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 June 2, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 333-44969-01
DESA HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 61-1251518
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
236 Public Square, Suite 103, Franklin, TN 37064
(Address of principal executive offices) (Zip Code)
(615) 599-6501
(Registrant's telephone number, including area code)
Indicate by check whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of June 29, 2001, there were 26,194,672 shares of Registrant's Common
Stock, $.01 par value per share, and 90,604 shares of the Registrant's
Nonvoting Common Stock, $.01 par value per share, outstanding.
DESA HOLDINGS CORPORATION
FORM 10-Q
June 2, 2001
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements (Unaudited) 2
Consolidated Balance Sheets - June 2, 2001 and March 3, 2001 3
Consolidated Statements of Operations - Thirteen Weeks
ended June 2, 2001 and Fourteen Weeks
ended June 3, 2000 4
Consolidated Statements of Cash Flows - Thirteen Weeks
ended June 2, 2001 and Fourteen Weeks
ended June 3, 2000 5
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
1
DESA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
June 2, March 3,
2001 2001
----------- ----------
(in (in
thousands) thousands)
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 1,502 $ 2,388
Accounts receivable, net of allowances of ($942) at
June 2, 2001 and ($919) at March 3, 2001 35,208 41,894
Inventories:
Raw materials 544 486
Work-in-process 13,330 10,938
Finished goods 39,636 37,869
---------- ----------
53,510 49,293
Deferred tax assets 3,274 3,274
Other current assets 4,269 6,376
---------- ----------
Total current assets 97,763 103,225
Property, plant and equipment:
Land 526 525
Buildings and improvements 6,569 6,561
Machinery and equipment 46,613 43,336
Furniture and fixtures 1,273 1,273
---------- ----------
54,981 51,695
Less accumulated depreciation 36,256 35,084
---------- ----------
18,725 16,611
Goodwill, net 94,551 95,312
Other assets 17,907 18,748
---------- ----------
Total assets $ 228,946 $ 233,896
========== ==========
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 28,459 $ 28,701
Accrued interest 6,360 3,195
Other accrued liabilities 7,723 13,824
Current portion of long-term debt 41,053 50,874
---------- ----------
Total current liabilities 83,595 96,594
Long-term debt 257,629 249,163
Other liabilities 15,138 15,139
---------- ----------
Total liabilities 356,362 360,896
Commitments and contingencies
Series C redeemable preferred stock, $.01 par value;
authorized--40,000 shares; issued and outstanding--
25,245 shares at June 2, 2001 and 25,245 shares at
March 3, 2001 (liquidation preference - $26,515 at
June 2, 2001 and $25,759 at March 3, 2001) 23,118 23,057
Stockholders' equity (deficit):
Common stock, $.01 par value; authorized--
50,000,000 shares; issued and outstanding--
25,557,829 shares at June 2, 2001 and 16,373,148
shares at March 3, 2001 262 164
Nonvoting common stock, $.01 par value; authorized--
3,000,000 shares; issued and outstanding-- 90,604
shares at June 2, 2001 and March 3, 2001 1 1
Capital in excess of par value 113,535 103,334
Accumulated deficit (258,257) (250,906)
Notes Receivable - Officers (2,789) -
Accumulated other comprehensive loss (3,286) (2,650)
---------- ----------
Total stockholders' equity (deficit) (150,534) (150,057)
---------- ----------
Total liabilities and stockholders' equity (deficit) $ 228,946 $ 233,896
========== ==========
See accompanying notes
2
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
Thirteen Weeks Fourteen Weeks
Ended Ended
June 2, 2001 June 3, 2000
-------------- --------------
Net sales $ 57,812 $ 70,619
Cost of sales 40,941 49,627
-------------- --------------
Gross profit 16,871 20,992
Operating costs and expenses:
Selling 14,932 15,142
General and administrative 4,183 4,416
Other 1,972 1,734
-------------- --------------
21,087 21,292
-------------- --------------
Operating loss (4,216) (300)
Interest expense 6,856 8,192
-------------- --------------
Loss before provision for income taxes (11,072) (8,492)
Income tax benefit (4,540) (3,990)
-------------- --------------
Net loss (6,532) (4,502)
Dividends and accretion on preferred stock 818 789
-------------- --------------
Loss applicable to common stockholders $ (7,350) $ (5,291)
============== ==============
See accompanying notes
3
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Thirteen Weeks Fourteen Weeks
Ended Ended
June 2, 2001 June 3, 2000
-------------- --------------
Cash flows from operating activities
Net loss $ (6,532) $ (4,502)
Adjustments to reconcile net loss to net
cash used used in operating activities:
Depreciation 1,172 986
Amortization 1,575 1,590
Equity in undistributed earnings of
joint venture (51) (51)
Change in operating assets and
liabilities, net of effects of
acquisition:
Accounts receivable, net 6,686 (6,250)
Inventories (4,217) (17,280)
Other current assets 2,107 (825)
Accounts payable (242) 7,136
Accrued interest 3,165 1,794
Other accrued liabilities (2,649) (2,084)
Income taxes payable (4,828) (4,452)
Other liabilities - 169
