<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
/ / For the Quarterly Period Ended: March 31, 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 Idenification 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 /X/ No / /
Indicate by check mark whether the registrant has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
As of May 10, 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 51,875 outstanding shares of the Registrant's 14%
Cumulative Redeemable Preferred Stock ($0.01 par value).
<PAGE> 2
DECORATIVE HOME ACCENTS, INC.
QUARTER ENDED MARCH 31, 1996
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1996 and
December 31, 1995 ............................................................... 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1996 and 1995 ............................................ 4
Condensed Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 1996 ..................................................... 5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1996 and 1995 ................................................... 6
Notes to Condensed Consolidated Financial Statements ..................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................................... 9
PART II OTHER INFORMATION
Signature Page ........................................................................... 14
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
<TABLE>
<CAPTION>
March 31,
1996 December 31,
(Unaudited) 1995 (1)
--------- ------------
(In Thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 169
Investment securities 1,000 1,000
Accounts receivable - net of allowance for doubtful accounts of
$2,661 at March 31, 1996 and $2,506 at December 31, 1995 32,258 28,982
Income taxes receivable 3,488 2,714
Inventories 47,705 43,713
Deferred income taxes 3,927 4,282
Other current assets 1,077 598
--------- --------
Total current assets 89,455 81,458
PROPERTY, PLANT AND EQUIPMENT, NET 30,636 30,667
OTHER ASSETS 9,336 8,790
INTANGIBLE ASSETS, NET 93,508 94,938
--------- --------
TOTAL ASSETS $ 222,935 $215,853
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 13,686 14,452
Accrued liabilities 7,157 9,775
Accrued interest 4,067 7,583
------------ --------
Total current liabilities 24,910 31,810
----------- --------
LONG-TERM DEBT 151,299 131,452
DEFERRED INCOME TAXES 1,154 3,348
REDEEMABLE PREFERRED STOCK 43,123 41,059
REDEEMABLE COMMON STOCK 1,817 1,639
STOCKHOLDERS' EQUITY:
Common stocks 9 9
Additional paid-in capital 13,864 16,107
Reduction of certain equity interest to predecessor basis (6,209) (6,209)
Accumulated deficit (7,032) (3,362)
--------- --------
Total stockholders' equity 632 6,545
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 222,935 $215,853
========= ========
</TABLE>
(1) Derived from December 31, 1995 audited consolidated financial statements.
See notes to condensed consolidated financial statements (unaudited).
3
<PAGE> 4
DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
SALES $39,786 $11,276
COST OF GOODS SOLD 28,802 5,819
------- -------
GROSS PROFIT 10,984 5,457
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,851 4,261
------- -------
INCOME (LOSS) FROM OPERATIONS (867) 1,196
------- -------
INTEREST INCOME (EXPENSE)
Interest expense (4,614) (1,812)
Interest income 9 131
------- -------
Interest income (expense), net (4,605) (1,681)
------- -------
LOSS BEFORE PROVISION FOR INCOME TAXES (5,472) (485)
INCOME TAX BENEFIT (1,802) (184)
------- -------
NET LOSS $(3,670) $ (301)
------- -------
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
4
<PAGE> 5
DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Reduction of
Certain Equity
Interest to Total
Common Additional Predecessor Retained Stockholders'
Stocks Paid-in Capital Basis Earnings Equity
------ --------------- ----- -------- ------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ 9 $ 16,107 $ (6,209) $ (3,362) $ 6,545
Accretion of redeemable common stock for the
three months ended March 31, 1996 (179) (179)
Accretion of redeemable preferred stock for the
three months ended March 31, 1996 (189) (189)
Preferred stock dividend accrual for the three
months ended March 31, 1996 (1,875) (1,875)
Net loss for the three months ended (3,670) (3,670)
------ ---------- ---------- --------- --------
Balances at March 31, 1996 $ 9 $ 13,864 $ (6,209) $ (7,032) $ 632
====== ========== ========== ========= ========
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
5
<PAGE> 6
DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,670) $ (301)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,318 1,027
Deferred tax (benefit) provision (1,839) 131
Changes in operating assets and liabilities
Accounts receivable (3,276) 1,548
Inventories (3,992) (639)
Income tax receivable (774) -
Other current assets (479) (1,158)
Accounts payable (766) 1,286
Accrued liabilities (869) (1,419)
Accrued interest (3,516) 1,757
Income taxes payable - (567)
-------- -------
Net cash provided by (used in) operating
activities (16,863) 1,665
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (857) (440)
Other long term assets (546) -
-------- -------
Net cash used in investing activities (1,403) (440)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit 19,847 -
Redeemable preferred stock dividends paid (1,750) -
Payments on notes payable - -
-------- -------
Net cash provided by financing activities 18,097 -
-------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (169) 1,225
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 169 8,355
-------- -------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ - $ 9,580
-------- -------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 9,875 $ -
======== =======
Income taxes paid $ - $ -
======== =======
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
6
<PAGE> 7
DECORATIVE HOME ACCENTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
- - ----------------------------------------------------------------------------
1. BASIS OF INTERIM PRESENTATION
The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the
instructions of Regulation S-X. Accordingly, they do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included in the interim financial information.
