-----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, WZXQGo0gNGypfMGXktvoZYJ5xQDDmvQGya0EuLqeSrne1gdwxhO1u8LyHji5l9zb HDxJOHcdLuTlchloHRtMwg== 0000950137-97-003832.txt : 19971117 0000950137-97-003832.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950137-97-003832 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971114 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 SEC ACT: SEC FILE NUMBER: 033-96794 FILM NUMBER: 97721913 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 1 FORM 10-Q DATED 6/30/97 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: June 30, 1997 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 Identification Number) incorporation or organization) Industrial Park Drive, Abbeville, South Carolina 29620 ------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (864) 446-2123 Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports). Yes No Indicate by check mark whether the registrant has been subject to such filing requirements for the past 90 days. Yes No As of September 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 60,100 shares outstanding of the Registrant's 14% Cumulative Redeemable Preferred Stock ($0.01 par value). 2 DECORATIVE HOME ACCENTS, INC. QUARTER ENDED JUNE 30, 1997 INDEX
Page No. --- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996............................. 4 Condensed Consolidated Statements of Operations for the three months ended June 30, 1997 and 1996.............. 5 Condensed Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996............ 6 Condensed Consolidated Statement of Stockholders' Equity (Deficiency) for the six months ended June 30, 1997.................................... 7 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996............ 8 Notes to Condensed Consolidated Financial Statements (Unaudited............................................. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 12 PART II - OTHER INFORMATION Item 1. Legal Proceedings.......................................... 18 Item 2. Changes in Securities...................................... 18 Item 3. Defaults Upon Senior Securities............................ 18 Item 4. Submission of Matters to a Vote of Security Holders........ 18 Item 5. Other information.......................................... 18 Item 6. Exhibits and Reports on Form 8-K........................... 18 Signature Page..................................................... 19
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) - -------------------------------------------------------------------------------
June 30, December 31, 1997 1996(1) --------- ---------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 621 $ 1,980 Accounts receivable - net of allowance for doubtful accounts of $4,697 at June 30, 1997 and $7,014 at December 31, 1996 26,073 25,800 Income taxes receivable 160 498 Inventories (Note 3) 39,033 32,565 Other current assets 2,554 1,212 ---------- ---------- Total current assets 68,441 62,055 PROPERTY, PLANT AND EQUIPMENT, NET (Note 3) 31,153 32,262 OTHER ASSETS 7,596 7,946 INTANGIBLE ASSETS, NET 13,027 13,783 ---------- ---------- TOTAL ASSETS $ 120,217 $ 116,046 ========== ========== LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY) CURRENT LIABILITIES: Current portion of long-term debt (Note 5) $ 132,376 $ 124,830 Accounts payable 14,168 17,231 Accrued liabilities 5,421 6,176 Accrued interest 7,901 -- ---------- ---------- Total current liabilities 159,866 148,237 LONG-TERM DEBT (Note 5) 33,831 34,100 REDEEMABLE PREFERRED STOCK 53,554 49,351 REDEEMABLE COMMON STOCK 3,044 2,476 STOCKHOLDERS EQUITY (DEFICIENCY): Common stock 9 9 Additional paid-in capital 1,915 6,685 Reduction of certain equity interest to predecessor basis (6,209) (6,209) Accumulated deficit (125,793) (118,603) ---------- ---------- Total stockholders' equity (deficiency) (130,078) (118,118) ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY) $ 120,217 $ 116,046 ========== ==========
(1) Derived from December 31, 1996 audited consolidated financial statements. See notes to condensed consolidated financial statements (unaudited). 3 4 DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED) - -------------------------------------------------------------------------------
Three Months Ended June 30, --------------------------- 1997 1996 ---------- ---------- SALES (Note 8) $ 37,629 $ 42,989 COST OF GOODS SOLD 29,224 31,774 ---------- ---------- GROSS PROFIT 8,405 11,215 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,555 12,362 ---------- ---------- LOSS FROM OPERATIONS (1,150) (1,147) INTEREST EXPENSE, NET (5,225) (4,917) DEBT RESTRUCTURING FEES AND EXPENSES (Note 1) (1,604) -- ---------- ---------- LOSS BEFORE PROVISION FOR INCOME TAXES (7,979) (6,064) INCOME TAX BENEFIT -- 2,001 ---------- ---------- NET LOSS $ (7,979) $ (4,063) ========== ==========
See notes to condensed consolidated financial statements (unaudited). 4 5 DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED) - -------------------------------------------------------------------------------
