<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission File Number: 33-96794
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DECORATIVE HOME ACCENTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 57-0998387
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
Industrial Park Drive, Abbeville, South Carolina 29620
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 446-2123
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports).
Yes No
Indicate by check mark whether the registrant has been subject to such
filing requirements for the past 90 days.
Yes No
As of September 15, 1997, there were 109,737 shares outstanding of the
Registrant's Class A Common Stock ($0.01 par value), 1,756,126 shares
outstanding of the Registrant's Class B Non-Voting Common Stock ($0.01 par
value), 386,040 shares outstanding of the Registrant's Class C Common Stock
($0.01 par value), 808,333 shares outstanding of the Registrant's Class D
Common Stock ($0.01 par value), 118,100 shares outstanding of the Registrant's
Class F Common Stock and 60,100 shares outstanding of the Registrant's 14%
Cumulative Redeemable Preferred Stock ($0.01 par value).
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DECORATIVE HOME ACCENTS, INC.
QUARTER ENDED JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
Page
No.
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<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30,
1997 and December 31, 1996............................. 4
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1997 and 1996.............. 5
Condensed Consolidated Statements of Operations for
the six months ended June 30, 1997 and 1996............ 6
Condensed Consolidated Statement of Stockholders'
Equity (Deficiency) for the six months
ended June 30, 1997.................................... 7
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1997 and 1996............ 8
Notes to Condensed Consolidated Financial Statements
(Unaudited............................................. 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 18
Item 2. Changes in Securities...................................... 18
Item 3. Defaults Upon Senior Securities............................ 18
Item 4. Submission of Matters to a Vote of Security Holders........ 18
Item 5. Other information.......................................... 18
Item 6. Exhibits and Reports on Form 8-K........................... 18
Signature Page..................................................... 19
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996(1)
--------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 621 $ 1,980
Accounts receivable - net of allowance for
doubtful accounts of $4,697 at June 30,
1997 and $7,014 at December 31, 1996 26,073 25,800
Income taxes receivable 160 498
Inventories (Note 3) 39,033 32,565
Other current assets 2,554 1,212
---------- ----------
Total current assets 68,441 62,055
PROPERTY, PLANT AND EQUIPMENT, NET (Note 3) 31,153 32,262
OTHER ASSETS 7,596 7,946
INTANGIBLE ASSETS, NET 13,027 13,783
---------- ----------
TOTAL ASSETS $ 120,217 $ 116,046
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt (Note 5) $ 132,376 $ 124,830
Accounts payable 14,168 17,231
Accrued liabilities 5,421 6,176
Accrued interest 7,901 --
---------- ----------
Total current liabilities 159,866 148,237
LONG-TERM DEBT (Note 5) 33,831 34,100
REDEEMABLE PREFERRED STOCK 53,554 49,351
REDEEMABLE COMMON STOCK 3,044 2,476
STOCKHOLDERS EQUITY (DEFICIENCY):
Common stock 9 9
Additional paid-in capital 1,915 6,685
Reduction of certain equity interest to
predecessor basis (6,209) (6,209)
Accumulated deficit (125,793) (118,603)
---------- ----------
Total stockholders' equity (deficiency) (130,078) (118,118)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIENCY) $ 120,217 $ 116,046
========== ==========
</TABLE>
(1) Derived from December 31, 1996 audited consolidated financial statements.
See notes to condensed consolidated financial statements (unaudited).