For interim reporting, the Company's subsidiary, Home innovations. Inc.
('HII") uses an estimated gross profit based on information provided by
its accounting and financial systems. At year-end, inventories of the
Company are stated at the lower of cost, determined using the first-in,
first-out (FIFO) method, or market.
The Company's business is seasonal in nature, with its highest sales
levels historically occurring in the third and fourth fiscal quarters,
which include the holiday selling season. Therefore, the results of
operations for the interim periods are not necessarily indicative of
the operating results of the full year.
2. ORGANIZATION
The accompanying interim consolidated financial statements as of March
31, 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):
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Raw materials $23,552 $24,464
Work-in-process 2,130 973
Finished goods 22,023 18,276
------- -------
$47,705 $43,713
======= =======
</TABLE>
7
<PAGE> 8
DECORATIVE HOME ACCENTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (CONTINUED)
Property, plant and equipment is summarized as follows (in $000's):
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Land $ 863 $ 863
Buildings and improvements 15,398 15,384
Furniture and fixtures 3,193 3,184
Machinery and equipment 14,171 14,101
------- -------
33,625 33,532
Accumulated depreciation (3,885) (3,375)
------- -------
29,740 30,157
Construction in progress 896 510
------- -------
$30,636 $30,667
======= =======
</TABLE>
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion provides management's assessment of the results of
operations and liquidity and capital resources of DHA and should be read in
conjunction with the respective financial statements of DHA and the notes
thereto included elsewhere in this Form 10-Q. The following table
includes unaudited proforma financial information 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
should be read using the proforma financial information presented below:
<TABLE>
<CAPTION>
ACTUAL PROFORMA
Three Months Ended
------------------
March 31, March 31,
1996 1995
--------- ---------
<S> <C> <C>
Sales $39,786 $52,712
Cost of goods sold 28,802 37,531
-------- -------
Gross profit 10,984 15,181
Selling, general and administrative
expenses 11,851 11,460
-------- -------
Income (loss) from operations (867) 3,721
Interest expense, net (4,605) (4,222)
-------- -------
Loss before income taxes $(5,472) $ (501)
======= =======
</TABLE>
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 speciality products, bedding products and the new
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 $31.0 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 March 31, 1995 reflect proforma adjustments related to the merger
agreement discussed above.
Comparison of Results of Operations for the Three Months Ended March 31,
1996 (Actual) with the Proforma Results of Operations for the Three Months
Ended March 31, 1995 (with proforma adjustments as discussed above).
9
<PAGE> 10
NET SALES
Net sales for three months ended March 31, 1996 decreased by $12.9
million, or 24.5% from $52.7 million of proforma net sales for the three months
ended March 31, 1995 to $39.8 million for the three months ended March 31,
1996. Sales across most of the Company's major product lines decreased
principally as a result of soft retail conditions in the major markets served
by the Company. All distribution channels served were affected by
the soft retail environment including the giftware trade. The reduction
of consumer spending and the associated tightening of retailer's inventory
positions which began in the third quarter of 1995 continued to have
negative effects on the Company's sales performance as expected. If current
market conditions prevail, the Company expects full year sales to
continue to be adversely affected.
