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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
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 of Incorporation) (I.R.S. Employer ID No.)
Industrial Park Drive, Abbeville, South Carolina 29620
(Address of principal executive offices) (Zip Code)
(803) 446-3163
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of May 15, 1997, there were 109,737 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), 118,100 shares outstanding of the Registrant's Class F
Common Stock and 50,000 shares outstanding of the Registrant's 14% Cumulative
Redeemable Preferred Stock ($0.01 par value).
DOCUMENTS INCORPORATED BY REFERENCE: None
No annual report or proxy material have been sent to security holders
during the last fiscal year.
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PART I
ITEM 1. BUSINESS
GENERAL
Decorative Home Accents, Inc. (the "Company") through its direct wholly
owned subsidiaries, The Rug Barn, Inc. (the "Rug Barn") and Home Innovations,
Inc. ("HII" or "Home Innovations"), designs, manufactures and markets an
extensive line of decorative home accessories. The Rug Barn's products include
decorative throws, pillows, table runners, placemats, rugs and golf towels. HII
manufactures accessories in four major product areas: bath furnishings, window
treatments, bedding products, and the Calvin Klein Home Collection, a line of
designer home products launched in September 1995 under the "Calvin Klein"
trademark. The Company competes in selected niches of the home accessories
industry under the Home Innovations, R.A. Briggs, Calvin Klein Home, The Rug
Barn, QTI Sports and Hedges & Ivy labels. The Company's products are marketed
worldwide to distributors and retailers. All of the Company's manufacturing
facilities are located in the United States.
In 1994, the Company was formed as a holding company to purchase certain
assets and assume certain liabilities from a group of commonly controlled
companies known as International Textile Fabrics, Inc. ("ITF") and to acquire
certain other assets from the principal shareholder of ITF. The primary products
of ITF were decorative throws, pillows, table runners, placemats, rugs and golf
towels. Substantially all products were marketed under the names The Rug Barn
and QTI Sports.
In July 1995, the Company acquired HII in a merger transaction for total
cash consideration of approximately $95.1 million, after a $6.7 million
adjustment to the purchase price, including acquisition related costs of
approximately $2.0 million. The Company also assumed approximately $35.0 million
in liabilities of HII. Concurrent with the merger, the Company completed the
offering and sale of (i) 125,000 units (the "Units"), each unit consisting of
one $1,000 principal amount Series A note and one share (a "Share") of the
Company's Class F common stock, par value $0.01 per share (the "Class F Common
Stock"), and (ii) 50,000 shares of 14% cumulative redeemable preferred stock
(the "Preferred Stock"), 808,333 shares of Class D common stock (the "Class D
Common Stock") and warrants to purchase shares of Class D Common Stock. In
addition to using the net proceeds from these offerings to pay the merger
consideration, the Company refinanced certain existing indebtedness of the Rug
Barn in an aggregate principal amount of approximately $66.9 million with the
proceeds from the sale of the Units.
Subsequently, the Units were separated and the Series A Notes were
exchanged for Series B Notes pursuant to an exchange offer effective December
26, 1995. The Series B Notes (the "Senior Notes") issued pursuant to the
exchange offering may be offered for resale, resold or otherwise transferred by
holders thereof, subject to the transfer restrictions under the federal
securities laws. The Notes bear interest at 13% per annum payable semi-annually
on June 30 and December 31 of each year. The principal amount of the Notes is
non amortizing with final maturity in June of 2002. The Notes are
unconditionally, jointly and severally guaranteed by each of the Rug Barn and
HII and each of HII's subsidiaries.
The Preferred Stock has a dividend rate of 14% which is payable quarterly.
Dividends on the Preferred Stock must be paid in cash unless prohibited by the
terms of the indenture agreement governing the Senior Notes (the "Indenture") or
the revolving credit facility (the "Revolving Credit Facility") available to the
Rug Barn, HII and each of HII's subsidiaries, in which case dividends must be
paid, in lieu of cash, by the issuance of additional Preferred Stock in an
amount based upon a 15% annual dividend rate on the Preferred Stock. The
Preferred Stock is redeemable at any time, in whole or part without penalty at
the option of the Company and, subject to certain conditions, at the option of
the holders of the Preferred Stock.
Since the Company's acquisition of HII, the Company's strategy has been to
upgrade the product lines, integrate HII with the Rug Barn, realize certain
expense and sales synergies and establish the Calvin Klein Home Collection as
the leader in designer home accessories. During 1996 the Company integrated
certain overhead functions and eliminated certain duplicative functions through
cost and headcount reduction programs. During 1996 the Company had not
implemented a marketing plan to achieve any sales synergies related to the gift
division. In April 1997, the Company introduced the gift division's product line
to mass merchandisers. Through the HII merger
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transaction the Company positioned itself to serve all major channels of
distribution in the home accessories market from large mass merchandisers to
small individual gift shops with niche oriented products. These niche markets
include the jacquard woven throw, coordinated bath and bedding accessories,
window treatment and fashion bedding markets. The introduction of the Calvin
Klein Home Collection further enhances the Company's niche orientation. The
Company is the exclusive master licensee of all Calvin Klein home accessories,
including soft home products such as bedding, sheets, towels and curtains, as
well as non-soft home goods such as flatware, glassware and furniture, and has a
right of negotiation to license the "CK" trademark in connection with such
products.
CAPITAL RESTRUCTURING PLAN
On May 15, 1997, the Company reached an agreement in principle with
certain of the Company's bond holders and equity holders providing for a
comprehensive capital restructuring plan that, among other things, (i) converts
the outstanding principal amount and accrued interest on its 13% Senior Notes
into common equity, (ii) provided $20 million in the form of a secured term loan
for working capital purposes and (iii) makes provision for a subsequent rights
offering to raise permanent equity capital of up to $20 million.
The restructuring agreement was entered into by the Company's preferred
stockholder TCW Special Credits Fund V - The Principal Fund ("Fund V") and the
beneficial owners of approximately 76% of the principal amount of the Senior
Notes, Magten Asset Management Corp., solely as agent for various of its
investment advisory clients in their respective accounts at Magten ("Magten"),
and CIGNA. The restructuring plan will, among other things, (i) convert the
outstanding $118.1 million principal plus all accrued and unpaid interest on the
Senior Notes into 92.5% of the Company's common equity, (ii) exchange all the
Company's 14% cumulative preferred stock outstanding into 7.5% of the common
equity and a 5 year warrant to purchase up to 7.5% of the fully diluted common
equity, and (iii) exchange all of the classes of common stock into a 5 year
warrant to purchase up to 2.5% of the fully diluted equity. In connection with
the Company's capital restructuring plan, the Company did not pay interest on
the Senior Notes due June 30, 1997.
Pursuant to the restructuring, Magten provided the Company with a secured
term loan facility of up to $20 million (the "Term Loan Facility"). As of the
date of this filing, the entire $20 million has been borrowed under the Term
Loan Facility. Additionally, the Indenture was modified to permit the Company to
incur the Term Loan Facility. It is contemplated that the Term Loan Facility
will be repaid with the proceeds of a rights offering to purchase additional
shares of the Company's common stock upon a consummation of the restructuring.
The proposed restructuring plan also provides that Magten and Fund V will each
agree to exercise all rights and/or oversubscription options issued to them in
the rights offering so that the Company will receive sufficient proceeds from
the rights offering to pay in full in cash all of the indebtedness under the
Term Loan Facility.
The proposed restructuring plan and Magten's and Fund V's related
commitments are subject to various conditions, including due diligence by Magten
and the parties entering into definitive documents.
If the above described restructuring is consummated, management believes
that the transactions contemplated thereby will generate additional proceeds
that will be adequate to finance anticipated operational needs, planned capital
expenditures and meet debt service obligations for the remainder of 1997.
Management of the Company expects that a pre-negotiated filing under the
provisions of Chapter 11 of the United States Bankruptcy Code will be necessary
to effect the restructuring. The Company intends to present its plan of
reorganization simultaneously with its bankruptcy filing, and seek confirmation
thereof at the earliest possible opportunity. The Company expects that a
pre-negotiated filing under the provisions of Chapter 11 of the United States
Bankruptcy Code will occur in mid August, 1997, although no assurance can be
given in that regard.
See Management's Discussion and Analysis of Financial Condition and
Results of Operations for a discussion of the significant liquidity shortage
which impacted the Company during 1996 and 1997.
INDUSTRY
The Company competes in the domestic and foreign decorative home
accessories market which is characterized by a variety of product niches and
distribution channels. The Company's specific market encompasses
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the decorative home accessories segments of both the fragmented giftware market
and the more traditional home textile market.
PRODUCTS
The Company has five major product divisions: gift division, bath
furnishings, window treatments, bedding products, and Calvin Klein Home
Collection. General descriptions are included below.
Gift Division. The gift division's products include decorative throws,
pillows, table runners, placemats, rugs and golf towels. The gift division
utilizes the jacquard weaving process to produce decorative home products
manufactured in complementary colors and designs. The gift division's products
are primarily marketed under The Rug Barn, Hedges & Ivy and QTI Sports labels.
General descriptions of the gift division's product lines are included below.
Throws. Throws represent the largest segment of the gift division's
product mix. The throws are woven in 2-layer, 3-layer and tapestry
versions (typically referred to as 2-ply, 3-ply and picturesque). Adding a
third layer to a throw adds weight and enables the throw to be produced
with additional colors and designs. The designs, styles, and colors of the
Company's throw product line are generated either from the Company's
internal design staff or external designers or licensers. The Company has
affiliations with outside designers including Warren Kimble, Laurel Burch,
Oliveria Brandewein, The Fraser Collection, Sanderson, Guy Harvey, Sony
Signatures, Tracy Porter and Sam Butcher, designer of the popular line
Precious Moments. Additionally, the Company has product licensing
arrangements with 125 NCAA colleges and universities as well as the
Professional Golf Association and Major League Baseball. The Company also
has developed a custom throw business which enables customers to customize
the design and coloration of the throw. Also, the gift division offers
rayon and acrylic chenille throws in a broad range of decorative colors.
Pillows. The gift division introduced its line of decorative pillows
in June 1993, and currently offers an assortment of pillows many of which
coordinate with the best selling throws. Pillows are available in
approximately 30 different designs.
Placemats and Table Runners. The gift division began producing its
"tabletop" collection of jacquard woven cotton placemats and table runners
in January 1993 and currently offers a broad assortment of designs. In
most cases, the placemats and table runners are available as matching
sets.
Rugs. The gift division currently offers a limited selection of
jacquard woven cotton throw rugs. The rugs are made using the same
manufacturing process as the Company's other jacquard woven products, but
are distinguished from other product categories in that they are woven
with heavier yarn to be more durable for day to day use. The gift division
is currently expanding its rug offerings through both printed and
hand-hooked wool rugs.
Golf and Sport Towels. The gift division also produces terry cloth
golf and locker towels which display the logos of golf courses, country
clubs and resorts. These products are marketed and produced on a custom
basis.
Bath Furnishings. The bath furnishings division product offering consists
of shower curtains, embellished towels and coordinated accessories. These
products are marketed under two brands: the Accents by Home Innovations line for
mass merchandisers and national chains and the Home Innovations line for
department and specialty stores. HII uses various techniques in manufacturing
its towels such as printing, embellishing and embroidering, thus enabling the
Company to supply a wide variety of product types and styles.
Window Treatments. The window treatment division produces a wide variety
of window treatments and coordinates such as wallpaper borders, placemats,
chairpads and fabric by the yard. The Company has diversified from the marketing
of traditional bedroom and living room window treatments to other areas such as
the kitchen and
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bathroom environments. These products are marketed under two brands: the Accents
by Home Innovations line for mass merchandisers and national chains and the Home
Innovations line for department and specialty stores.
Bedding Products. The Company's bedding products division is organized
around two brands: the Home Innovations line, consisting of jacquard-woven,
200-thread count, 50/50 cotton/polyester blend sheets and accessories targeted
at department stores and mid-market retailers; and the Marquis line, a
collection of 180 thread count, 50/50 cotton/polyester blend sheets and
accessories, targeted at the mass merchandise market. Bedding division products
include comforters, bedspreads, pillow shams, decorative pillows, dust ruffles
and other accessories.
Calvin Klein Home Collection. In May 1994, HII, through its wholly owned
subsidiary, Calvin Klein Home, Inc.("Calvin Klein Home"), became Calvin Klein
Inc.'s ("Calvin Klein") exclusive master licensee to introduce the Calvin Klein
Home Collection under the "Calvin Klein" trademark. The original license covered
North and South America, Europe and the Caribbean (the "Licensed Territory").
This license agreement had an initial term ending December 31, 1997, with an
automatic renewal period of three years commencing January 1, 1998, and one
additional three-year renewal term commencing on January 1, 2001, at the sole
option of Calvin Klein Home, Inc. subject to meeting certain minimum sales
targets. Under the original agreement, the total term of the contract would have
been nine years plus 9 months. Under the license agreement, Calvin Klein Home
has guaranteed Calvin Klein certain minimum royalties in exchange for an
exclusive right to use the "Calvin Klein" logo in connection with the
manufacture, distribution and sale within the Licensed Territory of home
products covered by the license (the "Licensed Products"). In addition to the
"Calvin Klein" logo, the license agreement permits Calvin Klein Home to use the
"CK/Calvin Klein" trademark in certain circumstances. The license agreement
provides that, in the event that Calvin Klein receives a proposal for a license
to use the "CK/Calvin Klein" trademark, including the "CK" logo on Licensed
Product in the Licensed Territory, Calvin Klein will offer Calvin Klein Home the
opportunity to enter into good faith negotiation regarding a license agreement
for such trademark on terms that are no less favorable than such proposed
license. In connection with the restructuring plan discussed elsewhere herein
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations") the original license described above was terminated and an interim
license entered into upon similar terms and conditions. As part of the interim
license agreement, the Company changed the name of Calvin Klein Home, Inc. to
DHA Home, Inc. ("DHA Home"). The interim license expires on the earlier of (i)
April 30, 1998, or (ii) upon the successful completion of the restructuring
plan.
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The collection of Licensed Products includes the following:
SOFT PRODUCTS NON-SOFT PRODUCTS
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Comforters Dinnerware, including:
Sheets glassware
Towels woodenware
Bedspreads crystal
Quilts flatware
Area rugs china
Shams porcelain
Dust ruffles cutlery
Decorative pillows
Window treatments Gift and accessory products, including:
Fabric covered accessories picture frames
Shower curtains baskets
Bath rugs decorative gifts
Ceramic and laminated accessories paper partyware
Bath valances photo albums
Duvets and duvet covers gift wrap
Packaged fabric by the yard stationary products
Coordinated fabric furniture
Coordinated wall borders carpet
Furniture covers wallpaper
Napkins
Placemats
Chair ads
Table rounds
Tablecloths
Bed pillows
Throws
Blankets
Closet and storage accessories
Kitchen textiles
With respect to the non-soft Licensed Products, the license provides
that DHA Home shall have entered into sublicenses by January 1, 1996 in order to
retain the exclusive right to manufacture, distribute and sell at wholesale such
products in the Licensed Territory. Calvin Klein, Inc., however, has sole
discretion in approving the selection of all sublicensees, as well as the
styles, designs, packaging, components, workmanship, quality, display,
merchandising, advertising and promotion of all Licensed Products. DHA Home has
entered into a Sublicense Agreement with Swid Powell, Inc. as sublicensee for
the production of dinnerware and selected giftware. Although the deadline to
sublicense has passed, DHA Home is currently working closely with Calvin Klein,
Inc. in determining appropriate sublicensees and the timing of introduction of
the other non-soft Licensed Products. No assurance can be given that any
additional sublicensees will be approved by Calvin Klein. Certain non-soft
products sold outside of the Company's targeted distribution channels will not
be sub-licensed by the Company. The Company has agreed to allow Calvin Klein,
Inc. to license this sale of non-soft products directly.
PRODUCT DESIGN AND DEVELOPMENT
Because the demand for decorative home furnishings and home textile
products is based on their fashion appeal to retailers and ultimately consumers,
the success of the Company's business is highly dependent upon the
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Company's ability to design and develop a wide range of attractive products and
a wide array of colors and color combinations at attractive price points.
The Company has made a significant investment in design automation
equipment including CAD/CAM equipment. The Company employs a design staff of
approximately 25 people to constantly evaluate trends in home furnishings design
and to introduce new product designs and construction throughout all channels of
distribution. Additionally, the Company has entered into numerous licensing
agreements to facilitate further product development and enhancement.
Significant time is spent by employees in activities such as meeting with
stylists, designers, customers, suppliers, and machinery manufacturers as well
as producing samples and running trials in order to develop new products and
markets. These activities are performed at various levels and at various
locations and their specifically identifiable incremental costs are not material
in relation to the Company's total operating costs.
MARKETING AND DISTRIBUTION
The Company markets its products through most major decorative giftware
and home textiles distribution channels, including gift shops, department
stores, mass merchandisers and specialty stores. The Company attempts to achieve
differentiation by offering products which it believes have better quality or
more unique styling than competing products at equal or lower prices. In the
case of The Rug Barn's throws, the Company focuses on fashionable colors and
designs as well as custom and licensed designs. Home Innovations focuses on
providing quality bedding, bath and window treatment products through steadfast
attention to current fashionable designs and popular color schemes. The Company
seeks additional differentiation through the use of coordinated presentations.
The Company's manufacturing process enables Home Innovations to ship coordinated
products from the same distribution center in one shipment, thereby encouraging
the retailer to display the products as a set.
The Rug Barn distributes its products to 15,000 - 20,000 gift accounts
nationwide in orders as small as four units. The Company believes that The Rug
Barn's guaranteed 48-hour turnaround time on in-stock items allows small
specialty retailer or gift shop operators to minimize their inventory
investments and effectively operate on a "just in time" basis. Home Innovations'
distribution strategy is similar to The Rug Barn's. Home Innovations' current
manufacturing process enables it to produce products in small production runs,
allowing minimum print runs of approximately 2,500 yards.
The Rug Barn distributes its throws and accessories primarily through a
nationwide network of external regional sales representatives. Most of these
representatives have salespeople who do not sell products that compete with The
Rug Barn's products. In addition to its network of external sales
representatives, The Rug Barn employs internal account executives who handle
selected large department stores, mass merchandisers and custom accounts.
International accounts are serviced by internal account executives through a
network of independent agents and distributors.
HII distributes its products through a team of dedicated internal account
executives in addition to various external regional independent sales
representatives. Mass merchandisers and large department store accounts are
handled primarily by HII personnel, while small and medium size department
stores and specialty stores are handled outside the company by independent sales
representatives. Because department store, mass merchandiser and specialty store
distribution tends to be relationship driven, HII seeks to maintain excellent
relationships with most major retail purchasers, or "buyers."
MANUFACTURING
The Rug Barn. The Rug Barn's throws, placemats, cotton rugs, pillows and
blankets/coverlets are manufactured in its 400,000 square foot manufacturing
facility in Abbeville, South Carolina. Certain non-cotton throws and rug
production is outsourced to independent producers in China. The Rug Barn's
manufacturing facility includes computerized jacquard looms that allow the Rug
Barn to transform an artist's throw design into a newly-woven throw in a matter
of hours.
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Home Innovations. HII manufactures window treatments and shower curtains
at its Draymore facility in Mooresville, North Carolina; bedding products at its
Glenn Facility in Morven, North Carolina; and bath products at its two
facilities in Lake Zurich, Illinois. Management of the Company expects to
relocate the manufacturing of bath products to South Carolina in 1998. Provided
that the company has sufficient funds the Company plans to invest $3.4 million
in new equipment related to the relocation of its bath division. DHA Home
products are manufactured at HII's cut-and-sew operation in Wadesboro, North
Carolina from imported printed fabric goods. Additionally, certain items are
purchased from domestic or foreign manufacturers.
HII does not manufacture "commodity" materials or products; instead it
focuses on processes that it believes command higher margins by adding unique
value. For example, HII has chosen not to weave its own towel blanks, but rather
add value by embellishing pre-existing towel blanks. Management believes that
the large number of greige goods providers and level of vendor competition
generally enables HII to purchase its raw materials more cost-effectively than
if it weaved its own fabric. See "Business - Raw Materials."
