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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: September 30, 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
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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 November 8, 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 55,836 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 SEPTEMBER 30, 1996
INDEX
Page
No.
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PART IFINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995 3
Condensed Consolidated Statements of Operations for the three
months ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Operations for the nine
months ended September 30, 1996 and 1995 5
Condensed Consolidated Statement of Stockholders' Equity (Deficiency)
for the nine months ended September 30, 1996 6
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 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)
(UNAUDITED)
- --------------------------------------------------------------------------------
September 30, December 31,
1996 1995(1)
--------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,338 $ 169
Investment securities 1,000 1,000
Accounts receivable - net of allowance for doubtful accounts of
$2,143 at September 30, 1996 and $2,506 at December 31, 1995 40,747 28,982
Income taxes receivable 456 2,714
Inventories 45,148 43,713
Deferred income taxes 3,015 4,282
Other current assets 3,427 598
----------- -----------
Total current assets 95,131 81,458
PROPERTY, PLANT AND EQUIPMENT, NET 31,671 30,667
OTHER ASSETS 8,270 8,790
INTANGIBLE ASSETS, NET 92,821 94,938
------------ ----------
TOTAL ASSETS $ 227,893 $ 215,853
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable 15,489 14,452
Accrued liabilities 6,490 9,775
Accrued interest 4,120 7,583
------------ ----------
Total current liabilities 26,099 31,810
LONG-TERM DEBT 162,734 131,452
DEFERRED INCOME TAXES 263 3,348
REDEEMABLE PREFERRED STOCK 47,269 41,059
REDEEMABLE COMMON STOCK 2,234 1,639
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock 9 9
Additional paid-in capital 9,301 16,107
Reduction of certain equity interest to predecessor basis (6,209) (6,209)
Accurated deficit (13,807) (3,362)
------------ -----------
Total stockholders' equity (deficiency) (10,706) 6,545
------------ ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 227,893 $ 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 September 30,
--------------------------------
1996 1995
------------- -------------
SALES $ 48,835 $ 54,757
COST OF GOODS SOLD 34,496 38,036
------------- -------------
GROSS PROFIT 14,339 16,721
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,656 12,937
------------- -------------
INCOME FROM OPERATIONS 2,683 3,784
INTEREST EXPENSE, NET (4,962) (4,373)
------------- -------------
LOSS BEFORE PROVISION FOR INCOME TAXES (2,279) (589)
PROVISION FOR INCOME TAXES (1,762) (97)
------------- -------------
NET LOSS BEFORE EXTRAORDINARY LOSS (4,041) (686)
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF
DEBT, NET OF TAXES OF $469 -- (763)
------------- -------------
NET LOSS $ (4,041) $ (1,449)
============= =============
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 September 30,
--------------------------------
1996 1995
------------- -------------
SALES $ 133,116 $ 76,882
COST OF GOODS SOLD 95,038 49,261
------------- -------------
GROSS PROFIT 38,078 27,621
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 35,426 21,325
------------- -------------
INCOME FROM OPERATIONS 2,652 6,296
INTEREST EXPENSE, NET (14,484) (7,766)
------------- -------------
LOSS BEFORE PROVISION FOR INCOME TAXES (11,832) (1,470)
INCOME TAX BENEFIT 1,387 238
------------- -------------
NET LOSS BEFORE EXTRAORDINARY LOSS (10,445) (1,232)
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF
DEBT, NET OF TAXES OF $469 -- (763)
------------- -------------
NET LOSS $ (10,445) $ (1,995)
============= =============
See notes to condensed consolidated financial statement (unaudited).
