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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: June 30, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 33-96794
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DECORATIVE HOME ACCENTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 57-0998387
- -------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
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 August 12, 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 53,820 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 JUNE 30, 1996
INDEX
Page
No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995 ........................................................ 3
Condensed Consolidated Statements of Operations for the three
months ended June 30, 1996 and 1995 ...................................... 4
Condensed Consolidated Statements of Operations for the six
months ended June 30, 1996 and 1995......... ............................. 5
Condensed Consolidated Statement of Stockholders' Equity (Deficiency)
for the three months ended June 30, 1996 ................................. 6
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1996 and 1995.............................................. 7
Notes to Condensed Consolidated Financial Statements ........................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 10
PART II OTHER INFORMATION
Signature Page ................................................................. 16
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
____________________________________________________________________________
June 30,
1996 December 31,
(Unaudited) 1995 (1)
---------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 169
Investment securities 1,000 1,000
Accounts receivable - net of allowance for doubtful accounts of
$2,112 at June 30, 1996 and $2,506 at December 31, 1995 26,535 28,982
Income taxes receivable 3,045 2,714
Inventories 45,407 43,713
Deferred income taxes 2,734 4,282
Other current assets 2,530 598
-------- --------
Total current assets 81,251 81,458
PROPERTY, PLANT AND EQUIPMENT, NET 31,712 30,667
OTHER ASSETS 9,987 8,790
INTANGIBLE ASSETS, NET 94,345 94,938
-------- --------
TOTAL ASSETS $217,295 $215,853
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable 12,684 14,452
Accrued liabilities 7,316 9,775
Accrued interest 8,165 7,583
-------- --------
Total current liabilities 28,165 31,810
-------- --------
LONG-TERM DEBT 146,291 131,452
DEFERRED INCOME TAXES - 3,348
REDEEMABLE PREFERRED STOCK 45,188 41,059
REDEEMABLE COMMON STOCK 2,015 1,639
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stocks 9 9
Additional paid-in capital 11,602 16,107
Reduction of certain equity interest to predecessor basis (6,209) (6,209)
Accumulated deficit (9,766) (3,362)
-------- --------
Total stockholders' equity (deficiency) (4,364) 6,545
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $217,295 $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
------------------
June 30, 1996 June 30, 1995
------------- -------------
SALES $ 44,495 $10,849
COST OF GOODS SOLD 31,740 5,406
GROSS PROFIT 12,755 5,443
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,919 4,126
------- ------
INCOME FROM OPERATIONS 836 1,317
------- ------
INTEREST INCOME (EXPENSE)
Interest expense (4,925) (1,819)
Interest income 8 106
Interest income (expense), net (4,917) (1,713)
------- ------
LOSS BEFORE PROVISION FOR INCOME TAXES (4,081) (396)
INCOME TAX BENEFIT (1,347) (151)
------- -----
NET LOSS $(2,734) $(245)
======= =====
See notes to condensed consolidated financial statements (unaudited).
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DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
(UNAUDITED)
________________________________________________________________________________
Six Months Ended
-----------------
June 30, 1996 June 30, 1995
------------- -------------
SALES $ 84,281 $22,125
COST OF GOODS SOLD 60,542 11,225
-------- -------
GROSS PROFIT 23,739 10,900
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 23,770 8,387
-------- -------
INCOME (LOSS) FROM OPERATIONS (31) 2,513
-------- -------
INTEREST INCOME (EXPENSE)
Interest expense (9,540) (3,631)
Interest income 18 238
-------- -------
Interest income (expense), net (9,522) (3,393)
-------- -------
LOSS BEFORE PROVISION FOR INCOME TAXES (9,553) (880)
INCOME TAX BENEFIT (3,149) (335)
-------- -------
NET LOSS $ (6,404) $ (545)
======== =======
See notes to condensed consolidated financial statements (unaudited).
