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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
/ / For the Quarterly Period Ended: March 31, 1996
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: 33-96794
DECORATIVE HOME ACCENTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 57-0998387
------------------------------ ----------------------------------
(State or other jurisdiction of (IRS Employer Idenification Number)
incorporation or organization)
Industrial Park Drive, Abbeville, South Carolina 29620
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 446-2123
Indicate by check mark whether the registrant 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).
Yes /X/ No / /
Indicate by check mark whether the registrant has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
As of May 10, 1996, there were 1,074,838 shares outstanding of the
Registrant's Class A Common Stock ($0.01 par value), 1,756,126 shares
outstanding of the Registrant's Class B Non-Voting Common Stock ($0.01 par
value), 386,040 shares outstanding of the Registrant's Class C Common Stock
($0.01 par value), 808,333 shares outstanding of the Registrant's Class D
Common Stock ($0.01 par value), 125,000 shares outstanding of the Registrant's
Class F Common Stock and 51,875 outstanding shares of the Registrant's 14%
Cumulative Redeemable Preferred Stock ($0.01 par value).
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DECORATIVE HOME ACCENTS, INC.
QUARTER ENDED MARCH 31, 1996
INDEX
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1996 and
December 31, 1995 ............................................................... 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1996 and 1995 ............................................ 4
Condensed Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 1996 ..................................................... 5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1996 and 1995 ................................................... 6
Notes to Condensed Consolidated Financial Statements ..................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................................... 9
PART II OTHER INFORMATION
Signature Page ........................................................................... 14
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
March 31,
1996 December 31,
(Unaudited) 1995 (1)
--------- ------------
(In Thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 169
Investment securities 1,000 1,000
Accounts receivable - net of allowance for doubtful accounts of
$2,661 at March 31, 1996 and $2,506 at December 31, 1995 32,258 28,982
Income taxes receivable 3,488 2,714
Inventories 47,705 43,713
Deferred income taxes 3,927 4,282
Other current assets 1,077 598
--------- --------
Total current assets 89,455 81,458
PROPERTY, PLANT AND EQUIPMENT, NET 30,636 30,667
OTHER ASSETS 9,336 8,790
INTANGIBLE ASSETS, NET 93,508 94,938
--------- --------
TOTAL ASSETS $ 222,935 $215,853
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 13,686 14,452
Accrued liabilities 7,157 9,775
Accrued interest 4,067 7,583
------------ --------
Total current liabilities 24,910 31,810
----------- --------
LONG-TERM DEBT 151,299 131,452
DEFERRED INCOME TAXES 1,154 3,348
REDEEMABLE PREFERRED STOCK 43,123 41,059
REDEEMABLE COMMON STOCK 1,817 1,639
STOCKHOLDERS' EQUITY:
Common stocks 9 9
Additional paid-in capital 13,864 16,107
Reduction of certain equity interest to predecessor basis (6,209) (6,209)
Accumulated deficit (7,032) (3,362)
--------- --------
Total stockholders' equity 632 6,545
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 222,935 $215,853
========= ========
(1) Derived from December 31, 1995 audited consolidated financial statements.
See notes to condensed consolidated financial statements (unaudited).
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DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
(UNAUDITED)
Three Months Ended
------------------
March 31, 1996 March 31, 1995
-------------- --------------
SALES $39,786 $11,276
COST OF GOODS SOLD 28,802 5,819
------- -------
GROSS PROFIT 10,984 5,457
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,851 4,261
------- -------
INCOME (LOSS) FROM OPERATIONS (867) 1,196
------- -------
INTEREST INCOME (EXPENSE)
Interest expense (4,614) (1,812)
Interest income 9 131
------- -------
Interest income (expense), net (4,605) (1,681)
------- -------
LOSS BEFORE PROVISION FOR INCOME TAXES (5,472) (485)
INCOME TAX BENEFIT (1,802) (184)
------- -------
NET LOSS $(3,670) $ (301)
------- -------
See notes to condensed consolidated financial statements (unaudited).
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DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS)
(UNAUDITED)
Reduction of
Certain Equity
Interest to Total
Common Additional Predecessor Retained Stockholders'
Stocks Paid-in Capital Basis Earnings Equity
------ --------------- ----- -------- ------
Balances at December 31, 1995 $ 9 $ 16,107 $ (6,209) $ (3,362) $ 6,545
Accretion of redeemable common stock for the
three months ended March 31, 1996 (179) (179)
Accretion of redeemable preferred stock for the
three months ended March 31, 1996 (189) (189)
Preferred stock dividend accrual for the three
months ended March 31, 1996 (1,875) (1,875)
Net loss for the three months ended (3,670) (3,670)
------ ---------- ---------- --------- --------
Balances at March 31, 1996 $ 9 $ 13,864 $ (6,209) $ (7,032) $ 632
====== ========== ========== ========= ========
See notes to condensed consolidated financial statements (unaudited).