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DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (In
Thousands)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
Reduction of
Certain Equity
Interest to Total
Common Additional Predecessor Accumulated Stockholder's
Stocks Paid-in Capital Basis Deficiency Equity (Deficiency)
-------- --------------- -------------- ----------- ------------------
Balances at December 31, 1995 $ 9 $ 16,107 $ (6,209) $ (3,362) $ 6,545
Accretion of redeemable common stock for the
nine months ended September 30, 1996 (595) (595)
Accretion of redeemable preferred stock for the
nine months ended September 30, 1996 (586) (586)
Preferred stock dividends paid in-kind for the
nine months ended September 30, 1996 (5,625) (5,625)
Net loss for the nine months ended
September 30, 1996 (10,445) (1O,445)
------ --------- ---------- --------- ---------
Balances at September 30, 1996 $ 9 $ 9,301 $ (6,209) $ (13,807) $ (10,706)
====== ========= ========== ========= =========
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)
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
1996 1995
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,445) $ (1,955)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 7,364 4,178
Deferred tax (benefit) provision (1,818) (986)
Changes in operating assets and liabilities:
Accounts receivable (11,765) (21,061)
Inventories (1,435) (1,830)
Income tax receivable 2,258 --
Other current assets (2,829) 254
Accounts payable 1,037 (2,321)
Accrued liabilities (3,713) 511
Accrued interest (3,464) 2,958)
Income taxes payable -- (304)
---------- -----------
Net cash used in operating activities (24,810) (20,556)
---------- -----------
CASH FLOWS FROM DIVESTING ACTIVITIES:
Net cash used to acquire HII -- (94,578)
Purchase of property and equipment (4,073) (1,733)
Other long-term assets 520 (4,250)
---------- -----------
Net cash used in investing activities (3,553) (100,561)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit 31,282 15,361
Redeemable preferred stock dividends paid (1,750) --
Issuance of 13% Senior Notes due 2002 and
Class F common stock -- 125,000
Issuance of $50 million redeemable preferred
stock and class D common stock -- 50,000
Early extinguishment of debt -- (66,900)
Deferred financing costs -- (10,699)
---------- -----------
Net cash provided by financing activities 29,532 112,762
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,169 (8,355)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 169 8,355
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 1,338 0
========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid
Income taxes paid $ 14,005 $ 3,790
$ -- $ 1,309
See notes to condensed consolidated financial statements (unaudited).
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DECORATIVE HOME ACCENTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 September
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):
September 30, 1996 December 31, 1995
------------------ -----------------
Raw materials $ 13,435 $ 24,464
Work-in-process 3,341 973
Finished goods 28,372 18,276
------------- ----------------
$ 45,148 $ 43,713
============= ================
Property, plant and equipment is summarized as follows (in $000's):
September 30, 1996 December 31, 1995
------------------ -----------------
Land $ 863 $ 863
Buildings and improvements 15,617 15,384
Furniture and fixtures 5,059 3,184
Machinery and equipment 16,656 14,101
------------- ----------------
38,195 33,532
Accumulated depreciation (6,524) (3,375)
------------- ----------------
31,671 30,157
Construction in progress - 510
-------------- ----------------
$ 31,671 $ 30,667
============== ================
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DECORATIVE HOME ACCENTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996 AND 1995 (CONTINUED)
________________________________________________________________________________
4. INCOME TAXES
The Company's income tax benefit for the nine months ended September 30,
1996 was calculated at an effective rate of 32% before being offset by an
increase in the tax valuation allowance of $2.4 million. Management of the
Company currently believes that the deferred tax asset reported in the
September 30, 1996 balance sheet will be fully realized.
5. REVOLVING CREDIT FACILITY
On November 12, 1996, the Company and certain subsidiaries entered into a
new Loan and Security Agreement (the "Agreement") with a new revolving
credit facility to provide for revolving loans and letters or credit in an
aggregate principal amount of up to $50 million for a three year period.
The Agreement may be renewed from year to year thereafter at the mutual
agreement of the parties. The initial borrowing of $xx.x million on
November 12, 1996 was utilized to repay amounts owed the prior lender
under the Company's former Revolving Credit Facility. Borrowings under the
new $50 million Revolving Credit Facility bear interest, at the Company's
discretion, at a rate of 5/8% percent per annum in excess of the Prime
Rate or 3-1/4% percent per annum in excess of the Eurodollar Rate. The
borrowings are secured by a first priority lien on the accounts receivable
and inventories of the Company's subsidiaries. The Company is required to
maintain a minimum adjusted tangible net worth, as defined, and the
payment of cash dividends on the Company's common stock is limited in
accordance with the Agreement. Further, there are limitations on the
ability of the Company to incur additional indebtedness and make loans,
advances and investments. Under the Company's borrowing formula, which is
based on underlying collateral as described above, approximately $7.3
million (net of $35.4 million of outstanding borrowings) was available for
borrowings by the Company under the new Revolving Credit Facility at
November 12, 1996.