Six Months Ended June 30, --------------------------- 1997 1996 ---------- ---------- SALES (Note 8) $ 73,526 $ 81,772 COST OF GOODS SOLD 57,050 60,610 ---------- ---------- GROSS PROFIT 16,476 21,162 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 18,945 24,098 ---------- ---------- INCOME (LOSS) FROM OPERATIONS (2,469) (2,936) OTHER INCOME (Note 6) 3,748 -- INTEREST (EXPENSE), NET (10,421) (9,522) DEBT RESTRUCTURING FEES AND EXPENSES (Note 1) (1,604) -- ---------- ---------- LOSS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM (10,746) (12,458) INCOME TAX BENEFIT - 4,107 ---------- ---------- LOSS BEFORE EXTRORDINARY ITEM (10,746) (8,351) EXTRAORDINARY GAIN FROM FORGIVENESS OF DEBT, NET OF TAXES 3,556 -- ---------- ---------- NET LOSS $ (7,190) $ (8,351) ========== ==========
See notes to condensed consolidated financial statements (unaudited). 5 6 DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) - -------------------------------------------------------------------------------
Reduction of Certain Equity Interest to Total Common Additional Predecessor Accumulated Stockholder's Stocks Paid-in Capital Basis Deficiency Equity (Deficiency) ------- --------------- -------------- ----------- ------------------- Balances at December 31, 1996 $ 9 $ 6,685 $ (6,209) $ (118,603) $ (118,118) Accretion of redeemable common stock for the six months ended June 30, 1997 (568) (568) Accretion of redeemable preferred stock for the six months ended June 30, 1997 (453) (453) Preferred stock dividends paid in-kind for the six months ended June 30, 1997 (3,749) (3,749) Net loss for the six months ended June 30, 1997 (7,190) (7,190) -------- -------- --------- ---------- ---------- Balances at June 30, 1997 $ 9 $ 1,915 $ (6,209) $ (125,793) $ (130,078) ======== ======== ========= ========== ==========
See notes to condensed consolidated financial statements (unaudited). 6 7 DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) - -------------------------------------------------------------------------------
Six Months Ended June 30, --------------------------- 1997 1996 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income less $ (7,190) $ (8,351) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,001 4,925 Deferred tax benefit -- (4,107) Retirement of related party debt (Note 6) (6,900) -- Changes in operating assets and liabilities: Accounts receivable (273) 4,956 Inventories (6,468) (1,694) Income tax receivable 338 (331) Other current assets (1,344) (1,514) Accounts payable (3,063) (1,768) Accrued liabilities (751) (849) Accrued interest 7,901 582 ---------- ---------- Net cash used in operating activities (14,749) (8,151) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (1,134) (1,938) Other long-term assets 347 (2,074) ---------- ---------- Net cash used in investing activities (787) (4,012) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving line of credit 14,177 13,744 Redeemable preferred stock dividends paid -- (1,750) ---------- ---------- Net cash provided by financing activities 14,177 11,994 ---------- ---------- DECREASE IN CASH AND CASH EQUIVALENTS (1,359) (169) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,980 169 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 621 $ -- ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 2,520 $ 10,418 Non-cash activities Forgiveness of debt (Note 6) $ 6,900 --
See notes to condensed consolidated financial statements (unaudited). 7 8 DECORATIVE HOME ACCENTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 AND 1996 - ------------------------------------------------------------------------------- 1. BASIS OF INTERIM PRESENTATION The accompanying 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 of 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 accruals) considered necessary to present fairly the Company's financial position as of June 30, 1997 and the results of its operations and its cash flows for the six months ended June 30, 1997 have been included. Operating results for the three and six months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. The condensed financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended December 31, 1996. For interim reporting, the Company's subsidiary, Home Innovations. Inc. ("HII") uses an estimated gross profit based on information provided by its accounting and financial systems. At year-end, inventories of the Company are stated at the lower of cost, determined using the first-in, first-out ("FIFO") method, or market. As discussed in Note 7, on September 29, 1997, the Company filed a pre-negotiated filing under the provisions of Chapter 11 of the United States Bankruptcy code in order to effect a financial reorganization of the Company. The plan of reorganization makes provision for the payment of all pre-petition trade debt following the confirmation of the plan. The financial statements of the Company are prepared on a going concern basis which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. In accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" issued by the American Institute of Certified Public Accountants ("SOP 90-7"), subsequent to the September 29, 1997 Chapter 11 filing and until the confirmation date, all pre-petition liabilities that are subject to compromise under the plan of reorganization (the $118.1 million principal amount of 13% Senior Notes plus all accrued and unpaid interest on the Senior Notes and the 14% Redeemable Preferred Stock) will be classified on the condensed balance sheets as liabilities subject to compromise. As of