-----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, Kl8xi1X+ZA5sVeF5JanGgAinU7kytow/u2iMAn6854YAXs5Og0MxM7KBUx8ifLyI JLsW8Jq4oSGPkzZ4TFjoeQ== 0000950137-97-002673.txt : 19970812 0000950137-97-002673.hdr.sgml : 19970812 ACCESSION NUMBER: 0000950137-97-002673 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 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: 97655730 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: June 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ 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 [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 August 12, 1996, there were 1,074,838 shares outstanding of the Registrant's Class A Common Stock ($0.01 par value), 1,756,126 shares outstanding of the Registrant's Class B Non-Voting Common Stock ($0.01 par value), 386,040 shares outstanding of the Registrant's Class C Common Stock ($0.01 par value), 808,333 shares outstanding of the Registrant's Class D Common Stock ($0.01 par value), 125,000 shares outstanding of the Registrant's Class F Common Stock and 53,820 outstanding shares of the Registrant's 14% Cumulative Redeemable Preferred Stock ($0.01 par value). 1 2 DECORATIVE HOME ACCENTS, INC. QUARTER ENDED JUNE 30, 1996 INDEX
Page No. --- PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of June 30, 1996 (As Restated) and December 31, 1995...................................... 4 Condensed Consolidated Statements of Operations for the three months ended June 30, 1996 (As Restated) and 1995....................... 5 Condensed Consolidated Statements of Operations for the six months ended June 30, 1996 (As Restated) and 1995....................... 6 Condensed Consolidated Statement of Stockholders' Equity (Deficiency) for the six months ended June 30, 1996 (As Restated) ................... 7 Condensed Consolidated Statements of Cash Flows for the six months ended June 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 ................................................................ 18
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 JUNE 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. 3 4 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) - --------------------------------------------------------------------------------
June 30, 1996 December 31, (Unaudited) 1995 (1) ----------- -------- (Restated - Note 4) ASSETS CURRENT ASSETS: Cash and cash equivalents $ - $ 169 Investment securities 1,000 1,000 Accounts receivable - net of allowance for doubtful accounts of $2,112 at June 30, 1996 and $2,506 at December 31, 1995 24,026 28,982 Income taxes receivable 3,045 2,714 Inventories 45,407 43,713 Deferred income taxes 3,692 4,282 Other current assets 2,112 598 --------- --------- Total current assets 79,282 81,458 PROPERTY, PLANT AND EQUIPMENT, NET 31,692 30,667 OTHER ASSETS 9,943 8,790 INTANGIBLE ASSETS, NET 94,345 94,938 --------- --------- TOTAL ASSETS $ 215,262 $ 215,853 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: Accounts payable $ 12,684 $ 14,452 Accrued liabilities 7,176 9,775 Accrued interest 8,165 7,583 --------- --------- Total current liabilities 28,025 31,810 --------- --------- LONG-TERM DEBT 146,345 131,452 DEFERRED INCOME TAXES - 3,348 REDEEMABLE PREFERRED STOCK 45,188 41,059 REDEEMABLE COMMON STOCK 2,015 1,639 STOCKHOLDERS' EQUITY (DEFICIENCY): Common stocks 9 9 Additional paid-in capital 11,602 16,107 Reduction of certain equity interest to predecessor basis (6,209) (6,209) Accumulated deficit (11,713) (3,362) --------- --------- Total stockholders' equity (deficiency) (6,311) 6,545 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 215,262 $ 215,853 ========= =========
(1) Derived from December 31, 1995 audited consolidated financial statements. See notes to condensed consolidated financial statements (unaudited). 4 5 DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED) - --------------------------------------------------------------------------------
Three Months Ended ------------------ June 30, 1996 June 30, 1995 ------------- ------------- (Restated -Note 4) SALES $ 42,989 $ 10,849 COST OF GOODS SOLD 31,774 5,406 -------- -------- GROSS PROFIT 11,215 5,443 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 12,362 4,126 -------- -------- INCOME (LOSS) FROM OPERATIONS (1,147) 1,317 -------- -------- INTEREST INCOME (EXPENSE) Interest expense (4,925) (1,819) Interest income 8 106 -------- -------- Interest income (expense), net (4,917) (1,713) -------- -------- LOSS BEFORE PROVISION FOR INCOME TAXES (6,064) (396) INCOME TAX BENEFIT 2,001 151 -------- -------- NET LOSS $ (4,063) $ (245) ======== ========
See notes to condensed consolidated financial statements (unaudited). 5 6 DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED) - --------------------------------------------------------------------------------