-------------- --------------
Net cash used in operating activities (3,814) (23,769)
-------------- --------------
Investing activities
Capital expenditures (3,286) (438)
Dividends received from joint venture 49 65
Net cash paid for acquisition of
businesses - (11,090)
Other (3) (1)
-------------- --------------
Net cash used in investing activities (3,240) (11,464)
-------------- --------------
Financing activities
Net proceeds from working capital loan 4,595 32,742
Net proceeds from Guaranteed Line
of Credit 1,550 -
Decrease in note payable - (1,842)
Proceeds from term loans - 6,000
Principal payments of term loans (3,885) (2,868)
Principal payments of acquisition loans (3,615) (3,125)
Issuance of common stock 7,509 5,007
Payment of debt financing costs - -
-------------- --------------
Net cash provided by financing activities 6,154 35,914
Effect of exchange rate changes on cash 14 -
-------------- --------------
Increase (decrease) in cash and cash
equivalents for the period (886) 681
Cash and cash equivalents at beginning
of period 2,388 173
-------------- --------------
Cash and cash equivalents at end of period $ 1,502 $ 854
============== ==============
See accompanying notes
4
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The interim consolidated financial statements for the periods presented
herein have not been audited by independent auditors. In the opinion of
management of DESA Holdings Corporation (with its consolidated subsidiaries,
"Company" or "Holdings"), all adjustments (consisting only of normal
recurring accruals) considered necessary to present fairly the results of
operations for the periods have been included. Interim results are not
necessarily indicative of results for a full year.
Sales of the Company's zone heating products follow seasonal patterns that
affect the Company's results of operations. Demand for the Company's zone
heating products has been historically highest in the third quarter, as
consumers prepare for winter. Consequently, the Company's net sales and the
Company's fiscal operating profit have also been historically highest during
the Company's fiscal third quarter. Management believes that the Company's
results of operations will continue to follow this pattern; there can be no
assurance, however, that third quarter results will always surpass those of
the first and second quarters, or that any improvement shown will be as great
as that shown in previous years. In particular, unusually warm weather in the
fall may reduce demand for zone heating products.
The unaudited consolidated financial statements have been prepared by the
Company in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations.
The consolidated balance sheet presented as of March 3, 2001, has been
derived from the consolidated financial statements that have been audited by
the Company's independent auditors. The consolidated financial statements and
notes thereto included herein should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
- -------------
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, DESA International, Inc.
("DESA") and all of its wholly-owned subsidiaries, including DESA Industries
of Canada, Inc., DESA Europe BV, DESA Industries of V.I., Inc., Heath Company
Limited and Desico, S.A. De C.V. All significant intercompany accounts and
transactions have been eliminated. DESA's 50% interest in a joint venture is
accounted for using the equity method.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements; and the reported amounts of revenues and
expenses during the reported period. Actual results can differ from those
estimates.
Receivables Related to Stock Transactions
- -----------------------------------------
Amounts receivable from officers and directors resulting from sales of stock
are presented separately as a deduction from stockholders' equity (deficit).
5
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. FINANCING ARRANGEMENTS
Outstanding borrowings consist of the following (in thousands):
June 2, March 3,
2001 2001
----------------------
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) 24,608 27,500
Bank of America and various banks Term B Loan (C) 44,723 45,435
Bank of America and various banks Term C Loan (D) 5,119 5,400
Bank of America and various banks Working Capital
Loan Commitment (E) 48,472 43,877
Bank of America and various banks Acquisition
Loan (F) 12,304 13,750
Bank of America and various banks Acquisition B
Loan (G) 18,456 20,625
Guaranteed Line of Credit (H) 15,000 13,450
----------------------
Total outstanding borrowings 298,682 300,037
Less current portion of long-term debt 41,053 50,874
----------------------
Total long-term debt $ 257,629 $ 249,163
======================
(A) The Senior Subordinated Notes are payable on December 15, 2007 and
accrue interest at a rate of 9.875% per annum. Interest is payable
semi-annually on June 15 and December 15. The Senior Subordinated
Notes can be redeemed prior to the mandatory redemption date based
upon the occurrence of certain events, as defined. DESA is the issuer
of the Senior Subordinated Notes, which are fully and unconditionally
guaranteed by Holdings.
