-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PkAyEvgPMYhZUgZFCGzGpTjf0FAWZy1qa5olAvLPKYjZ0zskJrLOXcHxrTmiBqxl HiVJ4k1ZPUp6x8RG1vo4xA== 0000950137-97-002672.txt : 19970812 0000950137-97-002672.hdr.sgml : 19970812 ACCESSION NUMBER: 0000950137-97-002672 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19970811 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DECORATIVE HOME ACCENTS INC CENTRAL INDEX KEY: 0001000453 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 570998387 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 033-96794 FILM NUMBER: 97655728 BUSINESS ADDRESS: STREET 1: INDUSTRIAL PARK DR STREET 2: P.O. BOX 11877 CITY: ABBEVILLE STATE: SC ZIP: 29620 BUSINESS PHONE: 8644462123 MAIL ADDRESS: STREET 1: P.O. BOX 1187 CITY: ABBEVILLE STATE: SC ZIP: 29620 10-Q/A 1 AMENDMENT TO FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: September 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number: 33-96794 DECORATIVE HOME ACCENTS, INC. (Exact name of registrant as specified in its charter) Delaware 57-0998387 (State or other jurisdiction of (IRS Employer incorporation or organization) Employer Identification Number) Industrial Park Drive, Abbeville, South Carolina 29620 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (864) 446-2123 Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports). Yes [ ] No [X] Indicate by check mark whether the registrant has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 8, 1996, there were 1,074,838 shares outstanding of the Registrant's Class A Common Stock ($0.01 par value), 1,756,126 shares outstanding of the Registrant's Class B Non-Voting Common Stock ($0.01 par value), 386,040 shares outstanding of the Registrant's Class C Common Stock ($0.01 par value), 808,333 shares outstanding of the Registrant's Class D Common Stock ($0.01 par value), 125,000 shares outstanding of the Registrant's Class F Common Stock and 55,836 outstanding shares of the Registrant's 14% Cumulative Redeemable Preferred Stock ($0.01 par value). 2 DECORATIVE HOME ACCENTS, INC. QUARTER ENDED SEPTEMBER 30, 1996 INDEX
Page No. ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of September 30, 1996 (As Restated) and December 31, 1995.................................................. 4 Condensed Consolidated Statements of Operations for the three months ended September 30, 1996 (As Restated) and 1995................. 5 Condensed Consolidated Statements of Operations for the nine months ended September 30, 1996 (As Restated) and 1995................. 6 Condensed Consolidated Statement of Stockholders' Equity (Deficiency) for the nine months ended September 30, 1996 (As Restated) .................................................... 7 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 (As Restated) and 1995........................ 8 Notes to Condensed Consolidated Financial Statements (Unaudited)................ 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 11 PART II OTHER INFORMATION Signature Page.................................................................. 17
2 3 AMENDMENT NO. 1 THIS AMENDMENT NO. 1 MODIFIES THE QUARTERLY REPORT FILED ON FORM 10-Q BY THE REGISTRANT FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AS FOLLOWS: PART I, ITEM 1, FINANCIAL STATEMENTS (UNAUDITED), AND ITEM 2, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAVE BEEN REPLACED IN THEIR ENTIRETY. 4 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) - --------------------------------------------------------------------------------
September 30, December 31, 1996 1995(1) ------------- ------------ (Restated - Note 6) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 957 $ 169 Investment securities 1,000 1,000 Accounts receivable - net of allowance for doubtful accounts of $2,143 at September 30, 1996 and $2,506 at December 31, 1995 36,844 28,982 Income taxes receivable 456 2,714 Inventories 45,148 43,713 Deferred income taxes 3,015 4,282 Other current assets 2,818 598 --------- --------- Total current assets 90,238 81,458 PROPERTY, PLANT AND EQUIPMENT, NET 31,641 30,667 OTHER ASSETS 8,226 8,790 INTANGIBLE ASSETS, NET 92,821 94,938 --------- --------- TOTAL ASSETS $ 222,926 $ 215,853 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: Accounts payable $ 15,489 $ 14,452 Accrued liabilities 6,350 9,775 Accrued interest 4,120 7,583 --------- --------- Total current liabilities 25,959 31,810 LONG-TERM DEBT 162,734 131,452 DEFERRED INCOME TAXES 263 3,348 REDEEMABLE PREFERRED STOCK 47,269 41,059 REDEEMABLE COMMON STOCK 2,234 1,639 STOCKHOLDERS' EQUITY (DEFICIENCY): Common stock 9 9 Additional paid-in capital 9,301 16,107 Reduction of certain equity interest to predecessor basis (6,209) (6,209) Accumulated deficit (18,634) (3,362) --------- --------- Total stockholders' equity (deficiency) (15,533) 6,545 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 222,926 $ 215,853 ========= =========