the effective date of the plan of reorganization, the Company will adopt "fresh start" reporting as defined in SOP 90-7. In accordance with "fresh start" reporting, the reorganization value of the Company will be allocated to the emerging entity's specific tangible and identifiable intangible assets. Any excess reorganization value will be reported as "reorganization value in excess of amounts allocable to identifiable assets." As a result of the adoption of such "fresh start" reporting, the Company's post-emergence financial statements ("successor") will not be comparable with its pre emergence financial statements ("predecessor") including the historical financial statements included in this quarterly report. The accompanying statements of operations reflect certain restructuring fees and expenses consisting of professional fees and expense directly related to the debt restructuring and reorganization. 8 9 2. ORGANIZATION The accompanying interim consolidated financial statements as of June 30, 1997, include the accounts of Decorative Home Accents, Inc. ("DHA" or the "Company") and its wholly-owned subsidiaries, The Rug Barn, Inc. (the "Rug Barn") and Home Innovations, Inc. All significant intercompany transactions and accounts have been eliminated. 3. BALANCE SHEET COMPONENTS Inventories are summarized as follows (in $000's):
JUNE 30, DECEMBER 31, 1997 1996 ---------- ---------- Raw materials $ 17,550 $ 13,964 Work-in-process 2,401 2,654 Finished goods 19,082 15,947 ---------- ---------- $ 39,033 $ 32,565 ========== ==========
Property, plant and equipment is summarized as follows (in $000's):
JUNE 30, DECEMBER 31, 1997 1996 ---------- ---------- Land $ 862 $ 862 Buildings and improvements 16,999 16,782 Furniture and fixtures 6,020 5,296 Machinery and equipment 15,912 15,536 ---------- ---------- 39,793 38,476 Accumulated depreciation (9,922) (7,594) ---------- ---------- 29,871 30,882 Construction in progress 1,282 1,380 ---------- ---------- $ 31,153 $ 32,262 ========== ==========
4. INCOME TAXES The Company's income tax benefit for the six months ended June 30, 1997 was calculated at an effective rate of 38% before being offset by an increase in the tax valuation allowance. Management of the Company cannot be assured that the net deferred income tax asset will be realized, therefore the deferred tax asset has been fully reserved. 5. LONG-TERM DEBT 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% 9 10 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. 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. At June 30, 1997, the Company's outstanding borrowings under the Revolving Credit Facility and the Supplemental Facility totaled approximately $30.1 million. The Supplemental Loans under the Supplemental Facility were repaid on May 27, 1997. Additionally, 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 June 30, 1997. In connection with the pre-negotiated Chapter 11 filing by the Company and its subsidiaries, the Agreement was amended. See Note 7 - Capital Restructuring Plan. The Company's did not make the scheduled interest payment of approximately $7.7 million on its Senior Notes due on June 30, 1997. As a result the Company has reclassified $118.1 million of long-term debt as a current liability. See Note 7 regarding the Company's planned financial reorganization. In March 1997, $6.9 million of the Company's Senior Notes were retired. See Note 6 - Related Party Transaction. Pursuant to the restructuring discussed in "Note 7 - Capital Restructuring Plan," 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). 6. RELATED PARTY TRANSACTION During 1996, two of the Company's officers who were 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. The Company recorded approximately $3.7 million as other income and approximately $3.6 million as an extraordinary gain in the first quarter of 1997, as a result of this settlement and forgiveness of debt. 7. 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. 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 10 11 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 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. Pursuant to certain agreements, dated September 26, 1997 (the "Exercise Agreements"), Magten and Fund V each agreed 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 enable it 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 5. 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. The proposed restructuring plan and the Exercise Agreements are subject to various conditions. On September 29, 1997, a pre-negotiated filing under the provisions of Chapter 11 of the United States Bankruptcy Code was made by the Company and its subsidiaries in order to effect the restructuring plan. Concurrent therewith, the Company filed its plan of reorganization with the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") that reflects the proposed restructuring plan described above. The plan of reorganization provides for the payment in full of all unpaid pre-petition trade debt following the confirmation of the plan. The Company is prohibited from making payment on any pre-petition obligations during the course of the Chapter 11 filing. In the event that a restructuring is not consummated, management of the Company believes 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. In