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DECORATIVE HOME ACCENTS , INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS)
(UNAUDITED)
________________________________________________________________________________
Reduction of
Certain Equity
Interest to Total
Common Additional Predecessor Accumulated Stockholders'
Stocks Paid-in Capital Basis Deficit Equity (Deficiency)
------ --------------- -------- ------- -------------------
Balances at December 31, 1995 $ 9 $16,107 $(6,209) $(3,362) $6,545
Accretion of redeemable common stock for the
six months ended June 30, 1996 (358) (358)
Accretion of redeemable preferred stock for the
six months ended June 30, 1996 (397) (397)
Preferred stock dividend accrual for the six
months ended June 30, 1996 (3,750) (3,750)
Net loss for the six months ended June 30, 1996 (6,404) (6,404)
--- ------- -------- ------- -------
Balances at June 30, 1996 $ 9 $11,602 $(6,209) $(9,766) $(4,364)
=== ======= ======= ======= =======
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)
________________________________________________________________________________
Six months ended
June 30
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,404) $ (546)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,905 1,993
Deferred tax (benefit) provision (3,149) (463)
Changes in operating assets and liabilities:
Accounts receivable 2,447 867
Inventories (1,694) (2,682)
Income tax receivable (331) (833)
Other current assets (1,932) 148
Accounts payable (1,768) 804
Accrued liabilities (709) (1,464)
Accrued interest 582 275
Income taxes payable - (567)
------- -------
Net cash used in operating activities (8,053) (2,468)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,938) (728)
Other long term assets (2,118) (110)
------- -------
Net cash used in investing activities (4,056) (838)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit 13,690 -
Redeemable preferred stock dividends paid (1,750) -
-------
Net cash provided by financing activities 11,940 -
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (169) (3,306)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 169 8,355
------- -------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ - $ 5,049
------- -------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $10,418 $ -
------- -------
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)
JUNE 30, 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 June 30,
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):
June 30, 1996 December 31, 1995
------------- -----------------
Raw materials $21,076 $24,464
Work-in-process 2,257 973
Finished goods 22,074 18,276
------- -------
$45,407 $43,713
======= =======
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DECORATIVE HOME ACCENTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
JUNE 30, 1996 AND 1995 (CONTINUED)
________________________________________________________________________________
Property, plant and equipment is summarized as follows (in $000's):
June 30, 1996 December 31, 1995
------------- -----------------
Land $ 863 $ 863
Buildings and improvements 15,491 15,384
Furniture and fixtures 4,747 3,184
Machinery and equipment 16,028 14,101
------- -------
37,129 33,532
Accumulated depreciation (5,417) (3,375)
------- -------
31,712 30,157
Construction in progress - 510
------- -------
$31,712 $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
------------------
June 30, June 30,
1996 1995
-------- --------
Sales $44,495 $47,568
Cost of goods sold 31,740 35,400
------- -------
Gross profit 12,755 12,168
Selling, general and administrative
expenses 11,919 13,919
------- -------
Income (loss) from operations 836 (1,751)
Interest expense, net (4,917) (4,594)
Gain on sale of equipment 0 175
Loss before income taxes $(4,081) $(6,170)
======= =======
ACTUAL PROFORMA
Six Months Ended
-----------------
June 30, June 30,
1996 1995
-------- --------
Sales $84,281 $100,280
Cost of goods sold 60,542 72,931
------- --------
Gross profit 23,739 27,349
Selling, general and administrative
expenses 23,770 25,379
------- --------
Income (loss) from operations (31) 1,970
Interest expense, net (9,522) (8,816)
Gain on sale of equipment 0 175
Loss before income taxes $(9,553) $ (6,671)
======= ========
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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 specialty products, bedding products and the 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 $32.8 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 June
30, 1995 reflect proforma adjustments related to the merger agreement
discussed above.
Comparison of Results of Operations for the Three Months Ended June 30,
1996 (Actual) with the Proforma Results of Operations for the Three Months
Ended June 30, 1995 (with proforma adjustments as discussed above).
NET SALES
Net sales for three months ended June 30, 1996 decreased by $3.1 million, or
6.5% from $47.6 million of proforma net sales for the three months ended June
30, 1995 to $44.5 million for the three months ended June 30, 1996. Weak
consumer demand and conservative inventory management by retailers served by the
Company continued to negatively impact the June 30, 1996 quarter. While the
Company experienced some improvement in retail conditions compared to the fourth
quarter of 1995 and the first quarter of 1996, sales declined for the 1996
quarter compared to the same period in 1995. Additionally, 1996 second quarter
sales were negatively impacted by furniture cover sales. The Company is
significantly reducing its commitment to the furniture cover business because of
substantial return problems generally experienced by the industry. Sales of
Calvin Klein Home products positively impacted the quarter-to-quarter
comparison. Sales of Calvin Klein Home products commenced in the third quarter
of 1995.