(1) Derived from December 31, 1995, audited consolidated financial statements. See notes to condensed consolidated financial statements (unaudited). 5 DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED) - --------------------------------------------------------------------------------
Three Months Ended September 30, ----------------------- 1996 1995 -------- -------- (Restated - Note 6) SALES $ 47,441 $ 54,757 COST OF GOODS SOLD 34,830 38,036 -------- -------- GROSS PROFIT 12,611 16,721 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,850 12,937 -------- -------- INCOME FROM OPERATIONS 761 3,784 INTEREST EXPENSE, NET (4,962) (4,373) -------- -------- LOSS BEFORE PROVISION FOR INCOME TAXES (4,201) (589) PROVISION FOR INCOME TAXES (2,720) (97) -------- -------- NET LOSS BEFORE EXTRAORDINARY LOSS (6,921) (686) EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT, NET OF TAXES OF $469 -- (763) -------- -------- NET LOSS $ (6,921) $ (1,449) ======== ========
See notes to condensed consolidated financial statements (unaudited). 5 6 DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED) - --------------------------------------------------------------------------------
Nine Months Ended September 30, ------------------------- 1996 1995 --------- --------- (Restated - Note 6) SALES $ 129,213 $ 76,882 COST OF GOODS SOLD 95,440 49,261 --------- --------- GROSS PROFIT 33,773 27,621 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 35,948 21,325 --------- --------- INCOME (LOSS) FROM OPERATIONS (2,175) 6,296 INTEREST EXPENSE, NET (14,484) (7,766) --------- --------- LOSS BEFORE PROVISION FOR INCOME TAXES (16,659) (1,470) INCOME TAX BENEFIT 1,387 238 --------- --------- NET LOSS BEFORE EXTRAORDINARY LOSS (15,272) (1,232) EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT, NET OF TAXES OF $469 -- (763) --------- --------- NET LOSS $ (15,272) $ (1,995) ========= =========
See notes to condensed consolidated financial statements (unaudited). 6 7 DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) - --------------------------------------------------------------------------------
Reduction of Certain Equity Total Interest to Stockholder's Common Additional Predecessor Accumulated Equity Stocks Paid-in Capital Basis Deficiency (Deficiency) ------- --------------- -------------- ----------- ------------ Balances at December 31, 1995 $ 9 $ 16,107 $ (6,209) $ (3,362) $ 6,545 Accretion of redeemable common stock for the nine months ended September 30, 1996 (595) (595) Accretion of redeemable preferred stock for the nine months ended September 30, 1996 (586) (586) Preferred stock dividends paid in-kind for the nine months ended September 30, 1996 (5,625) (5,625) Net loss (Restated - Note 6) (15,272) (15,272) ----------- ----------- ------------ ----------- --------- Balances at September 30, 1996 (Restated - Note 6) $ 9 $ 9,301 $ (6,209) $ (18,634) $ (15,533) =========== =========== ============ =========== =========
See notes to condensed consolidated financial statements (unaudited). 7 8 DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) - --------------------------------------------------------------------------------
Nine Months Ended September 30, ------------------------- 1996 1995 --------- --------- (Restated - Note 6) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (15,272) $ (1,955) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization 7,394 4,178 Deferred tax (benefit) provision (1,818) (986) Changes in operating assets and liabilities: Accounts receivable (7,862) (21,061) Inventories (1,435) (1,830) Income tax receivable 2,258 -- Other current assets (2,220) 254 Accounts payable 1,037 (2,321) Accrued liabilities (3,853) 511 Accrued interest (3,464) 2,958 Income taxes payable -- (304) --------- --------- Net cash used in operating activities (25,235) (20,556) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net cash used to acquire HII -- (94,578) Purchase of property and equipment (4,073) (1,733) Other long-term assets 564 (4,250) --------- --------- Net cash used in investing activities (3,509) (100,561) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving line of credit 31,282 15,361 Redeemable preferred stock dividends paid (1,750) -- Issuance of 13% Senior Notes due 2002 and Class F common stock -- 125,000 Issuance of $50 million redeemable preferred stock and class D common stock -- 50,000 Early extinguishment of debt -- (66,900) Deferred financing costs -- (10,699) --------- --------- Net cash provided by financing activities 29,532 112,762 --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 788 (8,355) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 169 8,355 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 957 $ 0 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 14,005 $ 3,790 Income taxes paid $ -- $ 1,309
