<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: 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
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DECORATIVE HOME ACCENTS, INC.
QUARTER ENDED JUNE 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 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
</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 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
<PAGE> 4
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30,
1996 December 31,
(Unaudited) 1995 (1)
----------- --------
(Restated - Note 4)
<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
$2,112 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
========= =========
</TABLE>
(1) Derived from December 31, 1995 audited consolidated financial statements.
See notes to condensed consolidated financial statements (unaudited).
4
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DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
------------------
June 30, 1996 June 30, 1995
------------- -------------
(Restated -Note 4)
<S> <C> <C>
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)
======== ========
</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>
Six Months Ended
-----------------
June 30, 1996 June 30, 1995
------------- -------------
(Restated -Note 4)
<S> <C> <C>
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)
======== ========
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
6
<PAGE> 7
DECORATIVE HOME ACCENTS , INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Reduction of
Certain Equity
Interest to Total
Common Additional Predecessor Accumulated Stockholders'
Stocks Paid-in Capital Basis Deficit Equity (Deficiency)
------ --------------- ----- ------- -------------------
<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
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)
======== ======== ======== ======== ========
</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>
Six months ended
June 30
1996 1995
-------------------------------
(Restated - Note 4)
<S> <C> <C>
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 $ -
-------- --------
</TABLE>
See notes to condensed consolidated financial statements (unaudited)
8
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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):
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Raw materials $21,076 $24,464
Work-in-process 2,257 973
Finished goods 22,074 18,276
------- -------
$45,407 $43,713
======= =======
</TABLE>
9
<PAGE> 10
Property, plant and equipment is summarized as follows (in $000's):
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
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
======== ========
</TABLE>
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 Six Months Ended
June 30, 1996 June 30, 1996
--------------------------- -------------------------
As As Originally As As Originally
Restated Recorded Restated Recorded
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
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)
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1996
----------------------------------
As As Originally
Restated Recorded
-------- --------
<S> <C> <C>
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)
</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 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:
<TABLE>
<CAPTION>
ACTUAL PROFORMA
Three Months Ended
-----------------------
June 30, June 30,
1996 1995
---- -----
<S> <C> <C>
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)
======== ========
</TABLE>
ACTUAL PROFORMA
Six Months Ended
----------------------
June 30, June 30,
11
<PAGE> 12
<TABLE>
<CAPTION>
1996 1995
---- -----
<S> <C> <C>
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)
========= =========
</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 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<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 JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> MAR-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 0
<SECURITIES> 1,000
<RECEIVABLES> 26,138
<ALLOWANCES> 2,112
<INVENTORY> 45,407
<CURRENT-ASSETS> 79,282
<PP&E> 37,129
<DEPRECIATION> (5,437)
<TOTAL-ASSETS> 215,262
<CURRENT-LIABILITIES> 28,025
<BONDS> 0
45,188
0
<COMMON> 9
<OTHER-SE> 11,602
<TOTAL-LIABILITY-AND-EQUITY> 215,262
<SALES> 42,989
<TOTAL-REVENUES> 42,989
<CGS> 31,774
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,362
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,917)
<INCOME-PRETAX> (6,064)
<INCOME-TAX> (2,001)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,063)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