connection with the pre-negotiated Chapter 11 filing, the Company (with approval of the Bankruptcy Court) has entered into a debtor-in-possession post-petition term loan agreement ("Term Loan") with Magten. The Term Loan provided $3.75 million of borrowings and is secured by all of the assets of the Company and its subsidiaries and the common stock of the Company's subsidiaries. Any amounts outstanding under the Term Loan agreement as of the effective date of the restructuring will be repaid with the proceeds from a new secured term loan of up to $7.5 million to be funded by Magten. Funding of this $7.5 million term loan is subject to various conditions. Subsequent to the Chapter 11 bankruptcy filing, the Company (with approval of the Bankruptcy Court) entered into a debtor-in-possession financing agreement with Congress Financial Corporation which has amended the pre-petition Agreement. The form of this financing substantially conforms with the Company's previous Agreement with Congress. 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. During the six months ended June 30, 1997 a charge of $512,000 was recorded for these retention agreements. On February 28, 1997, the Company also entered into amended and restated employment and non-competition agreements with certain officers. Each of such agreements provides that if the applicable officer'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) the officer, then the Company shall pay the officer an amount in cash, which amount for all such officers aggregates approximately $2.5 million. 11 12 In connection with the restructuring plan discussed elsewhere herein, the original license with Calvin Klein, Inc. was terminated on April 26, 1997 and on April 27, 1997, Calvin Klein and DHA Home, Inc. entered into an interim license agreement (the "Interim License Agreement") with 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. The Interim License Agreement expires upon the earlier of April 30, 1998, or the completion of the restructuring plan. Upon the consummation of the restructuring, the Company believes that Calvin Klein has committed to enter into a new multiple year license agreement on similar terms and conditions that would extend through the year 2004. DHA Home also believes that it has a good relationship with Calvin Klein and continues to work with Calvin Klein on long-range plans for Calvin Klein license products. Notwithstanding DHA Home's belief, Calvin Klein has asserted that (i) no assurances can be given that any such license will be entered into and (ii) Calvin Klein has not committed to enter into any such long-term license. At June 30, 1997, the carrying amount of the Calvin Klein license agreement is $7,809,000, 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. 8. THE RUG BARN, INC. SALES DECLINE Through September 1997, the Company has experienced a significant decline in sales at The Rug Barn, Inc. Demand for the Rug Barn's core product of two and three layer cotton throws has continued to decline in the giftware distribution channel served by the Rug Barn. Through September 1997, order bookings have declined approximately 50% compared to the same period in 1996. Management of the Company is addressing the sales decline through reductions in fixed overhead costs and planned expanded product offerings. The fixed overhead reductions are expected to be completed by December 31, 1997. The new product offerings will include both internally manufactured and outsourced products targeted at the giftware distribution channel. Management does not expect that the new product offerings will favorably impact 1997 operating results and expects that the operations at the Rug Barn will incur an operating loss through December 31, 1997. 9. LEGAL PROCEEDINGS On July 29, 1997, a fixture supplier of the Company filed suit seeking $1.9 million in damages, against the Company claiming that the Company failed to fulfill its obligations under a supply arrangement. Management of the Company intends to vigorously defend against the suit. Further, management expects to contest the claim during the course of its Chapter 11 case. Management does not expect that the ultimate settlement of the claim will have a material adverse impact on the Company. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion provides management's assessment of the results of operations and liquidity and capital resources of DHA. This discussion should be read in conjunction with the respective unaudited condensed consolidated financial statements of DHA and the notes thereto included elsewhere in this Form 10-Q and the audited consolidated financial statement of DHA and the notes thereto for the year ended December 31, 1996 reported on Form 10-K with the Securities and Exchange Commission. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 WITH THREE MONTHS ENDED JUNE 30, 1996 NET SALES Net sales for the three months ended June 30, 1997 decreased by approximately $5.4 million, or 12.5%, to $37.6 million from $43.0 million for the three months ended June 30, 1996. The Company experienced weakened sales during 1997 in its gift division (The Rug Barn, Inc.). Sales from the gift division decreased $3.3 million, or 40%, for the three months ended June 30, 1997 compared to the three months ended June 30, 1996. As discussed in Note 8 to the Condensed Consolidated Financial Statements, order bookings for the gift division through September 1997 have declined approximately 50% for the comparable 1996 period. Accordingly, the Company expects to experience continued weakening in sales from the gift division during 1997. In addition, the gift division was negatively impacted by delivery problems for product offerings sourced from other manufacturers. The liquidity shortages faced by the Company in 1997 significantly impacted the Company's ability to service its customer base. Given the limited resources, the Company attempted to service its most significant customers. GROSS PROFIT Gross profit decreased approximately $2.8 million, or 25.1%, to $8.4 million for the three months ended June 30, 1997 from $11.2 million for the three months ended June 30, 1996. Gross profit as a percentage of sales declined to 22.3% for the three months ended June 30, 1997 compared to 26.1% for the three months ended June 30, 1996. The decrease primarily resulted from the decline in the Company's gift division sales which accounted for approximately $1.9 million of the decrease in gross profit. Historically, gross profit margins achieved on products in the gift division have been higher than those earned on the Company's other product lines. The Company also experienced efficiency losses in its cut and-sew plants as a result of liquidity constraints negatively impacting raw material purchases. SELLING, GENERAL & ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses decreased approximately $2.8 million, or 25.4%, to $9.6 million for the three months ended June 30, 1997 from $12.4 million for the three months ended June 30, 1996. SG&A expenses decreased as a percentage of sales to 25.4% for the three months ended June 30, 1997 from 28.8% for the three months ended June 30, 1996. This decrease in SG&A expenses was due to a decrease in salaries and benefit expenses of approximately $200,000 and decreases in other variable general and administrative expenses of approximately $1.6 million for the three months ended June 30, 1997. Additionally, the 1996 results included approximately $1.0 million of goodwill amortization. As noted below, the Company wrote-off its unamortized goodwill at December 31, 1996 and accordingly, there was no goodwill amortization in 1997. 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 recoverability 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 13 14 impaired. 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 1996 consolidated statement of operations. INTEREST EXPENSE, NET Interest expense increase approximately $308,000, or 6.3%, to $5.2 million for the three months ended June 30 , 1997 from $4.9 million for the three months ended June 30, 1996. Short-term and long-term borrowings increased by approximately $7.3 million, net of a $6.9 million reduction for a related party transaction (see Note 6 - Related Party Transaction). DEBT RESTRUCTURING FEES AND EXPENSES The accompanying statements of operations reflect certain restructuring fees and expenses consisting of professional fees and expense directly related to the debt restructuring and reorganization. For the three months ended June 30, 1997 the Company incurred approximately $1.6 million in restructuring fees and expenses. INCOME TAXES The Company's income tax benefit for the three months ended June 30, 1997 was calculated at an effective rate of 38% before being offset by an increase in the tax valuation allowance. Management of the Company cannot be assured that the net deferred income tax asset will be realized. Therefore, the deferred tax asset has been fully reserved. COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 WITH SIX MONTHS ENDED JUNE 30, 1996 NET SALES Net sales for the six months ended June 30, 1997 decreased approximately $8.2 million, or 10.1%, to $73.5 million from $81.8 million for the six months ended June 30, 1996. The sales decline is primarily attributable to a $6.2 million decrease in the Company's gift division sales for the six months ended June 30, 1997 compared to the gift division sales for the six months ended June 30, 1996. As discussed in Note 8 to the Condensed Consolidated Financial Statements, order bookings through for the gift division September 1997 have declined approximately 50% from the comparable 1996 period. Accordingly, the Company expects to experience continued weakening in sales from the gift division during 1997.In addition, the gift division was negatively impacted by delivery problems for product offerings sourced from other manufacturers. The liquidity shortages faced by the Company in 1997 significantly impacted the Company's ability to service its customer base. Given the limited resources, the Company attempted to service its most significant customers. GROSS PROFIT Gross profit decreased approximately $4.7 million, or 22.1%, to $16.5 million for the six months ended June 30, 1997, compared to $21.1 million for the six months ended June 30, 1996. Gross profit as a percentage of sales decreased to 22.4% for the six months ended June 30, 1997 from 25.8% for the six months ended June 30, 1996. The decrease primarily resulted from the decline in the Company's gift division sales which accounted for approximately $3.4 million of the decrease in gross profit. Historically, gross profit margins achieved on products in the gift division have been higher than those earned on the Company's other product lines. The Company also experienced efficiency losses in its cut and-sew plants as a result of liquidity constraints negatively impacting raw material purchases. 