GROSS PROFIT
The gross profit margin decreased from a proforma of 28.8% for the
three months ended March 31, 1995 to 27.6% for the three months ended March 31,
1996. The decrease of approximately 1.2 percentage points in the Company's
gross profit margin primarily resulted from plant efficiency losses in
the printing and cut-and-sew operations. As part of the Company's program to
improve long-term operating performance and control inventory investment, the
Company temporarily reduced manufacturing operations at certain
plants during the quarter. This resulted in fixed overhead being unabsorbed by
inventory production. The Company believes that its manufacturing
operations are now properly sized relative to current market demand for the
Company's products. There were no significant changes in the prices paid for
raw materials between the 1995 and 1996 periods as the Company was able to
secure raw material purchase contracts at levels equal to or more favorable
than that of the prior year.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
SG&A expenses increased $391,000 or 3.4% from a proforma of $11.5 million for
the three months ended March 31, 1995 to $11.8 million for the three months
ended March 31, 1996. As a percentage of sales, SG&A expenses increased from a
proforma of 21.7% for the three months ended March 31, 1995 to 29.8% for the
same period of 1996. The increase in SG&A expenses as a percentage of sales was
principally attributable to the fixed nature of the Company's selling and
administrative salary base. Specifically, marketing and design functions, while
not increasing substantially from year to year on an absolute dollar basis,
reflect a higher percentage because of the decreased sales in the 1996 quarter.
SG&A expenses associated with the launch of the Calvin Klein Home line, which
since its inception in September 1995 have as a percentage of sales exceeded
the level of the Company's mature businesses, also contributed to the increased
SG&A for the 1996 quarter. Historically, the Company's SG&A costs as a
percentage of sales have exceeded many of the Company's competitors due to the
Commission structure associated with the giftware trade and a relatively high
fixed cost structure within Home Innovation. During the 1996 quarter, the
Company implemented a consolidation of many of its marketing and administrative
functions in an attempt to improve the SG&A expense ratio and expects to see
improvement in its absolute dollar of SG&A costs going forward beginning in the
second half of 1996.
INTEREST EXPENSE, NET
Interest expense, net increased from a proforma of $4.2 million for
the three months ended March 31, 1995 to $4.6 million for the three months
ended March 31, 1996. This increase was principally due to increased
borrowings under the Company's revolving line of credit during the first
quarter of 1996.
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 March 31, 1996, the Company had approximately
$9.1 million available under the revolving credit facility described above
(net of $24.7 million of outstanding borrowings and $1.4 million in outstanding
letters
10
<PAGE> 11
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 continued introduction of the Calvin
Klein Home line of products. Management expects the Calvin Klein Home line of
products to increase 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 March 31, 1996.
Cash flows used in operating activities were approximately $16.8
million for the three month period ended March 31, 1996. Driving the cash used
in operating activities for the first quarter, in addition to the Company's net
loss, were an increase in receivables of $3.3 million and inventory of $3.9
million and a reduction of $3.5 million in accrued interest. The additional
inventory investment related principally to the introduction of the new Calvin
Klein Home line. The increase in receivables resulted from a slight
increase in the Company's sales velocity in the latter weeks of the quarter.
The reduction of $5.3 million in accrued interest resulted from the
semi-annual interest payment on the Company's $125 million, 13% Senior Notes.
Capital expenditures for the three month period in 1996 approximated
$857,000. The Company currently has no material commitments for capital
expenditures.
Borrowings under the Company's line of credit increased by
approximately $19.8 million during the three month period ended March 31, 1996.
The additional borrowings resulted primarily from the cash used in operating
activities including the interest payment on the Company's Senior Notes and
the continued inventory investment in Calvin Klein Home. Additionally, the
Company paid dividends totalling $1.75 million on its redeemable preferred
stock in January 1996. During 1996 the Company expects that
dividends will be paid in kind rather than in cash.
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 three months ended March 31, 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
11
<PAGE> 12
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.
12
<PAGE> 13
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
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Decorative Home Accents, Inc.