3
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DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
SALES (Note 8) $ 37,629 $ 42,989
COST OF GOODS SOLD 29,224 31,774
---------- ----------
GROSS PROFIT 8,405 11,215
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,555 12,362
---------- ----------
LOSS FROM OPERATIONS (1,150) (1,147)
INTEREST EXPENSE, NET (5,225) (4,917)
DEBT RESTRUCTURING FEES AND EXPENSES (Note 1) (1,604) --
---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES (7,979) (6,064)
INCOME TAX BENEFIT -- 2,001
---------- ----------
NET LOSS $ (7,979) $ (4,063)
========== ==========
</TABLE>
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>
Six Months Ended June 30,
---------------------------
1997 1996
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<S> <C> <C>
SALES (Note 8) $ 73,526 $ 81,772
COST OF GOODS SOLD 57,050 60,610
---------- ----------
GROSS PROFIT 16,476 21,162
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 18,945 24,098
---------- ----------
INCOME (LOSS) FROM OPERATIONS (2,469) (2,936)
OTHER INCOME (Note 6) 3,748 --
INTEREST (EXPENSE), NET (10,421) (9,522)
DEBT RESTRUCTURING FEES AND EXPENSES (Note 1) (1,604) --
---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM (10,746) (12,458)
INCOME TAX BENEFIT - 4,107
---------- ----------
LOSS BEFORE EXTRORDINARY ITEM (10,746) (8,351)
EXTRAORDINARY GAIN FROM FORGIVENESS OF DEBT,
NET OF TAXES 3,556 --
---------- ----------
NET LOSS $ (7,190) $ (8,351)
========== ==========
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
5
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DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIENCY) (IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Reduction of
Certain Equity
Interest to Total
Common Additional Predecessor Accumulated Stockholder's
Stocks Paid-in Capital Basis Deficiency Equity (Deficiency)
------- --------------- -------------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996 $ 9 $ 6,685 $ (6,209) $ (118,603) $ (118,118)
Accretion of redeemable common
stock for the six months
ended June 30, 1997 (568) (568)
Accretion of redeemable
preferred stock for the
six months ended June 30, 1997 (453) (453)
Preferred stock dividends
paid in-kind for the six
months ended June 30, 1997 (3,749) (3,749)
Net loss for the six months
ended June 30, 1997 (7,190) (7,190)
-------- -------- --------- ---------- ----------
Balances at June 30, 1997 $ 9 $ 1,915 $ (6,209) $ (125,793) $ (130,078)
======== ======== ========= ========== ==========
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
6
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DECORATIVE HOME ACCENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income less $ (7,190) $ (8,351)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,001 4,925
Deferred tax benefit -- (4,107)
Retirement of related party debt (Note 6) (6,900) --
Changes in operating assets and liabilities:
Accounts receivable (273) 4,956
Inventories (6,468) (1,694)
Income tax receivable 338 (331)
Other current assets (1,344) (1,514)
Accounts payable (3,063) (1,768)
Accrued liabilities (751) (849)
Accrued interest 7,901 582
---------- ----------
Net cash used in operating activities (14,749) (8,151)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,134) (1,938)
Other long-term assets 347 (2,074)
---------- ----------
Net cash used in investing activities (787) (4,012)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit 14,177 13,744
Redeemable preferred stock dividends paid -- (1,750)
---------- ----------
Net cash provided by financing activities 14,177 11,994
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,359) (169)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,980 169
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 621 $ --
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 2,520 $ 10,418
Non-cash activities
Forgiveness of debt (Note 6) $ 6,900 --
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
7
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DECORATIVE HOME ACCENTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997 AND 1996
- -------------------------------------------------------------------------------
1. BASIS OF INTERIM PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary to present fairly the Company's financial position as of June
30, 1997 and the results of its operations and its cash flows for the six
months ended June 30, 1997 have been included. Operating results for the
three and six months ended June 30, 1997 are not necessarily indicative
of the results that may be expected for the year ending December 31,
1997. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the Securities and Exchange Commission's rules and regulations. The
condensed financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the year
ended December 31, 1996.
For interim reporting, the Company's subsidiary, Home Innovations. Inc.
("HII") uses an estimated gross profit based on information provided by
its accounting and financial systems. At year-end, inventories of the
Company are stated at the lower of cost, determined using the first-in,
first-out ("FIFO") method, or market.
As discussed in Note 7, on September 29, 1997, the Company filed a
pre-negotiated filing under the provisions of Chapter 11 of the United
States Bankruptcy code in order to effect a financial reorganization of
the Company. The plan of reorganization makes provision for the payment
of all pre-petition trade debt following the confirmation of the plan.
The financial statements of the Company are prepared on a going concern
basis which contemplates continuity of operations, realization of assets
and satisfaction of liabilities in the ordinary course of business.