(B) The Term A Loan is payable in quarterly installments through November
26, 2003, and accrues interest at the prime rate plus 2.50% or LIBOR
plus 3.50% 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 8.21% in first quarter 2002
and 9.58% in fiscal 2001. 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 2.75% or LIBOR
plus 3.75% 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 8.46% in first quarter 2002
and 9.82% in fiscal 2001. 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 2.75% or LIBOR plus 3.75% 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 8.46% in first quarter 2002 and 9.65% in
fiscal 2001. Once repaid, the Term C Loan may not be reborrowed.
6
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(E) The Working Capital Loan Commitment is payable at any time at the
option of DESA prior to November 26, 2003, and accrues interest at
the prime rate plus 2.50% or LIBOR plus 3.50%, at the option of DESA.
The weighted average interest rate was 8.37% in first quarter 2002
and 9.50% in fiscal 2001. 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 June 2, 2001 and March 3, 2001,
letters of credit of $1.8 million were outstanding under the Working
Capital Loan Commitment. Borrowings are generally limited to specific
percentages of eligible trade receivables and inventory. Holdings
pays commitment fees of 1/2 of 1% per annum on the daily unutilized
Working Capital Loan Commitment.
(F) The Acquisition Loan is payable in quarterly installments which
commenced in February 2000 and extend through November 26, 2003, and
accrues interest, which is payable quarterly, at the prime rate plus
2.75% or LIBOR plus 3.75% at the option of DESA. The weighted average
interest rate was 8.46% in first quarter 2002 and 9.77% in fiscal
2001. Once repaid, the Acquisition Loan may not be reborrowed.
(G) The Acquisition B Loan is payable in quarterly installments which
commenced in February 2000 and extend through November 26, 2003 and
accrues interest, which is payable quarterly, at the prime rate plus
2.75% or LIBOR plus 3.75% at the option of DESA. The weighted average
interest rate was 8.46% in first quarter 2002 and 9.85% in fiscal
2001. 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 26, 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 6.84% in first quarter 2002 and 8.30% in
fiscal 2001.
In accordance with the terms of the Credit Facility, the ability of the
Company to incur additional indebtedness is limited, as defined therein. At
June 2, 2001, the Company can incur additional indebtedness of $9.1 million.
4. COMPREHENSIVE LOSS
Comprehensive loss consisted of the following (in thousands):
June 2, June 3,
2001 2000
(Thirteen Weeks) (Fourteen Weeks)
----------------------------------------
Net loss $ (6,532) $ (4,502)
Unrealized loss on cash
flow hedges (358) -
Net change in foreign
currency translation
adjustment (278) (154)
----------------------------------------
Comprehensive loss $ (7,168) $ (4,656)
========================================
7
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As of June 2, 2001 and June 3, 2000 the accumulated other comprehensive loss
consisted of the Company's foreign currency translation adjustment and
cumulative loss on cash flow hedges.
5. SEGMENT INFORMATION
The Company is organized into three divisions. Each division is comprised of
dedicated operational resources required to support their specific product
and geographic categories, and shared administrative resources for certain
corporate functions. The divisions are: (a) zone heating division, which
includes indoor room heaters, hearth products and outdoor heaters sold in the
United States, (b) specialty products division, which includes specialty
tools and home security products sold in the United States and all products
sold in Canada and (c) international division, which includes zone heating
and specialty products sold in all geographic areas other than the United
States and Canada. Zone heating division and specialty products division are
reportable segments.