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DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(UNAUDITED)
Three months ended
March 31
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,670) $ (301)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,318 1,027
Deferred tax (benefit) provision (1,839) 131
Changes in operating assets and liabilities
Accounts receivable (3,276) 1,548
Inventories (3,992) (639)
Income tax receivable (774) -
Other current assets (479) (1,158)
Accounts payable (766) 1,286
Accrued liabilities (869) (1,419)
Accrued interest (3,516) 1,757
Income taxes payable - (567)
-------- -------
Net cash provided by (used in) operating
activities (16,863) 1,665
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (857) (440)
Other long term assets (546) -
-------- -------
Net cash used in investing activities (1,403) (440)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit 19,847 -
Redeemable preferred stock dividends paid (1,750) -
Payments on notes payable - -
-------- -------
Net cash provided by financing activities 18,097 -
-------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (169) 1,225
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 169 8,355
-------- -------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ - $ 9,580
-------- -------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 9,875 $ -
======== =======
Income taxes paid $ - $ -
======== =======
See notes to condensed consolidated financial statements (unaudited).
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DECORATIVE HOME ACCENTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
- - ----------------------------------------------------------------------------
1. BASIS OF INTERIM PRESENTATION
The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the
instructions of Regulation S-X. Accordingly, they do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included in the interim financial information.
For interim reporting, the Company's subsidiary, Home innovations. Inc.
('HII") uses an estimated gross profit based on information provided by
its accounting and financial systems. At year-end, inventories of the
Company are stated at the lower of cost, determined using the first-in,
first-out (FIFO) method, or market.
The Company's business is seasonal in nature, with its highest sales
levels historically occurring in the third and fourth fiscal quarters,
which include the holiday selling season. Therefore, the results of
operations for the interim periods are not necessarily indicative of
the operating results of the full year.
2. ORGANIZATION
The accompanying interim consolidated financial statements as of March
31, 1996, include the accounts of Decorative Home Accents, Inc. ("DHA"
or the "Company") and its wholly-owned subsidiaries, The Rug Barn, Inc.
and Home Innovations, Inc. (purchased on July 13, 1995).
All significant intercompany transactions and accounts have been
eliminated.
3. BALANCE SHEET COMPONENTS
Inventories are summarized as follows (in $000's):
March 31, 1996 December 31, 1995
-------------- -----------------
Raw materials $23,552 $24,464
Work-in-process 2,130 973
Finished goods 22,023 18,276
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$47,705 $43,713
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DECORATIVE HOME ACCENTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (CONTINUED)
Property, plant and equipment is summarized as follows (in $000's):
March 31, 1996 December 31, 1995
-------------- -----------------
Land $ 863 $ 863
Buildings and improvements 15,398 15,384
Furniture and fixtures 3,193 3,184
Machinery and equipment 14,171 14,101
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33,625 33,532
Accumulated depreciation (3,885) (3,375)
------- -------
29,740 30,157
Construction in progress 896 510
------- -------
$30,636 $30,667
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion provides management's assessment of the results of
operations and liquidity and capital resources of DHA and should be read in
conjunction with the respective financial statements of DHA and the notes
thereto included elsewhere in this Form 10-Q. The following table
includes unaudited proforma financial information as if the July 1995 purchase
of Home Innovations, Inc. ("HII") occurred as of January 1, 1995. Such
adjustments to the proforma financial information consist principally
of the following: net adjustments to cost of goods sold and SG & A expenses
related to adjusting depreciation expense for the new basis of accounting
resulting from the HII acquisition; increases in SG& A expenses to account for
the amortization of goodwill and the identifiable intangible assets resulting
from the HII acquisition; increases in SG & A expenses to account for
compensation expense resulting from granting stock options at less than
fair market value; net adjustments to interest expense resulting from issuance
of 13% Senior Notes due 2002 and extinguishment of prior debt, amortization of
debt issuance costs and accretion of discount on the Senior Notes.
Management's discussion and analysis of the results of operations
should be read using the proforma financial information presented below:
ACTUAL PROFORMA
Three Months Ended
------------------
March 31, March 31,
1996 1995
--------- ---------
Sales $39,786 $52,712
Cost of goods sold 28,802 37,531
-------- -------
Gross profit 10,984 15,181
Selling, general and administrative
expenses 11,851 11,460
-------- -------
Income (loss) from operations (867) 3,721
Interest expense, net (4,605) (4,222)
-------- -------
Loss before income taxes $(5,472) $ (501)
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IMPACT OF THE PURCHASE OF HOME INNOVATIONS, INC.