In accordance with Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" issued by the
American Institute of Certified Public Accountants ("SOP 90-7"),
subsequent to the September 29, 1997 Chapter 11 filing and until the
confirmation date, all pre-petition liabilities that are subject to
compromise under the plan of reorganization (the $118.1 million principal
amount of 13% Senior Notes plus all accrued and unpaid interest on the
Senior Notes and the 14% Redeemable Preferred Stock) will be classified
on the condensed balance sheets as liabilities subject to compromise.
As of the effective date of the plan of reorganization, the Company will
adopt "fresh start" reporting as defined in SOP 90-7. In accordance with
"fresh start" reporting, the reorganization value of the Company will be
allocated to the emerging entity's specific tangible and identifiable
intangible assets. Any excess reorganization value will be reported as
"reorganization value in excess of amounts allocable to identifiable
assets." As a result of the adoption of such "fresh start" reporting,
the Company's post-emergence financial statements ("successor") will not
be comparable with its pre emergence financial statements ("predecessor")
including the historical financial statements included in this quarterly
report.
The accompanying statements of operations reflect certain restructuring
fees and expenses consisting of professional fees and expense directly
related to the debt restructuring and reorganization.
8
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2. ORGANIZATION
The accompanying interim consolidated financial statements as of June 30,
1997, include the accounts of Decorative Home Accents, Inc. ("DHA" or the
"Company") and its wholly-owned subsidiaries, The Rug Barn, Inc. (the
"Rug Barn") and Home Innovations, Inc.
All significant intercompany transactions and accounts have been
eliminated.
3. BALANCE SHEET COMPONENTS
Inventories are summarized as follows (in $000's):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $ 17,550 $ 13,964
Work-in-process 2,401 2,654
Finished goods 19,082 15,947
---------- ----------
$ 39,033 $ 32,565
========== ==========
</TABLE>
Property, plant and equipment is summarized as follows (in $000's):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ----------
<S> <C> <C>
Land $ 862 $ 862
Buildings and improvements 16,999 16,782
Furniture and fixtures 6,020 5,296
Machinery and equipment 15,912 15,536
---------- ----------
39,793 38,476
Accumulated depreciation (9,922) (7,594)
---------- ----------
29,871 30,882
Construction in progress 1,282 1,380
---------- ----------
$ 31,153 $ 32,262
========== ==========
</TABLE>
4. INCOME TAXES
The Company's income tax benefit for the six months ended June 30, 1997
was calculated at an effective rate of 38% before being offset by an
increase in the tax valuation allowance. Management of the Company
cannot be assured that the net deferred income tax asset will be
realized, therefore the deferred tax asset has been fully reserved.
5. LONG-TERM DEBT
On November 12, 1996, the Company and certain subsidiaries entered into a
Loan and Security Agreement (the "Agreement") with a revolving credit
facility to provide for revolving loans ("Loans") and letters of credit
("Letters of Credit") in an aggregate principal amount of up to $50
million, subject to borrowing limitations, for a three year period. The
Agreement may be renewed from year to year thereafter at the mutual
agreement of the parties. The initial borrowing of $35.4 million on
November 12, 1996 was utilized to repay amounts owed the prior lender
under the Company's former Revolving Credit Facility. Borrowings under
the $50 million Revolving Credit Facility bear interest, at the Company's
discretion, at a rate of 5/8%
9
<PAGE> 10
percent per annum in excess of the Prime Rate or 3-1/4% percent per
annum in excess of the Eurodollar Rate. The borrowings are secured by a
first priority lien on the accounts receivable and inventories of the
Company's subsidiaries. The Company is required to maintain a minimum
adjusted tangible net worth, as defined, and the payment of cash dividends
on the Company's common stock is prohibited in accordance with the
Agreement. Further, there are limitations on the ability of the Company
to incur additional indebtedness and make loans, advances and investments.
On March 1, 1997, the Agreement was amended to provide for a line of
credit ("Supplemental Facility") pursuant to which the lender made
supplemental loans ("Supplemental Loans") of $5 million. At June 30,
1997, the Company's outstanding borrowings under the Revolving Credit
Facility and the Supplemental Facility totaled approximately $30.1
million.