HII's cut-and-sew operations are labor intensive and production lines are
organized to optimize labor productivity while retaining the flexibility to
adapt to ever-changing designs and styles. HII's strategy depends upon
experienced operations management to integrate its design, printing,
manufacturing and distribution capabilities into a competitive cost structure.
Pursuant to its long-term strategy, management has begun to upgrade the
Company's management information systems and share design systems used by The
Rug Barn with the goal of enhancing the overall productivity of the Company's
consolidated manufacturing operations. Because of the liquidity shortage faced
by the Company during 1996 and early 1997, the implementation of this strategy
has been delayed.
CUSTOMERS
During 1996, five department stores or mass merchandisers accounted for
approximately 32.2% of the Company's total net sales. Of these customers, J.C.
Penney accounted for approximately 15.4% of the Company's total net sales. The
Company does not have a written agreement with J.C. Penney; the indicated volume
was the result of purchase orders received by the Company in the ordinary course
of its business. The terms and conditions of the sales to J.C. Penney are
comparable to those offered to other customers.
RAW MATERIALS
One of the principal raw materials used in the manufacture of the
Company's gift division's products is cotton yarn, a significant amount of which
is purchased under fixed-price, cancellable contracts, dependent on actual
delivery of goods, with terms of up to twelve months from various suppliers.
Cotton yarn accounts for approximately 70% of The Rug Barn's cost of goods sold.
Management of the Company believes there is an ample supply of spun yarn to
service its manufacturing requirements.
The Company also uses a substantial amount of greige goods material, a
fabric processed from raw cotton and other raw materials, in its manufacturing
process. Approximately 40% of HII's cost of goods sold are attributable to
greige goods. During 1994, 1995, and 1996, each of Alice Mills, Inc., Clinton
Mills, Inc. and Hamrick Mills, Inc. supplied 10% or more of the greige goods
used by the Company. Management of the Company believes that the supplies
purchased from these vendors could be purchased from several other readily
available sources.
The Company also purchases a significant amount of towel blanks for use in
its bath business. Industry-wide capacity shortages for towel blanks during 1996
had a detrimental impact on the Company's sales. In order to help ensure an
adequate supply of towel blanks in the future, management of the Company is
diversifying the towel supplier base.
COMPETITION
Within the giftware market, the Company competes with thousands of
manufacturers servicing over 100,000 retailers, including 70,000 gift stores, in
the United States. Giftware manufacturers tend to be small operations that focus
on single-product novelty items or a long-running, unique product line.
Management of the Company believes that it competes in the decorative giftware
market on its reputation, manufacturing capabilities and product designs.
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Within the home textiles industry, the Company competes with large mills,
small specialty products manufacturers and medium-sized, niche manufacturers.
Large textile mills tend to be well-capitalized operations which focus on
mass-produced, commodity type textiles products such as basic sheets, comforters
and towels. The Company aggressively avoids competing in high-volume,
commodity-oriented product areas already serviced by the large mills. Small
specialty products manufacturers tend to have a limited product offering.
Management believes that the Company's market presence, its manufacturing and
distribution systems and the breadth of its product line allow it to compete
against specialty products manufacturers. Medium-size, niche manufacturers
present the greatest competition to the Company. Niche manufacturers typically
focus on profitable product niches in the bedding, bath, window treatments and
accessories market in a manner similar to that of the Company. Moreover, these
manufacturers tend to possess the minimum required production levels to reach a
level of production and marketing economies of scale not available to smaller
manufacturers. Nonetheless, management believes that its distribution, design
skills and manufacturing operations allow it to compete against other
medium-size, niche producers.
EMPLOYEES
As of December 31, 1996, the Company had approximately 2,050 employees,
none of whom are currently represented by a union. Management of the Company
considers relations with its employees to be good.
GOVERNMENTAL REGULATION
The business and operations of the Company are subject to governmental
regulation, including employee health and safety laws and regulations; laws and
regulations governing employment practices, wages and hours, and employee
benefits; and environmental laws and regulations. The Company believes that it
is in compliance in all material respects with applicable laws and regulations,
and that such compliance has not materially affected its business or required
major capital expenditures.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this Item 1 (Description of Business) and Item
7 (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 Annual Report on Form 10-K that a
number of important factors could cause the Company's actual results in 1997 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 inability to
receive customary credit terms from its vendors, the possible adverse impact of
a Chapter 11 filing, the failure to consummate the capital restructuring plan on
a timely basis, 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 materials cost and availability, 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 herein and 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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ITEM 2. PROPERTIES
The Company owns and leases facilities in North Carolina, South Carolina,
New York, Texas and Illinois. The following table lists the Company's
facilities:
Approximate
Floor Space
Location Owned/Leased (Square Feet) Description
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Mooresville, NC Owned 547,552 Offices, Printing, Manufacturing and Warehouse
Morven, NC Owned 459,500 Manufacturing
Abbeville, SC Owned 400,000 The Rug Bar Executive Offices, Manufacturing,
Distribution and Showroom
Lake Zurich, IL Leased(1) 199,544 Industrial Buildings/Office Space
Morven, NC Leased(2) 54,000 Storage Warehouse
Cheraw, SC Leased(3) 42,000 Storage Warehouse
Lake Zurich, IL Leased(4) 37,689 Industrial Building/Manufacturing
Lake Zurich, IL Leased(5) 27,700 General Warehouse/Manufacturing
New York, NY Leased(6) 26,523 Offices, Salesroom, Showroom
Wadesboro, NC Leased(7) 30,000 Manufacturing Space and Office/Administration
Space
Cheraw, SC Leased(8) 5,760 Metal Fabrication and Maintenance Shop
Lake Zurich, IL Leased(9) 4,694 Industrial Warehouse
Mooresville, NC Leased(10) 8,000 Outlet Store
South Plano, TX Leased(11) 2,336 Office and Showroom
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(1) Lease term expires May 31, 1998.
(2) Lease term is month to month.
(3) Lease term is month to month.
(4) Lease term expires May 31, 1998.
(5) Lease term expires May 31, 1998.
(6) Lease term expires January 31, 1999.
(7) Lease term expires November 30, 2000.
(8) Lease term is month to month.
(9) Lease term expires May 31, 1998.
(10) Lease term expires July 31, 2001.
(11) Lease term expires July 31, 1999.
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ITEM 3. LEGAL PROCEEDINGS
As contemplated by the Company's previously announced capital
restructuring plan, the Company expects that a pre-negotiated filing under the
provisions of Chapter 11 of the United States Bankruptcy Code will occur in
mid August, 1997. See "Business - Capital Restructuring Plan." The Company is
not a party to any litigation, and is not aware of any pending or threatened
litigation except for the anticipated voluntary Chapter 11 filing previously
discussed, that would have a material adverse effect on the Company or its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public trading market for the Company's common
stock. As of May 15, 1997, there was one record holder of the Company's Class A
Common Stock, six record holders of the Company's Class B Common Stock, one
record holder of the Company's Class C Common Stock and two record holders of
the Company's Class D Common Stock. The Company did not declare any dividends on
outstanding common stock during 1994, 1995 or 1996. Certain of the Company's
contracts restrict its (or The Rug Barn's or HII's) ability to pay dividends.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity."
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ITEM 6. SELECTED CONSOLIDATED/COMBINED FINANCIAL DATA
SUCCESSOR COMPANY(1) PREDECESSOR COMPANY(1)
------------------------------------------- --------------------------------------
YEARS ENDED EIGHT MONTHS FOUR MONTHS YEARS ENDED
DECEMBER 31, ENDED ENDED DECEMBER 31,
-------------------------- DECEMBER 31, APRIL 30, ----------------------
1996 1995(3) 1994 1994 1993 1992
--------- --------- ------------ --------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net sales $ 176,733 $ 128,031 $ 50,102 $ 14,609 $ 49,002 $ 32,862
Income (loss) from operations (93,693) 10,268 12,452 2,731 11,706 5,027
Net income (loss) (115,241) (4) (3,362) 4,841 2,691 11,783 4,694
OTHER FINANCIAL DATA:
Depreciation and amortization 10,051 6,552 2,404 465 1,228 726
Capital expenditures 4,019 4,106 3,665 3,575 2,406 4,588
Ratio of earnings to fixed
charges(2) - - 2.63x 13.66x 18.35x 10.16x
BALANCE SHEET DATA:
Total assets 116,046 215,853 81,118 25,432 25,838 16,716
Total long-term debt, including
current portion 158,930 131,452 68,400 5,465 5,383 5,667
Redeemable common stock 2,476 1,639 762 - - -
Redeemable preferred stock 49,351 41,059 - - - -
- ----------
(1) Effective May 1, 1994, DHA purchased, through its wholly owned
subsidiary The Rug Barn (successor in interest to International Textiles,
Inc.), certain assets and assumed certain liabilities from a group of
commonly controlled companies known collectively as International Textile
Fabrics, Inc. ("ITF" or the "Predecessor Companies") and acquired certain
other assets from the principal shareholders of ITF (collectively, the "DHA
1994 Recapitalization"). Financial data as of and for the twelve months
ended December 31, 1992 and 1993 and as of and for the four months ended
April 30, 1994 were derived from historical combined financial statements of
ITF. Financial data as of and for the eight months ended December 31, 1994
and as of and for the twelve months ended December 31, 1995 and 1996 were
derived from historical consolidated financial statements of DHA.
(2) The ratio of earnings to fixed charges is expressed as the ratio of pre-tax
income plus fixed charges to fixed charges. Fixed charges consist of
interest expense and the interest component of rental expense, assumed to be
approximately one-third of rental expense.
(3) On July 13, 1995, DHA purchased Home Innovations, Inc. for a cash purchase
price of approximately $95.1 million, after a $6.7 million adjustment to the
purchase price, including acquisition related costs of approximately $2.0
million. The Company also assumed approximately $35.0 million in liabilities
consisting principally of trade payables and accruals and $2.3 million of
junior subordinated notes. The acquisition was accounted for using the
purchase method of accounting. Accordingly, the Company allocated the
purchase price of the assets acquired and liabilities assumed based on their
respective fair values.
(4) Includes a non-cash charge of approximately $79.7 million for goodwill
impairment.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
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-K. The following table includes
unaudited pro forma financial information as if the 1994 acquisition and
recapitalization of DHA and the July 1995 purchase of Home Innovations, Inc.
occurred as of January 1, 1994. Such adjustments to the pro forma financial
information consist principally of the following:
Net adjustments to cost of goods sold and selling, general and
administrative ("SG&A") expenses relating to adjusting depreciation
expense for the new basis of accounting resulting from the DHA and HII
acquisitions; increases in SG&A expenses to account for the amortization
of goodwill and the identifiable intangible assets resulting from the DHA
and HII acquisitions; increases in SG&A expenses to account for
compensation expense resulting from granting stock options at less than
fair market value; increases in SG&A expenses related to management fees;
net adjustments to interest expense resulting from the issuance of 13%
Senior Notes due 2002; extinguishment of prior debt; and amortization of
debt issuance costs and accretion of discount on the Senior Notes.
Depreciation and amortization totaled approximately $10.0 million
for 1996 and pro forma depreciation totaled approximately $9.1 million and
$8.3 million for 1995 and 1994, respectively. Pro forma depreciation was
approximately $1.1 million less than historical combined depreciation due
to the new basis of the assets resulting from the acquisition of HII.
Stock option expense included in pro forma SG&A expenses totaled
pproximately $348,000 for 1995.
Management's discussion and analysis of the results of operations for the
items presented below should be read using the following actual and pro forma
financial information (in thousands):
ACTUAL PRO FORMA
----------- --------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
----------- ---------- -----------
Sales $ 176,733 $ 206,679 $ 223,641
Cost of Goods Sold 138,633 149,580 153,717
----------- ---------- -----------
Gross Profit 38,100 57,099 69,924
SG&A Expenses 52,076 47,816 49,080
Charge for Goodwill
Impairment 79,717 -- --
----------- ---------- -----------
Income (Loss) from
Operations (93,693) 9,283 20,844
----------- ---------- -----------
Interest Income (Expense):
- Interest Expense (19,985) (17,780) (17,582)
- Interest Income 69 322 164
----------- ---------- -----------
(19,916) (17,458) (17,418)
----------- ---------- -----------
Income (Loss) Before
Income Taxes $ (113,609) $ (8,175) $ 3,426
=========== ========== ===========
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IMPACT OF THE PURCHASE OF HOME INNOVATIONS, INC.
On July 13, 1995, DHA acquired HII, a manufacturer of niche oriented home
accessories with five major product areas: bath furnishings, window treatments,
furniture covers, 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 adjustment to the purchase price, including acquisition related
costs of approximately $2.0 million. The Company also assumed approximately
$35.0 million in liabilities consisting principally of trade payables and
accruals and $2.3 million of junior subordinated notes. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the Company
allocated the purchase price to the assets acquired and liabilities assumed
based upon their respective fair values. The $6.7 million adjustment to the
purchase price was determined as a result of the difference between the net
assets specified in the purchase agreement and the actual net assets received 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 1995 and 1994 reflect
pro forma adjustments related to the acquisition of HII in July 1995.
Additionally, the results of operations for 1994 reflect pro forma adjustments
related to the acquisition and recapitalization of DHA in May 1994.
ACTUAL YEAR ENDED 1996 COMPARED TO PRO FORMA YEAR ENDED 1995
NET SALES
Net sales for the year ended December 31, 1996 decreased $29.9 million or
14.5%, to $176.7 million compared to pro forma net sales of $206.7 million for
the year ended December 31, 1995. The liquidity shortages faced by the Company
in 1996 significantly impacted the Company's ability to service its customer
base. Given the limited resources, the Company attempted to service its most
significant customers. Sales for the year ended December 31, 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.
During the fourth quarter of 1996, sales were negatively impacted in the
Company's window and bedding businesses as a result of a significant changeover
in the styling and merchandising of these product lines. The anticipated
introduction of the re-merchandised product lines resulted in weak fourth
quarter demand for the existing product lines. The new lines were not targeted
to impact sales until the first quarter of 1997. Sales in the Company's bath
business were negatively impacted by delivery shortages for towel blanks as a
result of an industry-wide capacity shortage. Sales in the Company's gift
division (primarily cotton throws) also fell below expectations as a result of
continued weakening in the jacquard woven throw business. Finally, 1996 sales
were negatively impacted from the decline in furniture cover sales, resulting
from the Company's decision to exit this business. The growth in DHA Home sales
partially offset the 1996 declines.
GROSS PROFIT
Gross profit decreased $19.0 million or 33.3% to $38.1 million in 1996
from pro forma gross profit of $57.1 million in 1995. Gross profit margin
decreased to 21.6% in 1996 from a pro forma gross profit margin of 27.6% in
1995. Through the use of fixed price contracts with multiple vendors, the
Company was able to satisfy all of its raw material needs and accordingly, raw
material costs in 1996 were not significantly changed from 1995 levels. Gross
profit margin in 1996 was negatively impacted by increases in inventory cost
adjustments totaling approximately $3 million to provide for slow moving and
obsolete inventory. The majority of these adjustments related to inventory
associated with specific marketing and merchandising programs that were changed
or discontinued following the change over in senior management during the later
part of 1996. Additionally, charges totaling $1.3 million were recorded in the
fourth quarter to write-off inventory and fixturing associated with these
programs. The gross profit margin for 1996 was also negatively impacted by a
revaluation of the inventory costing standards performed during the fourth
quarter of 1996. Standards are based on volume and efficiency levels and plant
infrastructures which had been significantly adjusted by the new management team
at the Company during 1996 as a result of the present demand for the Company's
products. The standard cost revaluation resulted in charges to the 1996
statement of operations totaling $2.5. Finally, gross margin was negatively
impacted by the Company's decision to expanded its
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giftware product offerings to include items sourced from other manufacturers.
The margins realized on these products are below those realized on items
manufactured by the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased $4.3
million, or 8.9% to $52.1 million for the year ended December 31, 1996, from
$47.8 million for the pro forma year ended December 31, 1995. SG&A expense, as a
percentage of sales, increased to 29.5% for 1996 from 23.1% for 1995. 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 expenses were ongoing cost
and headcount reduction programs related to DHA's acquisition of HII. Duplicate
functions were eliminated and cost reductions of approximately $1.2 million
achieved from consolidating certain marketing, sales, design and support
services. Negatively impacting the 1996 SG&A amounts were charges totaling
approximately $1 million related to the discontinuation of certain marketing and
merchandising programs following the change in senior management during the
later part of 1996. Also negatively impacting the 1996 expenses were an increase
in charges and the allowance for uncollectable accounts specifically related to
customer chargebacks for pricing discounts and allowances and returns of
approximately $5.0 million. Finally, 1996 SG&A expenses were negatively impacted
by approximately $1.0 million for costs associated with DHA Home. Advertising
and overhead expenses associated with DHA Home, as a percentage of sales,
exceeded the level of such costs for the Company's more mature businesses. This
investment in the growth of DHA Home is part of the Company's long term plan and
management of the Company expects that SG&A expenses as a percentage of sales
for DHA Home will continue to exceed those of its other mature businesses for
the next 12 - 24 months.
FOURTH QUARTER OPERATING RESULTS
During the fourth quarter, there were several significant events which
significantly impacted the results of operations and the ability of the Company
to service its working capital needs and debt obligations:
- On October 18, 1996, the Company's CEO and Executive Vice President of
Operations resigned their positions with the Company at the request of
the board of directors. In order to settle certain disputes between the
Company and the former CEO and Executive Vice President of Operations,
these officers paid the Company $448,500, and transferred $6.9 million
principal amount of the Company's Senior Notes, 6,900 shares of Class F
Common Stock, and 965,100 shares of Class A Common Stock to the
Company. See Item 13 "Certain Relationships and Related Transactions."
- Following the departure of the former CEO and Executive Vice President
of Operations, a critical analysis of many of the Company's marketing,
merchandising and inventory realization plans was performed by the
newly installed management team. This analysis led to significant
write-offs of inventory, fixturing and printed advertising materials.
- During October, 1996 the Company introduced substantially upgraded
product lines for all of its business units. These introductions were
necessary in order for the Company to remain competitive in its
markets. The transition period between the existing product lines and
sales of the new product lines contributed to a significant variance in
sales below previous projections for the fourth quarter of 1996.
- Because of poor fourth quarter operating results, the majority of the
Company's significant vendors tightened credit limits and placed the
Company on cash on delivery or cash before delivery terms. The lack of
trade credit significantly impacted the Company's ability to service
its working capital needs specifically related to the purchase of raw
materials. The liquidity shortage also negatively impacted the
Company's ability to service customer orders during the first half of
1997.
- The continued softening of the cotton woven throw market in giftware
had a larger than expected negative impact on 1996 sales performance.
Historically, the third and fourth quarters are critical sales periods
for this product line. The Company continued to experience a
substantially lower demand for its cotton woven throws in the first
half of 1997.
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ACCOUNTING CHANGE - GOODWILL WRITE-OFF
Prior to the fourth quarter of 1996, the Company evaluated the
recoverability of goodwill by determining whether the amortization of the
goodwill balance over its remaining amortization period could be recovered
through undiscounted future operating cash flows of the acquired operations. In
the fourth quarter of 1996, the Company changed its method for evaluating the
recoverabilty of goodwill to a method whereby the carrying amount is compared to
its estimated fair value, and any excess carrying amount is determined to be
impaired. The fair value of goodwill is estimated by subtracting the estimated
fair value of the Company's identifiable net assets from the fair value of the
Company in its entirety, which is estimated using a discounted cash flow
approach. The Company believes fair value is a preferable method to assess
goodwill for recoverability as it believes that the value at which the Company
could be bought and sold in an arms length transaction between a willing buyer
and seller is the most objective evidence and, therefore, the most relevant
measure of its value. Based on an evaluation of the recoverability of goodwill
at December 31, 1996, the Company concluded that its unamortized balance of
goodwill, $79.7 million, was impaired and has recorded a pre-tax charge for such
amount in the accompanying 1996 consolidated statement of operations.