On July 13, 1995, DHA acquired HII, a leading manufacturer of niche
oriented home accessories with the following product categories: bath
furnishings, window and speciality products, bedding products and the new
Calvin Klein Home Collection, a new line of designer home products
launched in September 1995 under the Calvin Klein trademark. The cash purchase
price of HII was approximately $95.1 million, after a $6.7 million reduction
to the purchase price, including acquisition related costs of
approximately $1.8 million and the assumption of approximately $31.0 million in
liabilities consisting of trade payables and accruals and $2.3
million of junior subordinated notes. The $6.7 million adjustment to the
purchase price was determined as a result of the level of net assets
acquired as of the closing date and certain indemnifications from the
sellers. The $6.7 million was received from the sellers in December, 1995.
RESULTS OF OPERATIONS
As described above, the results of operations for the three months
ended March 31, 1995 reflect proforma adjustments related to the merger
agreement discussed above.
Comparison of Results of Operations for the Three Months Ended March 31,
1996 (Actual) with the Proforma Results of Operations for the Three Months
Ended March 31, 1995 (with proforma adjustments as discussed above).
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NET SALES
Net sales for three months ended March 31, 1996 decreased by $12.9
million, or 24.5% from $52.7 million of proforma net sales for the three months
ended March 31, 1995 to $39.8 million for the three months ended March 31,
1996. Sales across most of the Company's major product lines decreased
principally as a result of soft retail conditions in the major markets served
by the Company. All distribution channels served were affected by
the soft retail environment including the giftware trade. The reduction
of consumer spending and the associated tightening of retailer's inventory
positions which began in the third quarter of 1995 continued to have
negative effects on the Company's sales performance as expected. If current
market conditions prevail, the Company expects full year sales to
continue to be adversely affected.
GROSS PROFIT
The gross profit margin decreased from a proforma of 28.8% for the
three months ended March 31, 1995 to 27.6% for the three months ended March 31,
1996. The decrease of approximately 1.2 percentage points in the Company's
gross profit margin primarily resulted from plant efficiency losses in
the printing and cut-and-sew operations. As part of the Company's program to
improve long-term operating performance and control inventory investment, the
Company temporarily reduced manufacturing operations at certain
plants during the quarter. This resulted in fixed overhead being unabsorbed by
inventory production. The Company believes that its manufacturing
operations are now properly sized relative to current market demand for the
Company's products. There were no significant changes in the prices paid for
raw materials between the 1995 and 1996 periods as the Company was able to
secure raw material purchase contracts at levels equal to or more favorable
than that of the prior year.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
SG&A expenses increased $391,000 or 3.4% from a proforma of $11.5 million for
the three months ended March 31, 1995 to $11.8 million for the three months
ended March 31, 1996. As a percentage of sales, SG&A expenses increased from a
proforma of 21.7% for the three months ended March 31, 1995 to 29.8% for the
same period of 1996. The increase in SG&A expenses as a percentage of sales was
principally attributable to the fixed nature of the Company's selling and
administrative salary base. Specifically, marketing and design functions, while
not increasing substantially from year to year on an absolute dollar basis,
reflect a higher percentage because of the decreased sales in the 1996 quarter.
SG&A expenses associated with the launch of the Calvin Klein Home line, which
since its inception in September 1995 have as a percentage of sales exceeded
the level of the Company's mature businesses, also contributed to the increased
SG&A for the 1996 quarter. Historically, the Company's SG&A costs as a
percentage of sales have exceeded many of the Company's competitors due to the
Commission structure associated with the giftware trade and a relatively high
fixed cost structure within Home Innovation. During the 1996 quarter, the
Company implemented a consolidation of many of its marketing and administrative
functions in an attempt to improve the SG&A expense ratio and expects to see
improvement in its absolute dollar of SG&A costs going forward beginning in the
second half of 1996.
INTEREST EXPENSE, NET
Interest expense, net increased from a proforma of $4.2 million for
the three months ended March 31, 1995 to $4.6 million for the three months
ended March 31, 1996. This increase was principally due to increased
borrowings under the Company's revolving line of credit during the first
quarter of 1996.
SEASONALITY
The Company's business is seasonal in nature with its highest sales
levels historically occurring during the third and fourth fiscal quarters,
which includes the holiday selling season.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity for operations and
expansion have historically been funds generated internally and borrowings
under the Company's $50.0 million revolving credit facility. Available
borrowings under the credit facility are based on specified levels of
underlying collateral. As of March 31, 1996, the Company had approximately
$9.1 million available under the revolving credit facility described above
(net of $24.7 million of outstanding borrowings and $1.4 million in outstanding
letters
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of credit). The Company intends to utilize borrowings under the revolving
credit facility to meet seasonal fluctuations in the Company's working capital
requirements, typically peaking in early October, and to fund the anticipated
build up of inventory relating to the continued introduction of the Calvin
Klein Home line of products. Management expects the Calvin Klein Home line of
products to increase the Company's working capital needs in 1996 by
approximately $8 to $12 million from 1995 levels. Management believes that the
working capital requirements related to Calvin Klein in 1996 peaked in April
1996. Management believes that the Company's cash flow from operations and
borrowing under the revolving credit facility will be sufficient to fund the
Calvin Klein Home requirements. The obligations under the revolving credit
facility are secured by a first lien on the inventory and receivables of The
Rug Barn, Inc. and Home Innovations, Inc. and its subsidiaries. The revolving
credit facility contains certain financial and other covenants with which the
Company must comply, including, but not limited to a requirement to maintain
certain financial ratios and limitations on the ability of Rug Barn and Home
Innovations to incur additional indebtedness and pay dividends. The Company
was in compliance with the loan covenants, as amended, at March 31, 1996.