Identifiable assets are those assets of the Company that are identified with
the operations in each segment. Prior amounts have been reclassified to
conform to the current year's presentation. Operating results and other
financial data for the business segments for the periods ended June 2, 2001
and June 3, 2000 are presented below (in thousands):
Specialty
Zone Heating Products
Division Division Other Total
-----------------------------------------
Thirteen weeks ended June 2, 2001:
Net sales $ 16,691 $ 39,899 $ 1,222 $ 57,812
Operating profit (loss) (5,939) 2,973 (1,250) (4,216)
Depreciation and amortization 1,586 1,041 120 2,747
Identifiable assets 118,197 101,204 9,545 228,946
Capital expenditures 2,623 360 303 3,286
Fourteen weeks ended June 3, 2000:
Net sales $ 23,869 $ 46,034 $ 716 $ 70,619
Operating profit (loss) (3,752) 4,312 (860) (300)
Depreciation and amortization 1,750 770 56 2,576
Identifiable assets 134,590 122,592 7,730 264,912
Capital expenditures 364 74 0 438
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective, as
amended, for fiscal years beginning after June 15, 2000. SFAS 133 requires
that all derivative financial instruments and hedging activities be
recognized in the consolidated financial statements and measured at fair
value regardless of their intended use. Changes in the fair value of the
derivative financial instruments would then be recognized periodically in
operations or stockholders' equity (deficit) (as a component of other
comprehensive income) depending on whether the derivative is being used to
hedge changes in fair value or cash flows.
8
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company adopted the provisions of SFAS 133 effective March 4, 2001. 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 adoption of the statement resulted in a
cumulative after-tax increase to other comprehensive loss of $23,000. The
change in fair value of forward contracts resulted in an unrealized loss of
$335,000 which was included in other comprehensive income for the thirteen
weeks ended June 2, 2001.
7. 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 June 2, 2001
(in thousands)
Parent DESA Combined
Guarantor International, Non-Guarantor Consolidating
(Holdings) Inc. Subsidiaries Adjustments Consolidated
------------------------------------------------------------------
Assets:
Cash and cash equivalents $ - $ 1,036 $ 466 - $ 1,502
Accounts receivable, net - 129,465 16,501 $(110,758) 35,208
Inventories:
Raw materials - 544 - - 544
Work-in-process - 13,330 - - 13,330
Finished goods - 33,484 6,152 - 39,636
-----------------------------------------------------------------
- 47,358 6,152 - 53,510
Other current assets - 6,555 988 - 7,543
-----------------------------------------------------------------
Total current assets - 184,414 24,107 (110,758) 97,763
Property, plant and
equipment - 53,204 1,777 - 54,981
Less accumulated
depreciation - 35,675 581 - 36,256
-----------------------------------------------------------------
- 17,529 1,196 - 18,725
Investment in
subsidiaries (30,228) 12,181 - 18,047 -
Other assets 1,064 111,054 383 (43) 112,458
-----------------------------------------------------------------
Total assets $ (29,164) $325,178 $25,686 $ (92,754) $ 228,946
=================================================================
Liabilities and
stockholders' equity
(deficit):
Current liabilities:
Accounts payable $ 96,581 $ 30,298 $12,338 $(110,758) $ 28,459
Accrued interest - 6,360 - - 6,360
Other accrued
liabilities 1,270 5,305 1,148 - 7,723
Current portion of
long-term debt - 41,053 - - 41,053
-----------------------------------------------------------------
Total current liabilities 97,851 83,016 13,486 (110,758) 83,595
Long-term debt - 257,629 - - 257,629
Other liabilities - 15,119 19 - 15,138
Series C redeemable
preferred stock 23,118 - - - 23,118
Stockholders' equity
(deficit) (150,133) (30,586) 12,181 18,004 (150,534)
-----------------------------------------------------------------
Total liabilities and
stockholders' equity
(deficit) $ (29,164) $325,178 $25,686 $ (92,754) $ 228,946
=================================================================
9
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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
(deficit) (150,014) (23,425) 13,137 10,245 (150,057)
----------------------------------------------------------------
Total liabilities and
stockholders' equity
(deficit) $ (22,352) $336,903 $22,874 $(103,529) $ 233,896
================================================================
10
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Operations
Thirteen Weeks Ended June 2, 2001
(in thousands)
Parent DESA Combined
Guarantor International, Non-Guarantor Consolidating
(Holdings) Inc. Subsidiaries Adjustments Consolidated
------------------------------------------------------------------
Net sales $ - $ 55,525 $11,730 $ (9,443) $ 57,812
Cost of sales - 39,698 10,686 (9,443) 40,941
------------------------------------------------------------------
Gross profit - 15,827 1,044 - 16,871
Operating costs and
expenses:
Selling - 13,604 1,328 - 14,932
General, administrative
and other 8 5,999 148 - 6,155
Undistributed loss
of subsidiaries 6,524 463 - (6,987) -
------------------------------------------------------------------
6,532 20,066 1,476 (6,987) 21,087
------------------------------------------------------------------
Operating loss (6,532) (4,239) (432) 6,987 (4,216)