PRO FORMA YEAR ENDED 1995 COMPARED TO PRO FORMA YEAR ENDED 1994
NET SALES (PRO FORMA)
Pro forma net sales for 1995 decreased $16.9 million or 7.6%, from $223.6
million for 1994 to $206.7 million in 1995. Sales in several of the Company's
major product categories declined principally as a result of soft retail
conditions in the major markets served by the Company, most noticeably during
the second half of the year. All distribution channels served were affected by
the difficult retail environment including the giftware trade. These declines
were partially offset by sales growth in the DHA Home business introduced in
September 1995.
GROSS PROFIT (PRO FORMA)
Pro forma gross profit decreased $12.8 million or 18.3% from $69.9 million
in 1994 to $57.1 million in 1995. Pro forma gross profit margin decreased from
31.3% in 1994 to 27.6% in 1995. During the first half of 1995, the spot price of
cotton, the Company's principal raw material, increased significantly over the
same period in 1994. The Company was able to substantially mitigate the impact
of these price increases on its operating performance through the use of fixed
price contracts with multiple vendors to satisfy its raw material needs.
Accordingly, raw material costs in 1995 were not significantly changed from 1994
levels. Gross profit margin in 1995 was positively impacted by a strategic
change in the Company's sales mix but was offset by changes in marketing and
manufacturing strategy made by management intended to improve future
performance. Gross profit margin in 1995 was negatively impacted by increases in
inventory cost adjustments totaling approximately $2.5 million to provide for
slow moving and obsolete inventory at HII in its closing acquisition date
balance sheet. (A portion of the charges for these cost adjustments were
included in the $3.4 million earnings charge recorded in connection with the
$6.7 million purchase price adjustment previously discussed.) Additionally,
losses totaling approximately $2 million were recorded on sales of slow moving,
closeout and obsolete inventories disposed of during 1995. The earnings charges
related to inventory resulted from an inventory reduction plan implemented in
the third quarter of 1995. Reduced efficiencies in the cut-and-sew and printing
plants also reduced gross profit margins in 1995. In implementing management's
goal of improving operations, inventory controls were tightened and several of
the operating schedules of the Company's plants were reduced during the third
and fourth quarters of 1995. This resulted in substantial unabsorbed fixed
overhead and lower overall margins.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES (PROFORMA)
Pro forma SG&A expenses decreased from $49.1 million in 1994 to $47.8
million in 1995 primarily due to a reduction in the Company's variable selling
and distribution costs, principally commissions, resulting from the decline in
sales in 1995. Offsetting these reductions were increased SG&A expenses in 1995
of approximately $1.5 million related to the introduction of the Calvin Klein
Home line and the associated promotional expenses. The initial shipments for the
Calvin Klein Home line commenced in September 1995. 1995 SG&A expenses also
increased due to the addition in the allowance for uncollectible accounts
specifically related to customer chargebacks
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and returns of approximately $1 million. This charge was included in the $3.4
million earnings charge recorded in connection with the purchase price
adjustment discussed above. Increased employee benefit costs of approximately
$0.5 million also increased SG&A expenses. These costs resulted from HII's
former self-insured medical plans. Finally, SG&A expenses increased in the areas
of international sales and mass merchandiser marketing as well as the expansion
of the design function to facilitate the Company's expansion into mass
merchandiser and custom products markets for its jacquard woven throws. These
expenditures were made to invest in the Company's capability to better service
these markets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity for operations and expansions
are funds generated internally and borrowings under its revolving credit
facility ("Revolving Credit Facility") with Congress Financial Corporation
("Congress"). The Revolving Credit Facility provides for a revolving loan
facility and letters of credit based on specified levels of underlying
collateral with a maximum principal amount equal to the lesser of (a) $50
million or (b) a specified borrowing base, which is based on eligible
receivables and inventory of the Company and its operating subsidiaries
("Borrowing Subsidiaries"). The Revolving Credit Facility (or a similar credit
facility) is essential for the Company's working capital needs.
On December 31, 1996, the Company had $3.8 million available for borrowing
under the Revolving Credit Facility borrowing base formula based on underlying
collateral (net of $30.8 million of outstanding borrowings and $418,000 in
outstanding letters of credit). Borrowings under the Revolving Credit Facility
are made on a daily basis for requirements for that business day and repayments
are made on a daily basis by cash collections from trade accounts receivables.
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
prohibited in accordance with the Revolving Credit Facility. Further, there are
limitations on the Company's ability to incur additional indebtedness and make
loans, advances and investments. On May 23, 1997, the Revolving Credit Facility
was amended for, among other things, changes in certain covenants including the
tangible net worth calculation. There were no Events of Default (as defined)
under the Revolving Credit Facility, as amended, at December 31, 1996.
On March 1, 1997, the Revolving Credit Facility was amended to provide for
a line of credit ("Supplemental Facility") pursuant to which Congress agreed to
make supplemental loans ("Supplemental Loans") up to an aggregate principal
amount of $5.0 million. The Supplemental Loans were guaranteed by Fund V. The
guarantee was limited to the cash collateral amount of $2.5 million. The
Supplemental Loans under the Supplemental Facility were repaid in full on May
27, 1997, the guarantee was terminated and cash collateral returned.
In connection with the capital restructuring plan, Magten arranged for a
$20 million secured term loan facility. See "Business-Capital Restructuring
Plan." In late May, the Company borrowed $15 million under the Term Loan
Facility and the remaining $5 million was borrowed in July. Proceeds from the
Term Loan Facility were used to repay the Supplemental Loans, to reduce trade
payables and to purchase inventory.
The Company continues to receive little or no trade credit, which
adversely impacts its liquidity position. As of the date of this filling,
sources of liquidity are approximately $2.5 million of availability under its
Revolving Credit Facility and approximately $678,000 of cash.
Cash flows used in operating activities were approximately $18.6 million
in 1996 compared to cash used in operating activities of $6.7 million in 1995
and $12.3 million provided by operating activities in 1994. The principal reason
for the change in cash flow from operating activities between 1996 and 1995 was
an increase in the net loss and a $7.6 million decrease in accrued interest in
1996. The decrease in accrued interest resulted from the timing of the interest
payment on the Company's Senior Notes offset by an $11.1 million decline in
inventories.
The Company sells its products almost entirely on credit. The Company
performs ongoing credit evaluations of its customers' financial condition but
does not require collateral to support customer receivables. The Company
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maintains an allowance for doubtful accounts, determined based on management's
estimates of collectibility of past due accounts and prior experience, that is
deemed sufficient to provide for estimated credit losses.
Management believes the DHA Home division has increased the Company's
working capital needs in 1996 by approximately $8 to $12 million from 1995
levels. Management believes that the 1996 working capital requirements related
to DHA Home peaked in April 1996. Management expects that the working capital
requirements for supporting the DHA Home lines should be approximately $5 to $7
million for the next 12 to 15 months.
Cash flows used in investing activities were approximately $2.8 million in
1996 compared to cash used in investing activities of $100.3 million in 1995.
Approximately $95.1 million was used to purchase HII in July 1995. Capital
expenditures were approximately $4.0 million in 1996, $4.1 million in 1995 and
$7.2 million on a pro forma combined basis in 1994. The Company currently has no
material commitments for capital expenditures. However, the Company plans to
invest $3.4 million during 1997 and the first quarter of 1998 in new equipment
if sufficient funds are available.
Cash flows provided by financing activities were approximately $23.2
million in 1996 compared to $98.8 million in 1995 and cash used in financing
activities of $4.1 million on a pro forma combined basis in 1994. In July 1995,
the Company consummated its sale of 13% Senior Notes due 2002 and Class F common
stock with gross proceeds of $125 million (approximately $117.5 million net of
issuance costs) and its sale of redeemable Preferred Stock, Class D common stock
and warrants with gross proceeds of $50 million (approximately $46.5 million net
of issuance costs). The proceeds of these offerings were used to purchase HII,
as previously described and to repay certain indebtedness with principal
outstanding of $46.3 million. Borrowings under the Company's line of credit
increased by approximately $25.9 million during the year ended December 31,
1996, the majority of which was used to fund the operating activities, primarily
due to the net loss in 1996. Additionally, the Company paid dividends totaling
$1.75 million on its redeemable preferred stock in January 1996.
The Senior Notes outstanding as of December 31, 1996 of $124.1 million
have been reclassified as a current liability due to the agreement reached in
principle with certain of the Company's bond holders and equity holders
(described below) and as a result of the Company's decision to not make the
interest payment on the Senior Notes due on June 30, 1997.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of the assets and the settlement of liabilities and commitments
in the normal course of business. Due to a net shareholders deficiency at
December 31, 1996 and the Company's limited liquidity, the Company engaged
Houlihan, Lokey, Howard and Zukin as financial advisors for a potential
financial restructuring of the Company's obligations. On May 15, 1997, the
Company reached an agreement in principle with certain of the Company's bond
holders and equity holders providing for a comprehensive capital restructuring
plan that, among other things, (i) converts the outstanding principal amount and
accrued interest on its 13% Senior Notes and all of the Redeemable Preferred
Stock into common equity, (ii) provided $20 million in the form of a secured
term loan for working capital purposes and (iii) makes provision for a
subsequent rights offering to raise permanent equity capital of up to $20
million. See "Business- Capital Restructuring Plan."
INFLATION AND TAX MATTERS
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 in 1996, 1995 or 1994.
The Company has approximately $48.0 million of net operating loss
carryforwards available for Federal income tax purposes, which begin to expire
in 2007, Federal general business and alternative minimum tax credits which
begin to expire in 2009, state net operating losses totaling $60.9 million which
begin to expire in 1997 and state tax credits which begin to expire in 2002. The
deferred tax assets resulting from the aforementioned carryforwards contribute
to a net deferred tax asset of $30.8 million as of December 31, 1996. However,
management cannot be assured that this net deferred income tax asset will be
realized and accordingly, a 100% valuation allowance has been established for
such net deferred income tax asset.
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EFFECT OF COMPLIANCE WITH ENVIRONMENTAL 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, future
operating results or competitive position of the Company.
OTHER MATTERS
In connection with the Company's capital restructuring plan, on June 30,
1997 the Company did not make the interest payment on the Senior Notes due on
such date. The Company expects to file a pre-negotiated Chapter 11 bankruptcy
case to effect the restructuring. See "Business - Capital Restructuring Plan."
In connection with the restructuring and the poor financial performance in
1996 by the Company, Calvin Klein, Inc. informed the Company that it had
terminated the license agreement between Calvin Klein, Inc. and Calvin Klein
Home, Inc. On April 27, 1997, a new interim license agreement on similar terms
and conditions was entered into to replace the terminated agreement. In
connection with the interim license agreement, the name of Calvin Klein Home,
Inc. was changed to DHA Home, Inc. The interim license agreement will expire on
April 30, 1998, or upon the completion of the restructuring plan. Upon the
consummation of the above described restructuring, Calvin Klein, Inc. has
committed to enter into a new multi-year license agreement on similar terms and
conditions that will extend through the year 2004. If the above described
restructuring is not completed, Calvin Klein, Inc. may not enter into a new
multi-year license agreement with the Company. Failure to renew the license
agreement on a long-term basis would result in a charge to earnings for the
unamortized balance of the license agreement and may otherwise have a material
adverse effect on the Company's future results of operations.
On October 18, 1996, at the request of the Board of Directors, two of the
Company's officers and members of the Board of Directors, Mr. Henry E.
Scharling, II and Mrs. Barbara Scharling resigned as members of the Board of
Directors as well as their positions as Chief Executive Officer and Executive
Vice President - Operations, respectively. Subsequent to their resignation,
certain allegations concerning wrongful acts of Henry and/or Barbara Scharling
were made by the Company and certain stockholders. The allegations included, but
are not limited to, improper self dealing transactions, negligence in managing
and overseeing the business and affairs of the Company, and failure to disclose
material information regarding the financial condition and business plan of the
Company. In consideration of the release and discharge of Mr. and Mrs. Scharling
by the Company and certain stockholders from all claims, damages, and causes of
action, Mr. and Mrs. Scharling paid the Company $448,500 and assigned to the
Company 965,101 shares of the Company's Class A Common Stock, 6,900 shares of
the Company's Class F Common Stock, and $6.9 million of the Company's Senior
Notes.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and report of independent
auditors are included at pages F-1 through F-24.
Independent Auditors' Report
Decorative Home Accents, Inc. Consolidated Balance Sheets
Decorative Home Accents, Inc. Consolidated/Combined Statements of
Operations
Decorative Home Accents, Inc. Consolidated/Combined Statements of
Stockholders' (Deficiency) Equity
Decorative Home Accents, Inc. Consolidated/Combined Statements of
Cash Flows
Notes to Consolidated/Combined Financial Statements.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of DHA.
NAME AGE POSITION
- ------------------ ------- -------------------------------------
Peter H. Howard(1) 38 Chairman and Director
Murphy L. Fontenot 53 President, Chief Executive Officer
Fontenot and Director
Jay N. Baker 36 Executive Vice President, Chief
Financial Officer
David M. Tracy 72 Vice Chairman and Director
Stephen A. Kaplan(1) 38 Director
Vincent J. Cebula 33 Director
Richard J. Goldstein 31 Director
- ------------
(1) Member of the Compensation Committee.
Peter Howard has been Chairman and a Director of the Company since April
1994, has been Chairman of The Rug Barn since May 1994 and is the founder of
Howard Industries, Inc., a private investment firm. Prior to founding Howard
Industries in 1993, Mr. Howard was a Managing Partner at Dubin Clark and
Company, a private investment firm. From 1984 to 1988, Mr. Howard was a Manager
at Arthur Young and Company where he performed strategic and due diligence
consulting. Mr. Howard serves on the Boards of Directors of Jakel, Incorporated,
Comair Rotron, Inc. and Howard Industries, Inc. Mr. Howard also serves as a
Director of DHA Home, Inc. and as the sole Director on all of the Boards of
Directors of all of the other direct and indirect subsidiaries of the Company.
Murphy Fontenot has been a Director of the Company since February 1996 and
Chief Executive Officer since October 21, 1996. Mr. Fontenot previously served
as President, Chief Operating Officer and a Director of the Company, as well as
President and Chief Executive Officer of HII, since February 1996. Prior to
joining the Company, Mr. Fontenot was President and Chief Executive Officer of
Perfect Fit Industries, a home textiles manufacturer, from May 1989 to February
1996. Prior to May 1989, Mr. Fontenot was Executive Vice President of Springs
Industries where he was employed for 21 years in various management positions.
Jay Baker has been Executive Vice President and Chief Financial Officer of
the Company since July 1995 and has been the Chief Financial Officer of The Rug
Barn since July 1993. Mr. Baker is responsible for the Company's finance and
accounting operations. Prior to joining The Rug Barn, Mr. Baker was employed at
Esmark Marine Sports, Inc. as its chief financial officer for approximately one
year beginning in 1992 and, prior to that, was a senior manager at Arthur
Andersen & Company where he was employed for almost 10 years. Mr. Baker is a
Certified Public Accountant.
David Tracy has been a Director and Vice Chairman of the Company since
September 1995, has been affiliated with HII since 1990, acting as its interim
President from September 1995 through January 1996, and has been Chairman of
HII's wholly owned subsidiary, Calvin Klein Home, Inc., since May 1994. Mr.
Tracy has over 47 years of home furnishings industry experience. Prior to
joining HII, Mr. Tracy was associated with J. P. Stevens & Co. as Vice Chairman
of the Board and Senior Marketing Executive where he was responsible for the
introduction and building of the Ralph Lauren Home Collection. Mr. Tracy also
held various positions with Fieldcrest Mills where he was President from 1971 to
1981. Mr. Tracy has served as the Chairman of the Executive Committee of the
Board of Directors of HII and Vice Chairman of the Board of Directors of HII.
Mr. Tracy is a member of the Board of Directors of Royal International Optical
Company. Mr. Tracy also serves as a Director of DHA, Inc.
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Stephen Kaplan has been a Director of the Company since December 1995 and
is a Principal of Oaktree Capital Management, LLC where he has worked since
1995. Pursuant to a subadvisory agreement with TCW Asset Management Company, the
general partner of TCW Special Credits Fund V The Principal Fund (the "Principal
Fund"), Oaktree Capital Management, LLC provides investment management services
to the Principal Fund, which is a holder of the Preferred Stock and Class D
Common Stock. See Item 12, "Security Ownership of Certain Beneficial Owners and
Management." Mr. Kaplan was a Managing Director of Trust Company of the West and
TCW Asset Management Company from 1993 to 1995. Prior thereto, Mr. Kaplan was
employed by the law firm of Gibson, Dunn & Crutcher, where he was elected
partner in 1990. Mr. Kaplan currently serves as a member of the Board of
Directors of Acorn Products, Inc., Chief Auto Parts, Inc., KinderCare Learning
Centers, Inc. and Roller Bearing Holding Company, Inc.
Vincent Cebula has been a Director of the Company since December 1995 and
is a Managing Director of Oaktree Capital Management, LLC where he has worked
since 1995. Pursuant to a subadvisory agreement with TCW Asset Management
Company, the general partner of the Principal Fund, Oaktree Capital Management,
LLC provides investment management services to the Principal Fund. Mr. Cebula
was a Senior Vice President of Trust Company of the West and TCW Asset
Management Company from 1994 to 1995. Prior thereto, Mr. Cebula was executive
assistant to the Vice Chairman of Brooke Group Ltd. from 1990 through 1993,
where he was responsible for the coordination of financing and investment
banking activities.
Richard Goldstein has been a Director of the Company since December 1995
and is a Senior Vice President of Oaktree Capital Management, LLC where he has
worked since 1995. Pursuant to a subadvisory agreement with TCW Asset Management
Company, the general partner of the Principal Fund, Oaktree Capital Management,
LLC provides investment management services to the Principal Fund. Mr. Goldstein
was an Assistant Vice President of Trust Company of the West and TCW Asset
Management Company from 1994 to 1995. Prior thereto, Mr. Goldstein was an
Associate in the Corporate Finance Department of Jefferies & Company, Inc. from
1992 to 1994. Prior to being employed by Jefferies & Company, Inc., Mr.
Goldstein was a Senior Consultant with Deloitte & Touche Management Consulting
from 1991 to 1992.
On October 18, 1996, two of the Company's Directors, Mr. Henry E.
Scharling, II and Mrs. Barbara Scharling resigned at the Board of Director's
request as members of the Board of Directors as well as their positions as Chief
Executive Officer and Executive Vice President - Operations, respectively.
Subsequent to their resignation, certain allegations concerning wrongful acts of
Henry and/or Barbara Scharling were made by the Company and certain
stockholders. The allegations included, but are not limited to, improper self
dealing transactions, negligence in managing and overseeing the business and
affairs of the Company, and failure to disclose material information regarding
the financial condition and business plan of the Company. In consideration for
the release by the Company and certain stockholders of Mr. and Mrs. Scharling
from all claims, damages and causes of action, Mr. and Mrs. Scharling paid the
Company $448,500 and assigned to the Company 965,101 shares of the Company's
Class A Common Stock, 6,900 shares of the Company's Class F Common Stock, and
$6.9 million of the Company's Senior Notes.
All directors of the Company hold office until the election and
qualification of their successors. Executive officers of the Company are chosen
by the Board of Directors and serve at its discretion.
The Company and certain of its stockholders have entered into an Amended
and Restated Stockholders' Agreement, pursuant to which each party thereto has
agreed to vote all shares of Common Stock held by it (i) so long as CIGNA
Mezzanine Partners III, L.P. holds any Class B Non-Voting Common Stock (or
shares of Class A Common Stock issued upon conversion of shares of Class B
Non-Voting Common Stock), to nominate and elect as a Common Stock Director one
person designated by CIGNA Mezzanine Partners III, L.P., (ii) so long as he is
employed by the Company, to nominate and elect as a Common Stock Director David
Tracy, (iii) to nominate and elect as the Class D Directors those persons
designated by the Principal Fund V and (iv) so long as the Class C Director has
eight votes, to nominate and elect Peter Howard as the Class C Director.
