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