Interest expense - 6,856 - - 6,856
------------------------------------------------------------------
Loss before provision
(benefit) for income
taxes (6,532) (11,095) (432) 6,987 (11,072)
Provision (benefit) for
income taxes - (4,571) 31 - (4,540)
------------------------------------------------------------------
Net loss $(6,532) $ (6,524) $ (463) $ 6,987 $ (6,532)
==================================================================
Condensed Consolidating Statement of Operations
Fourteen Weeks Ended June 3, 2000
(in thousands)
Parent DESA Combined
Guarantor International, Non-Guarantor Consolidating
(Holdings) Inc. Subsidiaries Adjustments Consolidated
------------------------------------------------------------------
Net sales $ - $ 68,321 $20,156 $(17,858) $ 70,619
Cost of sales - 48,843 18,642 (17,858) 49,627
------------------------------------------------------------------
Gross profit - 19,478 1,514 - 20,992
Operating costs and
expenses:
Selling - 14,127 1,015 - 15,142
General, administrative
and other 8 6,050 92 - 6,150
Undistributed earnings
of subsidiaries 4,480 (258) - (4,222) -
------------------------------------------------------------------
4,488 19,919 1,107 (4,222) 21,292
------------------------------------------------------------------
Operating profit (loss) (4,488) (441) 407 4,222 (300)
Interest expense 14 8,178 - - 8,192
------------------------------------------------------------------
Income (loss) before
provision (benefit) for
income taxes (4,502) (8,619) 407 4,222 (8,492)
Provision (benefit) for
income taxes - (4,139) 149 - (3,990)
------------------------------------------------------------------
Net income (loss) $(4,502) $ (4,480) $ 258 $ 4,222 $ (4,502)
==================================================================
11
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Cash Flows
Thirteen Weeks Ended June 2, 2001
(in thousands)
Parent DESA Combined
Guarantor International, Non-Guarantor Consolidating
(Holdings) Inc. Subsidiaries Adjustments Consolidated
------------------------------------------------------------------
Net cash (used in)
provided by operating
activities $(7,509) $ 3,480 $ 215 $ - $ (3,814)
Net cash (used in)
investing activities - (2,933) (307) - (3,240)
Net cash provided by
(used in) financing
activities 7,509 (1,355) - - 6,154
Effect of exchange rate
changes on cash - - 14 - 14
------------------------------------------------------------------
Decrease in cash and cash
equivalents for the year - (808) (78) - (886)
Cash and cash equivalents
at beginning of year - 1,844 544 - 2,388
------------------------------------------------------------------
Cash and cash equivalents
at end of year $ - $ 1,036 $ 466 $ - $ 1,502
==================================================================
Condensed Consolidating Statement of Cash Flows
Fourteen Weeks Ended June 3, 2000
(in thousands)
Parent DESA Combined
Guarantor International, Non-Guarantor Consolidating
(Holdings) Inc. Subsidiaries Adjustments Consolidated
------------------------------------------------------------------
Net cash (used in)
provided by operating
activities $(3,165) $(20,591) $ (13) $ - $(23,769)
Net cash (used in)
investing activities - (11,390) (74) - (11,464)
Net cash provided by
financing activities 3,165 32,749 - - 35,914
------------------------------------------------------------------
Increase (decrease) in
cash and cash equivalents
for the year - 768 (87) - 681
Cash and cash equivalents
at beginning of year - 8 165 - 173
------------------------------------------------------------------
Cash and cash equivalents
at end of year $ - $ 776 $ 78 $ - $ 854
==================================================================
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This quarterly report on Form 10-Q of DESA Holdings Corporation (the
"Company"), which includes its consolidated subsidiaries unless the context
indicates otherwise, contains statements that constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended. Those statements appear in a number of places in this
report and include statements regarding the strategies, plans, beliefs or
current expectations of the Company and its management and other statements
that are not historical facts. Forward looking statements generally can be
identified by the use of forward looking terminology such as "may," "will,"
"expect," "intend," "estimate," "could," "anticipate," "believe," continue,"
(or the negative thereof) or similar terminology. Readers are cautioned that
any such forward looking statements are not guarantees of future performance
and involve risks and uncertainties, and that actual results may differ
materially from those set forth in such forward looking statements as a
result of various factors. Such factors include, but are not limited to, the
Company's vulnerability to adverse general economic and industry conditions
because of its leverage, the Company's ability to obtain future financing on
acceptable terms, the Company's ability to integrate acquired companies and
to complete acquisitions on satisfactory terms, the demand and price for the
Company's products relative to production costs and the seasonality of the
Company's business. The Company undertakes no obligation to release publicly
the results of any revisions to these forward-looking statements that may be
made to reflect errors or circumstances that occur after the date hereof.