-----------------------------
(Registrant)
Date:
/s/ Jay N. Baker
-----------------------------
Jay N. Baker*
Chief Financial Officer
*Duly authorized to sign on behalf of the Registrant.
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
<S> <C>
3.3 Certificate of Correction to Certificate of Designation for Decorative Home Accents, Inc.
27 Financial data schedule
4.6 Form of Third 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, and by the Second Amendment, dated as of December 31, 1995.
</TABLE>
15
<PAGE> 1
EXHIBIT 4.6
THIRD AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
This THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment") is dated as of March 31, 1996 by and among The Rug Barn, Inc., a
South Carolina corporation ("Rug Barn"), Home Innovations, Inc., a Delaware
corporation ("HII"), Calvin Klein Home, Inc., a Delaware corporation ("Calvin
Klein"), Draymore Mfg. Corp., a North Carolina corporation ("Draymore"), R.A.
Briggs and Company, an Illinois corporation ("R.A. Briggs") (each of Rug Barn,
HII, Calvin Klein, Draymore and R.A. Briggs a "Borrower" and collectively the
"Borrowers"), LaSalle National Bank, as Agent and Lender, and General Electric
Capital Corporation, as Co-Agent and Lender. All capitalized terms used but not
otherwise defined herein shall have the meanings ascribed thereto in the Credit
Agreement (as hereinafter defined).
W I T N E S S E T H
WHEREAS, Rug Barn, Home Innovations, Inc., a Delaware corporation, Home
Curtain Corp., a New York corporation, Calvin Klein, Draymore and R.A. Briggs,
the Agent, the Co-Agent and the Lenders have entered into that certain Amended
and Restated Credit Agreement dated as of July 13, 1995, as amended by the
First Amendment to Amended and Restated Credit Agreement dated as of November
17, 1995 and the Second Amendment to Amended and Restated Credit Agreement
dated as of December 31, 1995 (as the same may hereafter be further amended,
supplemented or otherwise modified, the "Credit Agreement"); and
WHEREAS, the Lenders are willing to amend the Credit Agreement as
herein set forth, to, among other things, modify the financial covenants, all
on the terms and conditions set forth herein;
NOW THEREFORE, in consideration of the premises herein and other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Borrowers hereby agree with the Agent, the Co-Agent and the
Lenders as follows:
SECTION 1. Amendments to the Credit Agreement. The parties hereto
agree that the Credit Agreement is amended as follows:
<PAGE> 2
A. Subsection (a) of Schedule I to the Credit Agreement is
hereby amended and replaced in its entirety with the following:
" (a) Maximum Total Liabilities Coverage Ratio. Holdings and each
of its Subsidiaries on a consolidated basis shall have at the end
of each Fiscal Quarter after the Closing Date, a Total Liabilities
Coverage Ratio for the 12-month period then ended (or with the
Fiscal Quarters ending on or before June 30, 1996, the period from
the Closing Date to the last day of such Fiscal Quarter) of not
greater than 6.5 to 1.0 for the Fiscal Quarters ending before (but
not including the Fiscal Quarter ending on) December 31, 1995 or
after (but not including the Fiscal Quarter ending on) March 31,
1996; provided, however, that for each Fiscal Quarter ending on or
before June 30, 1996, the calculation of EBITDA of Holdings used in
determining the Total Liabilities Coverage Ratio for the period
from the Closing Date through such Fiscal Quarter end shall be made
by taking the actual amount of EBITDA ("Actual EBITDA") that would
otherwise be calculated for such period in accordance with the
Agreement and (i) dividing such Actual EBITDA by the number of days
in the period then being tested and then (ii) multiplying such
product in clause (i) by 365."