See notes to condensed consolidated financial statements (unaudited). 8 9 DECORATIVE HOME ACCENTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1996 (AS RESTATED) AND 1995 - -------------------------------------------------------------------------------- 1. BASIS OF INTERIM PRESENTATION The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included in the interim financial information. For interim reporting, the Company's subsidiary, Home Innovations. Inc. ("HII") records an estimated gross profit based on information provided by its accounting and financial systems. At year-end, inventories of the Company are stated at the lower of cost, determined using the first-in, first-out (FIFO) method, or market. The Company's business is seasonal in nature, with its highest sales levels historically occurring in the third and fourth fiscal quarters, which include the holiday selling season. Therefore, the results of operations for the interim periods are not necessarily indicative of the operating results of the full year. 2. ORGANIZATION The accompanying interim consolidated financial statements as of September 30, 1996, include the accounts of Decorative Home Accents, Inc. ("DHA" or the "Company") and its wholly-owned subsidiaries, The Rug Barn, Inc. and Home Innovations, Inc. (purchased on July 13, 1995). All significant intercompany transactions and accounts have been eliminated. 3. BALANCE SHEET COMPONENTS Inventories are summarized as follows (in $000's):
September 30, December 31, 1996 1995 ------------- ------------ Raw materials $13,435 $24,464 Work-in-process 3,341 973 Finished goods 28,372 18,276 ------- ------- $45,148 $43,713 ======= =======
Property, plant and equipment is summarized as follows (in $000's):
September 30, December 31, 1996 1995 ------------- ------------ Land $ 863 $ 863 Buildings and improvements 15,617 15,384 Furniture and fixtures 5,059 3,184 Machinery and equipment 16,656 14,101 -------- -------- 38,195 33,532 Accumulated depreciation (6,554) (3,375) -------- -------- 31,641 30,157 Construction in progress -- 510 -------- -------- $ 31,641 $ 30,667 ======== ========
9 10 DECORATIVE HOME ACCENTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1996 AND 1995 (CONTINUED) - -------------------------------------------------------------------------------- 4. INCOME TAXES The Company's income tax benefit for the nine months ended September 30, 1996 was calculated at an effective rate of 32% before being offset by an increase in the tax valuation allowance of $2.4 million. Management of the Company currently believes that the deferred tax asset reported in the September 30, 1996 balance sheet will be fully realized. 5. REVOLVING CREDIT FACILITY On November 12, 1996, the Company and certain subsidiaries entered into a new Loan and Security Agreement (the "Agreement") with a new revolving credit facility to provide for revolving loans and letters or credit in an aggregate principal amount of up to $50 million for a three year period. The Agreement may be renewed from year to year thereafter at the mutual agreement of the parties. The initial borrowing of $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 new $50 million Revolving Credit Facility bear interest, at the Company's discretion, at a rate of 5/8% percent per annum in excess of the Prime Rate or 3-1/4% percent per annum in excess of the Eurodollar Rate. The borrowings are secured by a first priority lien on the accounts receivable and inventories of the Company's subsidiaries. The Company is required to maintain a minimum adjusted tangible net worth, as defined, and the payment of cash dividends on the Company's common stock is limited in accordance with the Agreement. Further, there are limitations on the ability of the Company to incur additional indebtedness and make loans, advances and investments. Under the Company's borrowing formula, which is based on underlying collateral as described above, approximately $7.3 million (net of $35.4 million of outstanding borrowings) was available for borrowings by the Company under the new Revolving Credit Facility at November 12, 1996. 6. RESTATEMENT Subsequent to the original issuance of the Company's financial statements for the three months ended March 1996, the six months ended June 30, 1996 and the nine months ended September 30, 1996, management determined that certain customer chargebacks and credits had either not been properly recorded in the financial statements or had been recorded in improper accounting periods. As a result, the accompanying financial statements have been restated. The following is a summary of the effects of the restatements:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1996 SEPTEMBER 30, 1996 -------------------------- --------------------------- AS AS ORIGINALLY AS AS ORIGINALLY RESTATED RECORDED RESTATED RECORDED --------- ------------- --------- ------------- Net sales $ 47,441 $ 48,835 $ 129,213 $ 133,116 Income (Loss) from operations $ 761 $ 2,683 $ (2,175) $ 2,652 Net Loss $ (6,921) $ (4,041) $ (15,272) $ (10,445)