Six Months Ended ----------------- June 30, 1996 June 30, 1995 ------------- ------------- (Restated -Note 4) SALES $ 81,772 $ 22,125 COST OF GOODS SOLD 60,610 11,225 -------- -------- GROSS PROFIT 21,162 10,900 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 24,098 8,387 -------- -------- INCOME (LOSS) FROM OPERATIONS (2,936) 2,513 -------- -------- INTEREST INCOME (EXPENSE) Interest expense (9,540) (3,631) Interest income 18 238 -------- -------- Interest income (expense), net (9,522) (3,393) -------- -------- LOSS BEFORE PROVISION FOR INCOME TAXES (12,458) (880) INCOME TAX BENEFIT 4,107 335 -------- -------- NET LOSS $ (8,351) $ (545) ======== ========
See notes to condensed consolidated financial statements (unaudited). 6 7 DECORATIVE HOME ACCENTS , INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS) (UNAUDITED) - --------------------------------------------------------------------------------
Reduction of Certain Equity Interest to Total Common Additional Predecessor Accumulated Stockholders' Stocks Paid-in Capital Basis Deficit Equity (Deficiency) ------ --------------- ----- ------- ------------------- Balances at December 31, 1995 $ 9 $ 16,107 $ (6,209) $ (3,362) $ 6,545 Accretion of redeemable common stock for the six months ended June 30, 1996 (358) (358) Accretion of redeemable preferred stock for the six months ended June 30, 1996 (397) (397) Preferred stock dividend paid-in-kind (3,750) (3,750) Net loss (Restated - Note 4) (8,351) (8,351) -------- -------- -------- -------- -------- Balances at June 30, 1996 (Restated - Note 4) $ 9 $ 11,602 $ (6,209) $(11,713) $ (6,311) ======== ======== ======== ======== ========
See notes to condensed consolidated financial statements (unaudited). 7 8 DECORATIVE HOME ACCENTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Six months ended June 30 1996 1995 ------------------------------- (Restated - Note 4) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (8,351) $ (546) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization 4,925 1,993 Deferred tax (benefit) provision (4,107) (463) Changes in operating assets and liabilities: Accounts receivable 4,956 867 Inventories (1,694) (2,682) Income tax receivable (331) (833) Other current assets (1,514) 148 Accounts payable (1,768) 804 Accrued liabilities (849) (1,464) Accrued interest 582 275 Income taxes payable - (567) -------- -------- Net cash used in operating activities (8,151) (2,468) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (1,938) (728) Other long term assets (2,074) (110) -------- -------- Net cash used in investing activities (4,012) (838) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving line of credit 13,744 - Redeemable preferred stock dividends paid (1,750) - -------- -------- Net cash provided by financing activities 11,994 - -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (169) (3,306) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 169 8,355 -------- -------- CASH AND CASH EQUIVALENTS AT END OF $ - $ 5,049 -------- -------- PERIOD SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 10,418 $ - -------- --------
See notes to condensed consolidated financial statements (unaudited) 8 9 DECORATIVE HOME ACCENTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED JUNE 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 June 30, 1996, include the accounts of Decorative Home Accents, Inc. ("DHA" or the "Company") and its wholly-owned subsidiaries, The Rug Barn, Inc. and Home Innovations, Inc. (purchased on July 13, 1995). All significant intercompany transactions and accounts have been eliminated. 3. BALANCE SHEET COMPONENTS Inventories are summarized as follows (in $000's):
June 30, 1996 December 31, 1995 ------------- ----------------- Raw materials $21,076 $24,464 Work-in-process 2,257 973 Finished goods 22,074 18,276 ------- ------- $45,407 $43,713 ======= =======
9 10 Property, plant and equipment is summarized as follows (in $000's):
June 30, 1996 December 31, 1995 ------------- ----------------- Land $ 863 $ 863 Buildings and improvements 15,491 15,384 Furniture and fixtures 4,747 3,184 Machinery and equipment 16,028 14,101 -------- -------- 37,129 33,532 Accumulated depreciation (5,437) (3,375) -------- -------- 31,692 30,157 Construction in progress - 510 -------- -------- $ 31,692 $ 30,667 ======== ========
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 Six Months Ended June 30, 1996 June 30, 1996 --------------------------- ------------------------- As As Originally As As Originally Restated Recorded Restated Recorded -------- ------------- -------- ------------- Net sales $42,989 $44,495 $81,772 $84,281 Income (loss) from operations ($1,147) $836 ($2,936) ($31) Net loss ($4,063) ($2,734) ($8,351) ($6,404)
As of June 30, 1996 ---------------------------------- As As Originally Restated Recorded -------- -------- Current assets $79,282 $81,251 Total assets $215,262 $217,295 Current liabilities $28,025 $28,165 Total liabilities $174,370 $174,456 Total shareholders' deficiency ($6,311) ($4,364)