GROSS PROFIT
The gross profit margin increased from a proforma of 25.6% for the three months
ended June 30, 1995 to 28.7% for the three months ended June 30 , 1996. The 1995
margin was negatively impacted by substantial write-downs of slow moving,
close-out and obsolete inventory. Plant operating strategies were changed in
1996 to help reduce the Company's exposure to inventory writedowns, particularly
in the cut-and-sew and print plants. The new operating strategy also contributed
to higher efficiencies in those plants. Gains from the plant operations and
inventory control were offset somewhat by a slight decline in giftware margins
resulting from a change in product mix. As the Company continues to broaden its
giftware product offerings to maximize its distribution strength, the margins
realized on certain products sourced through outside manufacturers will
continue to put some downward pressure on margins.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
SG&A expenses decreased $2.0 million or 14.4% from a proforma of $13.9 million
for the three months ended June 30, 1995 to $11.9 million for the three months
ended June 30, 1996. As a percentage of sales, SG&A expenses decreased from a
proforma of 29.3% for the three months ended June 30, 1995 to 26.8% for the
same period of 1996. The 1995 amount was negatively impacted by significant
charges recorded related to customer chargebacks and claims. Positively
impacting the 1996 results were the ongoing cost and headcount reduction
programs resulting from the July 1995 merger. Duplicate functions are being
eliminated and cost reductions achieved from consolidating certain functions and
services. Management of the Company expects
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the cost reduction programs to continue to favorably impact the second half of
1996 compared to 1995 expense levels. Negatively impacting the amounts of SG&A
expenses for 1995 and 1996 were the costs associated with Calvin Klein Home.
Advertising and overhead expenses associated with Calvin Klein Home, as a
percentage of sales, exceeded the level of the Company's mature businesses. This
investment in the growth of the Calvin Klein Home Line is part of the Company's
long-term plan and management of the Company expects that SG&A expenses as a
percentage of sales will continue to exceed its other mature businesses for the
next 12-24 months.
INTEREST EXPENSE, NET
Interest expense, net increased from a proforma of $4.6 million for the three
months ended June 30, 1995 to $4.9 million for the three months ended June 30,
1996. This increase was principally due to increased borrowings under the
Company's revolving line of credit during the second quarter of 1996.
RESULTS OF OPERATIONS
As described above, the results of operations for the six months ended June 30,
1995 reflect proforma adjustments related to the merger agreement
discussed above.
Comparison of Results of Operations for the Six Months Ended June 30, 1996
(Actual) with the Proforma Results of Operations for the Six Months
Ended June 30, 1995 (with proforma adjustments as discussed above).
NET SALES
Net sales for six months ended June 30, 1996 decreased by $16.0 million, or
16.0% from $100.3 million of proforma net sales for the six months ended June
30, 1995 to $84.3 million for the six months ended June 30, 1996. A soft retail
climate continued to negatively impact sales. While the most significant
decline was in furniture cover sales, all product lines and distribution
channels served by the Company were impacted. A modest improvement in retail
conditions was experienced by the Company in the second quarter ended June 30,
1996 compared to the fourth quarter of 1995 and the first quarter of 1996.
However, the improvement did not completely offset the negative impact of the
weak retail environment on 1996 sales. The decrease in furniture cover sales
was offset by sales of Calvin Klein Home products. Currently, management of
the Company expects full year sales for 1996 to be below 1995 levels as a result
of the difficult retail climate.