AS OF SEPTEMBER 30, 1996 --------------------------- AS AS ORIGINALLY RESTATED RECORDED --------------------------- Current assets $ 90,238 $ 95,161 Total assets $ 222,926 $ 227,893 Current liabilities $ 25,959 $ 26,099 Total liabilities $ 188,956 $ 189,096 Total shareholders' deficiency $ (15,533) $ (10,706)
10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Note: Subsequent to the original issuance of the Company's financial statements for the three months ended March 1996, the six months ended June 30, 1996 and the nine months ended September 30, 1996, management determined that certain customer chargebacks and credits had either not been properly recorded in the financial statements or had been recorded in improper accounting periods. As a result, the accompanying financial statements have been restated. The Company has implemented additional procedures, including timely reconciliation of the Company's accounts receivable and inventory, to avoid such future errors. This Management's Discussion and Analysis of Financial Condition and Results of Operations reflects the restatement of the Company's unaudited condensed consolidated statements of operations for the three months and nine months ended September 30, 1996. See Note 6 to the Company's unaudited condensed consolidated financial statements. INTRODUCTION The following discussion provides management's assessment of the results of operations and liquidity and capital resources of DHA and should be read in conjunction with the respective unaudited financial statements of DHA and the notes thereto included elsewhere in this Form 10-Q. The following table includes unaudited proforma financial information for the nine months ended September 30, 1995, as if the July 1995 purchase of Home Innovations, Inc. ("HII") occurred as of January 1, 1995. Such adjustments to the proforma financial information consist principally of the following: net adjustments to cost of goods sold and SG&A expenses related to adjusting depreciation expense for the new basis of accounting resulting from the HII acquisition; increases in SG&A expenses to account for the amortization of goodwill and the identifiable intangible assets resulting from the HII acquisition; increases in SG&A expenses to account for compensation expense resulting from granting stock options at less than fair market value; net adjustments to interest expense resulting from issuance of 13% Senior Notes due 2002 and extinguishment of prior debt, amortization of debt issuance costs and accretion of discount on the Senior Notes. Management's discussion and analysis of the results of operations for the nine months ended September 30, 1996, should be read using the proforma financial information presented below:
ACTUAL PRO FORMA Nine Months Ended ----------------------------- September 30, September 30, 1996 1995 ------------- ------------- Sales $ 129,213 $ 155,038 Cost of goods sold 95,440 109,977 --------- --------- Gross profit 33,773 45,061 Selling, general and administrative expenses 35,948 38,092 --------- --------- Income from operations (2,175) 6,969 Interest expense, net (14,484) (13,065) --------- --------- Loss before income taxes $ (16,659) $ (6,096) ========= =========
IMPACT OF THE PURCHASE OF HOME INNOVATIONS, INC. On July 13, 1995, DHA acquired HII, a manufacturer of niche oriented home accessories with the following product categories: bath furnishings, window and specialty products, bedding products and the Calvin Klein Home Collection, a line of designer home products launched in September 1995 under the Calvin Klein trademark. The cash purchase price of HII was approximately $95.1 million, after a $6.7 million reduction to the purchase price, including acquisition related costs of approximately $1.8 million and the assumption of approximately $34.7 million in liabilities consisting of trade payables and accruals and $2.3 million of junior subordinated notes. The $6.7 million adjustment to the purchase price was determined as a 11 12 result of the level of net assets acquired as of the closing date and certain indemnifications from the sellers. The $6.7 million was received from the sellers in December, 1995. RESULTS OF OPERATIONS Comparison of Three Months Ended September 30, 1996 (As Restated) with Three Months Ended September 30, 1995 NET SALES Net sales decreased by $7.4 million, or 13.5% to $47.4 million for the three months ended September 30, 1996 from $54.8 million for the three months ended September 30, 1995. During the latter part of the third quarter of 1996, sales were negatively impacted by delays in deliveries of towel blanks used in the Company's bath business as a result of industry capacity shortages. Deliveries are expected to improve during