The following discussion of the Company's results of operations and financial
condition for the thirteen week period ended June 2, 2001 and the fourteen
week period ended June 3, 2000, 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 March 3, 2001,
included in the Company's Annual Report on Form 10-K.
OVERVIEW
The Company is organized into three divisions. Each division is comprised of
dedicated operational resources required to support their specific product
and geographic categories, and shared administrative resources for certain
corporate functions. The divisions are: (a) zone heating division, which
includes indoor room heaters, hearth products and outdoor heaters sold in the
United States, (b) specialty products division, which includes specialty
tools and home security products sold in the United States and all products
sold in Canada and (c) international division, which includes zone heating
and specialty products sold in all geographic areas other than the United
States and Canada.
Sales of the Company's zone heating products follow seasonal patterns that
affect the Company's results of operations. Demand for the Company's zone
heating products has been historically highest in the fiscal third quarter,
as consumers prepare for winter. Consequently, the Company's net sales and
the Company's fiscal operating profit have also been historically highest
during the Company's fiscal third quarter. Management believes that the
Company's results of operations will continue to follow this pattern; there
can be no assurance, however, that third quarter results will always surpass
those of the first and second quarters, or that any improvement shown will be
as great as that shown in previous years. In particular, unusually warm
weather in the fall may reduce demand for zone heating products.
Sales of the Company's specialty products do not follow a significant
seasonal pattern and are not affected by weather patterns. Historically,
these sales have followed a relatively level quarterly pattern.
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED JUNE 2, 2001, COMPARED TO THE FOURTEEN WEEK PERIOD
ENDED JUNE 3, 2000
NET SALES. Net sales in the thirteen weeks ended June 2, 2001 ("first quarter
2002") were $57.8 million, a decrease of 18.1% or $12.8 million compared to
the fourteen weeks ended June 3, 2000 ("first quarter 2001"). Zone heating
division had net sales of $16.7 million in first quarter 2002, a decrease of
30.1% or $7.2 million in first quarter 2001, primarily due to the timing of
certain sales volume related to the de-emphasis of a pre-season sales program
for heating product. Specialty products division had net sales of $39.9
million in the first quarter 2002, a decrease of
13
13.3% or $6.1 million from first quarter 2001, primarily due to general
economic conditions and one less week in the current quarter.
COST OF SALES. Cost of sales for first quarter 2002 was $40.9 million, a
decrease of $8.7 million or 17.5% from first quarter 2001. The decrease was
attributable to the lower unit sales for the period. Cost of sales was 70.8%
of net sales in first quarter 2002 compared to 70.3% for first quarter 2001
and is primarily due to a change in the product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For first quarter 2002,
selling, general and administrative expenses were $21.1 million, a decrease
of $.2 million or 1.0% from first quarter 2001. As a percentage of net sales,
selling, general and administrative expenses were 36.5% for first quarter
2002 compared to 30.2% in first quarter 2001. The increase as a percent of
net sales is primarily attributable to timing of fixed costs which are
incurred evenly through out the year and their relationship to sales in the
quarter and costs associated with the start-up of certain international
operations.
OPERATING PROFIT (LOSS). Operating loss was $4.2 million for first quarter
2002 compared to $.3 million for first quarter 2001, an increase of $3.9
million. Operating loss attributable to zone heating products was $5.9
million for first quarter 2002, an increase of $2.2 million or 58.3% from
first quarter 2001. The increase is primarily the result of decreased sales
volume. Specialty products operating profit was $3.0 million for the first
quarter 2002, a decrease of $1.3 million or 31.1% from first quarter 2001.
This decrease is primarily attributable to a decline in sales volume related
to a decline in the general economic conditions.