14 15 SELLING, GENERAL & ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased approximately $5.2 million, or 21.4%, to $18.9 million for the six months ended June 30, 1997 from $24.1 million for the six months ended June 30, 1996. SG&A expenses decreased as a percentage of sales to 25.8% for the six months ended June 30, 1997 from 29.4% million for the six months ended June 30, 1996. This decrease in SG&A expenses was due to a decrease in salaries and benefit expenses of approximately $860,000 and decreases in other variable general and administrative expenses of approximately $2.2 million for the six months ended June 30, 1997. Additionally, the 1996 results included approximately $2.1 million of goodwill amortization. As discussed above, the Company wrote-off its unamortized goodwill at December 31, 1996 and accordingly, there was no goodwill amortization in 1997. OTHER INCOME AND EXTRAORDINARY GAIN During 1996, two of the Company's officers who were 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. The Company recorded approximately $3.7 million as other income and approximately $3.6 million in the first quarter of 1997, as a result of this settlement and forgiveness of debt. INTEREST EXPENSE, NET Interest expense increase approximately $899,000, or 9.4%, to $10.4 million for the six months ended June 30 , 1997 from $9.5 million for the six months ended June 30, 1996. Short-term and long-term borrowings increased by approximately $7.3 million, net of a $6.9 million reduction for a related party transaction (see Note 6 - Related Party Transaction). INCOME TAXES The Company's income tax benefit for the six months ended June 30, 1997 was calculated at an effective rate of 38% before being offset by an increase in the tax valuation allowance. Management of the Company cannot be assured that the net deferred income tax asset will be realized. Therefore the deferred tax asset has been fully reserved. DEBT RESTRUCTURING FEES AND EXPENSES The accompanying statements of operations reflect certain restructuring fees and expenses consisting of professional fees and expense directly related to the debt restructuring and reorganization. For the six months ended June 30, 1997 the Company incurred approximately $1.6 million in restructuring fees and expenses. SEASONALITY The Company's business is seasonal in nature with its highest sales levels historically occurring during the third and fourth fiscal quarters, which includes the holiday selling season. LIQUIDITY AND CAPITAL RESOURCES During the first half of 1997, the Company experienced significant liquidity constraints as a result of poor operating performance during the fourth quarter of 1996 and a December 31, 1996 payment of the $8.125 million interest on the Company's Senior Notes. Additionally, the Company experienced a significant reduction in vendor trade credit and was forced to operate on a cash-in-advance or cash-on-delivery basis. As a 15 16 result, the Company was unable to service all of its customers. Also, operating efficiencies of the Company's plants were negatively impacted due to the restricted raw material purchasing ability. The comprehensive restructuring plan discussed herein provided additional liquidity to the Company through the $20 million secured term loan facility. Additionally, the committed post-petition term loans form Magten will provide additional liquidity. Finally, the Company expects to receive debtor-in-possession financing from Congress Financial Corporation ("Congress") on terms substantially conforming with the Company's revolving credit facility ("Revolving Credit Facility") with Congress. Management believes that these sources of liquidity combined with operating cash flow will be adequate to service the working capital needs of the Company as well as funding operating losses at the Rug Barn. In the event that a restructuring and the related financing are not consummated, the ability of the Company to continue as a going concern is doubtful. The Company's 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. 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 June 30, 1997. On June 30, 1997, the Company had approximately $2.6 million available for borrowing under the Revolving Credit Facility borrowing base formula based on underlying collateral. 