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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
unaudited financial statements of DHA and the notes thereto included
elsewhere in this Form 10-Q. The following table includes unaudited
proforma financial information for the nine months ended September 30,
1995, 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 for
the nine months ended September 30, 1996, should be read using the
proforma financial information presented below:
ACTUAL PRO FORMA
Nine Months Ended
--------------------------------------
September 30, September 30,
1996 1995
------------- -------------
Sales $ 133,116 $ 155,038
Cost of goods sold 95,038 109,977
------------- -------------
Gross profit 38,078 45,061
Selling, general and
administrative expenses 35,426 38,092
------------- -------------
Income 2,652 6,969
Interest expensse, net (14,484) (13,065)
------------- -------------
Loss before income taxes $ (11,832) $ (6,096)
============= =============
IMPACT OF THE PURCHASE OF HOME INNOVATIONS, INC.
On July 13, 1995, DHA acquired HII, a 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 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 $34.7
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.
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RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1996 with Three Months
Ended September 30, 1995
NET SALES
Net sales decreased by $5.9 million, or 10.8% to $48.8 million for the
three months ended September 30, 1996 from $54.8 million for the three
months ended September 30, 1995. During the latter part of the third
quarter of 1996, sales were negatively impacted by delays in deliveries of
towel blanks used in the Company's bath business as a result of industry
capacity shortages. Deliveries are expected to improve during the fourth
quarter. The continued phase out of the furniture cover business also
negatively impacted the quarter-to-quarter comparison by over $2 million.
Down-sizing of the Company's printing operation in early 1996 further
contributed to the 1996 sales decline. Historically, the Company had
performed contract printing services at relatively low margins to
supplement internal capacity demands of the printing operation. These sale
declines were partially offset by a $1.4 million increase in sales of
Calvin Klein Home products.
GROSS PROFIT
Gross profit margin decreased slightly to 29.4% for the three months ended
September 30, 1996, compared to 30.5% in 1995. Negatively impacting the
1996 period was the continued expansion of new product lines in the
Company's giftware business. This strategy is intended to help maximize
the Company's distribution strength. Products sourced through outside
manufacturers resulted in margins below those historically achieved on
cotton throws. The quarter-to-quarter comparison was favorably impacted by
improved operating efficiencies in the Company's cut-and-sew plants.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses decreased $1.3
million, or 9.9% to $11.7 million for the three months ended September 30,
1996 from $12.9 for the same period in 1995. Positively impacting the 1996
results were ongoing cost and headcount reduction programs resulting from
the DHA's acquisition of HII. Duplicate functions are being eliminated and
cost reductions achieved from consolidating certain functions and
services. Management expects the cost reduction programs to continue to
favorably impact the remainder of 1996 compared to 1995 expense levels.
Negatively impacting the amounts of SG&A expenses for 1996 and 1995 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 such costs for the Company's more mature business.
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 the
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 13.5% to $5.0 million for the three
months ended September 30, 1996, from $4.4 million for the three months
ended September 30, 1995. The increase resulted from higher average
borrowings under the Company's revolving credit facility.
RESULTS OF OPERATIONS
Comparison of Nine Months Ended September 30, 1996 (Actual) with Proforma
Nine Months Ended September 30, 1995
As described above, the results of operations for the nine months ended
September 30, 1995 reflect proforma adjustments related to the purchase of
HII discussed above.
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NET SALES
Net sales for the nine months ended September 30, 1996, decreased $21.9
million, or 14.1% compared to the proforma net sales for the nine months
ended September 30, 1995. Sales for the nine months ended September 30,
1996 were negatively impacted by weak consumer demand and conservative
inventory management by retailers serviced by the Company in the first six
months of 1996. Delivery shortages for towel blanks used in the Company's
bath business, as well as reduced capacity in the Company's contract
printing business also negatively impacted the year-to-year comparison.
The decline in furniture cover sales for 1996, resulting from the
Company's decision to exit this business, was partially offset by growth
in Calvin Klein Home sales.