EBITDA. EBITDA for the first quarter 2002 was a loss of $1.5 million, a
decrease of $3.7 million from first quarter 2001. EBITDA is defined as income
(loss) before income taxes plus interest expense and depreciation as well as
amortization expense associated with intangibles and deferred charges. EBITDA
is presented because it is a widely accepted financial indicator of a
leveraged company's ability to service and/or incur indebtedness and because
management believes that EBITDA is a relevant measure of the Company's
ability to generate cash without regard to the Company's capital structure or
working capital needs. However, EBITDA should not be considered as an
alternative to net income as a measure of a company's operating results or to
cash flows from operating activities as a measure of liquidity as defined by
accounting principles generally accepted in the United States.
INTEREST EXPENSE. Interest expense for first quarter 2002 was $6.9 million,
a decrease of $1.3 million from first quarter 2001. The decrease is
primarily attributable to lower levels of working capital borrowing during
the quarter.
INCOME TAXES. The effective income tax rate was 41.0% for first quarter 2002,
a decrease of 6.0% compared to first quarter 2001 rate of 47.0%. The decrease
is primarily due to a change in the mix of foreign and domestic income
compared to first quarter 2001.
NET LOSS. Net loss was $6.5 million for first quarter 2002 compared to a net
loss of $4.5 million for first quarter 2001, an increase of $2.0 million. The
increase is primarily attributable to lower sales volumes and related
margins, partially offset by lower 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, borrowings under its
revolving credit facilities and the Guaranteed Line of Credit. The Company's
business is subject to a pattern of seasonal fluctuation. The Company's needs
for working capital and the corresponding debt levels tend to peak in the
second and third fiscal quarters. The amount of sales generated during the
second and third fiscal quarters generally depends upon a number of factors,
including the level of retail sales for heating products during the prior
winter, current fall weather conditions affecting the level of sales of
heating products, general economic conditions, and other factors beyond the
Company's control.
Net cash used in operating activities for first quarter 2002 was $3.8 million
compared to net cash used of $23.8 million for first quarter 2001. This
decreased use of cash in first quarter 2002 was primarily due to a decreased
use of cash for working capital purposes offset by lower net income.
14
Net cash used in investing activities was $3.2 million for first quarter
2002, compared to $11.5 million in first quarter 2001. The use of cash in
investing activities in first quarter 2002 primarily reflects capital
expenditures and the prior period includes the acquisition of Trine Products
Company for $11.1 million. Net cash provided by financing activities in first
quarter 2002 was $6.2 million, compared to $35.9 million for first quarter
2001. Cash provided by financing activities in first quarter 2002 reflects
the sale of $7.5 million of common stock and increases in the working capital
loan and the Guaranteed Line of Credit offset by principal payments on term
loans and acquisition loans.
The Credit Facility provides for commitments in an aggregate amount of up to
$162.8 million. Borrowings outstanding under the Credit Facility were $153.7
million on June 2, 2001. Outstanding letters of credit and foreign currency
contracts established to facilitate merchandise purchases were $1.9 million
and $3.7 million, respectively, at June 2, 2001. The Company had the ability
to incur additional indebtedness of $9.1 million at June 2, 2001 under the
Credit Facility.
The Company entered into an agreement for a $15.0 million Guaranteed Line of
Credit on May 25, 1999. The Guaranteed Line of Credit matures on November 26,
2003 and is guaranteed by UBS Capital LLC, a shareholder of the Company.
Borrowings under the Guaranteed Line of Credit bear interest at an annual
rate equal to either (at the Company's option) a margin over a base rate or
a margin over LIBOR. The Guaranteed Line of Credit contains customary
covenants and events of default.
The Company expects that capital expenditures during fiscal 2002 will not
exceed $8.0 million. Capital expenditures are expected to be funded from
internally generated cash flows and from borrowings under the Credit
Facility.