B. The first sentence of subsection (b) of Schedule I to the
Credit Agreement is hereby amended and replaced in its entirety with the
following sentence:
"Holdings and its Subsidiaries shall have on a consolidated basis
at the end of each Fiscal Quarter beginning with June 30, 1995, a
Debt Service Coverage Ratio for the 12-month period then ended of
not less than 1.15 to 1.0 for the Fiscal Quarters ending before
September 30, 1995, 1.05 to 1.0 for the Fiscal Quarter ending on
September 30, 1995, 1.0 to 1.0 for the Fiscal Quarter ending on
December 31, 1995 and 1.25 to 1.0 for the Fiscal Quarters ending
after (but not including the Fiscal Quarter ending on) March 31,
1996; provided, however, that notwithstanding anything to the
contrary herein, this paragraph (b) shall not directly or
indirectly prohibit Holdings from paying in cash the
2
<PAGE> 3
interest due on the Senior Notes and the dividends due on the Preferred
Stock in January, 1996, if the Debt Service Coverage Ratio for the
trailing 12 month period ending on September 30, 1995 is not less than
1.15 to 1.0; provided, further, that for Fiscal Quarters ending on or
before June 30, 1996 the Debt Service Coverage Ratio shall be calculated
using historical EBITDA before the Closing Date of Holdings and
Borrowers (on a consolidated basis) to the extent necessary to complete
a twelve month period, and Debt Service shall be calculated assuming (i)
for all periods prior to the Closing Date, the Senior Notes, Preferred
Stock, Subordinated Notes and Revolving Credit Facility (with debt
service calculated as described in the next sentence) were the only
Indebtedness and Preferred Stock outstanding during such periods (ii)
that the Subordinated Debt and Senior Notes accrued interest in
accordance with their terms during such periods; (iii) that cash
dividends on the Preferred Stock were paid in full during each Fiscal
Quarter of such period, and (iv) that no Revolving Credit Loans were
outstanding on June 30, 1995, and for each Fiscal Quarter end thereafter
for purposes of calculating Debt Service on the Revolving Credit
Facility, Interest Expenses actually incurred by Borrowers subsequent to
the Closing Date shall be annualized as if such Interest Expenses had
been incurred during such period."
C. The proviso following Subsection 6.14(c) of the Credit
Agreement is hereby amended and replaced in its entirety as follows:
"provided, however, that for payments under clause (c)(iii) or the last
proviso to clause (b)(iii) above to be permitted under this Agreement,
Holdings and its Subsidiaries, on a consolidated basis, must also
demonstrate that they could have achieved a Debt Service Coverage Ratio
for the trailing twelve month period ending on the last day of the most
recently completed Fiscal Quarter for which financial statements are
available prior to such payment date of at least 1.15 to 1.0 for the
Fiscal Quarters ending before September 30, 1995, 1.05 to 1.0 for the
Fiscal Quarter ending on September 30, 1995, 1.0 to 1.0 for the Fiscal
Quarter
3
<PAGE> 4
ending on December 31, 1995 and 1.25 to 1.0 for the Fiscal Quarters
ending after (but not including the Fiscal Quarter ending on) March 31,
1996 (which shall include for purposes of such calculation if Holdings
intends to pay a cash dividend on the Preferred Stock or the arrearage
on any Management Fees in cash, an assumption that the amount of any
then contemplated cash dividend on the Preferred Stock or cash payment
of the Management Fee had been made in cash during the twelve month
period being tested and therefor increased Debt Service by the amount of
such payment, unless (with respect to Preferred Stock) such twelve month
period already includes four quarterly dividend payments on the
Preferred Stock which were made in cash, in which case the then
contemplated cash dividend need not be counted); provided, however, that
notwithstanding anything to the contrary herein, paragraph (b) of
Schedule I shall not directly or indirectly prohibit Holdings from
paying in cash the interest on the Senior Notes and the dividends due on
the Preferred Stock on January 1, 1996, if the Debt Service Coverage
Ratio for the trailing 12 month period ending on September 30, 1995 is
not less than 1.15 to 1.0."
D. The following section is hereby inserted after section (b)
of Schedule I of the Credit Agreement:
" (c) Minimum Excess Availability. From the Fiscal Quarter
ending on March 31, 1996 until Holdings receives a notice signed by each
of the Lenders expressly terminating application of this section (c),
Holdings and its Subsidiaries shall not permit at any given time the
difference between (a) Borrowing Availability minus (b) the aggregate
amount of all outstanding Revolving Credit Advances to be less than
$2,000,000."
