contribute manufacturing facilities located in China
in exchange for a 60% interest in the joint venture and a preferred interest in
an additional $7 million of profits of the joint venture. The Company intends to
contribute $3 million in cash for a 40% interest in the joint venture, which
will be subordinate to UHI's $7 million preferred interest in profits. The
Company intends to finance its $3 million contribution to the joint venture
through indebtedness under the Credit Facility. There can be no assurance that
the joint venture will be formed or, if formed, formed on the terms described
above.
14
Results of Operations
Thirteen Week Period Ended August 29, 1998 Compared to the Thirteen Week Period
Ended August 30, 1997
Net Sales. Net sales in the thirteen weeks ended August 29, 1998
("second quarter 1999") were $75.4 million, an increase of 15% or $9.8 million
compared to the thirteen weeks ended August 30, 1997 ("second quarter 1998").
Zone heating products had net sales of $42.5 million in second quarter 1999, a
decrease of 22% or $11.6 million from second quarter 1998. This decline reflects
primarily the effects of last winter's unusually warm weather and the related
customer carryover inventory of heating products. Specialty products had net
sales of $32.9 million in second quarter 1999, an increase of 186% or $21.4
million over second quarter 1998, primarily attributable to the acquisition of
Heath Company and its Heath/Zenith line of home security products
("Heath/Zenith") in February 1998 and a 17% growth in the traditional tool
business.
Cost of Sales. For second quarter 1999, cost of sales was $50.3
million, an increase of $8.9 million or 22% from second quarter 1998,
attributable to the higher net sales for the period. Cost of sales was 67% of
net sales in second quarter 1999 compared to 63% for second quarter 1998. This
increase is because of (i) proportionately higher sales of home security
products, which are sold at lower margins, and (ii) higher manufacturing
overhead per unit of zone heating products, which resulted from the
weather-related reduction in production of heating products.
Selling, General and Administrative Expenses. For second quarter 1999,
selling, general and administrative expenses were $16.3 million, an increase of
$4.3 million or 35% from second quarter 1998, primarily attributable to the net
sales increase. As a percentage of net sales, selling, general and
administrative expenses were 22% for second quarter 1999 compared to 18% in
second quarter 1998. This higher level is associated with an increase in selling
expenses for higher freight, advertising and warranty expenses associated with
the sales increase to the major home centers and higher amortization expenses
associated with the November 1997 recapitalization and the acquisitions of
Heath/Zenith, FMI and UHI.
Operating Profit. Operating profit was $8.7 million for second quarter
1999 compared to $12.2 million for second quarter 1998, a decline of 28%.
Operating profit attributable to zone heating products was $5.9 million for
second quarter 1999, down $5.2 million from second quarter 1998. This decline is
attributable to the decline in net sales of zone heating products and the
increased cost of goods sold associated with under absorbed factory overhead.
Specialty products operating profit was $3.9 million for the second quarter
1999, an increase of $1.9 million over second quarter 1998. This increase is
attributable to increased net sales of specialty products related primarily to
the acquisition of Heath/Zenith.
Interest Expense. Interest expense for second quarter 1999 was $6.7
million, an increase of $2.9 million or 75%, reflecting the November 1997
recapitalization and the acquisitions of FMI, UHI and Heath/Zenith.
15
Income Tax. The provision for income taxes was 44% for second quarter
1999, comparable to 42% for second quarter 1998.
Net Income. Net income was $1.1 million for second quarter 1999
compared to net income of $4.8 million for second quarter 1998, a decline of
77%. This decline is attributable to the lower operating profit and higher
interest expense.
Twenty-six Week Period Ended August 29, 1998 Compared to the Twenty-six Week
Period Ended August 30, 1997
Net Sales. Net sales for the twenty-six weeks ended August 29, 1998
("year to date 1999") were $116.2 million, an increase of $25.8 million or 29%
compared to the twenty-six weeks ended August 30, 1997 ("year to date 1998").
Zone heating products had net sales of $52.1 million for the year to date 1999,
a decrease of 23% or $15.3 million from the year to date 1998. This decline
primarily reflects the effects of last winter's unusually warm weather and the
related customer carryover inventory on heating products. Specialty products had
net sales of $64.0 million for the year to date 1999, an increase of 180% or
$41.1 million from the year to date 1998, primarily attributable to the
acquisition of Heath/Zenith in February 1998 and a 15% increase in the
traditional tool business.