Management believes that cash flow from operations, availability under the
Credit Facility and the Guaranteed Line of Credit will provide adequate funds
for the Company's foreseeable working capital needs, planned capital
expenditures and debt service obligations. Additionally, the Company reviews
potential acquisitions and relationships from time to time and may be
required to seek additional debt to fund any acquisition. The Credit Facility
requires a Clean-Up Period, as defined, under the Working Capital Loan
Commitment, for a period of 30 consecutive days occurring between January 1
and May 30 in each calendar year. During the Clean-Up Period, the sum of
Working Capital advances, Letter of Credit advances and Swing Line loan
advances outstanding shall not exceed $30 million. As of June 2, 2001,
approximately $18.5 million of working capital borrowings have been
classified as current as a result of the Clean-Up requirement. Such amount
may be reborrowed after compliance with the Clean-Up Period. The Company's
ability to fund its operations, make planned capital expenditures, make
scheduled debt payments, make desired acquisitions, refinance indebtedness
and remain in compliance with all of the financial covenants under its debt
agreements depends on its future operating performance and cash flow, which
in turn, are subject to prevailing economic conditions and to financial,
business and other factors, some of which are beyond its control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from
changes in interest rates. The Company also has limited foreign currency risk
associated with its Canadian, European, and Hong Kong operations. A portion
of the Company's operations consists of purchasing and sales activities in
foreign jurisdictions. The Company manufactures its products in the United
States and Hong Kong, purchases products in Europe, China, and Japan and
sells products primarily in the United States, Canada, and Europe. As a
result, the Company's financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company operates. The Company employs
established policies and procedures to manage its exposure to fluctuations in
interest rates and the value of the foreign currencies. Interest rate and
foreign currency transactions are used only to the extent considered
necessary to meet the Company's objectives. The Company does not utilize
derivative financial instruments for trading or other speculative purposes.
There have been no material changes in the market risk to which the Company
is exposed since the end of the Company's preceding fiscal year.
15
INTEREST RATE RISK
The Company's interest rate risk management objective is to limit the impact
of interest rate changes on its earnings and cash flow and to lower its
overall borrowing cost. To achieve its objectives, the Company regularly
evaluates the amount of its variable rate debt as a percentage of its
aggregate debt. The Company manages its exposure to interest rate
fluctuations in its variable rate debt through periodic review of the cost of
interest rate swap agreements and interest rate cap agreements relative to
the perceived interest rate risk. At June 2, 2001, the Company did not have
an interest rate swap or interest rate cap agreement in place.
The following table summarizes the carrying amounts and estimated fair values
of the Company's remaining financial instruments at June 2, 2001 and March 3,
2001:
June 2, 2001 March 3, 2001
Carrying Amount Fair Value Carrying Amount Fair Value
--------------------------------------------------------
(in thousands)
Bank debt $ 153,682 $ 153,682 $ 156,587 $ 156,587
Senior subordinated
notes 130,000 59,800 130,000 74,100
Guaranteed Line of
Credit 15,000 15,000 13,450 13,450
Foreign exchange
contracts -
unrealized loss 358 358 -- 23
Based on the average outstanding amount of variable rate indebtedness of the
Company in fiscal 2001, a one percentage point change in the interest rates
for the Company's variable rate debt would have impacted the Company's fiscal
2001 interest expense by an aggregate of approximately $1.9 million.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company does not conduct a significant portion of its manufacturing or
sales activity in foreign markets. The Company's reported financial results
could be affected, however, by factors such as changes in foreign currency
exchange rates in the markets where it operates. When the U.S. dollar
strengthens against such foreign currencies, the reported U.S. dollar value
of local currency operating profits generally decreases; when the U.S. dollar
weakens against such foreign currencies, the reported U.S. dollar value of
local currency operating profits generally increases. The Company utilizes
foreign exchange forward contracts to mitigate the short-term effect of
movements in currency exchange rates on the Company's foreign currency based
inventory purchases. The Company regularly hedges by entering into foreign
exchange forward contracts, approximately 85% to 95% of its budgeted (future)
net foreign currency purchase transactions over a period of four quarters.
At June 2, 2001, the Company had forward exchange contracts, with maturities
ranging from June 2001 to October 2001, to purchase approximately $3.7 million
in foreign currency. The fair value of the derivative instrument has been
recorded in accordance with SFAS 133. Because the Company does not have
significant foreign operations, the Company does not believe it is necessary to
enter into any other derivative financial instruments to reduce its exposure to
foreign currency exchange rate risk.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 10, 2001, 1,375 shares were issued to employees upon the exercise of
stock options at an aggregate exercise price of $8,938. On May 30, 2001,
9,820,148 shares were issued to current shareholders at an aggregate purchase
price of $10,289,580. These shares are exempt from registration under Section
4(2) of the Securities Act.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the period
for which this report is made.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DESA HOLDINGS CORPORATION
By:
Dated: July 11, 2001 /s/ Stephen L. Clanton
Stephen L. Clanton
Chief Financial Officer
(Principal Financial Officer and Chief Accounting
Officer)
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