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ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the annual
compensation for 1996, 1995 and 1994 of the Company's Chief Executive Officer
and each of the other most highly compensated executive officers of the Company
whose total compensation exceeded $100,000 for the fiscal year ended December
31, 1996 (collectively, the "Named Officers").
grants
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
- ------------------------------------ ------ ---------------- ----------------------------
NAME AND YEAR SALARY BONUS SECURITIES ALL OTHER
PRINCIPAL POSITION ($) ($) UNDERLYING (COMPENSATION
OPTIONS/SAR(#) ($)(4)
- ------------------------------------ ------ --------- ------ ----------- -------------
Henry E. Scharling II, Chief 1996 $203,125 $ -- -- $7,675
Executive Officer(1)(2).......... 1995 250,000 -- -- 7,675
1994 166,667 86,880 -- 7,675
Barbara Scharling, Executive Vice 1996 203,125 -- -- $1,922
President-Operations(1)(2)....... 1995 250,000 -- -- 1,922
1994 166,667 86,880 -- 1,422
Murphy L. Fontenot, Chief 1996 272,845 -- 180,000(5) $35,000
Executive Officer................
Jay N. Baker, Chief Financial 1996 208,838 -- 45,000(5) $1,660
Officer(1)....................... 1995 165,000 15,000 355,093(5) 1,577
1994 93,333 43,440 -- 1,577
David M. Tracy, Vice-Chairman(3)... 1996 232,163 130,000 -- --
1995 112,500 380,390 45,000(5) --
- ------------------
(1) Salary figures for 1994 are based on compensation for the period of May 4,
1994 to December 31, 1994. Prior to May 4, 1994, none of the Named Officers
received any compensation from the Company, as Henry E. Scharling II,
Barbara Scharling and Jay N. Baker were executives of ITF, which had not yet
been acquired by the Company.
(2) Henry E. Scharling, II and Barbara Scharling resigned their positions on
October 18, 1996. See "Certain Relationships and Related Transactions."
Their salary figures for 1996 are based on compensation from January 1, 1996
through October 18, 1996.
(3) Salary figures for 1995 are based on compensation for the period from July
13, 1995 to December 31, 1995. Prior to July 13, 1995, Mr. Tracy did not
receive any compensation from the Company, as he was an executive of HII
which had not yet been acquired by the Company.
(4) "All Other Compensation" includes payments of $7,675 for each of 1996, 1995
and 1994 on behalf of Mr. Scharling for supplemental life and accident
insurance, payments of $1,922 in 1996 and 1995, and $1,422 in 1994 on behalf
of Mrs. Scharling for supplemental life and accident insurance and $1,660 in
1996, and $1,577 for each of 1995 and 1994 on behalf of Mr. Baker for
long-term disability insurance.
(5) Mr. Fontenot was granted options to purchase 180,000 shares of Common Stock
in 1996. Mr. Baker was granted options to purchase 45,000 and 355,093 shares
of Common Stock in 1996 and 1995, respectively. Mr. Tracy was granted
options to purchase 45,000 shares of Common Stock and was also granted
certain stock appreciation rights. See "Executive Compensation - Options and
Stock Appreciation Rights."
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OPTIONS AND STOCK APPRECIATION RIGHTS
The following tables summarize grants of stock options and stock
appreciation rights ("SARs") in 1996 to the Named Officers and unexercised
options and SARs at December 31, 1996. No Named Officer exercised any options or
SARs during 1996.
OPTION/SAR GRANTS IN 1996
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL OPTION/SAR
GRANTS TERMS (1)
- --------------------------------------------------------------------- -----------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED
OPTIONS TO EXERCISE
GRANTED EMPLOYEES PRICE EXPIRATION
NAME (#) IN 1996 ($/SH) DATE 5% ($) 10% ($)
- ---------------------- ------------------------- --------- ---------- -----------------
Jay N. Baker 45,000 (2) 14.20% $7.68 11/1/01 -- --
Murphy L. Fontenot 180,000 (3) 56.76% $7.68 12/1/01 -- --
AGGREGATE OPTION EXERCISES IN 1996
AND YEAR-END 1996 OPTION VALUES
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED DECEMBER 31, 1996 DECEMBER 31, 1996
ON VALUE (#) ($)(4)
EXERCISE REALIZE ------------------------------------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------------- --------- -------- ----------- ------------- ------------ -------------
Jay N. Baker -- -- 241,821 158,272 -- --
David M. Tracy (5) -- -- 15,000 30,000 -- --
Murphy L. Fontenot -- -- -- 180,000 -- --
- ------------------
(1) Potential realizable value is presented net of the option exercise price but
before any federal or state income taxes associated with exercise. These
amounts represent certain assumed rates of appreciation only. Actual gains,
if any, on stock option exercise are dependent on the future performance of
the Common Stock, as well as the option holder's continued employment
throughout the vesting period. The amounts reflected in the table may not
necessarily be achieved.
(2) These options vest in three equal annual installments on each of January 1,
1997, January 1, 1998, and January 1, 1999.
(3) These options vest in three equal annual installments on each of February 1,
1997, February 1, 1998, and February 1, 1999.
(4) The value of the in-the-money options was based on the estimated market
value of the shares after considering various factors.
(5) Mr. Tracy's employment agreement also provides that he shall be given
certain stock appreciation rights, one-third of which vest on each of
September 19, 1996, 1997 and 1998. Except in the case of the sale of all or
substantially all of the assets or common stock of Calvin Klein Home, Inc.
("CKH") to an unrelated party, Mr. Tracy is entitled to a cash bonus based
upon CKH's earnings before interest income and expense, taxes, depreciation
and amortization for the twelve months prior to exercise of the SARs. In the
case of the sale of all or substantially all of CKH's assets or common
stock, Mr. Tracy is entitled to a cash bonus based upon the net cash
proceeds of such sale to CKH's common stockholders.
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EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Mr. Fontenot which provides
for his employment with the Company as Chief Executive Officer of the Company at
a Base Compensation of $300,000 per year until February 28, 2000, subject to
annual review by the Board of Directors, which shall be automatically extended
for additional one year periods, unless the Company or Mr. Fontenot provides a
written notice at least 90 days prior to the expiration of the contract that
such party does not desire to extend the employment agreement. Mr. Fontenot is
entitled to participate in the Company's Executive Bonus Plan. With respect to
the 1997 bonus plan, Mr. Fontenot will receive (i) $150,000 on March 31, 1998
and (ii) an amount equal to the amount determined pursuant to the 1997 Executive
Bonus Plan. Mr. Fontenot is also entitled to other employee benefits
substantially comparable to those regularly provided for other key management
employees. If the Company were to terminate Mr. Fontenot's employment without
good cause (as defined in the employment agreement) prior to February 28, 2000,
Mr. Fontenot is entitled to receive as severance pay (i) his base salary for a
period equal to the remainder of said employment period, payable in regular
installments in accordance with the Company's general payroll practices for
salaried employees and (ii) any rights he may have under the Executive Bonus
Plan. If Mr. Fontenot's employment is terminated within 90 days following a
change of control of the Company, by (i) the Company without good cause, (ii) a
successor to the Company without good cause or (iii) Mr. Fontenot, then the
Company shall pay Mr. Fontenot an amount equal to $1,800,000 in a single sum in
cash within 30 days after such termination of employment. Pursuant to the
Agreement, the Company has also agreed to reimburse Mr. Fontenot in an amount up
to $70,000 per year for a life insurance policy currently in force and owned by
Mr. Fontenot and in an amount up to $10,000 per year for a disability policy
currently in force and owned by Mr. Fontenot.
The Company has an employment agreement with Mr. Baker which provides for
his employment with the Company as Executive Vice President and Chief Financial
Officer until February 28, 2000, at an annual base salary of $225,000, subject
to annual review by the Board of Directors, which shall be automatically
extended for additional one year periods, unless the Company or Mr. Baker
provides a written notice at least 90 days prior to the expiration of the
contract that such party does not desire to extend the employment agreement. Mr.
Baker is entitled to participate in the Company's Executive Bonus Plan. With
respect to the 1997 bonus plan, Mr. Baker will receive (i) $112,500 on March 31,
1998 and (ii) an amount equal to the amount determined pursuant to the 1997
Executive Bonus Plan. Mr. Baker is also entitled to other employee benefits
substantially comparable to those regularly provided for other key management
employees. If the Company terminates Mr. Baker's employment without good cause
(as defined in the employment agreement) prior to February 28, 2000, Mr. Baker
is entitled to receive as severance pay (i) his base salary for a period equal
to the remainder of said employment period, payable in regular installments in
accordance with the Company's general payroll practices for salaried employees
and (ii) any rights he may have under the Executive Bonus Plan. If Mr. Baker's
employment is terminated within 90 days following a change of control of the
Company, by (i) the Company without good cause, (ii) a successor to the Company
without good cause or (iii) Mr. Baker, then the Company shall pay Mr. Baker an
amount equal to $675,000 in a single sum in cash within 30 days after such
termination of employment. Pursuant to the Agreement, the Company has also
agreed to reimburse Mr. Baker an amount up to $10,000 per year for a disability
policy currently in force and owned by Mr. Baker.
The Company has an employment agreement with Mr. Tracy which provides for
his employment with the Company as Vice Chairman and Chairman of DHA Home until
October 1998, and may be extended for additional one-year periods, at an annual
base salary of $225,000 for the first 12-month period, $250,000 for the next
12-month period and $275,000 per annum thereafter, other employee benefits
substantially comparable to those regularly provided for other key management
employees, the right to participate in any pension, salary or profit sharing
plan of the Company, the right to participate in the Bonus Plan and the right to
participate in a Stock Appreciation Rights Plan (the "SAR Plan") for DHA Home.
In addition, pursuant to such employment agreement, the Company paid Mr. Tracy a
signing bonus of $175,000 and paid him a bonus for staying with the Company
through December 31, 1995 of $175,390. Such employment agreement provides that
so long as Mr. Tracy remains an executive of the Company, the Company agrees to
cause Mr. Tracy to be elected to its Board of Directors and to the Board of
Directors of DHA Home. See "Certain Relationships and Related Transactions." If
the Company were to terminate Mr. Tracy's employment without good cause (as
defined in the employment agreement) prior to the expiration of the employment
period thereunder, Mr. Tracy is entitled to receive as severance pay (i) his
base salary for a period equal to the remainder of said employment period,
payable in regular installments in accordance with the Company's general
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payroll practices for salaried employees and (ii) any rights he may have under
the Bonus Plan, his Management Options or the SAR Plan. Upon Mr. Tracy's death
or disability, Mr. Tracy (or his estate) is entitled to receive as severance pay
(i) his base salary for a period equal to six months, payable in regular
installments in accordance with the Company's general payroll practices for
salaried employees and (ii) any rights he may have under the Bonus Plan, his
Management Options or the SAR Plan. In addition, the Company has agreed to
continue to provide medical and dental insurance to certain of Mr. Tracy's
dependents if he should die while employed by the Company. The employment
agreement also contains a broker fee agreement in the event Mr. Tracy originates
acquisitions or certain licenses on behalf of the Company. See "Certain
Relationships and Related Transactions."
In addition, pursuant to their employment agreements, Mr. Fontenot, Mr.
Baker, and Mr. Tracy were granted options to purchase shares of the Company's
Class E Common Stock ("Management Options"). These Management Options are
subject to one or more of the following: (i) transfer restrictions, (ii) terms
that provide for the vesting of the right to exercise the options over time,
(iii) terms that provide for the vesting of the right to exercise the options
only upon the attainment of certain performance criteria, or (iv) an exercise
price that assumes a certain valuation for the Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company, currently composed of Peter H.
Howard and Stephen A. Kaplan, determines the compensation of all executive
officers of the Company including, Murphy L. Fontenot, the President and Chief
Executive Officer of the Company, Jay Baker, Executive Vice President and Chief
Financial Officer of the Company, and David M. Tracy, Vice Chairman of the
Company. From July 13, 1995 to October 18, 1996, the Compensation Committee
determined the compensation of Henry E. Scharling, Chief Executive Officer of
the Company, and Barbara Scharling, Executive Vice President of Operations.
Prior to July 13, 1995, the Board of Directors of the Company, then composed of
Peter H. Howard, Henry E. Scharling II and Barbara Scharling, determined the
compensation of all the executive officers of the Company including Henry E.
Scharling II and Barbara Scharling.
COMPENSATION OF DIRECTORS
The Company does not pay any fees or remuneration to its directors for
service on the Board or any Board committee, but the Company does reimburse
directors for their ordinary out-of-pocket expenses incurred in connection with
attending meetings of the Board.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table furnishes certain information regarding the beneficial
ownership of the Common Stock of the Company as of March 31, 1997 by (a) each
person that is the beneficial owner of more than five percent of the outstanding
number of shares of any class of voting securities of the Company, (b) the
directors of the Company, (c) each of the Named Officers, and (d) all directors
and executive officers of the Company as a group. To the knowledge of the
Company, except as otherwise indicated, each named person has voting and
investment power over the listed shares, and such voting and investment power is
exercised solely by the named person or shared with a spouse. (See Note 14 to
the accompanying consolidated/combined financial statements - Subsequent
Events).
PERCENTAGE
OF
SHARES TOTAL
NAME AND ADDRESS OF TITLE OF BENEFICIAL PERCENTAGE VOTING
BENEFICIAL OWNER CLASS OWNED OF CLASS POWER (10)
------------------- ------- ----------- ---------- ----------
Southern Farm Bureau Annuity Class A 109,737 48.16% 3.45%
Insurance Company Common Stock
P.O. Box 78 (1)(7)
Jackson, Mississippi 39205
CIGNA Mezzanine Partners III, Class B 765,223 43.57% 24.08%
L.P. (2) Non-Voting
c/o CIGNA Investments, Inc. Common Stock
Hartford, Connecticut 06152 (3)(7)
Connecticut General Life Class B 387,346 22.06% 12.19%
Insurance Non-Voting
Company (2) Common Stock
c/o CIGNA Investments, Inc. (3)(7)
Hartford, Connecticut 06152
Connecticut General Life Class B 210,657 12.00% 6.63%
Insurance Company, Non-Voting
on behalf of one or more Common Stock
separate (3)(7)
accounts (2)
c/o CIGNA Investments, Inc.
Hartford, Connecticut 06152
Life Insurance Company of North Class B 118,556 6.75% 3.73%
America (2) Non-Voting
c/o CIGNA Investments, Inc. Common Stock
Hartford, Connecticut 06152 (3)(7)
Providian Life and Health Class B 137,172 7.81% 4.32%
Insurance Company (4) Non-Voting
c/o Capital Holding Common Stock
Corporation (3)(7)
400 West Market Street
P.O. Box 32830
Louisville, Kentucky 40202
People's Security Life Class B 137,172 7.81% 4.32%
Insurance Company (4) Non-Voting
c/o Capital Holding Common Stock
Corporation (3)(7)
400 West Market Street
P.O. Box 32830
Louisville, Kentucky 40202
Peter H. Howard Class C Common 386,040 100.00% 12.15%
136 Main Street Stock (5)(9)
Westport, Connecticut 06880
TCW Special Credits Fund V--
The Class D Common 797,016 98.60% 25.08%
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NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS SHARES PERCENTAGE PERCENTAGE
BENEFICIAL OF CLASS OF
OWNED TOTAL
VOTING
POWER (10)
- ---------------------------- -------------- ------- ------ ------------
Principal Fund Stock
c/o Oaktree Capital (1)(6)(7)(8)
Management, LLC
550 South Hope Street, 22nd
Floor
Los Angeles, California 90071
Jay N. Baker Class E Common 285,139 79.17% 8.23%
Industrial Park Drive Stock (7)(9)(11)
Abbeville, South Carolina
29620
Murphy L. Fontenot Class E Common 60,000 16.66% 1.85%
Industrial Park Drive Stock (7)(9)(12)
Abbeville, South Carolina
29620
David M. Tracy Class E Common 15,000 4.17% 0.47%
Stock (7)(9)(13)
Stephen A. Kaplan(14) -- -- -- --
Vincent J. Cebula(14) -- -- -- --
Richard J. Goldstein(14) -- -- -- --
Directors and executive Class C Common 386,040 100.00% 12.15%
officers as a group (9 persons) Stock (5)(9)
Class E Common 360,139 100.00% 10.18%
Stock (7)(9)(11)
- ------------------
(1)Holders of Class A Common Stock, Class D Common Stock, Class E Common Stock
and Class F Common Stock are entitled to one vote per share and vote together
as one class. The holders of Class A Common Stock and Class F Common Stock
have substantially similar rights and privileges and, as such, for purposes
of this "Beneficial Ownership of Securities" table are considered one class
of common stock. As of March 31, 1997 there were 118,100 shares of Class F
Common Stock outstanding.
(2)CIGNA Mezzanine Partners III, L.P., Connecticut General Life Insurance
Company, Connecticut General Life Insurance Company, on behalf of one or more
separate accounts, and Life Insurance Company of North America are affiliated
entities but each entity exercises independent investment authority from the
other entities.
(3)Holders of Class B Non-Voting Common Stock are not entitled to vote on any
matters, except under certain circumstances. Each outstanding share of Class
B Non-Voting Common Stock may be converted into one fully paid and non
assessable share of Class A Common Stock at any time at the option of a
non-affiliated transferee of the current holder thereof.
(4)Providian Life and Health Insurance Company (formerly National Home Life
Assurance Company) and Peoples Security Life Insurance Company (successor by
merger to Durham Life Insurance Company) are affiliated entities.
(5)Subject to certain conditions, holders of Class C Common Stock are entitled
to (i) a majority of the votes of the common stock of the Company and (ii)
elect the Class C Director, which director is entitled to cast a majority of
the votes on any matter submitted to the Company's Board of Directors. Under
certain circumstances, including conversion of certain shares of Class B
Non-Voting Common Stock to Class A Common Stock and an initial public
offering, holders of Class C Common Stock are entitled to one vote per share
and the Class C Director is only entitled to one vote. Howard Industries,
Inc., which is owned by Mr. Howard, is the nominal owner of all of the
outstanding Class C Common Stock.
(6)The directors nominated by the Principal Fund have that number of votes
constituting 50% of the votes of the Company's Board of Directors.
(7)Certain matters require the affirmative vote of certain classes of DHA's
Common Stock, voting as a separate class or voting as a single class,
including (i) certain amendments to DHA's Certificate of Incorporation or
Bylaws, (ii) certain mergers or consolidations of DHA, and (iii) amendments
to DHA's Certificate of Incorporation and
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Bylaws affecting provisions that address the personal liability of
directors and certain indemnifications.
(8) Does not include the Class D Warrants exercisable for shares of Class D
Common Stock held by the Principal Fund, which Class D Warrants are not
exercisable earlier than December 31, 1997 except pursuant to a sale of the
Company.
(9) Peter Howard, an executive officer and director of the Company, owns and
controls Howard Industries, Inc., which is the nominal owner of all of the
outstanding Class C Common Stock. Murphy L. Fontenot, David M. Tracy and
Jay N. Baker are executive officers of the Company. All directors and
officers of the Company, as a group, beneficially own 746,179 shares of
Common Stock, or 21.09% of the issued and outstanding shares of Common
Stock (assuming the exercise of all options which are exercisable within 60
days of March 31, 1997).
(10) Assumes (i) one vote per share which would occur upon the conversion of all
of the Class B Non-Voting Common Stock into shares of Class A Common Stock,
which conversion may occur anytime at the option of non-affiliate
transferees of the current holders of the Class B Non-Voting Common Stock
and (ii) the exercise of all options exercisable within 60 days of March
31, 1997. Howard Industries, Inc. otherwise has the power to vote 54.38% of
the issued and outstanding Common Stock of the Company.
(11) Includes 285,139 shares issuable prior to May 30, 1997 upon exercise of
stock options granted to Mr. Baker.
(12) Includes 60,000 shares issuable prior to May 30, 1997 upon exercise of
stock options granted to Mr. Fontenot.
(13) Includes 15,000 shares issuable prior to May 30, 1997 upon exercise of
stock options granted to Mr. Tracy.
(14) Excludes 797,016 shares of Class D Common Stock held by The Principal Fund,
as to which such person shares voting and investment power and of which
such person disclaims beneficial ownership.