Cost of Sales. For the year to date 1999, cost of sales was $79.9
million, an increase of $21.9 million or 38% from the year to date 1998,
reflecting the higher sales. Cost of sales was 69% of net sales during the year
to date 1999 compared to 64% for the year to date 1998. This increase is because
of (i) proportionately higher sales of home security products, which are sold at
lower margins, and (ii) higher manufacturing overhead per unit of zone heating
products, which resulted from the weather-related reduction in production of
heating products.
Selling, General and Administrative Expenses. For the year to date
1999, selling, general and administrative expenses were $28.9 million, an
increase of $8.8 million or 44% over the year to date 1998, primarily
attributable to the net sales increase. As a percentage of net sales, selling,
general and administrative expenses were 25% for the year to date 1999 compared
to 22% for the year to date 1998. This higher level is associated with an
increase in selling expenses for higher freight, advertising and warranty
expenses associated with the sales increase to the major home centers and higher
amortization expenses associated with the November 1997 recapitalization and the
acquisitions of Heath/Zenith, FMI and UHI.
Operating Profit. Operating profit was $7.4 million for the year to
date 1999 as compared to $12.2 million for the year to date 1998, a decline of
40%. Operating profit attributable to zone heating products was $3.0 million for
the year to date 1999, down $8.2 million from the year to date 1998 . This
decline is attributable to the decline in net sales of zone heating products and
the increased cost of goods sold. Operating profit attributable to specialty
products was $6.3 million for the year to date 1999, an increase of $3.3 million
over the year to date 1998. This increase is attributable to increased net sales
of specialty products related primarily to the acquisition of Heath/Zenith.
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Interest Expense. Interest expenses for the year to date 1999 was $13.2
million an increase of $6.1 million from the year to date 1998, reflecting the
November 1997 recapitalization and the acquisitions of FMI, UHI and
Heath/Zenith.
Income Tax. The provision for income taxes was 44% for the year to date
1999, comparable to the rate of 42% for the year to date 1998.
Net Income. Net income for the year to date 1999 was a loss of $3.2
million compared to a profit of $2.9 million for the year to date 1998, a
decline of 210%. This decline is attributable to the lower operating profit and
higher interest expense.
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 revolving credit
facilities. The Company's business is subject to a pattern of seasonal
fluctuation. The Company's needs for working capital and the corresponding debt
levels tend to peak in the second and third fiscal quarters. The amount of sales
generated during the second and third fiscal quarters generally depends upon a
number of factors, including the level of retail sales for heating products
during the prior fall and winter, weather conditions affecting the level of
sales of heating products, general economic conditions, and other factors beyond
the Company's control.
Net cash used in operating activities for the twenty-six weeks ended
August 29, 1998 was $31.9 million compared to net cash used a year ago of $42.8
million for the same period last year. This positive reduction of $10.9 million
reflects the lower inventory build up associated with the reduced production of
zone heating products.
Net cash used in investing activities was $43.0 million for the
twenty-six weeks ended August 29, 1998 compared to $2.7 million for the
twenty-six weeks ended August 30, 1997. This higher cash used for investing
activities reflects the acquisition of UHI and FMI. Net cash provided by
financing activities for the second quarter ended August 29, 1998 was $74.7
million compared to $40.7 million a year ago due to the issuance of Common Stock
and bank loans associated with the acquisitions of UHI and FMI.
The Credit Facility provides for commitments in an aggregate amount of
up to $225.0 million. Borrowings outstanding under the Credit Facility were
$197.0 million on August 29, 1998. Outstanding letters of credit and foreign
currency contracts established to facilitate merchandise purchases were $9.0
million and $4.2 million, respectively, on August 29, 1998. The Company had the
ability to incur additional indebtedness of $16.8 million at August 29, 1998
under the Credit Facility.
The Company expects that capital expenditures during fiscal 1999 will
be approximately $3.9 million. Capital expenditures are expected to be funded
from internally generated cash flows and by borrowings under the Credit
Facility.
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Management believes that cash flow from operations and availability
under the Credit Facility will provide adequate funds for the Company's
foreseeable working capital needs, planned capital expenditures and debt service
obligations. The Company's ability to fund its operations, make planned capital
expenditures, make scheduled debt payments, refinance indebtedness and remain in
compliance with all of the financial covenants under its debt agreements depends
on its future operating performance and cash flow, which in turn, are subject to
prevailing economic conditions and to financial, business and other factors,
some of which are beyond its control.