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 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 six months ended June 30, 1996. See Note 4 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 financial statements of DHA and the notes thereto included elsewhere in this Form 10-Q. The following table includes unaudited pro forma financial information as if the July 1995 purchase of Home Innovations, Inc. ("HII") occurred as of January 1, 1995. Such adjustments to the pro forma financial information consist principally of the following: net adjustments to cost of goods sold and SG&A expenses related to adjusting depreciation expense for the new basis of accounting resulting from the HII acquisition; increases in SG&A expenses to account for the amortization of goodwill and the identifiable intangible assets resulting from the HII acquisition; increases in SG&A expenses to account for compensation expense resulting from granting stock options at less than fair market value; net adjustments to interest expense resulting from issuance of 13% Senior Notes due 2002 and extinguishment of prior debt, amortization of debt issuance costs and accretion of discount on the Senior Notes. Management's discussion and analysis of the results of operations should be read using the proforma financial information presented below:
ACTUAL PROFORMA Three Months Ended ----------------------- June 30, June 30, 1996 1995 ---- ----- Sales $ 42,989 $ 47,568 Cost of goods sold 31,774 35,400 -------- -------- Gross profit 11,215 12,168 Selling, general and administrative expenses 12,362 13,919 -------- -------- Loss from operations (1,147) (1,751) Interest expense, net (4,917) (4,594) Gain on sale of equipment 0 175 -------- -------- Loss before income taxes $ (6,064) $ (6,170) ======== ========
ACTUAL PROFORMA Six Months Ended ---------------------- June 30, June 30, 11 12
1996 1995 ---- ----- Sales $ 81,772 $ 100,280 Cost of goods sold 60,610 72,931 --------- --------- Gross profit 21,162 27,349 Selling, general and administrative expenses 24,098 25,379 --------- --------- Income (loss) from operations (2,936) 1,970 Interest expense, net (9,522) (8,816) Gain on sale of equipment 0 175 Loss before income taxes $ (12,458) $ (6,671) ========= =========
IMPACT OF THE PURCHASE OF HOME INNOVATIONS, INC. On July 13, 1995, DHA acquired HII, a leading manufacturer of niche oriented home accessories with the following product categories: bath furnishings, window and specialty products, bedding products and the Calvin Klein Home Collection, a new line of designer home products launched in September 1995 under the Calvin Klein trademark. The cash purchase price of HII was approximately $95.1 million, after a $6.7 million reduction to the purchase price, including acquisition related costs of approximately $1.8 million and the assumption of approximately $32.8 million in liabilities consisting of trade payables and accruals and $2.3 million of junior subordinated notes. The $6.7 million adjustment to the purchase price was determined as a result of the level of net assets acquired as of the closing date and certain indemnifications from the sellers. The $6.7 million was received from the sellers in December, 1995. RESULTS OF OPERATIONS As described above, the results of operations for the three months ended June 30, 1995 reflect pro forma adjustments related to the merger agreement discussed above. Comparison of Results of Operations for the Three Months Ended June 30, 1996 (Actual) (As Restated) with the Pro forma Results of Operations for the Three Months Ended June 30, 1995 (with pro forma adjustments as discussed above). NET SALES Net sales for three months ended June 30, 1996 decreased by $4.6 million, or 9.6% from $47.6 million of pro forma net sales for the three months ended June 30, 1995 to $43.0 million for the three months ended June 30, 1996. Weak consumer demand and conservative inventory management by retailers served by the Company continued to negatively impact the June 30, 1996 quarter. While the Company experienced some improvement in retail conditions compared to the fourth quarter of 1995 and the first quarter of 1996, sales declined for the 1996 quarter compared to the same period in 1995. Additionally, 1996 second quarter sales were negatively impacted by furniture cover sales. The Company is significantly reducing its commitment to the furniture cover business because of substantial return problems generally experienced by the industry. Sales of Calvin Klein Home products positively impacted the quarter-to-quarter comparison. Sales of Calvin Klein Home products commenced in the third quarter of 1995. Finally, 1996 sales were negatively impacted by increased accounts receivable chargebacks related to customer returns and sales allowances. 