Section 2. Borrowers' Representations and Warranties. In order to
induce the Agent, the Co-Agent and the Lenders to enter into this Amendment and
to amend the Credit Agreement in the manner provided herein, the Borrowers
represent and warrant to the Agent, the Co-Agent and the Lenders that the
following statements are true, correct and complete:
4
<PAGE> 5
A. Corporate Power and Authority. The Borrowers have all requisite
corporate power and authority to enter into this Amendment, and to carry out
the transactions contemplated by, and to perform their obligations under, the
Credit Agreement as amended by this Amendment (the "Amended Agreement").
B. Authorization of Agreements. The execution, delivery and
performance of this Amendment, and the performance of the Amended Agreement
have been duly authorized by all necessary corporate action by the Borrowers.
C. No Conflict. The execution, delivery and performance by the
Borrowers of this Amendment, and the performance by the Borrowers of the
Amended Agreement do not and will not (i) violate any provision of any law,
rule or regulation applicable to the Borrowers or Holdings, the Certificate or
Articles of Incorporation or Bylaws of the Borrowers or Holdings or any order,
judgment or decree of any court or other agency or government binding on any
Borrower or Holdings, (ii) conflict with, result in a breach of or constitute
(with due notice or lapse of time or both) a default under any contract,
agreement, mortgage or obligation of any Borrower or Holdings except where the
Borrowers or Holdings, as the case may be, shall have obtained waivers or
consents from the other parties to such agreements and disclosed the same to
the Agent, (iii) result in or require the creation or imposition of any lien
upon any of the Borrowers' or Holdings' properties or assets (other than
Permitted Encumbrances) or (iv) require any approval of stockholders or any
approval or consent of any Person under any contract, agreement, mortgage or
obligation to which any Borrower or Holdings is a party (or by which its assets
or properties are bound) except for the approvals or consents which will be
obtained on or before the date hereof and disclosed in writing to the Agent.
D. Governmental Consents. The execution, delivery and performance by
the Borrowers of this Amendment, and the performance by the Borrowers of the
Amended Agreement do not and will not require any registration with, consent or
approval of, or notice to, or other action to, with or by, any
5
<PAGE> 6
Federal, state or other governmental authority or regulatory body or
other governmental Person.
E. Binding Obligation. This Amendment and the Amended Agreement are
legally valid and binding obligations of the Borrowers, enforceable against
the Borrowers in accordance with their respective terms except as
enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws now or hereafter in effect relating to or
limiting creditors' rights generally or general principles of equity,
whether such enforceability is considered in a proceeding in equity or at
law, and subject to the discretion of the court before which any proceeding
therefor may be brought.
F. Incorporation of Representations and Warranties From Credit
Agreement. The representations and warranties contained in Section 3 of
the Amended Agreement are and will be true, correct and complete in all
material respects on and as of the effective date of this Amendment to the
same extent as though made on and as of that date, except to the extent
that such representations and warranties specifically relate to an earlier
date, in which case they are true, correct and complete in all material
respects as of such earlier date.
G. Absence of Default. No event has occurred and is continuing or
will result after giving effect to the consummation of the transactions
contemplated by this Amendment which would constitute a Default or an Event
of Default.
H. Accuracy of Information. All factual information heretofore or
contemporaneously furnished by or on behalf of Borrowers to the Agent, the
Co-Agent or any Lender for purposes of or in connection with this Amendment
or any transaction contemplated hereby is true, complete and accurate in
every material respect on the date as of which such information is dated or
certified and as of the date of execution and delivery of this Amendment by
the Agent and the Lenders and such information is not incomplete by
omitting to state any material fact necessary to make such information not
misleading.
6
<PAGE> 7
I. Material Adverse Change. Except as disclosed in the financial
statements that have heretofore been delivered to Agent, the Co-Agent and
the Lenders, there has been no material adverse change in the business,
assets, operations, operating properties, prospects or financial or other
condition of the Borrowers since the Closing Date.