* Less than one percent.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DHA was formed as a holding company to effect the Company's acquisition of
certain assets and assumption of certain liabilities of ITF and its acquisition
of certain other assets from the principal shareholders of ITF (the "DHA 1994
Recapitalization"). In connection with the DHA 1994 Recapitalization, ITF, a
group of companies owned and controlled by Mr. and Mrs. Scharling, received (i)
subordinated notes totaling $8.4 million, (ii) approximately $60.3 million in
cash, (iii) a warrant exercisable for 1,232 shares of DHA's Class A Common Stock
and (iv) 1,723 shares of DHA's Class A Common Stock. In connection with the DHA
1994 Recapitalization, Howard Industries, Inc., a company owned and controlled
by Mr. Howard, received (a) 1,182 shares of Class C Common Stock for the
contribution of certain contract rights and other property to DHA and (b) a
transaction fee of $400,000 for its role in the structuring, negotiation and
consummation of the DHA 1994 Recapitalization. Also in connection with the DHA
1994 Recapitalization, DHA's institutional stockholders (i) purchased an
aggregate of 336 shares of DHA's Class A Common Stock and an aggregate of 5,377
shares of DHA's Class B Non-Voting Common Stock for an aggregate purchase price
of $8.0 million and (ii) purchased outstanding senior notes for an aggregate
purchase price of $60.0 million.
In May 1994, The Rug Barn entered into a management fee agreement with Howard
Industries, Inc. (the "Management Fee Agreement") pursuant to which The Rug Barn
agreed to make annual payments to Howard Industries, Inc. of $400,000 plus an
additional amount based on certain financial thresholds in consideration of
Howard Industries, Inc. providing general supervisory and business planning
services which include, but are not limited to, financial management, tax,
accounting, human resources and personnel advice and public relations and press
relations services (the "Services"). Contemporaneously with the closing of the
Company's acquisition of HII, the Management Fee Agreement was amended to
provide for an annual fixed management fee to Howard Industries, Inc. of
$750,000. Management fees and reimbursement for expenses totaling approximately
$398,000, $603,000 and $451,000 in 1996, 1995, and 1994, respectively, were paid
to Howard Industries. During 1996, the management fee was reduced to $375,000
per year. Howard Industries, Inc. is owned and managed by Mr. Howard; its
employees provide management services to a number of companies controlled by Mr.
Howard, including the Company, and, as such, its employees devote only a portion
of their time to the Company. The Services rendered by Howard Industries, Inc.
to the Company include Mr. Howard's acting as a Director of the Company as well
as other financial and management advisory services, for which Mr. Howard does
not receive any direct compensation.
In connection with the DHA 1994 Recapitalization, ITF, a company wholly owned
by Mr. Scharling, entered into a letter agreement with the Company pursuant to
which ITF would make available an airplane to the Company under certain
circumstances. In consideration, the Company would reimburse ITF for certain
expenses related to the Company's use of the airplane, including among other
expenses fuel, maintenance and engine reserve. The Company paid ITF
approximately $99,000 in 1996, $266,000 in 1995 and $78,000 for the eight months
ended December 31, 1994, for reimbursement of such expenses.
In connection with the DHA 1994 Recapitalization, DHA issued to Mr. and Mrs.
Scharling a warrant exercisable for 1,232 shares of DHA's Class A Common Stock
at an aggregate exercise price of $1.5 million. In June 1995, $1.5 million of
the principal amount of the subordinated notes issued to the Scharlings in
connection with the DHA 1994 Recapitalization was used to pay the exercise price
under such warrant. Immediately following such cancellation, the outstanding
principal balance of the subordinated notes was $6.9 million, which balance was
repaid in connection with the 1995 refinancing.
Action Digital Color, Inc., a company wholly-owned by Mr. and Mrs. Scharling,
provides certain printing services to the Company on terms that management
believes are no less favorable to the Company than those that would be
negotiated on an arm's-length basis. Payments made by the Company to Action
Digital Color, Inc. for such printing services were approximately $987,000 in
1996, $244,000 in 1995 and $85,000 for the eight months ended December 31, 1994.
Mr. and Mrs. Scharling purchased $6.9 million of the Units in connection with
the sale of the Units and at the time of their resignations on October 18, 1996
still held $6.9 million in principal amount of the Series A Notes and 6,900
shares of the Class F Common Stock. Such securities were subsequently assigned
to the Company as described below.
32
33
On October 18, 1996, two of the Company's Board of Directors, Mr. Henry E.
Scharling, II and Mrs. Barbara Scharling resigned at the Board of Director's
request as members of the Board of Directors as well as their positions as Chief
Executive Officer and Executive Vice President Operations, respectively.
Subsequent to their resignation, certain allegations concerning wrongful acts of
Henry and/or Barbara Scharling were made by the Company and certain
stockholders. The allegations included, but are not limited to, improper self
dealing transactions, negligence in managing and overseeing the business and
affairs of the Company, and failure to disclose material information regarding
the financial condition and business plan of the Company. In consideration for
the release by the Company and certain stockholders of Mr. and Mrs. Scharling
from all claims, damages and causes of actions, Mr. and Mrs. Scharling paid the
Company $448,500 and assigned to the Company 965,101 shares of the Company's
Class A Common Stock, 6,900 shares of the Company's Class F Common Stock, and
$6.9 million of the Company's Senior Notes.
In connection with the sale of Units, Connecticut General Life Insurance
Company tendered $12,452,000 principal amount of 11% Senior Notes due May 31,
2004 of The Rug Barn (the "Rug Barn Notes") in exchange for 12,452 Units;
Connecticut General Life Insurance Company, on behalf of one or more separate
accounts, tendered $6,776,000 principal amount of Rug Barn Notes in exchange for
6,776 Units; and Life Insurance Company of North America tendered $3,811,000
principal amount of Rug Barn Notes in exchange for 3,811 Units.
The Rug Barn Notes were subsequently cancelled.
Pursuant to his employment agreement with the Company, Mr. Tracy would be
entitled to receive a brokers fee on acquisitions or designer licenses
originated by him. There were no payments made pursuant to this arrangement for
the years ended December 31, 1996 and 1995.
The Company believes that the terms of the above-described transactions are
no less favorable to the Company than could be obtained with non-affiliated
parties.
Pursuant to the Amended and Restated Stockholders' Agreement, all of the
holders of Common Stock entitled to vote for the election of directors have
agreed to vote their shares to elect David Tracy to the Board of Directors of
the Company so long as he is an executive officer of the Company.
33
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
DOCUMENTS FILED AS PART OF THIS FORM 10-K:
(A)(1)THE FOLLOWING FINANCIAL STATEMENTS ARE INCLUDED ON PAGES F-1 THROUGH
F-24 OF THIS REPORT.
Decorative Home Accents, Inc. Consolidated Balance Sheets
Decorative Home Accents, Inc. Consolidated/Combined Statements of
Operations
Decorative Home Accents, Inc. Consolidated/Combined Statements of
Stockholders' Equity
Decorative Home Accents, Inc. Consolidated/Combined Statements of
Cash Flows
(A)(2)THE FOLLOWING FINANCIAL STATEMENT SCHEDULES ARE INCLUDED (NO OTHER
FINANCIAL STATEMENT SCHEDULES ARE INCLUDED BECAUSE SUCH SCHEDULES ARE
NOT REQUIRED OR THE INFORMATION REQUIRED HAS BEEN PRESENTED IN THE
AFOREMENTIONED FINANCIAL STATEMENTS):
Schedule I - Condensed Financial Information
Schedule II - Valuation and Qualifying Accounts
(A)(3)EXHIBITS
THE FOLLOWING EXHIBITS ARE INCORPORATED BY REFERENCE:
2.1(1)-- Agreement and Plan of Merger, dated as of June 7, 1995, by
and between HII Acquisition Corp. and Home Innovations,
Inc., as amended. A list identifying the exhibits and
schedules to the Agreement is attached thereto.
Registrant agrees to furnish supplementally to the
Commission, upon request, a copy of any omitted exhibit or
schedule.
2.2(1)-- Purchase Agreement, dated as of June 29, 1995, by and
among Decorative Home Accents, Inc., The Rug Barn, Inc.,
HII Acquisition Corp. and Jefferies & Company, Inc. A
list identifying the exhibits and schedules to the
Agreement is attached thereto. Registrant agrees to
furnish supplementally to the Commission, upon request, a
copy of any omitted exhibit or schedule.
2.3(1)-- Purchase Agreement, dated as of July 13, 1995, by and
among Decorative Home Accents, Inc., DHA Partners, L.P.
and TCW Special Credits Fund V--The Principal Fund. A
list identifying the exhibits and schedules to the
Agreement is attached thereto. Registrant agrees to
furnish supplementally to the Commission, upon request, a
copy of any omitted exhibit or schedule.
3.1(1)-- Second Amended and Restated Certificate of Incorporation
of Decorative Home Accents, Inc.
3.2(1)-- Amended and Restated Bylaws of Decorative Home Accents,
Inc.
3.3(1)-- Certificate of Designation for Decorative Home Accents,
Inc., as amended by the Certificate of Correction for
Decorative Home Accents, Inc.
4.1(1)-- Indenture, dated as of July 13, 1995, by and among
Decorative Home Accents, Inc. The Rug Barn, Inc., Home
Innovations, Inc., Home Curtain Corp., Calvin Klein Home,
Inc., Draymore Mfg. Corp., R.A. Briggs and Company and
American Bank National Association, as Trustee, relating
to $125,000,000 13% Senior Notes due 2002, Series A and
Series B.
4.2(1)-- Form of Series B Notes
4.3(1)-- Registration Rights Agreement, dated as of July 13, 1995,
by and among Decorative Home Accents, Inc., The Rug Barn,
Inc., Home Innovations, Inc., Home Curtain Corp., Calvin
Klein Home, Inc., Draymore Mfg. Corp., R.A. Briggs and
Company and Jefferies & Company, Inc.
4.4(3)-- Amended and Restated Credit Agreement, dated as of
July 13, 1995, by and among
34
35
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
10.1(1)-- Amended and Restated Stockholders' Agreement dated as of
July 13, 1995, by and among Decorative Home Accents, Inc.,
Howard Industries, Inc., Henry E. Scharling II, Barbara
Scharling, Jay Baker, David M. Tracy, CIGNA Mezzanine
Partners III, L.P., Connecticut General Life Insurance
Company, Connecticut General Life Insurance Company, on
behalf of one or more separate accounts, Life Insurance
Company of North America, National Home Life Assurance
Company, Durham Life Insurance Company, Southern Farm
Bureau Annuity Insurance Company, TCW Special Credits Fund
V--The Principal Fund and DHA Partners, L.P.
10.2(1)-- Class F Stockholders' Agreement, dated as of July 13,
1995, by and between Decorative Home Accents, Inc. and
Jefferies & Company, Inc.
10.3(1)-- Registration Rights Agreement, dated as of July 13, 1995,
by and among Decorative Home Accents, Inc. and TCW Special
Credits Fund V -- The Principal Fund.
10.4(1)-- Warrant Agreement, dated as of July 13, 1995, by and
between Decorative Home Accents, Inc. and American Bank
National Association, as Warrant Agent.
10.5(1)-- Employment and Non-Competition Agreement, dated as of
July 13, 1995, between Decorative Home Accents, Inc. and
Henry E. Scharling II
10.6(1)-- Employment and Non-Competition Agreement, dated as of
July 13, 1995, between Decorative Home Accents, Inc. and
Barbara Scharling
10.7(1)-- Employment and Non-Competition Agreement, dated as of
July 13, 1995, between Decorative Home Accents, Inc. and
Jay Baker
10.8(2)-- Employment Agreement, dated as of October 25, 1995,
between Decorative Home Accents, Inc. and David M. Tracy.
10.9(3)-- Employment and Non-Competition Agreement, dated as of
February 1, 1996, between Decorative Home Accents, Inc.
and Murphy L. Fontenot.
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 33-96794).
(2) Incorporated by reference to the Company's report on Form 10-Q for
the quarter ended September 30, 1995.
(3) Incorporated by reference to the Company's report on Form 10-K for
the year ended December 31, 1995.
THE FOLLOWING EXHIBITS ARE CONTAINED HEREIN:
10.1 -- Mutual Release and Settlement Agreement, dated as of March
11, 1997, between Decorative Home Accents, Inc. and Henry
E. Scharling, II and Barbara Scharling.
10.2 -- Employment and Non-Competition Agreement, dated as of
February 28, 1997, between Decorative Home Accents, Inc.
and Jay N. Baker.
10.3 -- Employment and Non-Competition Agreement, dated as of
February 28, 1997, between Decorative Home Accents, Inc.
and Murphy L. Fontenot.
10.4 -- Amendment to Loan and Security Agreement, dated as of
February 28, 1997, between Decorative Home Accents, Inc.
and Congress Financial Corporation.
10.5 -- Amendment to Loan and Security Agreement, dated as of May
23, 1997, between Decorative Home Accents, Inc. and
Congress Financial Corporation.
10.6 -- Credit Agreement, dated as of May 23, 1997, between
Decorative Home Accents, Inc. and General Motors Domestic
Group Pension Trust, Hughes Master Retirement Trust,
Department of Pensions - City of Los Angeles, Magten
Offshore Fund Ltd., Magten Partners, L.P., Magten Group
Trust, Navy Exchange Service Command Retirement Trust,
Western Union Pension Trust and Saturn Fund Ltd.
10.7-- Security Agreement, dated as of May 23, 1997, between
Decorative Home Accents, Inc.
35
36
and General Motors Domestic Group Pension Trust, Hughes
Master Retirement Trust, Department of Pensions - City of Los
Angeles, Magten Offshore Fund Ltd., Magten Partners, L.P.,
Magten Group Trust, Navy Exchange Service Command Retirement
Trust, Western Union Pension Trust and Saturn Fund Ltd.
10.8 -- License Agreement, dated as of April 27, 1997, between DHA
Home Inc. and Calvin Klein, Inc.
12 -- Computation of Ratio of Earnings to Fixed Charges for
Decorative Home Accents, Inc. and Predecessor Companies
18 -- Letter regarding change in accounting principle
21 -- List of Subsidiaries
------------------
(B) REPORTS ON FORM 8-K:
THE COMPANY FILED THE FOLLOWING REPORT ON FORM 8-K DURING THE LAST QUARTER
OF 1996.
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.
36
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 31st day of
July, 1997.
DECORATIVE HOME ACCENTS, INC.
By: /s/ Murphy L. Fontenot
---------------------------------------------
Murphy L. Fontenot, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chief Executive Officer, July 31, 1997
/s/ Murphy L. Fontenot President and a Director
- ----------------------------
Murphy L. Fontenot
Chief Financial Officer
(Principal Financial and July 31, 1997
/s/ Jay N. Baker Accounting Officer)
- ----------------------------
Jay N. Baker
/s/ Peter H. Howard Chairman of the Board July 31, 1997
- ----------------------------
Peter H. Howard
/s/ David M. Tracy Vice-Chairman and a Director July 31, 1997
- ----------------------------
David M. Tracy
/s/ Stephen A. Kaplan Director July 31, 1997
- ----------------------------
Stephen A. Kaplan
/s/ Vincent J. Cebula Director July 31, 1997
- ----------------------------
Vincent J. Cebula
/s/ Richard J. Goldstein Director July 31, 1997
- ----------------------------
Richard J. Goldstein
37
38
INDEX TO EXHIBITS
SEQUENTIAL
EXHIBITS DESCRIPTION PAGE NO.
- -------- ------------------------------------------------------- ----------
10.1 -- Mutual Release and Settlement Agreement, dated as of
March 11, 1997, between Decorative Home Accents, Inc.
and Henry E. Scharling, II and Barbara Scharling.
10.2 -- Employment and Non-Competition Agreement, dated as of
February 28, 1997, between Decorative Home Accents,
Inc. and Jay N. Baker.
10.3 -- Employment and Non-Competition Agreement, dated as of
February 28, 1997, between Decorative Home Accents,
Inc. and Murphy L. Fontenot.
10.4 -- Amendment to Loan and Security Agreement, dated as of
February 28, 1997, between Decorative Home Accents,
Inc. and Congress Financial Corporation.
10.5 -- Amendment to Loan and Security Agreement, dated as of
May 23, 1997, between Decorative Home Accents, Inc.
and Congress Financial Corporation.
10.6 -- Credit Agreement, dated as of May 23, 1997, between
Decorative Home Accents, Inc. and General Motors
Domestic Group Pension Trust, Hughes Master
Retirement Trust, Department of Pensions - City of
Los Angeles, Magten Offshore Fund Ltd., Magten
Partners, L.P., Magten Group Trust, Navy Exchange
Service Command Retirement Trust, Western Union
Pension Trust and Saturn Fund Ltd.
10.7 -- Security Agreement, dated as of May 23, 1997, between
Decorative Home Accents, Inc. and General Motors
Domestic Group Pension Trust, Hughes Master
Retirement Trust, Department of Pensions - City of
Los Angeles, Magten Offshore Fund Ltd., Magten
Partners, L.P., Magten Group Trust, Navy Exchange
Service Command Retirement Trust, Western Union
Pension Trust and Saturn Fund Ltd.
10.8 -- License Agreement, dated as of April 27, 1997,
between DHA Home Inc. and Calvin Klein, Inc.
12 -- Computation of Ratio of Earnings to Fixed Charges for
Decorative Home Accents, Inc. and Predecessor
Companies
18 -- Letter regarding change in accounting principle
21 -- List of Subsidiaries
38
39
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Decorative Home Accents, Inc.:
We have audited the accompanying consolidated balance sheets of Decorative Home
Accents, Inc. and subsidiaries (collectively, the "Company" or "Successor") as
of December 31, 1996 and 1995, and the related statements of operations,
shareholders' equity (deficiency), and cash flows for the years then ended and
the eight months ended December 31, 1994. We have also audited the accompanying
combined statements of operations, stockholders' equity and cash flows of
International Textile Fabrics, Inc. and Affiliates (the "Predecessor") for the
four months ended April 30, 1994. Our audits also included the financial
statement schedules listed in the Index at Item 14(a). These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated/combined financial statements present fairly,
in all material respects, the financial position of the Successor as of December
31, 1996 and 1995, and the results of the Successor and Predecessor operations
and their cash flows for the years then ended, the eight months ended December
31, 1994 and the four months ended April 30, 1994 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated/combined
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, in the fourth
quarter of 1996 the Company changed its method of accounting for evaluating the
recoverability of goodwill.
The accompanying consolidated financial statements for the year ended December
31, 1996 have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 13 to the financial statements, the Company's
recurring net losses, net shareholders' deficiency, and limited liquidity raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 13. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
June 20, 1997 (July 9, 1997 as to Note 14)
Greenville, South Carolina
F-1
40
DECORATIVE HOME ACCENTS, INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
December 31, December 31,
1996 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,980 $ 169
Investment securities - 1,000
Accounts receivable - net of allowance for doubtful accounts of
$7,014 and $2,506 at December 31, 1996 and 1995, respectively (Note 7) 25,800 28,982
Inventories (Notes 4 and 7) 32,565 43,713
Income taxes receivable 498 2,714
Deferred income taxes (Note 8) - 4,282
Other current assets 1,212 598
--------- ---------
Total current assets 62,055 81,458
PROPERTY, PLANT AND EQUIPMENT, NET (Note 4) 32,262 30,667
INTANGIBLE ASSETS, NET (Note 3) 13,783 94,938
OTHER ASSETS (Note 4) 7,946 8,790
--------- ---------
TOTAL ASSETS $ 116,046 $ 215,853
--------- ---------
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 7) $ 124,830 $ -
Accounts payable 17,231 14,452
Accrued liabilities 6,176 9,775
Accrued interest - 7,583
--------- ---------
Total current liabilities 148,237 31,810
--------- ---------
LONG-TERM DEBT (Notes 7 and 10) 34,100 131,452
--------- ---------
DEFERRED INCOME TAXES (Note 8) - 3,348
REDEEMABLE PREFERRED STOCK (Note 6) 49,351 41,059
--------- ---------
REDEEMABLE COMMON STOCK (Note 6) 2,476 1,639
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 9, 10, 11, 12, 13 and 14)
STOCKHOLDERS` (DEFICIENCY) EQUITY (Notes 5, 6 and 7):
Common stocks 9 9
Additional paid-in capital 6,685 16,107
Reduction of certain equity interests to predecessor basis (6,209) (6,209)
Accumulated deficit (118,603) (3,362)
--------- ---------
Total stockholders` (deficiency) equity (118,118) 6,545
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS` (DEFICIENCY) EQUITY $ 116,046 $ 215,853
========= =========
See notes to consolidated/combined financial statements
F-2
41
DECORATIVE HOME ACCENTS, INC.
CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS)
Successor
Years Successor
Ended Eight Months Predecessor
December 31, Ended Four Months
------------------------- December 31, Ended April 30,
1996 1995 1994 1994
--------- --------- ------------- ---------------
SALES $ 176,733 $ 128,031 $ 50,102 $ 14,609
COST OF GOODS SOLD 138,633 88,262 23,003 7,498
--------- --------- --------- ---------
GROSS PROFIT 38,100 39,769 27,099 7,111
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 52,076 29,501 14,647 4,380
CHARGE FOR GOODWILL IMPAIRMENT 79,717 - - -
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (93,693) 10,268 12,452 2,731
--------- --------- --------- ---------
INTEREST INCOME (EXPENSE):
Interest expense (19,985) (12,603) (4,765) (151)
Interest income 69 322 118 167
--------- --------- --------- ---------
Interest income (expense), net (19,916) (12,281) (4,647) 16
--------- --------- --------- ---------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES AND EXTRAORDINARY
LOSS (113,609) (2,013) 7,805 2,747
PROVISION (BENEFIT) FOR INCOME
TAXES 1,632 (177) 2,964 56
--------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
LOSS (115,241) (1,836) 4,841 2,691
EXTRAORDINARY LOSS FROM EARLY
EXTINGUISHMENT OF DEBT, NET OF
TAX BENEFIT OF $936 - (1,526) - -
--------- --------- --------- ---------
NET INCOME (LOSS) (115,241) (3,362) 4,841 2,691
LESS DIVIDENDS PAID TO PREFERRED
STOCKHOLDERS 7,792 3,247 - -
--------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS ($123,033) ($ 6,609) $ 4,841 $ 2,691
========= ========= ========= =========
PROFORMA PROVISION FOR INCOME
TAXES AND NET INCOME ASSUMING
ALL PREDECESSOR INCOME WAS
TAXABLE:
Income before provision for income taxes
(historical) $ 2,747
Proforma provision for income taxes 1,043
---------
PROFORMA NET INCOME $ 1,704
=========
See notes to consolidated/combined financial statements.
F-3
42
DECORATIVE HOME ACCENTS, INC.
CONSOLIDATED/COMBINED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
(IN THOUSANDS)
Additional
Common Class A Paid-in
Stocks Warrants Capital
------ -------- ---------
Balances at December 31, 1993 $150 $- $20
------ -------- -------
Stockholders' distributions
Net income for the four months ended April 30, 1994
Balances at April 30, 1994 150 - 20
Effect of May 1, 1994 purchase acquisition:
Reversal of April 30, 1994 equity accounts (150) (20)
Establish new equity accounts at May 1, 1994 1,237 6,763
Accretion of redeemable common stock for the eight
months ended December 31, 1994
Net income for the eight months ended December 31,
1994
------ -------- -------
Balances at December 31, 1994 - 1,237 6,763
Exercise of Class A warrants (1,237) 2,737
Issuance of Class F common stock in connection with sale
of 13% Senior Notes due 2002, net of issue costs 1 902
Issuance of Class D common stock in connection with sale
of $50 million redeemable preferred stock, net of issue costs 8 5,747
Accretion of redeemable common stock for the year ended
December 31, 1995
Accretion of redeemable preferred stock for the six months
ended December 31, 1995
Preferred stock dividends paid or accrued for the
six months ended December 31, 1995 (390)
Accrued compensation on stock options 348
Net loss for the year ended December 31, 1995
------ -------- -------
Reduction of
Certain Equity Retained Total
Interests to Earnings Stockholders'
Predecessor (Accumulated (Deficiency)
Basis Deficit) Equity
-------------- ------------ --------------
Balances at December 31, 1993 $- $16,080 $16,250
-------- --------- --------
Stockholders' distributions (3,925) (3,925)
Net income for the four months ended April 30, 1994 2,691 2,691
Balances at April 30, 1994 - 14,846 15,016
Effect of May 1, 1994 purchase acquisition:
Reversal of April 30, 1994 equity accounts (14,846) (15,016)
Establish new equity accounts at May 1, 1994 (6,209) 1,791
Accretion of redeemable common stock for the eight
months ended December 31, 1994 (762) (762)
Net income for the eight months ended December 31,
1994 4,841 4,841
-------- --------- --------
Balances at December 31, 1994 (6,209) 4,079 5,870
Exercise of Class A warrants 1,500
Issuance of Class F common stock in connection with sale
of 13% Senior Notes due 2002, net of issue costs 903
Issuance of Class D common stock in connection with sale
of $50 million redeemable preferred stock, net of issue costs 5,755
Accretion of redeemable common stock for the year ended
December 31, 1995 (877) (877)
Accretion of redeemable preferred stock for the six months
ended December 31, 1995 (345) (345)
Preferred stock dividends paid or accrued for the
six months ended December 31, 1995 (2,857) (3,247)
Accrued compensation on stock options 348
Net loss for the year ended December 31, 1995 (3,362) (3,362)
-------- --------- --------
F-4
43
DECORATIVE HOME ACCENTS, INC.
CONSOLIDATED/COMBINED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
(IN THOUSANDS)
Additional
Common Class A Paid-in
Stocks Warrants Capital
------ -------- ---------
Balances at December 31, 1995 9 - 16,107
Accretion of redeemable common stock for the year
ended December 31, 1996 (837)
Accretion of redeemable preferred stock for the year
ended December 31, 1996 (793)
Preferred stock dividends paid for the year ended
December 31, 1996 (292)
Preferred stock dividends paid-in-kind for the year
ended December 31,996 (7,500)
Net loss for the year ended December 31, 1996 - - -
---- ---- ------
Balances at December 31, 1996 $9 $- $6,685
==== ==== ======
Reduction of
Certain Equity Retained Total
Interests to Earnings Stockholders'
Predecessor (Accumulated (Deficiency)
Basis Deficit) Equity
-------------- ------------ --------------
Balances at December 31, 1995 (6,209) (3,362) 6,545
Accretion of redeemable common stock for the year
ended December 31, 1996 (837)
Accretion of redeemable preferred stock for the year
ended December 31, 1996 (793)
Preferred stock dividends paid-in-kind for the year
ended December 31, 1996 (7,500)
Accrued compensation on stock options
Net loss for the year ended December 31, 1996 - (115,241) (115,241)
Balances at December 31, 1996 ($6,209) ($118,603) ($118,118)
See notes to consolidated/combined financial statements.
F-5
44
DECORATIVE HOME ACCENTS, INC.
CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Successor
Years Successor Predecessor
Ended Eight Months Four Months
December 31, Ended Ended
------------------------- December 31, April 30,
1996 1995 1994 1994
--------- ------- ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(115,241) $(3,362) $4,841 $2,691
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 10,051 6,552 2,404 465
Write-off of goodwill 79,717
Provision for doubtful accounts 4,507 1,278 225 100
Deferred income tax provision 934 337 355 7
Loss on early extinguishment of debt, net of tax 1,526
Stock compensation expense 348
Changes in operating assets and liabilities, net of HII business
acquisition:
Accounts receivable (1,326) (9,256) (2,595) 2,018
Income taxes receivable 1,961 (1,007)
Inventories 11,148 319 (262) (345)
Other current assets (424) 1,105 532 390
Accounts payable 2,603 (5,021) (1,764) 1,780
Accrued liabilities (4,929) (5,903) 2,208 (796)
Accrued interest (7,583) 6,979
Income taxes payable (567)
--------- ------- ------ ------
Net cash provided by (used in) operating act (18,582) (6,672) 5,944 6,310
--------- ------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of HII:
Current assets (55,063)
Property, plant and equipment, net (14,291)
Other assets (1,270)
Intangible assets, net (57,716)
Current liabilities 28,779
Deferred income taxes 2,179
Long-term debt 2,296
--------- ------- ------ ------
Net cash used to acquire HII (95,086)
Purchases of property and equipment (4,019) (4,106) (3,665) (3,575)
Disposal of property and equipment 114 104
Other long term assets 130 (1,180)
Sale (purchase) of investment securities 1,000 (1,000) 4,317
--------- ------- ------ ------
Net cash provided by (used in) investing act (2,775) (100,268) (4,665) 742
--------- ------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
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
Repayment of indebtedness (68,132)
Debt issuance and other financing costs (701) (11,398)
Net borrowings under revolving line of credit 25,868 4,972
Distributions to stockholders (3,925)
Proceeds from notes payable 182 101
Payments on notes payable (156)
Principal payments under capital lease obligations (431)
Redeemable preferred stock dividends paid (1,750) (1,789)
--------- ------- ------ ------
Net cash provided by (used in) financing act 23,168 98,754 (4,081)
--------- ------- ------ ------
F-6
45
DECORATIVE HOME ACCENTS, INC.
CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (CONTINUED)
Successor
Year Successor Predecessor
Ended Eight Months Four Months
December 31, Ended Ended
----------------------- December 31, April 30,
1996 1995 1994 1994
-------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 1,811 $( 8,186) $ 1,279 $ 2,971
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 169 8,355 7,076 2,211
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 1,980 $ 169 $ 8,355 $ 5,182
-------- -------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 27,568 $ 4,582 $ 4,161 $ 154
-------- -------- -------- --------
Income taxes paid (refunded) ($ 2,559) $ 901 $ 1,882 $ --
-------- -------- -------- --------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Accrued redeemable preferred stock dividends $ -- $ 1,458 $ -- $ --
-------- -------- -------- --------
Accrued compensation under stock options $ -- $ 348 $ -- $ --
-------- -------- -------- --------
Accretion of redeemable preferred stock $ 793 $ 345 $ -- $ --
-------- -------- -------- --------
Accretion of redeemable common stock $ 837 $ 875 $ 762 $ --
-------- -------- -------- --------
Exercise of common stock warrants $ -- $ 1,500 $ -- $ --
-------- -------- -------- --------
Preferred stock dividends paid in kind $ 7,500 $ -- $ -- $ --
-------- -------- -------- --------
Capital lease obligations incurred $ 1,716 $ -- $ -- $ --
-------- -------- -------- --------
See notes to consolidated financial statements
F-7
46
DECORATIVE HOME ACCENTS, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION, OPERATIONS AND PURCHASE ACQUISITIONS
ORGANIZATION - The accompanying consolidated financial statements
(successor) for the years ended December 31, 1996 and 1995, and the eight
months ended December 31, 1994, include the consolidated accounts of
Decorative Home Accents, Inc. ("DHA" or the "Company") and its
wholly-owned subsidiaries, The Rug Barn, Inc. and Home Innovations, Inc.
In June 1995, the Company changed its name from CHS Industries, Inc. to
Decorative Home Accents, Inc. Also in 1995, the Company's wholly-owned
subsidiary, International Textiles, Inc. ("INTEX"), was merged into its
wholly-owned subsidiary, The Rug Barn, Inc.
The accompanying combined financial statements (predecessor) for the four
months ended April 30, 1994 include the combined accounts of the
following:
International Textile Fabrics, Inc. S Corporation
The Rug Barn, Inc. C Corporation
QTI Sports, Inc. C Corporation
The Rug Barn Accessories, Inc. S Corporation
Action International, Inc. C Corporation
OPERATIONS - The Company designs, manufactures and markets an extensive
line of decorative home furnishings and accessories. Through its
wholly-owned subsidiary, The Rug Barn, Inc. ("The Rug Barn"), the Company
produces woven throws, pillows, placemats, rugs and other woven products.
Through its wholly-owned subsidiary, Home Innovations, Inc. ("Home
Innovations" or "HII"), the Company manufactures niche-oriented home
accessories with four major product areas: Bath furnishings, window
treatments, bedding products and the Calvin Klein Home Collection ("Calvin
Klein"). The Company principally sells to retail companies throughout the
United States.
PURCHASE OF HOME INNOVATIONS, INC. - Concurrent with the proceeds from the
separate debt and equity offerings on July 13, 1995 (see Note 5), the
Company purchased all of the outstanding stock of HII, and thus HII became
a wholly-owned subsidiary of the Company. The cash purchase price of HII
was approximately $95.1 million (after purchase price adjustments
described below), including acquisition related costs of approximately
$2.0 million plus the assumption of approximately $35.0 million in
liabilities consisting principally of trade payables and accruals and $2.3
million of junior subordinated debt. The acquisition was accounted for
using the purchase method of accounting. Accordingly, the Company
allocated the purchase price to the assets acquired and liabilities
assumed based upon their respective fair values. The purchase price for
HII was subject to adjustments based on the level of net assets acquired
as of the closing date and certain indemnifications from the sellers. The
Company finalized negotiations on the purchase price adjustment in
November 1995 which resulted in a $6.7 million reduction in the originally
agreed-upon $100.0 million purchase price. The final determination of the
purchase price allocation resulted in $16.0 million assigned to certain
identifiable intangible assets and goodwill of approximately $45.9
million.
1994 ACQUISITION OF THE RUG BARN, INC. - DHA was formed as a holding
Company for The Rug Barn, Inc. DHA has no operating activities. Through
its subsidiary, The Rug Barn, Inc., DHA purchased certain assets and
assumed certain liabilities from a group of commonly controlled companies
known as International Textile Fabrics, Inc. ("ITF") and acquired certain
other assets from the principal shareholders of ITF effective May 1, 1994.
The acquisition was financed, in part, with 11% Senior Notes issued by
INTEX. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the Company allocated the purchase price
(approximately $81 million) to the assets acquired and liabilities
assumed, based upon their respective
F-8
47
fair values, adjusted for the continuing residual interest in the Company by the
principal shareholders of the entities from whom the net assets were acquired.
The following summarizes the net effect of this purchase acquisition as of
May 1, 1994 (in thousands):
ASSETS LIABILITIES AND EQUITY
- ------ ----------------------
Cash and cash equivalents $ 7,076 Current liabilities $ 5,642
Accounts receivable, net 6,034 Long-term debt 68,400
Inventory 3,440 Capital stock and additional paid-in
Other current assets 874 capital 6,763
Property, plant and equipment 12,084 Class A warrants outstanding 1,237
Deferred income taxes 3,805 Reduction of certain equity interests
Goodwill 42,520 to predecessor basis (6,209)
------- -------
Total $75,833 Total $75,833
======= =======
Since the stockholders of the entities from which the net assets were acquired
retained a minority residual interest in the Company, the Company recorded a
reduction in its stockholders' equity to reflect the excess of the purchase
price over these stockholders' basis in those net assets acquired, net of the
related tax benefit to be realized.
The unaudited consolidated results of operations on a pro forma basis as though
HII and The Rug Barn, Inc. had been acquired as of January 1, 1994 are as
follows (in thousands):
YEAR YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
Sales $206,679 $223,641
Income (loss) before extraordinary items $ (6,515) 2,572
Net income (loss) $ (8,041) 1,045
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
(successor) for periods subsequent to April 30, 1994 include the accounts
of the Company and its wholly-owned subsidiaries, The Rug Barn, Inc. and
Home Innovations, Inc. (purchased on July 13, 1995). All significant
intercompany accounts and transactions have been eliminated in the
consolidated financial statements.
PRINCIPLES OF COMBINATION - The combined financial statements
(predecessor) for periods prior to May 1, 1994 include the combined
accounts of International Textile Fabrics, Inc., The Rug Barn, Inc., QTI
Sports, Inc., The Rug Barn Accessories, Inc. and Action International,
Inc. All significant intercompany accounts and transactions have been
eliminated in the combined financial statements.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash in
banks and highly-liquid investments with a maturity of one year or less.
Substantially all cash receipts are applied to the outstanding balance of
the revolving line of credit on a daily basis.
INVESTMENT SECURITIES - The Company's investment in municipal bonds (sold
in 1996) were classified as securities available-for-sale in 1995 and were
carried at fair market value which approximated cost.
F-9
48
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company's most significant
financial statement estimates include the estimate of the allowance for
doubtful accounts and adjustments to reduce inventory to lower of cost or
market. Management determines adjustments to reduce inventory to lower of
cost or market based on a number of factors, including historical
experience, aging of the accounts and the current credit worthiness of its
customers. Management determines its estimate of the inventory valuation
reserves considering a number of factors, including historical experience,
aging and condition of the goods on hand, degree of obsolescence and
quantities on hand which might exceed current requirements. Management
believes that its estimates provided in the financial statements,
including for these valuation reserves and inventory adjustments, are
reasonable and adequate. However, actual results could differ from those
estimates.
CREDIT RISKS AND SIGNIFICANT CUSTOMER - Trade receivables are the
principal financial instrument which subject the Company to concentration
of credit risks. The Company's principal customers are U.S. retailers of
decorative home accessories and the Company operates in a single industry
segment. Sales to one of the Company's customers accounted for
approximately $27.2 million, $19.0 million and $7.1 million in 1996, 1995
and 1994, respectively. This represented 15.4%, 14.8% and 11.0% of total
net sales in the respective years. No sales to a single customer exceeded
10% of sales in any predecessor period. No other customer represented more
than 10% of total net sales. Although the Company's exposure to credit
risk associated with nonpayment by this customer is affected by conditions
or occurrences within the retail industry, trade receivables from this
customer (approximately 13.6% of total trade receivables at December 31,
1996) were substantially current as of December 31, 1996 and those which
were past due at December 31, 1996 have been subsequently collected.
The Company performs ongoing credit evaluations of its customers'
financial condition but does not require collateral to support customer
receivables. The Company maintains an allowance for doubtful accounts
sufficient to provide for estimated credit losses. The allowance is
determined based on a variety of factors including management's estimates
of collectibility of past due accounts and prior experience. The resulting
provisions for losses are charged to income.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost,
which includes labor, material and factory overhead, is determined on the
first-in, first-out basis.
ADVERTISING AND CATALOG COSTS - The Company produces annual, periodic and
seasonal catalogs and accordingly, costs relating to the production of the
catalogs are deferred and amortized using the straight-line method, over
the expected period of future benefit of one year or less. No amounts were
deferred at December 31, 1996, and approximately $168,000 of deferred
catalog costs were included in other assets in the consolidated balance
sheet at December 31, 1995. Total advertising and promotional expenses
were approximately $2.1 million in 1996, $1.3 million in 1995, $674,000
for the eight months ended December 31, 1994, and $323,000 for the four
months ended April 30, 1994.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated
at cost and are depreciated over the estimated useful lives of the assets
using the straight-line method.
The estimated useful lives used in computing depreciation are as follows:
Machinery and equipment 5 to 8 years
Furniture and fixtures 5 to 7 years
Buildings 30 years
INCOME TAXES - The Company provides deferred income taxes for temporary
differences between the tax basis and financial reporting basis of assets
and liabilities assuming that they will be realized and settled at the
amount reported in the Company's financial statements.
F-10
49
Income taxes on earnings of the S Corporations in the predecessor period
were payable by the stockholders individually and, accordingly, are not
reflected in the financial statements. In addition to the historical
income tax provision on the C Corporation income in the predecessor
period, the combined statements of operations include disclosure of net
income assuming a pro forma income tax provision at 38% as if the
Company's entire combined income, rather than a portion of it, was taxed
at C Corporation rates.
INTANGIBLE ASSETS, NET - Certain identifiable intangible assets purchased
in the acquisition of HII, principally the Calvin Klein contract and
customer lists, were determined by independent appraisal to have an
aggregate value of approximately $16.0 million at the date of acquisition.
These identifiable intangible assets are amortized over an average life of
approximately 11 years on the straight-line method and are reported net of
accumulated amortization of approximately $2,223,000 and $712,000 at
December 31, 1996 and 1995, respectively.
The excess of cost over the fair value of the net assets (goodwill) of the
acquired businesses of approximately $88.5 million was being amortized
over 20 years on the straight-line method. As described in Note 3, at
December 31, 1996 the Company changed its method of evaluating the
realizability of its intangible assets to a fair value approach determined
using an estimate of discounted cash flows. Using the fair value approach,
the Company wrote off the unamortized value of its goodwill, $79.7
million, in the accompanying 1996 consolidated statement of operations.