12 13 GROSS PROFIT The gross profit margin increased from a pro forma of 25.6% for the three months ended June 30, 1995 to 26.1% for the three months ended June 30 , 1996. The 1995 margin was negatively impacted by write-downs of slow moving, close-out and obsolete inventory. Plant operating strategies were changed in 1996 to help reduce the Company's exposure to inventory writedowns, particularly in the cut-and-sew and print plants. The new operating strategy also contributed to higher efficiencies in those plants. Gains from the plant operations and inventory control were offset somewhat by a slight decline in giftware margins resulting from a change in product mix. As the Company continues to broaden its giftware product offerings to maximize its distribution strength, the margins realized on certain products sourced through outside manufacturers will continue to put some downward pressure on margins. SELLING, GENERAL & ADMINISTRATIVE EXPENSES SG&A expenses decreased $1.6 million or 11.2% from a pro forma of $13.9 million for the three months ended June 30, 1995 to $12.4 million for the three months ended June 30, 1996. As a percentage of sales, SG&A expenses decreased from a pro forma of 29.3% for the three months ended June 30, 1995 to 28.8% for the same period of 1996. The 1995 amount was negatively impacted by significant charges recorded related to customer chargebacks and claims. Positively impacting the 1996 results were the ongoing cost and headcount reduction programs resulting from the July 1995 merger. Duplicate functions are being eliminated and cost reductions achieved from consolidating certain functions and services. Management of the Company expects the cost reduction programs to continue to favorably impact the second half of 1996 compared to 1995 expense levels. Negatively impacting the amounts of SG&A expenses for 1995 and 1996 were the costs associated with Calvin Klein Home. Advertising and overhead expenses associated with Calvin Klein Home, as a percentage of sales, exceeded the level of the Company's mature businesses. This investment in the growth of the Calvin Klein Home Line is part of the Company's long-term plan and management of the Company expects that SG&A expenses as a percentage of sales will continue to exceed its other mature businesses for the next 12-24 months. INTEREST EXPENSE, NET Interest expense, net increased from a proforma of $4.6 million for the three months ended June 30, 1995 to $4.9 million for the three months ended June 30, 1996. This increase was principally due to increased borrowings under the Company's revolving line of credit during the second quarter of 1996. RESULTS OF OPERATIONS As described above, the results of operations for the six months ended June 30, 1995 reflect proforma adjustments related to the merger agreement discussed above. Comparison of Results of Operations for the Six Months Ended June 30, 1996 (Actual) (As Restated) with the Proforma Results of Operations for the Six Months Ended June 30, 1995 (with proforma adjustments as discussed above). NET SALES Net sales for six months ended June 30, 1996 decreased by $18.5 million, or 18.5% from $100.3 million of pro forma net sales for the six months ended June 30, 1995 to $81.8 million for the six months ended June 13 14 30, 1996. A soft retail climate continued to negatively impact sales. While the most significant decline was in furniture cover sales, all product lines and distribution channels served by the Company were impacted. A modest improvement in retail conditions was experienced by the Company in the second quarter ended June 30, 1996 compared to the fourth quarter of 1995 and the first quarter of 1996. However, the improvement did not completely offset the negative impact of the weak retail environment on 1996 sales. The decrease in furniture cover sales was offset by sales of Calvin Klein Home products. Finally, 1996 sales were negatively impacted by increased accounts receivable chargebacks related to customer returns and sales allowances. Currently, management of the Company expects full year sales for 1996 to be below 1995 levels as a result of the difficult retail climate. GROSS PROFIT The gross profit margin decreases from a pro forma of 27.3% for the six months ended June 30, 1995 to 25.9% for the six months ended June 30 , 1996. Gross margins for the six months ended June 30, 1996 were negatively impacted by some declines in the giftware trade margins. As the Company continues to broaden its giftware product offerings to maximize its distribution strength, the margins realized on certain products sourced through outside manufacturers will continue to put some downward pressure on margins. Additionally, plant efficiency losses in the Company's printing and cut-and-sew plants negatively impacted 1996 margins. The losses resulted from unabsorbed fixed overhead due to temporary plant curtailments. SELLING, GENERAL & ADMINISTRATIVE EXPENSES SG&A expenses decreased $1.3 million or 5.1% from a pro forma of $25.4 