The Supplemental Loans under the Supplemental Facility were repaid on May
27, 1997. Additionally, on May 23, 1997, the Agreement was amended for,
among other things, changes in certain covenants including the tangible
net worth calculation. There were no Events of Default (as defined)
under the Agreement, as amended, at June 30, 1997. In connection with
the pre-negotiated Chapter 11 filing by the Company and its subsidiaries,
the Agreement was amended. See Note 7 - Capital Restructuring Plan.
The Company's did not make the scheduled interest payment of
approximately $7.7 million on its Senior Notes due on June 30, 1997. As
a result the Company has reclassified $118.1 million of long-term debt as
a current liability. See Note 7 regarding the Company's planned
financial reorganization.
In March 1997, $6.9 million of the Company's Senior Notes were retired.
See Note 6 - Related Party Transaction.
Pursuant to the restructuring discussed in "Note 7 - Capital
Restructuring Plan," Magten provided the Company with a secured term loan
facility of up to $20 million (the "Secured Term Loan Facility") ($15
million was advanced to the Company on May 23, 1997 and an additional $5
million was advanced to the Company on July 9, 1997).
6. RELATED PARTY TRANSACTION
During 1996, two of the Company's officers who were members of the Board
of Directors resigned. Subsequent to their resignation, certain
allegations concerning wrongful acts were made by the Company and certain
stockholders. On March 11, 1997, in consideration of the release and
discharge from all claims, damages, and all causes of action, the two
former officers and members of the Board of Directors returned to the
Company 965,101 shares of the Company's Class A Common Stock, 6,900
shares of the Company's Class F Common Stock, $6.9 million of the
Company's Senior Notes and $448,000 in cash. The Company recorded
approximately $3.7 million as other income and approximately $3.6 million
as an extraordinary gain in the first quarter of 1997, as a result of
this settlement and forgiveness of debt.
7. CAPITAL RESTRUCTURING PLAN
On May 15, 1997, the Company reached an agreement in principle with
certain of the Company's bond holders and equity holders providing for a
comprehensive capital restructuring plan. The restructuring agreement
was entered into by the Company's preferred stockholder, TCW Special
Credits Fund V - The Principal Fund ("Fund V") and the beneficial owners
of approximately 76% of the principal amount of the Senior Notes, Magten
Asset Management Corp., solely as agent for various of its investment
advisor clients in their respective accounts at Magten ("Magten"), and
CIGNA. The restructuring plan will, among other things, (i) convert the
$118.1 million principal amount still outstanding on the 13% Senior Notes
plus all accrued and unpaid interest on the Senior Notes into 92.5% of
the Company's common equity, (ii) exchange all the Company's 14%
redeemable preferred stock into 7.5% of the common equity along with a 5
year warrant to purchase up to 7.5% of the fully diluted common equity
and, (iii) exchange all of the classes of common stock into a 5 year
warrant to purchase up to 2.5% of the fully diluted equity. In
10
<PAGE> 11
connection with the Company's capital restructuring plan, the Company
did not pay interest on the Senior Notes due on June 30, 1997.
Pursuant to the restructuring, Magten provided the Company with a secured
term loan facility of up to $20 million (the "Secured Term Loan
Facility") ($15 million was advanced to the Company on May 23, 1997 and
an additional $5 million was advanced to the Company on July 9, 1997).
Magten also earned a $5 million closing fee which will be waived under
certain conditions set forth in the credit agreement with respect to the
Secured Term Loan Facility. Additionally, the indenture that governs the
Senior Notes was modified to permit the Company to incur the Secured Term
Loan Facility. It is contemplated that the Secured Term Loan Facility
will be repaid with the proceeds of a rights offering to purchase
additional shares of the Company's common stock upon a consummation of
the restructuring. Pursuant to certain agreements, dated September 26,
1997 (the "Exercise Agreements"), Magten and Fund V each agreed to
exercise all rights and/or oversubscription options issued to them in the
rights offering so that the Company will receive sufficient proceeds from
the rights offering to enable it to pay in full in cash all of the
indebtedness under the Secured Term Loan Facility. A portion of the
proceeds from the Secured Term Loan Facility was used to retire the
Supplemental Facility described in Note 5. In connection with the
Secured Term Loan Facility provided by Magten, the Company's existing
working capital lender and Magten entered into an inter-creditor
agreement. The proposed restructuring plan and the Exercise Agreements
are subject to various conditions.