Prior to the change in method of accounting, the Company evaluated the
realizability of its intangible assets based upon expectations of
undiscounted cash flows and comparing such future cash flows to the
carrying amount of the related assets.
DEFERRED FINANCING COSTS - Costs associated with the placement of debt
have been deferred and are included in other assets in the consolidated
balance sheet and are amortized over the term of the related debt using
the effective interest method.
Costs associated with the revolving credit facility have been deferred and
are amortized over the term of the agreement using the straight-line
method.
REDEEMABLE STOCK - The carrying amounts of redeemable preferred and common
stock are recorded at fair value and are accreted over their terms using
the effective interest method. The periodic accretion is charged against
retained earnings, or in the absence of retained earnings, by charges
against additional paid-in capital.
REVENUE RECOGNITION POLICY - The Company recognizes revenue from product
sales when it has shipped the goods. The Company's customers have the
right to return certain merchandise for replacement with another product.
No restocking fee is charged if the customer obtains a return
authorization and places a replacement order prior to returning
merchandise. The Company provides an accrual for the effect of estimated
future returns relating to reported sales.
IMPAIRMENT OF LONG-LIVED ASSETS - Effective January 1, 1996, the Company
adopted the provisions of Statement of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." This statement requires
long-lived and identifiable intangible assets to be reviewed for
impairment when circumstances indicate that the carrying amount of the
asset may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying
amount of the asset, the entity recognizes an impairment loss which is to
be measured as the amount by which the carrying amount of the asset
exceeds the fair value of the asset. No impairment losses were recognized
by the Company upon the adoption of SFAS 121. The Company considered the
change in executive management combined with revised operating
expectations and the Company's liquidity crisis, which occurred in the
fourth quarter, to be impairment indicators under SFAS 121. Accordingly,
the Company performed an impairment analysis using projected future cash
flows (undiscounted and without interest charges) which indicated that the
carrying amount of the Company's assets was not impaired.
STOCK COMPENSATION - During 1996, the Company adopted Statement of
Financial Accounting Standards 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation." SFAS 123 recommends that companies account
F-11
50
for stock compensation on a fair-value-based method which requires that
the fair value of stock options be measured at the grant date based on the
value of the award and be recognized over the vesting period. Companies
may, however, continue to measure compensation cost using the method
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." Under APB 25, compensation
cost is measured based on the excess, if any, of the quoted market price
of the stock at the grant date (or other measurement date) over the amount
an employee must pay to acquire the stock. Companies that continue to
apply APB 25 must include in the financial statements certain disclosures
which reflect pro forma amounts as if the fair value method had been used.
The Company has elected to continue to account for such plans under APB
25. See Note 6.
RECLASSIFICATIONS - Certain 1995 and 1994 amounts have been reclassified
to conform to the 1996 presentation.
3. GOODWILL IMPAIRMENT
Prior to the fourth quarter of 1996, the Company evaluated the
recoverability of goodwill by determining whether the amortization of the
goodwill balance over its remaining amortization period could be recovered
through undiscounted future operating cash flows of the acquired
operations. In the fourth quarter of 1996, the Company changed its method
for evaluating the recoverabilty of goodwill to a method whereby the
carrying amount is compared to its estimated fair value, and any excess
carrying amount is determined to be impaired. The fair value of goodwill
is estimated by subtracting the estimated fair value of the Company's
identifiable net assets from the fair value of the Company in its
entirety, which is estimated using a discounted cash flow approach. The
Company believes fair value is a preferable method to assess goodwill for
recoverability as it believes that the value at which the Company could be
bought and sold in an arms length transaction between a willing buyer and
seller is the most objective evidence and, therefore, the most relevant
measure of its value. Based on an evaluation of the recoverability of
goodwill at December 31, 1996, the Company concluded that its unamortized
balance of goodwill, $79.7 million, was impaired and has recorded a
pre-tax charge for such amount in the accompanying 1996 consolidated
statement of operations.
4. BALANCE SHEET COMPONENTS
Inventories are summarized as follows (in thousands):
DECEMBER 31,
------------------------
1996 1995
------- -------
Raw materials and supplies $13,964 $24,464
Work-in-process 2,654 973
Finished goods 15,947 18,276
------- -------
Total $32,565 $43,713
======= =======
Property, plant and equipment is summarized as follows (in thousands):
DECEMBER 31,
---------------------------
1996 1995
-------- --------
Land $ 862 $ 863
Buildings and improvements 16,782 15,384
Furniture and fixtures 5,296 3,184
Machinery and equipment 15,536 14,101
-------- --------
38,476 33,532
Accumulated depreciation (7,594) (3,375)
-------- --------
30,882 30,157
Construction in progress 1,380 510
-------- --------
Property, plant and equipment, net $ 32,262 $ 30,667
======== ========
F-12
51
Other assets are summarized as follows (in thousands):
DECEMBER 31,
----------------------
1996 1995
------ ------
Deferred financing costs, net $7,007 $7,417
Other 939 1,373
------ ------
Total $7,946 $8,790
====== ======
5. DEBT AND EQUITY OFFERINGS
On July 13, 1995, the Company sold for gross proceeds of $125 million,
125,000 Units, each such Unit consisting of $1,000 principal amount of
Series A 13% Senior Notes due June 30, 2002 and one share of the Company's
Class F Common Stock, par value $0.01 per share.
In connection with the sale of the Units, certain of the Company's
stockholders purchased $6.9 million of the Units and received $6.9 million
of the Series A 13% Senior Notes and 6,900 shares of the Class F Common
Stock. In addition, other stockholders of the Company tendered $23.039
million principal amount of 11% Senior Notes of INTEX in exchange for
23,039 of the Units (see Note 6).
On December 26, 1995, the Company completed an exchange of its Series A
13% Senior Notes due 2002 for Series B 13% Senior Notes due 2002 ("13%
Senior Notes"). The terms of the Senior Notes are substantially the same
except the Series B 13% Senior Notes can be publicly traded (registered
with the Securities and Exchange Commission on November 9, 1995).
Concurrent with the sale of the Units, the Company sold for gross proceeds
of $50 million, 50,000 shares of Redeemable Preferred Stock, 803,333
shares of Class D Common Stock and Class D Warrants (collectively, the
"Equity Offering") which are exercisable, under certain conditions, for
additional shares of Class D Common Stock. Dividends on the Redeemable
Preferred Stock are payable quarterly at an annual rate of 14%. Under
certain terms governing the 13% Senior Notes and the amended and restated
Revolving Credit Facility, dividends on the Redeemable Preferred Stock
must be paid, at a 15% annual rate, by the issuance of additional
Redeemable Preferred Stock in lieu of cash dividends. The Redeemable
Preferred Stock is redeemable at any time prior to mandatory redemption on
July 1, 2003, without penalty, at the Company's option. The Company is
required to redeem the Redeemable Preferred Stock upon the occurrence of
certain events, including the violation of certain restrictive covenants.
Also, upon a change of control of the Company, the preferred stockholders
have the option to require the Company to repurchase their shares. The
agreements relating to the Redeemable Preferred Stock prohibit the payment
of cash dividends on the Company's Common Stock. The Redeemable Preferred
Stock is contractually subordinated to the full payment in cash of the
Senior Notes. Upon the occurrence of certain events such as the Company's
failing to meet certain ratios, the Class D directors will have 50% of the
total votes of the Board of Directors of the Company. Such event occurred
in April 1996, and accordingly, the Class D directors have 50% of the
total votes of the Board of Directors. The holders of the Class D Warrants
are entitled to acquire shares of Class D Common Stock representing up to
approximately 10% of the Company's Common Stock if the Company does not
achieve certain performance criteria, cumulative for fiscal 1996 and 1997,
and certain leverage ratios. Also, the holders of the Class D Warrants are
entitled to acquire shares of Class D Common Stock representing up to
approximately 5% of the Company's Common Stock if the Redeemable Preferred
Stock remains outstanding after January 13, 1999 (2.5% of Common Stock) or
July 13, 1999 (an additional 2.5% of Common Stock).
The net proceeds from the sale of the Units and the Equity Offering, along
with approximately $4.2 million of the Company's cash, were used to
finance the acquisition on July 13, 1995 of Home Innovations, Inc. ("HII")
and to repay certain indebtedness of approximately $46.3 million due to
related parties, including approximately $1.2 million in accrued interest
and a $1.2 million prepayment penalty on the INTEX 11%
F-13
52
Senior Notes. The prepayment penalty, net of taxes, was recognized as an
extraordinary loss in the accompanying 1995 consolidated statement of
operations.
Subsequent to December 31, 1996, the Company reached an agreement in
principle to restructure the Units and Redeemable Preferred Stock. See
Note 14.
F-14
53
6. REDEEMABLE STOCK AND SHAREHOLDERS' EQUITY
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT - On July 13, 1995, the
Company amended and restated its Stockholders' Agreement ("Amended and
Restated Stockholders' Agreement"). Shares issued and outstanding and
shares authorized at December 31, 1996 and 1995, are as follows:
SHARES ISSUED SHARES
DESCRIPTION AND OUTSTANDING AUTHORIZED
--------------- ----------
Redeemable preferred stock 50,000 200,000
Redeemable common stock:
Class A (voting) 109,737 109,737
Class B (non-voting) 1,756,126 1,800,000
Common stock (voting):
Class A 965,101 2,790,263
Class C 386,040 400,000
Class D 808,333 2,400,000
Class E -- 2,100,000
Class F 125,000 400,000
REDEEMABLE PREFERRED STOCK - The Redeemable Preferred Stock was recorded
at its fair value at its July 13, 1995 issuance. The carrying amount of
the Redeemable Preferred Stock is being accreted, using the interest
method, to its redemption value of $50 million over its term until
mandatory redemption on July 1, 2003. The periodic accretion is charged
against retained earnings, or in the absence of retained earnings, by
charges against additional paid-in capital. Such accretion totaled
$793,000 and $345,000 for the year ended December 31, 1996 and 1995,
respectively.
Total dividends on the Redeemable Preferred Stock in 1996 were $7.8
million, of which, $7.5 million were paid-in-kind. Total dividends on the
Redeemable Preferred Stock in 1995 were $3,247,000, including $1,458,000
paid in 1996 and $1,789,000 paid in 1995.
REDEEMABLE COMMON STOCK - Certain holders of the Class A voting common
stock (par value $.01 per share, 109,737 shares issued and outstanding)
and all holders of the Class B non-voting common stock (par value $.01 per
share, 1,756,126 shares issued and outstanding) can, at their option on
the later of May 4, 2001 or ninety-one days after the redemption of the
Redeemable Preferred Stock (mandatory redemption on July 1, 2003), require
the Company to repurchase their shares of common stock ("Redeemable Common
Stock") at the then fair market value of each share. The Company has the
option, after May 4, 2002, to purchase the Redeemable Common Stock for
cash at the then fair market value of each share. The carrying amount of
the Redeemable Common Stock is determined by estimating the fair market
value of the common stock at the holders' optional redemption date and
accreting, using the interest method, to such estimated redemption amount.
The periodic accretion is being charged against retained earnings, or in
the absence of retained earnings, by charges against additional paid-in
capital.
F-15
54
The following summarizes accretion in the Redeemable Common Stock account
from May 1, 1994 to December 31, 1996 (in thousands):
Accretion for the eight months ended December 31, 1994
and balance at December 31, 1994 $ 762
Accretion for the year ended December 31, 1995 877
------
Balance at December 31, 1995 1,639
Accretion for the year ended December 31, 1996 837
------
Balance at December 31, 1996 $2,476
======
STOCK OPTIONS - During the years ended December 31, 1996 and 1995, the
Company granted stock options to certain key employees. As discussed in
Note 2, the Company will continue to apply the principles of APB 25 to
account for these options. Compensation expense of $348,000 was recognized
in 1995 for time-vested options which were granted at less than fair
market value. The pro forma effects of applying the fair value measurement
principles of SFAS 123 on net income are not materially different from
that reported for both 1996 and 1995. Since the Company's equity
securities are not publicly held, earnings per share data is not
presented.
In 1996 and 1995, the Company granted options for 317,000 and 214,908
shares of common stock, respectively, at a weighted-average exercise price
of $7.68 and $1.62. The foregoing and following table excludes "super
performance" options for 185,185 shares of common stock granted in 1995
with an exercise price of $76.80. Management believes inclusion of such
options would reduce the relevance of such disclosures. No options were
exercised or canceled in 1996 or 1995.
The following summarizes certain information about options outstanding at
December 31, 1996:
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
EXERCISE PRICE SHARES LIFE (YEARS)
- ------------------------------------------------------------------------------
$ 0.01 169,908 3.50
$ 7.68 362,000 4.66
-------
531,908
=======
As of December 31, 1996, there were vested options to purchase 71,636
shares at a weighted-average exercise price of $1.62.
Of the options granted during 1996 and 1995, 317,000 and 45,000 shares
vest at a rate of 33% per year over a 3 year period in annual increments
on each of the first, second and third anniversaries of the date of grant.
The remaining options granted during 1995, 84,954 shares vest based on
performance and 84,954 shares are time-vested. The performance options are
based on the achievement of certain Company performance criteria,
cumulative for 1996 and 1997. During 1996, the performance criteria were
not met. For the 84,954 time-vested options, vesting occurs with an
initial 33% at the date of grant and 33% on each of the first and second
anniversaries of the date of grant.
F-16
55
EXERCISE OF COMMON STOCK WARRANTS - In June 1995, certain of the Company's
stockholders exercised warrants for the purchase of 1,232 shares of the
Company's Class A Common Stock for $1.5 million. The exercise price was
paid by the reduction of certain indebtedness owed by a subsidiary of the
Company to the stockholders.
7. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996 and 1995 (in
thousands):
DECEMBER 31,
-----------------------------
1996 1995
--------- ---------
13% Senior Notes due June 30, 2002 $ 125,000 $ 125,000
Less - discount (821) (917)
--------- ---------
124,179 124,083
Borrowings under revolving credit facility 30,841 4,972
Other long-term debt 3,910 2,397
--------- ---------
Total 158,930 131,452
Current portion 124,830 --
--------- ---------
Long-term portion $ 34,100 $ 131,452
========= =========
SENIOR NOTES - As described in Note 5, the Company sold $125 million
principal amount of 13% Senior Notes due June 30, 2002. Interest is paid
semiannually on June 30 and December 31. The Senior Notes were issued at a
discount of approximately $958,000. The Senior Notes are being accreted,
using the interest method, to their $125 million principal amount. The
periodic accretion is charged to interest expense. The Senior Notes are
unconditionally, jointly and severally guaranteed by each of the Rug Barn
and HII and each of the direct and indirect subsidiaries of HII.
Under the indenture agreement of the 13% Senior Notes, the Company is not
permitted to declare or pay dividends on capital stock other than the
Redeemable Preferred Stock prior to June 30, 1997, except for dividends
payable in capital stock. The 13% Senior Notes also contain various
covenants, restrictions and redemption features. The payment of cash
dividends on the Redeemable Preferred Stock is allowed provided that
certain financial covenants of the Company are met. Subsequent to June 30,
1997, cash payment of dividends is allowed on other classes of the
Company's capital stock, provided that certain financial covenants of the
Company are met. Further, there are limitations on the ability of the Rug
Barn and Home Innovations to incur additional indebtedness and pay
dividends.
As discussed in Note 14, the 13% Senior Notes have been classified as
current in the accompanying consolidated balance sheet. The Company has
reached an agreement in principal with certain of the Company's bond
holders and equity holders to convert the Senior Notes to equity.
F-17
56
REVOLVING CREDIT FACILITY - On November 12, 1996, the Company and certain
subsidiaries entered into a Loan and Security Agreement (the "Agreement")
with a revolving credit facility to provide for revolving loans ("Loans")
and letters of credit ("Letters of Credit") in an aggregate principal
amount of up to $50 million, subject to borrowing limitations, 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 $35.4
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 $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
prohibited 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 $3.8 million (net of $30.8 million of outstanding Loans and
approximately $418,000 in outstanding Letters of Credit) was available for
borrowing by the Company under the Revolving Credit Facility at December
31, 1996.
On March 1, 1997, the Agreement was amended to provide for a line of
credit ("Supplemental Facility") pursuant to which the lender made
supplemental loans ("Supplemental Loans") of $5 million. The Supplemental
Loans under the Supplemental Facility were repaid on May 27, 1997. See
Note 14.
On May 23, 1997, the Agreement was amended for, among other things,
changes in certain covenants including the tangible net worth calculation.
There were no Events of Default (as defined) under the Agreement, as
amended, at December 31, 1996. See Note 13.
OTHER LONG-TERM DEBT - Other long-term debt at December 31, 1996 consists
principally of $2,579,000 of subordinated notes bearing interest at 7.5%
and obligations under capital leases. The debt matures in May 1999.
FAIR VALUE OF LONG-TERM DEBT - The fair value of the 13% Senior Notes,
based on estimated quoted prices, was $62.5 million at December 31, 1996.
The fair value of the amounts outstanding under the revolving credit
facility and the other long-term debt approximates their carrying value.
8. INCOME TAXES
The provision (benefit) for income taxes of successor consists of the
following (in thousands):
YEAR ENDED EIGHT MONTHS
DECEMBER 31, ENDED
------------------------- DECEMBER 31,
1996 1995 1994
------- ------- ------------
Current:
Federal $ 849 $ (551) $ 2,244
State (149) 37 365
Deferred:
Federal 174 273 305
State
758 64 50
------- ------- -------
Total provision (benefit) $ 1,632 $ (177) $ 2,964
======= ======= =======
F-18
57
Presented below are the sources of deferred income tax assets and
liabilities (in thousands):
DECEMBER 31,
---------------------------
1996 1995
-------- --------
Gross deferred income tax assets:
Allowance for doubtful accounts $ 1,187 $ 935
Inventory valuation reserves 1,385 1,369
Deductible goodwill 13,669 2,807
Reserves for plant relocations 142 1,682
Net operating loss carryforwards 19,369 4,861
Tax credit carryforwards 1,778 703
Other 475 360
Valuation allowance (30,838) (5,106)
-------- --------
Total 7,167 7,611
-------- --------
Gross deferred income tax liabilities:
Depreciation (1,792) (911)
Prepaid advertising -- (63)
Identifiable intangible assets (5,375) (5,703)
-------- --------
Total (7,167) (6,677)
-------- --------
Net deferred income tax asset $ -- $ 934
======== ========
The net deferred income tax asset at December 31, 1995 was recognized in
the accompanying consolidated balance sheet as follows (in thousands):
DECEMBER 31,
1995
-------
Current deferred income tax asset $ 4,282
Noncurrent deferred income tax liability (3,348)
-------
Net deferred income tax asset $ 934
=======
Management cannot be assured that the net deferred income tax asset of
$30.8 million will be realized. Accordingly, in 1996 the valuation allowance was
increased to 100% of the total net deferred income tax asset. In 1995, a
valuation allowance was established at $5.1 million or 100% of the deferred tax
asset arising from net operating loss carryforwards and state tax credits earned
during 1995 as management could not be assured that the deferred asset would be
realized.
F-19
58
A reconciliation of the statutory income tax rate to the annual effective
income tax rate of successor follows:
YEAR ENDED EIGHT MONTHS
DECEMBER 31, ENDED
--------------------- DECEMBER 31,
1996 1995 1994
------ ------ ------------
Federal income tax at statutory rate (34)% (34)% 34%
State income tax, net of federal tax benefit -- (3) 4
Intangible asset amortization not deductible 16 16 --
Valuation allowance for deferred tax assets 19 10 --
Other -- 2 --
------ ------ ----
Total 1 % (9)% 38%
====== ====== ====
At December 31, 1996, the Company has available for Federal income tax
purposes net operating loss carryforwards of approximately $48.0 million which
begin to expire in 2007, Federal general business and alternative minimum tax
credits which begin to expire in 2009, state net operating losses totaling $60.9
million which begin to expire in 1997 and state tax credits which begin to
expire in 2002.