GROSS PROFIT
Gross margin decreased to 28.6% of net sales for the nine months ended
September 30, 1996, from a proforma of 29.1% for the nine months ended
September 30, 1995. The slight decline in the 1996 results is attributable
to the Company's strategy to broaden its giftware product offerings in
order to maximize its distribution strength. The margins realized on
certain products sourced through outside manufacturers are below those on
items manufactured by the Company. Offsetting this decline were
improvements in the 1996 plant efficiencies and reduced writedowns of slow
moving and obsolete inventory.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
SG&A expenses decreased $2.7 million, or 7% to $35.4 million for the nine
months ended September 30, 1996 from $38.1 million for the proforma nine
months ended September 30, 1995. As a percentage of sales, SG&A expenses
increased to 27% for the nine months ended September 30, 1996 from 25% for
the 1995 period. The year-to-year decline in sales volume resulted in
higher relative SG&A costs primarily as a result of the fixed salary
structure of the Company's sales and marketing functions. Positively
impacting the 1996 results were ongoing cost and headcount reduction
programs resulting from DHA's acquisition of HII. Duplicate functions are
being eliminated and cost reductions achieved from consolidating certain
functions and services. Management expects the cost reduction programs to
continue to favorably impact the remainder of 1996 compared to proforma
1995 expense levels. Negatively impacting the amounts of SG&A expenses for
1996 and 1995 were the costs associated with Calvin Klein Home.
Advertising and overhead expense associated with Calvin Klein Home, as a
percentage of sales, exceeded the level of such costs for the Company's
more mature business. 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 the 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 10.9%, or $1.4 million to $14.5 million
for the nine months ended September 30, 1996, from $13.1 million for the
proforma nine months ended September 30, 1995. The increase resulted from
higher average borrowings under the Company's revolving credit facility.
INCOME TAXES
The Company has recognized an income tax benefit arising from the
year-to-date loss. The Company has provided a valuation allowance of $2.4
million on the related deferred tax asset. Management of the Company
currently believes that the deferred tax asset reported in the September
30, 1996 balance sheet will be fully realized.
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.
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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.
In November of 1996, the Company entered into a new Loan and Security
Agreement (the "Agreement") with a new revolving credit facility. The
Company terminated its relationship with its previous revolving credit
facility lenders. The Agreement will provide the Company with a $50
million revolving line of credit. The initial term of the Agreement is for
three years and can be renewed from year-to-year thereafter. The Agreement
contains certain financial and other covenants with which the Company must
comply, including a covenant requiring the Company to maintain a minimum
adjusted tangible net worth, as defined, and covenant restricting the
payment of cash dividends on the Company's common stock. 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 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. Under the Company's
borrowing formula, which is based on underlying collateral as described
above, approximately $7.3 million (net of $35.4 million of outstanding
borrowings) was available for borrowings by the Company under the new
Revolving Credit Facility at November 12, 1996.
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 expects that the working capital requirements for supporting
the Calvin Klein Home lines should be approximately $7 to $9 million for
the next 12 to 15 months. Management believes that the Company's cash flow
from operations and borrowing under the new revolving credit facility will
be sufficient to fund the Calvin Klein Home requirements.
Cash flows used in operating activities were approximately $24.8 million
for the nine months ended September 30, 1996. In addition to the
Company's net loss, cash requirements for the nine month period ended
September 30, 1996 were driven by an increase in accounts receivable of
$11.8 million. This increase in accounts receivable is primarily due to
the seasonality of the business accompanied with a sales program extending
the payment terms of sales made earlier in the year in an effort to
accelerate the timing of customer purchases for the holiday season. Also,
this increase in cash used for operating activities was due to an
additional investment of $1.4 million in inventory. 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 $3 million from December
31, 1995 amounts.
Capital expenditures for the nine month period ended September 30, 1996
approximated $4.1 million. The Company currently has no material
commitments for capital expenditures.
Borrowings under the Company's line of credit increased by approximately
$31.3 million during the nine months ended September 30, 1996.
Additionally, the Company paid dividends totaling $1.75 million on its
redeemable preferred stock in January, 1996. During the balance of 1996,
dividends will be paid in-kind rather than in cash.
Management expects that the Company's cash flow from operations and
borrowings under the new 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 nine months ended
September 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.
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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
Form 8-K filed on November 6, 1996, regarding the resignation of
Henry E. Scharling, II and Barbara Scharling reported under
Item 5 of Form 8-K.
15
16
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: November 14, 1996
/s/ JAY N. BAKER
-----------------------------------------
Jay N. Baker*
Chief Financial Officer
*Duly authorized to sign on behalf of the Registrant.
16
17
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Loan and Security Agreement between Decorative Home
Accents, Inc. and subsidiaries and Congress
Financial Corporation dated November 12, 1996.
27 Financial data schedule