SECTION 3. Borrowing Base Amendment. The parties hereto agree that
upon delivery by Agent and Co-Agent to the Borrowers of a notice describing the
final written results and recommendations of the certain field audit completed
on March 7, 1996, they shall negotiate in good faith to make any necessary
revisions to the method of calculation of the Borrowing Base, including but not
limited to amendments to: (a) the definition to "Borrowing Base" set forth in
Schedule A to the Credit Agreement, (b) the definition of "Eligible Account"
set forth in Schedule C to the Credit Agreement, (c) the definition of
"Eligible Inventory" set forth in Schedule D to the Credit Agreement and
(d) Exhibit B to the Credit Agreement. THE ENTIRETY OF THIS AMENDMENT SHALL BE
VOID AND OF NO FURTHER FORCE OR EFFECT UNLESS, WITHIN 30 DAYS OF THE DELIVERY
TO THE BORROWERS OF THE FINAL RESULTS AND RECOMMENDATIONS RESULTING FROM THE
FIELD AUDIT, ALL PARTIES TO THIS AMENDMENT (OR THEIR SUCCESSORS) SHALL (A)
EXECUTE AN AMENDMENT TO THE CREDIT AGREEMENT SETTING FORTH THE REVISIONS TO THE
METHOD OF CALCULATION OF THE BORROWING BASE NEGOTIATED AS DESCRIBED ABOVE OR
(B) ACKNOWLEDGE IN WRITING THAT, AFTER THE NEGOTIATION REFERRED TO ABOVE, NO
REVISIONS TO THE CREDIT AGREEMENT ARE NECESSARY.
Section 4. Conditions to Effectiveness. This Amendment shall become
effective only upon the satisfaction of all of the following conditions
precedent on the date hereof:
A. Amendment. Fully executed copies of this Amendment signed by the
Borrowers, each Lender, the Agent and the Co-Agent shall have been
delivered to the Agent.
B. Opinion of Borrowers' Counsel. The Agent shall have received an
opinion of the Borrowers' counsel in form and substance satisfactory to the
Agent and its counsel covering, without limitations, (i) the due
incorporation, valid existence, good standing and corporate power and
authority to conduct business of Holdings, (ii) each Borrower's due
incorporation, valid existence and good standing, corporate
7
<PAGE> 8
power and authority to conduct business, due authorization, execution
and delivery of this Amendment, (iii) enforceability of this Amendment
and (iv) no conflicts with laws generally or Holding's or each
Borrower's certificate or articles of incorporation, by-laws and other
material contracts.
C. Other Documents. The Agent shall have received copies of such
other documents as the Agent may reasonably request.
Section 5. Miscellaneous
A. Effect upon the Credit Agreement. Except as specifically amended
hereunder, the Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed. The execution, delivery and effectiveness of
this Amendment shall not operate as a waiver of any right, power or remedy
of the Agent or any Lender under any Loan Document, nor constitute a waiver
of any provision of any Loan Document or any Default or Event of Default.
B. Section Headings. All section headings are inserted for
convenience of reference only and shall not affect any construction or
interpretation of this Amendment or the Amended Agreement.
C. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties in separate counterparts,
each of which when so executed and delivered shall be deemed to be an
original, but all of which taken together shall constitute one and the same
agreement.
D. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE INTERNAL LAWS, AS OPPOSED TO THE CONFLICT OF LAWS
PROVISIONS, AND DECISIONS OF THE STATE OF ILLINOIS. This Amendment and the
other Loan Documents constitute the entire understanding among the parties
hereto with respect to the subject matter hereof and supersede any prior
agreements, written or oral, with respect thereto.
8
<PAGE> 9
E. Severability. Whenever possible, each provision of this Amendment
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Amendment shall be prohibited by
or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the
remainder of such provisions or the remaining provisions of this Amendment or
the Amended Agreement.
F. Binding Agreement. This Amendment shall be binding upon the
Borrowers, the Agent, the Co-Agent and the Lenders and their respective
successors and assigns, and shall inure to the benefit of the Borrowers, the
Agent, the Co-Agent and each Lender and the successors and assigns of the
Borrowers, the Agent, the Co-Agent and the Lenders.