Year 2000
The Company is in the process of reviewing its computer and operational
systems to identify and determine the extent to which any such systems will be
vulnerable to potential errors and failures as a result of the "Year 2000"
problem. The Year 2000 problem is a result of computer programs being written
using two digits, rather than four digits, to identify years. The Year 2000
presents several risks to the Company: (i) that the Company's internal systems
may not function properly, (ii) that suppliers' computer systems may not
function properly and, consequently, deliveries of required parts may be
delayed, (iii) that customers' computer systems may not function properly and,
consequently, orders or payments for the Company's products may be delayed, and
(iv) that the Company's bank's computer systems could malfunction, disrupting
the Company's orderly posting of deposits, funds transfers and payments. The
occurrence of any one or more of these events could have a material adverse
effect on the Company's financial condition and results of operations. Except as
disclosed below, the Company does not have any contingency plans to address the
Year 2000 problem.
The Company has written all of its internal management information
systems ("MIS") applications, rather than buying applications from vendors, and
is in the process of testing those applications to identify those which require
modification to appropriately address the Year 2000 problem. Management believes
that the Company's MIS staff will be able to modify all such applications prior
to the Year 2000, although there can be no assurances that such modifications
will be timely completed. The expenses of the Company's efforts to identify and
address any Year 2000 problems are not expected to be material.
The Company has begun a program to identify critical parts and
materials suppliers to evaluate the extent of the Year 2000 risk to the
Company's continued timely receipt of parts and materials deliveries. Management
believes that such efforts will allow the Company to identify any risk of parts
or materials shortages and either to find alternative suppliers or to order
sufficient quantities of critical parts and materials prior to the Year 2000 so
as to avoid adverse effects on the Company's financial condition and results of
operations, although there can be no assurances that such efforts will be
successful.
The Company is also engaged in discussions with certain major customers
to ensure that electronic data interchange ("EDI") formats function properly
notwithstanding the advent of the Year 2000. EDI is the primary method by which
customers place orders for the Company's products. Such discussions are well
advanced, and management believes that transmission of orders from these major
customers will not be significantly affected by the advent of the Year 2000,
although there can
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be no assurances in this regard. Management does not, however, have sufficient
information regarding the internal systems of all of its customers to form an
opinion as to whether such customers will be able to timely place such orders or
to timely pay for products. The purchasing patterns of existing and potential
customers may be affected by Year 2000 problems that could cause unexpected
fluctuations in the Company's sales volumes.
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PART II Other Information
Item 2. Changes in Securities
On August 19, 1998, the Company issued approximately 1,849,043 shares
of Common Stock to existing stockholders, at a price of approximately$6.49 per
share. Such sales were exempt from registration under the Securities Act of
1933, as amended, pursuant to Rule 506 thereunder.
On August 28, 1998, the Company issued approximately 11,634 shares of
Common Stock to existing stockholders, at a price of approximately$6.49 per
share. Such sales were exempt from registration under the Securities Act of
1933, as amended, pursuant to Rule 506 thereunder.
Item 4. Submission of Matters to a Vote of Security Holders
On June 29, 1998, the holders of a majority of the Company's issued and
outstanding shares of Common Stock, by written consent, approved, as of March
19, 1998, the Company's 1998 Stock Option Plan relating options for officers and
employees of the Company and Desa to acquire up to an aggregate of 1,462,222
shares of Common Stock, such options to be granted by the Compensation Committee
of the Company's Board of Directors. As required by the Delaware General
Corporation Law, notice of such action by written consent was mailed to all of
the Company's stockholders on or about July 7, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Desa Holdings Corporation 1998 Stock Option Plan
10.2 Desa Holdings Corporation Stockholders Agreement
dated as of November 26, 1997 among the Company and
the persons named therein
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the period for
which this report is made.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DESA HOLDINGS CORPORATION
By:
Dated: October 9, 1998 /s/ Robert H. Elman
Robert H. Elman
Chairman and Chief Executive Officer
Dated: October 9, 1998 /s/ Edward G. Patrick
Edward G. Patrick
Vice President of Finance and Treasurer
(Principal Financial Officer)
Dated: October 9, 1998 /s/ Scott M. Nehm
Scott M. Nehm
Vice President and Controller
(Chief Accounting Officer)
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