The provision for income taxes for the predecessor companies for the four
months ended April 30, 1994 consist of the following (in thousands):
FOUR MONTHS
ENDED
APRIL 30,
1994
-----------
Current:
Federal $ 42
State 7
-----
49
-----
Deferred:
Federal 6
State 1
-----
7
-----
Total $56
=====
The deferred taxes for the four months ended April 30, 1994, result
primarily from reserves for doubtful accounts and inventories, sales
adjustments, depreciation and amortization, certain accrued liabilities not
currently deductible for income tax purposes and capitalized catalog costs which
are currently deductible for income tax purposes.
F-20
59
The combined net income of the S Corporations was approximately $2.6
million for the four months ended April 30, 1994. A reconciliation of the
statutory income tax rate to the annual effective income tax rate on the C
Corporation pretax income is as follows:
FOUR MONTHS ENDED
APRIL 30, 1994
Federal income tax at statutory rate 34%
State income tax, net of federal tax benefit 4
---
Total 38%
===
9. 401(K) CONTRIBUTION PLAN
On February 1, 1996, the Company adopted a discretionary contribution plan
(the "New Plan") available to employees meeting the New Plan's eligibility
requirements. A determination letter has been filed with the Internal
Revenue Service. The New Plan is expected to be qualified under Section
401(k) of the Internal Revenue Code. Currently, the Company matches $0.25
per $1.00 of employee contributions, up to a maximum of 6% of each
employees' compensation. The Company's contribution is determined by the
Board of Directors. The Company's contributions to the New Plan during
1996 were approximately $148,000.
Prior to the adoption of the New Plan, the Company's wholly-owned
subsidiary, Home Innovations, had a defined contribution plan (the "Old
Plan") available to Home Innovations' employees meeting eligibility
requirements. The assets of the Old Plan were transferred to the New Plan
during 1996. The Old Plan was a tax qualified plan under Section 401(k) of
the Internal Revenue Code. The Company made a matching contribution of 25%
of each participant's base compensation. The Company's contributions to
the Old Plan were approximately $101,000 for the year ended December 31,
1995 (subsequent to the acquisition of Home Innovations in July 1995).
10. LEASES
The Company leases office, warehouse and manufacturing facilities, and
computer equipment under operating and capital leases expiring through
2003. Rental expense under operating leases totaled approximately $901,000
in 1996, $778,000 in 1995, $42,000 for the eight months ended December 31,
1994, and $198,000 for the four months ended April 30, 1994.
Future minimum rental payments under the capital and operating leases are
as follows:
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- -------
1997 $ 738 $ 1,861 $ 2,599
1998 531 1,308 1,839
1999 194 275 469
2000 45 143 188
2001 -- 138 138
Thereafter -- 279 279
------- ------- -------
Total minimum lease payments 1,508 $ 4,004 $ 5,512
======= =======
Less interest (178)
-------
Present value of minimum lease payments $ 1,330
=======
F-21
60
11. COMMITMENTS AND CONTINGENCIES
The Company has a license agreement with Calvin Klein, Inc., expiring
April 30, 1998. In connection with the restructuring plan discussed in
Note 14, Calvin Klein, Inc. has committed to enter into a new multi-year
agreement extending through 2004. The agreement requires that the Company
pay various fees and royalties, generally based on net sales, over the
term of the agreement.
Future commitments for purchases of raw materials are approximately $4.6
million. Certain of these contracts can be canceled without penalty to the
Company.
The Company is involved in various legal actions, environmental matters
and other proceedings that are incidental to the conduct of its business.
The Company believes, after reviewing such matters and consulting with
counsel, that any liability which may ultimately be incurred with respect
to these matters is not expected to have a material effect on either the
Company's consolidated financial position or results of operations.
12. RELATED PARTIES
MANAGEMENT FEES - In May 1994, the Company entered into a management fee
agreement with a stockholder of the Company which required payments of
$400,000 each year, payable in equal monthly installments, in
consideration of general supervisory and business planning services
provided by the stockholder, plus an additional fee based on achieving
certain financial thresholds. In addition, this stockholder received
reimbursements for expenses incurred in the performance of these services.
In July 1995, the Company amended its management fee agreement with the
stockholder to require payments of $750,000 each year, payable in equal
monthly installments, plus reimbursements to the stockholder for
out-of-pocket expenses. Effective January 1, 1996, the stockholder
voluntarily reduced his annual fees to $375,000, payable in equal monthly
installments, plus reimbursements to the stockholder for out-of-pocket
expenses. Payments to the stockholder were approximately $398,000,
$603,000 and $451,000 in 1996, 1995 and for the eight months ended
December 31, 1994, respectively.
OTHER - Under an agreement with a former stockholder of the Company, the
Company paid the former stockholder approximately $99,000 in 1996,
$266,000 in 1995 and $78,000 for the eight months ended December 31, 1994
for the use of an airplane. The Company also paid approximately $987,000
in 1996, $244,000 in 1995 and $85,000 for the eight months ended December
31, 1994 for printing services to a company wholly owned by certain former
stockholders of the Company.
13. GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern which
contemplates the realization of the assets and the settlement of
liabilities and commitments in the normal course of business. The Company
has incurred net losses in 1996 and 1995 and has a net shareholders'
deficiency of approximately $118.1 million at December 31, 1996. At
December 31, 1996 and through the date of this report, the Company's
liquidity is limited and it does not have the ability to pay all of its
current obligations. Further, the Company maximized its borrowings under
its senior revolving credit facility. As described in Notes 7 and 14, the
Company has received temporary financing from its bank and certain of its
bondholders.
In addition to the above-described inability to pay all of its current
obligations, the Company also does not foresee the ability to meet its
obligations under its Senior Notes (including the interest obligation due
on June 30, 1997) or Redeemable Preferred Stock. Accordingly, on February
6, 1997, the Company engaged Houlihan, Lokey, Howard and Zukin, Inc. as
financial advisors for a potential financial restructuring of the
Company's obligations. As described in Note 14, on May 23, 1997 the
Company reached an agreement in principle with
F-22
61
certain of the Company's bondholders and equity holders which would
convert the Senior Notes into common equity and provide up to $20 million
of financing for working capital purposes. Management believes that the
restructuring plan, if it is accomplished, will be adequate to finance
anticipated operational needs, planned capital expenditures and to meet
other debt service obligations during 1997.
Consummation of the proposed restructuring is subject to various
conditions described in Note 14. There is no assurance that the proposed
restructuring will be accomplished. Currently, management of the Company
expects that a pre-negotiated filing under the provisions of Chapter 11
of the United States Bankruptcy Code will be necessary to effect the
restructuring. The Company intends to present its plan of reorganization
substantially simultaneously with its bankruptcy filing and seek
confirmation thereof at the earliest possible opportunity. Management of
the Company and its legal counsel intend to file a motion with the
bankruptcy court to obtain an order to allow full payment during the
Chapter 11 case of the pre-petition trade debt of those suppliers that
provide customary trade credit terms to the Company during the pendency
of its Chapter 11 case. In addition, it is expected that the
pre-negotiated plan of reorganization that the Company intends to file
will provide for the payment of all unpaid pre-petition trade debt upon
the consummation thereof. If the pre-negotiated restructuring plan is
not approved by the Court the Company will attempt to negotiate another
restructuring plan with its creditors. In the event that a restructuring
is not consummated, management of the Company believe that the Company's
inability to pay all of the current obligations and service its debt as
required raises substantial doubt about the Company's ability to continue
as a going concern.
14. SUBSEQUENT EVENTS
As described in Note 7, on March 1, 1997, the Company's senior revolving
credit facility was amended to provide an additional $5 million unsecured
loan which was repaid on May 27, 1997. Also, on May 23, 1997, the
Company's senior revolving credit facility was amended for certain matters
including revised loan covenants.
During 1996, at the request of the Board of Directors, two of the
Company's officers and members of the Board of Directors resigned.
Subsequent to their resignation, certain allegations concerning wrongful
acts were made by the Company and certain stockholders. On March 11, 1997,
in consideration of the release and discharge from all claims, damages,
and all causes of action, the two former officers and members of the Board
of Directors returned to the Company 965,101 shares of the Company's Class
A Common Stock, 6,900 shares of the Company's Class F Common Stock, $6.9
million of the Company's Senior Notes and $448,000 in cash.
On May 15, 1997, the Company reached an agreement in principle with
certain of the Company's bond holders and equity holders providing for a
comprehensive capital restructuring plan. The restructuring agreement was
entered into by the Company's preferred stockholder, TCW Special Credits
Fund V - The Principal Fund ("Fund V") and the beneficial owners of
approximately 76% of the principal amount of the Senior Notes, Magten
Asset Management Corp., solely as agent for various of its investment
advisor clients in their respective accounts at Magten ("Magten"), and
CIGNA. The restructuring plan will, among other things, (i) convert the
$118.1 million principal amount still outstanding on the 13% Senior Notes
plus all accrued and unpaid interest on the Senior Notes into 92.5% of the
Company's common equity, (ii) exchange all the Company's 14% redeemable
preferred stock into 7.5% of the common equity along with a 5 year warrant
to purchase up to 7.5% of the fully diluted common equity and, (iii)
exchange all of the classes of common stock into a 5 year warrant to
purchase up to 2.5% of the fully diluted equity. In connection with the
Company's capital restructuring plan, the Company did not pay interest on
the Senior Notes due on June 30, 1997.
Pursuant to the restructuring, Magten provided the Company with a secured
term loan facility of up to $20 million (the "Secured Term Loan Facility")
($15 million was advanced to the Company on May 23, 1997 and an additional
$5 million was advanced to the Company on July 9, 1997). Magten also
earned a $5 million closing fee which will be waived under certain
conditions set forth in the credit agreement with respect to the Secured
Term Loan Facility. Additionally, the indenture that governs the Senior
Notes was modified to permit the Company to incur the Secured Term Loan
Facility. It is contemplated that the Secured Term Loan Facility
F-23
62
will be repaid with the proceeds of a rights offering to purchase
additional shares of the Company's common stock upon a consummation of the
restructuring. The proposed restructuring plan also provides that Magten
and Fund V will each agree to exercise all rights and/or oversubscription
options issued to them in the rights offering so that the Company will
receive sufficient proceeds from the rights offering to pay in full in
cash all of the indebtedness under the Secured Term Loan Facility. A
portion of the proceeds from the Secured Term Loan Facility was used to
retire the Supplemental Facility described in Note 7. In connection with
the Secured Term Loan Facility provided by Magten, the Company's existing
working capital lender and Magten entered into an inter-creditor
agreement.
Management believes that the transactions contemplated by the above
described restructuring will generate additional proceeds that will be
adequate to finance anticipated operational needs, planned capital
expenditures and meet any debt service obligations for the remainder of
1997.
The proposed restructuring plan and Magten's related commitments are
subject to various conditions, including due diligence by Magten. As
described in Note 13, management of the Company expects that a
pre-negotiated filing under the provisions of Chapter 11 of the United
States Bankruptcy Code will be necessary to effect the restructuring.
In connection with the restructuring, the Company entered into employment
retention agreements with certain key management personnel. The agreements
provide for, among other things, a guaranteed bonus payment in March 1998
if the individual is employed by the Company on that date. The maximum
obligation to the Company for payments under these agreements is $1.1
million. The Company also entered into amended and restated employment and
non-competition agreements with certain officers. If either of these
officers' employment is terminated within 90 days following a change of
control of the Company, by (i) the Company without good cause, (ii) a
successor to the Company without good cause or (iii) the officers
themselves, then the Company shall pay the officers an amount aggregating
approximately $2.5 million.
On April 27, 1997, Calvin Klein, Inc. terminated its license agreement
with Calvin Klein Home, Inc. and entered into a new interim agreement,
with similar terms and conditions, that expires on April 30, 1998, or upon
the completion of the restructuring plan. If the restructuring plan is
consummated, Calvin Klein, Inc. has committed to enter into a new
multi-year agreement that would extend through the year 2004. At December
31, 1996, the carrying amount of the Calvin Klein license agreement is
$8,365,000, which is calculated based on the original contract period
ending in 2004. If the above-described restructuring is not completed,
Calvin Klein, Inc. may not renew its license agreement with the Company.
Failure to renew the license agreement on a long-term basis would result
in a charge to earnings for the unamortized balance of the license
agreement and may otherwise have a material adverse effect on the
Company's future results of operations.
********
F-24
63
DECORATIVE HOME ACCENTS, INC. SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
CURRENT ASSETS-- INCOME TAXES RECEIVABLE $ -- $ 1,909
DUE FROM SUBSIDIARIES 88,933 63,000
INVESTMENT IN (DUE TO) SUBSIDIARIES (37,547) 118,106
DEFERRED INCOME TAXES -- 132
OTHER ASSETS 6,502 7,324
--------- ---------
TOTAL ASSETS $ 57,888 $ 190,471
========= =========
CURRENT LIABILITIES:
Current portion of long-term debt (Notes A and C) $ 124,179 $ --
Accrued liabilities -- 2,288
Accrued interest -- 7,583
Due to subsidiaries -- 7,274
--------- ---------
TOTAL CURRENT LIABILITIES 124,179 17,145
--------- ---------
LONG-TERM DEBT (NOTES A AND C) -- 124,083
REDEEMABLE PREFERRED STOCK (NOTES A AND B) 49,351 41,059
REDEEMABLE COMMON STOCK (NOTE B) 2,476 1,639
STOCKHOLDERS' (DEFICIENCY) EQUITY (NOTE B):
Common stocks 9 9
Additional paid-in capital 476 9,898
Accumulated deficit (118,603) (3,362)
--------- ---------
Total stockholders' (deficiency) equity (118,118) 6,545
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY $ 57,888 $ 190,471
========= =========
See Notes to Condensed Financial Information.
64
DECORATIVE HOME ACCENTS, INC. SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Equity in income (losses) of consolidated subsidiaries $ (97,075) $ 2,241
--------- ---------
Expenses:
Selling, general and administrative expenses 504 812
Interest expense 17,253 7,988
--------- ---------
Total expenses 17,757 8,800
--------- ---------
Loss before income taxes (114,832) (6,599)
Income tax provision (benefit) 409 (3,197)
--------- ---------
Net loss $(115,241) $ (3,362)
========= =========
See Notes to Condensed Financial Information.
65
DECORATIVE HOME ACCENTS, INC. SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
RETAINED TOTAL
ADDITIONAL EARNINGS STOCKHOLDERS'
COMMON CLASS A PAID-IN (ACCUMULATED EQUITY
STOCK WARRANTS CAPITAL DEFICIT) (DEFICIENCY)
------------- ------------ --------------- ------------------ ------------------
Balances at December 31, 1994 $ -- $ 1,237 $ 554 $ 4,079 $ 5,870
Exercise of Class A warrants (1,237) 2,737 1,500
Issuance of Class F common stock in
connection with the sale of the
13% Senior Notes due 2002, net of
Notes due 2002, net of issue costs 1 902 903
Issuance of Class D common stock in
connection with sale of $50 million
redeemable preferred stock, net of
issue costs 8 5,747 5,755
Accretion of redeemable common stock
for the year ended December 31, 1995 (877) (877)
Accretion of redeemable preferred
stock for the six months ended
December 31, 1995 (345) (345)
Preferred stock dividends paid or
accrued for the six months ended
December 31, 1995 (390) (2,857) (3,247)
Accrued compensation on stock options 348 348
Net (loss) for the year ended
December 31, 1995 (3,362) (3,362)
------------ ----------- -------------- ----------------- -----------------
Balance at December 31, 1995 9 -- 9,898 (3,362) 6,545
Accretion of redeemable common stock
for the year ended December 31, 1996 (837) (837)
Accretion of redeemable preferred
stock for the year ended (793) (793)
December 31, 1996
Preferred stock dividends paid the
year ended December 31, 1996 (292) (292)
Preferred stock dividends paid-in-
kind for the year ended
December 31, 1996 (7,500) (7,500)
Net (loss) for the year ended
December 31, 1996 (115,241) (115,241)
------------ ----------- -------------- ----------------- -----------------
Balance at December 31, 1996 $ 9 $ -- $ 476 $ (118,603) $ (118,118)
============ =========== ============== ================= =================
See Notes to Condensed Financial Information.
66
DECORATIVE HOME ACCENTS, INC. SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net loss to net $(115,241) $ (3,362)
cash provided by (used in) operating activities:
(Equity) losses in income of consolidated subsidiaries 97,074 (2,241)
Stock compensation expense -- 348
Deferred income tax provision (benefit) 132 (132)
Amortization -- 405
Changes in operating assets and liabilities:
Income tax receivable 1,908 (1,908)
Accrued liabilities (2,190) 829
Accrued interest (7,584) 7,584
--------- ---------
Net cash provided by (used in) operating activities (25,901) 1,523
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES --
Purchase of HII -- (93,209)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
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
Deferred debt issuance and other financing costs (108) (11,275)
Other long-term assets 930
Redeemable preferred stock dividends paid (293) (1,789)
Net intercompany activity 25,372 (70,250)
--------- ---------
Net cash provided by financing activities 25,901 91,686
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS -- --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -- --
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ --
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITIES:
Accrued redeemable preferred stock dividends $ -- $ 1,458
========= =========
Accrued compensation under stock options $ -- $ 348
========= =========
Accretion of redeemable preferred stock $ 792 $ 345
========= =========
Accretion of redeemable common stock $ 837 $ 877
========= =========
Exercise of common stock warrants $ -- $ 1,500
========= =========
Preferred stock dividends paid-in-kind $ 7,500 $ --
========= =========
See Notes to Condensed Financial Information.
67
DECORATIVE HOME ACCENTS, INC. SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
Note A - Debt and Equity Offerings
See Note 5 of the Notes to the Consolidated/Combined Financial Statements.
Note B - Redeemable Stock and Shareholders' Equity
See Note 6 of the Notes to Consolidated/Combined Financial Statements.
Note C - Long-Term Debt
See Note 7 of the Notes to Consolidated/Combined Financial Statements.
Note D - Related Parties
See Note 12 of the Notes to Consolidated/Combined Financial Statements.
Note E - Going Concern
See Note 13 of the Notes to Consolidated/Combined Financial Statements.
Note F - Subsequent Events
See Note 14 of the Notes to Consolidated/Combined Financial Statements.
68
DECORATIVE HOME ACCENTS, INC. SCHEDULE II
("SUCCESSOR") AND PREDECESSOR COMPANIES
Valuation and Qualifying Accounts and Reserves
(In Thousands)
Additions
------------------------------
Balance at Charged to Balance
Beginning Other Costs and at End
Descripton of Period Accounts Expenses Deductions of Period
- ---------- ---------- -------- ---------- ---------- ---------
Predecessor:
Four Months Ended April 30, 1994
Allowance for doubtful accounts $ 1,034 $ -- $ 100 $ 322 (1) $ 812
Inventory reserve 150 -- -- 150
---------- -------- ---------- ---------- ---------
$ 1,184 $ -- $ 100 $ 322 $ 962
========== ======== ========== ========== =========
Successor Periods:
Eight Months Ended December 31, 1994
Allowance for doubtful accounts $ 812 $ -- $ 355 $ 443 (1) $ 724
Inventory reserve 150 -- -- 100 (2) 50
---------- -------- ---------- ---------- ---------
$ 962 $ -- $ 355 $ 543 $ 774
========== ======== ========== ========== =========
Year Ended December 31, 1995
Allowance for doubtful accounts $ 724 $ 2,189 (3) $ 2,482 $ 2,889 (1) $ 2,506
Inventory reserve 50 2,069 (3) 1,891 400 (1) 3,610
---------- -------- ---------- ---------- ---------
$ 774 $ 4,258 $ 4,373 $ 3,289 $ 6,116
========== ======== ========== ========== =========
Year Ended December 31, 1996
Allowance for doubtful accounts $ 2,506 $ -- $ 7,437 $ 2,929 $ 7,014
Inventory reserve 3,610 -- 2,998 2,659 3,949
---------- -------- ---------- ---------- ---------
$ 6,116 $ -- $10,435 $ 5,588 $10,963
========== ======== ========== ========== =========
(1) Deductions represent accounts receivable write-offs.
(2) Deduction represents inventory written off.
(3) Other additions represent beginning balances for Home Innovations, Inc. at
the July 13, 1995 acquisition date. Other activity related to Home
Innovations, Inc. for the year is included in the appropriate columns.