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. Cash used in operating activities was approximately $14.7 million for the six months ended June 30, 1997 compared to use of cash of $8.2 million for the six months ended June 30, 1996. The principal reason for the change is due to the timing of the Company's $8.1 million interest payment paid in the first quarter of 1997 on its Senior Notes. The company did not make its scheduled interest payment due on June 30, 1997 on its Senior Notes. Inventories increased $6.5 million during the first six months of 1997 compared to an increase of $1.7 million during the same period in 1996. The Company used approximately $3.1 million to reduce trade payables as a result of decreasing support from the Company's vendors. Cash used in investing activities was approximately $787,000 for the six months ended June 30, 1997 compared to $4.0 million used for the six months ended June 30, 1996. The Company used $1.1 million for the six months ended June 30, 1997 for purchases of property and equipment compared to $1.9 million used for the first six months of 1996. This reduction in capital expenditures is a result of the Company's limited liquidity. Cash used for long-term assets decreased by approximately $2.4 million in the first six months of 1997 compared to the first six months of 1996. This resulted from ongoing systems conversions programs which were cut back in 1997 due to liquidity constraints. Cash provided by financing activities was approximately $14.2 million for the six months ended June 30, 1997 compared to $12.0 million for the six months ended June 30, 1996. This change is primarily due to the operating losses for 1997 and additional working capital requirements. See Footnote 7 - Capital Restructuring Plan. 16 17 INFLATION Although the operations of the Company are generally influenced by economic conditions, the Company does not believe that inflation had a material effect on the results of operations during the six months ended June 30, 1997 and 1996. The Company has been historically able to mitigate the impact of the increases in the spot market prices of cotton through fixed price purchase contracts. EFFECT OF COMPLIANCE WITH ENVIRONMENTAL PROTECTION PROVISIONS Compliance with Federal, State and local provisions that have been enacted or adopted regulating the discharge of materials in the environment, or otherwise relating to protection of the environment, has not had, and is not expected to have, a material adverse effect on the capital expenditures, net income or competitive position of the Company. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements contained in this Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company cautions readers of this Quarterly Report on Form 10-Q that a number of important factors could cause the Company's actual results in 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 ability complete its plan of reorganization, 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. 17 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On July 29, 1997, a fixture supplier of the Company filed suit seeking $1.9 million against the Company claiming that the Company failed to fulfill its obligations under a supply arrangement. Prayed damages are approximately $1.9 million. Management of the Company intends on vigorously defending the suit. Further, management expects to contest the claim during the course of its Chapter 11 case. Management does not expect that the ultimate settlement of the claim will have a material adverse impact on the Company. As contemplated by the Company's capital restructuring plan, the Company filed a pre-negotiated filing under the provisions of Chapter 11 of the United States Bankruptcy Code on September 29, 1997. See Note 7 to the Condensed Consolidated Financial Statements contained in Part I of this Form 10-Q. The Company is involved in various routine legal proceedings incidental to the conduct of its business. Management believes that none of these legal proceedings, except for the pre-negotiated Chapter 11 filing, could 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 (a) The Company did not make a scheduled interest payment of approximately $7.7 million on its Series B 13% Senior Notes due on June 30, 1997. The principal amount of the Senior Notes is $118.1 million. The terms of the indenture governing the Company's Senior Notes provide that such a failure to pay interest when due results in an event of default on such indebtedness and as a result, the holders of these debt securities are entitled to accelerate the debt represented thereby. In addition, under the indenture, as a consequence of the Chapter 11 bankruptcy filing by the Company, the indebtedness under the Senior Notes was automatically accelerated and became immediately due and payable. (b) The Company did not make a scheduled dividend payment in kind of approximately $1.9 million on its Redeemable Preferred Stock ($0.01 par value). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE ITEM 5. OTHER INFORMATION NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS SEE EXHIBIT INDEX. (B) REPORTS ON FORM 8-K NONE 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. Decorative Home Accents, Inc. ----------------------------- (Registrant) Date: November 14, 1997 /s/ Jay N. Baker ----------------- ----------------------------- Jay N. Baker* Chief Financial Officer * Duly authorized to sign on behalf of the Registrant. 19 20 EXHIBIT INDEX -------------
EXHIBIT NUMBER DESCRIPTION - ------ -------------------------------------------------------------------- 27 Financial data schedule
20 EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF DECORATIVE HOME ACCENTS, INC. FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 3-MOS DEC-31-1997 DEC-31-1996 JUN-30-1997 1 621 0 30,770 4,697 39,033 68,441 41,075 (9,922) 120,217 159,866 118,100 53,554 0 9 (127,043) 120,217 37,629 37,269 29,224 29,224 9,555 0 (5,225) (7,979) 0 (7,979) 0 0 0 (7,979) 0 0
-----END PRIVACY-ENHANCED MESSAGE-----