the fourth quarter. The continued phase out of the furniture cover business also negatively impacted the quarter-to-quarter comparison by over $2 million. Down-sizing of the Company's printing operation in early 1996 further contributed to the 1996 sales decline. Historically, the Company had performed contract printing services at relatively low margins to supplement internal capacity demands of the printing operation. These sale declines were partially offset by a $1.4 million increase in sales of Calvin Klein Home products. GROSS PROFIT Gross profit margin decreased to 26.6% for the three months ended September 30, 1996, compared to 30.5% in 1995. Realized gross profit margins in 1996 were negatively impacted by higher customer accounts receivable chargebacks related to customer returns and sales allowances. Also, negatively impacting the 1996 period was the continued expansion of new product lines in the Company's giftware business. This strategy is intended to help maximize the Company's distribution strength. Products sourced through outside manufacturers resulted in margins below those historically achieved on cotton throws. The quarter-to-quarter comparison was favorably impacted by improved operating efficiencies in the Company's cut-and-sew plants. SELLING, GENERAL & ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses decreased $1.0 million, or 8.0% to $11.9 million for the three months ended September 30, 1996 from $12.9 for the same period in 1995. Positively impacting the 1996 results were ongoing cost and headcount reduction programs resulting from the DHA's acquisition of HII. Duplicate functions are being eliminated and cost reductions achieved from consolidating certain functions and services. Management expects the cost reduction programs to continue to favorably impact the remainder of 1996 compared to 1995 expense levels. Negatively impacting the amounts of SG&A expenses for 1996 and 1995 were the costs associated with Calvin Klein Home. Advertising and overhead expenses associated with Calvin Klein Home, as a percentage of sales, exceeded the level of such costs for the Company's more mature business. This investment in the growth of the Calvin Klein Home line is part of the Company's long-term plan and management of the Company expects that the SG&A expenses as a percentage of sales will continue to exceed its other mature businesses for the next 12-24 months. INTEREST EXPENSE, NET Interest expense, net, increased 13.5% to $5.0 million for the three months ended September 30, 1996, from $4.4 million for the three months ended September 30, 1995. The increase resulted from higher average borrowings under the Company's revolving credit facility. RESULTS OF OPERATIONS Comparison of Nine Months Ended September 30, 1996 (Actual) (As Restated) with Pro Forma Nine Months Ended September 30, 1995 As described above, the results of operations for the nine months ended September 30, 1995 reflect proforma adjustments related to the purchase of HII discussed above. 12 13 NET SALES Net sales for the nine months ended September 30, 1996, decreased $25.8 million, or 16.6% compared to the proforma net sales for the nine months ended September 30, 1995. Sales for the nine months ended September 30, 1996 were negatively impacted by weak consumer demand and conservative inventory management by retailers serviced by the Company in the first six months of 1996. Delivery shortages for towel blanks used in the Company's bath business, as well as reduced capacity in the Company's contract printing business also negatively impacted the year-to-year comparison. The decline in furniture cover sales for 1996, resulting from the Company's decision to exit this business, was partially offset by growth in Calvin Klein Home sales. GROSS PROFIT Gross margin decreased to 26.1% of net sales for the nine months ended September 30, 1996, from a proforma of 29.1% for the nine months ended September 30, 1995. Realized gross profit margins in 1996 were negatively impacted by higher customer accounts receivable chargebacks related to customer returns and sales allowances. Additionally, decline in the 1996 results is attributable to the Company's strategy to broaden its giftware product offerings in order to maximize its distribution strength. The margins realized on certain products sourced through outside manufacturers are below those on items manufactured by the Company. Offsetting this decline were improvements in the 1996 plant efficiencies and reduced writedowns of slow moving and obsolete inventory. SELLING, GENERAL & ADMINISTRATIVE EXPENSES SG&A expenses decreased $2.1 million, or 5.6% to $35.9 million for the nine months ended September 30, 1996 from $38.1 million for the proforma nine months ended September 30, 1995. As a percentage of sales, SG&A expenses increased to 27.8% for the nine months ended September 30, 1996 from 