On September 29, 1997, a pre-negotiated filing under the provisions of
Chapter 11 of the United States Bankruptcy Code was made by the Company
and its subsidiaries in order to effect the restructuring plan.
Concurrent therewith, the Company filed its plan of reorganization with
the United States Bankruptcy Court for the Southern District of New York
(the "Bankruptcy Court") that reflects the proposed restructuring plan
described above. The plan of reorganization provides for the payment in
full of all unpaid pre-petition trade debt following the confirmation of
the plan. The Company is prohibited from making payment on any
pre-petition obligations during the course of the Chapter 11 filing. In
the event that a restructuring is not consummated, management of the
Company believes that the Company's inability to pay all of the current
obligations and service its debt as required raises substantial doubt
about the Company's ability to continue as a going concern.
In connection with the pre-negotiated Chapter 11 filing, the Company
(with approval of the Bankruptcy Court) has entered into a
debtor-in-possession post-petition term loan agreement ("Term Loan") with
Magten. The Term Loan provided $3.75 million of borrowings and is
secured by all of the assets of the Company and its subsidiaries and the
common stock of the Company's subsidiaries. Any amounts outstanding
under the Term Loan agreement as of the effective date of the
restructuring will be repaid with the proceeds from a new secured term
loan of up to $7.5 million to be funded by Magten. Funding of this $7.5
million term loan is subject to various conditions.
Subsequent to the Chapter 11 bankruptcy filing, the Company (with
approval of the Bankruptcy Court) entered into a debtor-in-possession
financing agreement with Congress Financial Corporation which has amended
the pre-petition Agreement. The form of this financing substantially
conforms with the Company's previous Agreement with Congress.
In connection with the restructuring, the Company entered into employment
retention agreements with certain key management personnel. The
agreements provide for, among other things, a guaranteed bonus payment in
March 1998 if the individual is employed by the Company on that date.
The maximum obligation to the Company for payments under these agreements
is $1.1 million. During the six months ended June 30, 1997 a charge of
$512,000 was recorded for these retention agreements. On February 28,
1997, the Company also entered into amended and restated employment and
non-competition agreements with certain officers. Each of such
agreements provides that if the applicable officer's employment is
terminated within 90 days following a change of control of the Company,
by (i) the Company without good cause, (ii) a successor to the Company
without good cause or (iii) the officer, then the Company shall
pay the officer an amount in cash, which amount for all such officers
aggregates approximately $2.5 million.
11
<PAGE> 12
In connection with the restructuring plan discussed elsewhere herein, the
original license with Calvin Klein, Inc. was terminated on April 26, 1997
and on April 27, 1997, Calvin Klein and DHA Home, Inc. entered into an
interim license agreement (the "Interim License Agreement") with similar
terms and conditions. As part of the Interim License Agreement, the
Company changed the name of Calvin Klein Home, Inc. to DHA Home, Inc.
The Interim License Agreement expires upon the earlier of April 30, 1998,
or the completion of the restructuring plan. Upon the consummation of
the restructuring, the Company believes that Calvin Klein has committed
to enter into a new multiple year license agreement on similar terms and
conditions that would extend through the year 2004. DHA Home also
believes that it has a good relationship with Calvin Klein and continues
to work with Calvin Klein on long-range plans for Calvin Klein license
products. Notwithstanding DHA Home's belief, Calvin Klein has asserted
that (i) no assurances can be given that any such license will be entered
into and (ii) Calvin Klein has not committed to enter into any such
long-term license. At June 30, 1997, the carrying amount of the Calvin
Klein license agreement is $7,809,000, which is calculated based on the
original contract period ending in 2004. If the above described
restructuring is not completed, Calvin Klein, Inc. may not renew its
license agreement with the Company. Failure to renew the license
agreement on a long-term basis would result in a charge to earnings for
the unamortized balance of the license agreement and may otherwise have a
material adverse effect on the Company's future results of operations.