million for the six months ended June 30, 1995 to $24.1 million for the six months ended June 30, 1996. As a percentage of sales, SG&A expenses increased to 29.5% for the six months ended June 30, 1996 from a pro forma of 25.3% for the same period of 1995. The increase in SG&A expenses, as a percentage of sales, resulted from the fixed nature of many of the Company's SG&A costs, particularly salaries and benefits and the reduced sales for six months ending June 30, 1996. From an absolute dollar standpoint, the 1995 results were negatively impacted by uncollectible accounts charges resulting from customer chargebacks and claims. Additionally, substantial expenditures related to the September, 1995 launch of the Calvin Klein Home Line negatively impacted SG&A expenses for the first half of 1995. The negative impact on SG&A expenses continued, to a lesser extent, as advertising and overhead expenses related to the new Calvin Klein Home Line continued in 1996. As a percentage of sales, the SG&A expenses associated with the Calvin Klein Home Line exceeded those of the Company's mature businesses. This investment in the growth of the Calvin Klein Home is part of the Company's long-term plan and management of the Company expects that SG&A expense as a percentage of sales will continue to exceed its other mature businesses for the next 12-24 months. Favorably impacting the 1996 results was the on-going cost and headcount reduction programs resulting from the July, 1995 acquisition of Home Innovations. Integration of certain overhead functions as well as the elimination of duplicative headcount began to positively impact the Company's result for the second quarter of 1996. Management of the Company expects that SG&A expenses will continue to be favorably impacted from these programs for the balance of 1996. INTEREST EXPENSE, NET Interest expense, net increased from a pro forma of $8.8 million for the six months ended June 30, 1995 to $9.6 million for the six months ended June 30, 1996. This increase was principally due to increased borrowings under the Company's revolving line of credit during the first six months of 1996. INCOME TAXES The Company has recognized an income tax benefit arising from the year-to-date loss. The Company has not provided a valuation allowance on the related deferred tax asset. Management of the Company currently 14 15 believes that the deferred tax asset reported in the June 30, 1996 Balance Sheet will be fully realized in the foreseeable future. SEASONALITY The Company's business is seasonal in nature with its highest sales levels historically occurring during the third and fourth fiscal quarters, which includes the holiday selling season. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity for operations and expansion have historically been funds generated internally and borrowings under the Company's $50.0 million revolving credit facility. Available borrowings under the credit facility are based on specified levels of underlying collateral. As of June 30, 1996, the Company had approximately $10.9 million available under the revolving credit facility described above (net of $18.7 million of outstanding borrowings and $2.6 million in outstanding letters of credit). The Company intends to utilize borrowings under the revolving credit facility to meet seasonal fluctuations in the Company's working capital requirements, typically peaking in early October, and to fund the anticipated build up of inventory relating to the continuing rollout of the Calvin Klein Home line of products. Management believes the Calvin Klein Home line of products have increased the Company's working capital needs in 1996 by approximately $8 to $12 million from 1995 levels. Management believes that the working capital requirements related to Calvin Klein in 1996 peaked in April 1996. Management believes that the Company's cash flow from operations and borrowing under the revolving credit facility will be sufficient to fund the Calvin Klein Home requirements. The obligations under the revolving credit facility are secured by a first lien on the inventory and receivables of The Rug Barn, Inc. and Home Innovations, Inc. and its subsidiaries. The revolving credit facility contains certain financial and other covenants with which the Company must comply, including, but not limited to a requirement to maintain certain financial ratios and limitations on the ability of Rug Barn and Home Innovations to incur additional indebtedness and pay dividends. The Company was in compliance with the loan covenants, as amended, at June 30, 1996. Cash flows used in operating activities were approximately $8.2 million for the six months ended June 30, 1996. In addition to the Company's net loss, cash used for the six month period ended June 30, 1996 was driven by an additional investment of $1.7 million in inventory as well as reductions in trade payables and accruals totaling $2.0 million. Additionally, other current assets increased by approximately $1.5 million primarily as a result of prepaid catalog costs associated with new product roll-outs. The incremental inventory investment related almost entirely to the new Calvin Klein Home Line. Excluding investment made in Calvin Klein inventory, the Company's inventory investment decreased by approximately $6 million or 14%, from December 31, 1995 amounts. The Company's cash from operations for the six months ended June 30, 1996 was positively impacted by a $5.0 million reduction in receivables resulting from increased emphasis on collections. Capital expenditures for the six month period ended June 30, 1996 approximated $1.9 million. The Company currently has no material commitments for capital expenditures. Borrowings under the Company's line of credit increased by approximately $13.7 million during the six months ended June 30, 1996. Additionally, the Company paid dividends totaling $1.75 million on its redeemable preferred stock in January, 1996. During the balance of 1996, the Company expects that dividends will be paid in kind rather than in cash. 15 16 Management expects that the Company's cash flow from operations and borrowings under the revolving credit facility, as required, will be adequate to finance anticipated operation needs, planned capital expenditures and to meet its debt service obligations in 1996. INFLATION Although the operations of the Company are generally influenced by economic conditions, the Company does not believe that inflation had a material effect on the results of operations during the six months ended June 30, 1996 and 1995. The Company has been historically able to mitigate the impact of the increases in the spot market prices of cotton through fixed price purchase contracts. EFFECT OF COMPLIANCE WITH ENVIRONMENTAL PROTECTION PROVISIONS Compliance with Federal, State and local provisions that have been enacted or adopted regulating the discharge of materials in the environment, or otherwise relating to protection of the environment, has not had, and is not expected to have, a material adverse effect on the capital expenditures, net income or competitive position of the Company. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements contained in this Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company cautions readers of this Quarterly Report on Form 10-Q that a number of important factors could cause the Company's actual results in 1996 and beyond to differ materially from those expressed in any such forward-looking statements. These factors include, without limitation, the general economic and business conditions affecting the retail industry, the Company's ability to meet its debt service obligations, contractual restrictions on HII's and the Rug Barn's ability to pay dividends to the Company, competition from a variety of firms ranging from small manufacturers to large textile mills, the seasonality of the Company's sales, the volatility of the Company's raw material cost, the Company's dependence on key personnel and the risk of loss of a material customer or a significant license. These and other factors are more fully described in the Company's previous filings with the Securities and Exchange Commission including, without limitation, the Company's Prospectus dated November 10, 1995. 16 17 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in various routine legal proceedings incidental to the conduct of its business. Management believes that none of these legal proceedings will have a material adverse impact on the financial condition or results of operations of the Company. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS SEE EXHIBIT INDEX. (b) REPORTS ON FORM 8-K NONE 17 18 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 June 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. 18 19 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 27 Financial data schedule 4.6 Form of Fourth Amendment to the Amended and Restated Credit Agreement, dated as of July 13, 1995, by among LaSalle National Bank, as co-agent and lender, General Electric Capital Corporation, as co-agent and lender, the Rug Barn, Inc., Home Innovations, Inc., Home Curtain Corp., Calvin Klein Home, Inc., Draymore Mfg. Corp. and R.A. Briggs and Company, as amended by the First Amendment, dated as of November 17, 1995, by the Second Amendment, dated as of December 31, 1995 and by the Third Amendment dated as of March 31, 1996. 19 EX-27 2 FINANICAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF DECORATIVE HOME ACCENTS, INC. FOR THE THREE MONTHS ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1995 MAR-31-1996 JUN-30-1996 0 1,000 26,138 2,112 45,407 79,282 37,129 (5,437) 215,262 28,025 0 45,188 0 9 11,602 215,262 42,989 42,989 31,774 0 12,362 0 (4,917) (6,064) (2,001) 0 0 0 0 (4,063) 0 0
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