GROSS PROFIT
The gross profit margin increased from a proforma of 27.3% for the six months
ended June 30, 1995 to 28.2% for the six months ended June 30 , 1996. The
improvement in the 1996 period is attributable primarily to higher plant
efficiencies and stronger controls over inventory. The 1995 proforma gross
profit margin reflects the effect of substantial efficiency losses in the
Company's cut-and- sew and print plants. Additionally, the Company recorded
substantial inventory writedowns in the 1995 period. Gross margins for the six
months ended June 30, 1996 were negatively impacted by some declines in the
giftware trade margins. As the Company continues to broaden its giftware product
offerings to maximize its distribution strength, the margins realized on certain
products sourced through outside manufacturers will continue to put some
downward pressure on margins.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
SG&A expenses decreased $1.6 million or 6.3% from a proforma of $25.4 million
for the six months ended June 30, 1995 to $23.8 million for the six months
ended June 30, 1996. As a percentage of sales, SG&A expenses increased to 28.2%
for the six months ended June 30, 1996 from a proforma of 25.3% for the same
period of 1995. The increase in SG&A expenses, as a
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percentage of sales, resulted from the fixed nature of many of the Company's
SG&A costs, particularly salaries and benefits and the reduced sales for six
months ending June 30, 1996. From an absolute dollar standpoint, the 1995
results were negatively impacted by uncollectible accounts charges resulting
from customer chargebacks and claims. Additionally, substantial expenditures
related to the September, 1995 launch of the Calvin Klein Home Line negatively
impacted SG&A expenses for the first half of 1995. The negative impact on SG&A
expenses continued, to a lesser extent, as advertising and overhead expenses
related to the new Calvin Klein Home Line continued in 1996. As a percentage of
sales, the SG&A expenses associated with the Calvin Klein Home Line exceeded
those of the Company's mature businesses. This investment in the growth of the
Calvin Klein Home is part of the Company's long-term plan and management of the
Company expects that SG&A expense as a percentage of sales will continue to
exceed its other mature businesses for the next 12-24 months. Favorably
impacting the 1996 results was the on-going cost and headcount reduction
programs resulting from the July, 1995 acquisition of Home Innovations.
Integration of certain overhead functions as well as the elimination of
duplicative headcount began to positively impact the Company's result for the
second quarter of 1996. Management of the Company expects that SG&A expenses
will continue to be favorably impacted from these programs for the balance of
1996.
INTEREST EXPENSE, NET
Interest expense, net increased from a proforma of $8.8 million for the three
months ended June 30, 1995 to $9.6 million for the three months ended June 30,
1996. This increase was principally due to increased borrowings under the
Company's revolving line of credit during the first six months of 1996.
INCOME TAXES
The Company has recognized an income tax benefit arising from the
year-to-date loss. The Company has not provided a valuation allowance on the
related deferred tax asset. Management of the Company currently believes that
the deferred tax asset reported in the June 30, 1996 Balance Sheet will be
fully realized in the foreseeable future.
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 June 30, 1996, the Company had approximately $10.9 million available under
the revolving credit facility described above (net of $18.7 million of
outstanding borrowings and $2.6 million in outstanding letters 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 continuing rollout of the Calvin Klein Home line of
products. Management believes the Calvin Klein Home line of products have
increased 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 June 30, 1996.
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Cash flows used in operating activities were approximately $8.1 million for the
six months ended June 30, 1996. In addition to the Company's net loss, cash
used for the six month period ended June 30, 1996 was driven by an additional
investment of $1.7 million in inventory as well as reductions in trade payables
and accruals totaling $4.2 million. Additionally, other current assets
increased by approximately $2.0 million primarily as a result of prepaid
catalog costs associated with new product roll-outs. The incremental inventory
investment related almost entirely to the new Calvin Klein Home Line. Excluding
investment made in Calvin Klein inventory, the Company's inventory investment
decreased by approximately $6 million or 14%, from December 31, 1995 amounts.
The Company's cash from operations for the six months ended June 30, 1996 was
positively impacted by a $2.4 million reduction in receivables resulting from
increased emphasis on collections.
Capital expenditures for the six month period ended June 30, 1996
approximated $1.9 million. The Company currently has no material commitments
for capital expenditures.
Borrowings under the Company's line of credit increased by approximately
$13.7 million during the six months ended June 30, 1996. Additionally, the
Company paid dividends totaling $1.75 million on its redeemable preferred stock
in January, 1996. During the balance of 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 six months ended June 30, 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 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: August 12, 1996
---------------------------------
Jay N. Baker*
Chief Financial Officer
*Duly authorized to sign on behalf of the Registrant.
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.6 Form of Fourth 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, by the
Second Amendment, dated as of December 31, 1995 and by
the Third Amendment dated as of March 31, 1996 .
27 Financial data schedule
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