Cash flows used in operating activities were approximately $16.8
million for the three month period ended March 31, 1996. Driving the cash used
in operating activities for the first quarter, in addition to the Company's net
loss, were an increase in receivables of $3.3 million and inventory of $3.9
million and a reduction of $3.5 million in accrued interest. The additional
inventory investment related principally to the introduction of the new Calvin
Klein Home line. The increase in receivables resulted from a slight
increase in the Company's sales velocity in the latter weeks of the quarter.
The reduction of $5.3 million in accrued interest resulted from the
semi-annual interest payment on the Company's $125 million, 13% Senior Notes.
Capital expenditures for the three month period in 1996 approximated
$857,000. The Company currently has no material commitments for capital
expenditures.
Borrowings under the Company's line of credit increased by
approximately $19.8 million during the three month period ended March 31, 1996.
The additional borrowings resulted primarily from the cash used in operating
activities including the interest payment on the Company's Senior Notes and
the continued inventory investment in Calvin Klein Home. Additionally, the
Company paid dividends totalling $1.75 million on its redeemable preferred
stock in January 1996. During 1996 the Company expects that
dividends will be paid in kind rather than in cash.
Management expects that the Company's cash flow from operations and
borrowings under the revolving credit facility, as required, will be adequate
to finance anticipated operation needs, planned capital expenditures and to
meet its debt service obligations in 1996.
INFLATION
Although the operations of the Company are generally influenced by economic
conditions, the Company does not believe that inflation had a material effect
on the results of operations during the three months ended March 31, 1996 and
1995. The Company has been historically able to mitigate the impact of the
increases in the spot market prices of cotton through fixed price purchase
contracts.
EFFECT OF COMPLIANCE WITH ENVIRONMENTAL PROTECTION PROVISIONS
Compliance with Federal, State and local provisions that have been enacted or
adopted regulating the discharge of materials in the environment, or otherwise
relating to protection of the environment, has not had, and is not expected to
have, a material adverse effect on the capital expenditures, net income or
competitive position of the Company.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this Item 2 (Management's Discussion and
Analysis of Financial Condition and Results of Operations) that are not
historical facts are forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. The Company
cautions readers of this Quarterly Report on Form 10-Q that a number of
important factors could cause the Company's actual results in 1996 and beyond
to differ materially from those expressed in any such forward-looking
statements. These factors include, without limitation, the general economic
and business conditions affecting the retail industry, the Company's ability to
meet its debt service obligations, contractual restrictions on HII's and the
Rug Barn's ability to pay dividends to the Company, competition from a variety
of firms ranging from small manufacturers to large textile mills, the
seasonality of the Company's sales, the volatility of the Company's raw
material cost, the Company's dependence on key personnel and the risk of loss
of a material customer or a
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significant license. These and other factors are more fully described in the
Company's previous filings with the Securities and Exchange Commission
including, without limitation, the Company's Prospectus dated November 10,
1995.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings incidental to the
conduct of its business. Management believes that none of these legal
proceedings will have a material adverse impact on the financial condition or
results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
ITEM 5. OTHER INFORMATION None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
SEE EXHIBIT INDEX.
(B) REPORTS ON FORM 8-K
NONE
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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.
Decorative Home Accents, Inc.
-----------------------------
(Registrant)
Date:
/s/ Jay N. Baker
-----------------------------
Jay N. Baker*
Chief Financial Officer
*Duly authorized to sign on behalf of the Registrant.
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
3.3 Certificate of Correction to Certificate of Designation for Decorative Home Accents, Inc.
27 Financial data schedule
4.6 Form of Third Amendment to the Amended and Restated Credit Agreement, dated as of July 13, 1995, by among
LaSalle National Bank, as co-agent and lender, General Electric Capital Corporation, as co-agent
and lender, the Rug Barn, Inc., Home Innovations, Inc., Home Curtain Corp., Calvin Klein Home, Inc.,
Draymore Mfg. Corp. and R.A. Briggs and Company, as amended by the First Amendment, dated as of
November 17, 1995, and by the Second Amendment, dated as of December 31, 1995.
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