25.0% for the 1995 period. The year-to-year decline in sales volume resulted in higher relative SG&A costs primarily as a result of the fixed salary structure of the Company's sales and marketing functions. Positively impacting the 1996 results were ongoing cost and headcount reduction programs resulting from DHA's acquisition of HII. Duplicate functions are being eliminated and cost reductions achieved from consolidating certain functions and services. Management expects the cost reduction programs to continue to favorably impact the remainder of 1996 compared to proforma 1995 expense levels. Negatively impacting the amounts of SG&A expenses for 1996 and 1995 were the costs associated with Calvin Klein Home. Advertising and overhead expense associated with Calvin Klein Home, as a percentage of sales, exceeded the level of such costs for the Company's more mature business. This investment in the growth of the Calvin Klein Home line is part of the Company's long-term plan and management of the Company expects that the SG&A expenses as a percentage of sales will continue to exceed its other mature businesses for the next 12-24 months. INTEREST EXPENSE, NET Interest expense, net, increased 10.9%, or $1.4 million to $14.5 million for the nine months ended September 30, 1996, from $13.1 million for the proforma nine months ended September 30, 1995. The increase resulted from higher average borrowings under the Company's revolving credit facility. INCOME TAXES The Company has recognized an income tax benefit arising from the year-to-date loss. The Company has provided a valuation allowance of $3.9 million on the related deferred tax asset. Management of the Company currently believes that the deferred tax asset reported in the September 30, 1996 balance sheet will be fully realized. SEASONALITY The Company's business is seasonal in nature with its highest sales levels historically occurring during the third and fourth fiscal quarters, which includes the holiday selling season. 13 14 LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity for operations and expansion have historically been funds generated internally and borrowings under the Company's $50.0 million revolving credit facility. Available borrowings under the credit facility are based on specified levels of underlying collateral. In November of 1996, the Company entered into a new Loan and Security Agreement (the "Agreement") with a new revolving credit facility. The Company terminated its relationship with its previous revolving credit facility lenders. The Agreement will provide the Company with a $50 million revolving line of credit. The initial term of the Agreement is for three years and can be renewed from year-to-year thereafter. The Agreement contains certain financial and other covenants with which the Company must comply, including a covenant requiring the Company to maintain a minimum adjusted tangible net worth, as defined, and covenant restricting the payment of cash dividends on the Company's common stock. The obligations under the revolving credit facility are secured by a first lien on the inventory and receivables of The Rug Barn, Inc. and Home Innovations, Inc. and its subsidiaries. The Company intends to utilize borrowings under the revolving credit facility to meet seasonal fluctuations in the Company's working capital requirements, typically peaking in early October, and to fund the anticipated build up of inventory relating to the continuing rollout of the Calvin Klein Home line of products. Under the Company's borrowing formula, which is based on underlying collateral as described above, approximately $7.3 million (net of $35.4 million of outstanding borrowings) was available for borrowings by the Company under the new Revolving Credit Facility at November 12, 1996. Management believes the Calvin Klein Home line of products have increased the Company's working capital needs in 1996 by approximately $8 to $12 million from 1995 levels. Management believes that the working capital requirements related to Calvin Klein in 1996 peaked in April 1996. Management expects that the working capital requirements for supporting the Calvin Klein Home lines should be approximately $7 to $9 million for the next 12 to 15 months. Management believes that the Company's cash flow from operations and borrowing under the new revolving credit facility will be sufficient to fund the Calvin Klein Home requirements. Cash flows used in operating activities were approximately $25.2 million for the nine months ended September 30, 1996. In addition to the Company's net loss, cash requirements for the nine month period ended September 30, 1996 were driven by an increase in accounts receivable of $7.9 million. This increase in accounts receivable is primarily due to the seasonality of the business accompanied with a sales program extending the payment terms of sales made