G. JURY TRIAL WAIVER. THE BORROWERS, THE AGENT, THE CO-AGENT AND THE
LENDERS HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING
TO ENFORCE OR DEFEND AND RIGHTS UNDER THIS AMENDMENT, THE LOAN DOCUMENTS OR
UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY
IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY LENDING
RELATIONSHIP EXISTING IN CONNECTION WITH THIS AMENDMENT OR ANY LOAN DOCUMENT,
AND AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND
NOT BEFORE A JURY.
H. Costs, Expenses and Taxes. As provided in Section 11.3 of the
Credit Agreement, the Borrowers agree to pay on demand all fees, costs and
expenses incurred by the Agent, the Co-Agent and the Lenders in connection with
the preparation, execution and delivery of this Amendment (including, without
limitation, all attorneys fees). In addition, the Borrowers shall pay any and
all stamp and other taxes and fees payable or determined to be payable in
connection with the execution and delivery of this Amendment and agree to hold
the Agent and the Lenders harmless from and against any and all liabilities
with respect to or resulting from any delay in paying or omission to pay such
taxes or fees.
9
<PAGE> 10
I. Reaffirmation of Guaranty. Each of the Borrowers as a guarantor
under Section 12 of the Credit Agreement hereby (i) acknowledges and reaffirms
all of its obligations and undertakings under the guaranty under Section 12 of
the Credit Agreement, and (ii) acknowledges and agrees that subsequent to, and
taking into account this Amendment, the guaranty under Section 12 of the Credit
Agreement is and shall remain in full force and effect in accordance with the
terms thereof.
J. Releases. In further consideration of the execution of this
Amendment by the Agent, the Co-Agent and the Lenders, the Borrowers and Holdings
hereby release the Agent, the Co-Agent and the Lenders and all current and
future holders of assignments of or participations in the Obligations and their
respective affiliates, officers, employees, directors, agents and attorneys
(collectively, the "Releasees") from any and all claims, demands, liabilities,
responsibilities, disputes, causes of action (whether at law or in equity) and
obligations of every nature whatsoever, whether liquidated or unliquidated,
known or unknown, matured or unmatured, fixed or contingent (collectively,
"Claims") that any Borrower or Holdings may have against the Releasees which
arise from or relate to any actions which the Releasees may have taken or
omitted to take on or prior to the date hereof with respect to the Obligations,
any Collateral, the Credit Agreement, any other Loan Document and any third
parties liable in whole or in part for the Obligations. For purposes of the
release contained in this paragraph, the term "Borrowers" and "Holdings" shall
mean and include the Borrowers, Holdings and their successors and assigns,
including, without limitation, any trustees acting on behalf of such parties and
any debtor-in-possession in respect of any such party.
[signature pages follow]
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their duly authorized officers
on the date first above written.
"BORROWERS"
HOME INNOVATIONS, INC.
By: _____________________________
Title: __________________________
THE RUG BARN, INC.
By: _____________________________
Title: __________________________
DRAYMORE MFG. CORP.
By: _____________________________
Title: __________________________
CALVIN KLEIN HOME, INC.
By: _____________________________
Title: __________________________
R.A. BRIGGS AND COMPANY
By: _____________________________
Title: __________________________
"LENDERS"
LASALLE NATIONAL BANK, as Agent and
Lender
<PAGE> 12
By: _____________________________
Title: __________________________
GENERAL ELECTRIC CAPITAL
CORPORATION, as Co-Agent and Lender
By: _____________________________
Title: __________________________
Acknowledged and agreed to
DECORATIVE HOME ACCENTS, INC.
By: _____________________________
Title: __________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DECORATIVE HOME ACCENTS, INC. FOR THE THREE MONTHS ENDED
MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 0
<SECURITIES> 1,000
<RECEIVABLES> 35,746
<ALLOWANCES> 2,661
<INVENTORY> 47,705
<CURRENT-ASSETS> 89,455
<PP&E> 34,521
<DEPRECIATION> 3,885
<TOTAL-ASSETS> 222,935
<CURRENT-LIABILITIES> 24,910
<BONDS> 0
43,123
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 222,935
<SALES> 39,786
<TOTAL-REVENUES> 39,786
<CGS> 28,802
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,614
<INCOME-PRETAX> (5,472)
<INCOME-TAX> (1,802)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,670)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