earlier in the year in an effort to accelerate the timing of customer purchases for the holiday season. Also, this increase in cash used for operating activities was due to an additional investment of $1.4 million in inventory. The incremental inventory investment related almost entirely to the new Calvin Klein Home Line. Excluding investment made in Calvin Klein inventory, the Company's inventory investment decreased by approximately $3 million from December 31, 1995 amounts. Capital expenditures for the nine month period ended September 30, 1996 approximated $4.1 million. The Company currently has no material commitments for capital expenditures. Borrowings under the Company's line of credit increased by approximately $31.3 million during the nine months ended September 30, 1996. Additionally, the Company paid dividends totaling $1.75 million on its redeemable preferred stock in January, 1996. During the balance of 1996, dividends will be paid in-kind rather than in cash. Management expects that the Company's cash flow from operations and borrowings under the new revolving credit facility, as required, will be adequate to finance anticipated operation needs, planned capital expenditures and to meet its debt service obligations in 1996. INFLATION Although the operations of the Company are generally influenced by economic conditions, the Company does not believe that inflation had a material effect on the results of operations during the nine months ended September 30, 1996 and 1995. The Company has been historically able to mitigate the impact of the increases in the spot market prices of cotton through fixed price purchase contracts. EFFECT OF COMPLIANCE WITH ENVIRONMENTAL PROTECTION PROVISIONS 14 15 Compliance with Federal, State and local provisions that have been enacted or adopted regulating the discharge of materials in the environment, or otherwise relating to protection of the environment, has not had, and is not expected to have, a material adverse effect on the capital expenditures, net income or competitive position of the Company. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements contained in this Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company cautions readers of this Quarterly Report on Form 10-Q that a number of important factors could cause the Company's actual results in 1996 and beyond to differ materially from those expressed in any such forward-looking statements. These factors include, without limitation, the general economic and business conditions affecting the retail industry, the Company's ability to meet its debt service obligations, contractual restrictions on HII's and the Rug Barn's ability to pay dividends to the Company, competition from a variety of firms ranging from small manufacturers to large textile mills, the seasonality of the Company's sales, the volatility of the Company's raw material cost, the Company's dependence on key personnel and the risk of loss of a material customer or a significant license. These and other factors are more fully described in the Company's previous filings with the Securities and Exchange Commission including, without limitation, the Company's Prospectus dated November 10, 1995. 15 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in various routine legal proceedings incidental to the conduct of its business. Management believes that none of these legal proceedings will have a material adverse impact on the financial condition or results of operations of the Company. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS SEE EXHIBIT INDEX. (B) REPORTS ON FORM 8-K Form 8-K filed on November 6, 1996, regarding the resignation of Henry E. Scharling, II and Barbara Scharling reported under Item 5 of Form 8-K. 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q/A (Amendment No. 1 to its quarterly report on Form 10-Q for the quarter ended September 30, 1996) to be signed on its behalf by the undersigned thereunto duly authorized. Decorative Home Accents, Inc. ---------------------------------------- (Registrant) Date: August 1, 1997 /s/ Jay N. Baker --------------------- ---------------------------------------- Jay N. Baker* Chief Financial Officer *Duly authorized to sign on behalf of the Registrant. 17 18 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ------------ 10.1 Loan and Security Agreement between Decorative Home Accents, Inc. and subsidiaries and Congress Financial Corporation dated November 12, 1996. 27 Financial data schedule
18 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF DECORATIVE HOME ACCENTS, INC. FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1995 JUN-30-1996 SEP-30-1996 957 1,000 38,987 2,143 45,148 90,238 38,195 (6,554) 222,926 25,959 0 47,269 0 9 9,301 222,926 47,441 47,441 34,830 0 11,850 0 (4,962) (4,201) (2,720) 0 0 0 0 (6,921) 0 0
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