8. THE RUG BARN, INC. SALES DECLINE
Through September 1997, the Company has experienced a significant decline
in sales at The Rug Barn, Inc. Demand for the Rug Barn's core product of
two and three layer cotton throws has continued to decline in the
giftware distribution channel served by the Rug Barn. Through September
1997, order bookings have declined approximately 50% compared to the same
period in 1996. Management of the Company is addressing the sales
decline through reductions in fixed overhead costs and planned expanded
product offerings. The fixed overhead reductions are expected to be
completed by December 31, 1997. The new product offerings will include
both internally manufactured and outsourced products targeted at the
giftware distribution channel. Management does not expect that the new
product offerings will favorably impact 1997 operating results and
expects that the operations at the Rug Barn will incur an operating loss
through December 31, 1997.
9. LEGAL PROCEEDINGS
On July 29, 1997, a fixture supplier of the Company filed suit seeking
$1.9 million in damages, against the Company claiming that the Company
failed to fulfill its obligations under a supply arrangement. Management
of the Company intends to vigorously defend against the suit. Further,
management expects to contest the claim during the course of its Chapter
11 case. Management does not expect that the ultimate settlement of the
claim will have a material adverse impact on the Company.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion provides management's assessment of the results
of operations and liquidity and capital resources of DHA. This
discussion should be read in conjunction with the respective unaudited
condensed consolidated financial statements of DHA and the notes thereto
included elsewhere in this Form 10-Q and the audited consolidated
financial statement of DHA and the notes thereto for the year ended
December 31, 1996 reported on Form 10-K with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 WITH THREE MONTHS ENDED
JUNE 30, 1996
NET SALES
Net sales for the three months ended June 30, 1997 decreased by
approximately $5.4 million, or 12.5%, to $37.6 million from $43.0 million
for the three months ended June 30, 1996. The Company experienced
weakened sales during 1997 in its gift division (The Rug Barn, Inc.).
Sales from the gift division decreased $3.3 million, or 40%, for the
three months ended June 30, 1997 compared to the three months ended June
30, 1996. As discussed in Note 8 to the Condensed Consolidated Financial
Statements, order bookings for the gift division through September 1997
have declined approximately 50% for the comparable 1996 period.
Accordingly, the Company expects to experience continued weakening in
sales from the gift division during 1997. In addition, the gift division
was negatively impacted by delivery problems for product offerings
sourced from other manufacturers. The liquidity shortages faced by the
Company in 1997 significantly impacted the Company's ability to service
its customer base. Given the limited resources, the Company attempted to
service its most significant customers.
GROSS PROFIT
Gross profit decreased approximately $2.8 million, or 25.1%, to $8.4
million for the three months ended June 30, 1997 from $11.2 million for
the three months ended June 30, 1996. Gross profit as a percentage of
sales declined to 22.3% for the three months ended June 30, 1997 compared
to 26.1% for the three months ended June 30, 1996. The decrease
primarily resulted from the decline in the Company's gift division sales
which accounted for approximately $1.9 million of the decrease in gross
profit. Historically, gross profit margins achieved on products in the
gift division have been higher than those earned on the Company's other
product lines. The Company also experienced efficiency losses in its cut
and-sew plants as a result of liquidity constraints negatively impacting
raw material purchases.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses decreased
approximately $2.8 million, or 25.4%, to $9.6 million for the three
months ended June 30, 1997 from $12.4 million for the three months ended
June 30, 1996. SG&A expenses decreased as a percentage of sales to 25.4%
for the three months ended June 30, 1997 from 28.8% for the three months
ended June 30, 1996. This decrease in SG&A expenses was due to a decrease
in salaries and benefit expenses of approximately $200,000 and decreases
in other variable general and administrative expenses of approximately
$1.6 million for the three months ended June 30, 1997. Additionally, the
1996 results included approximately $1.0 million of goodwill
amortization. As noted below, the Company wrote-off its unamortized
goodwill at December 31, 1996 and accordingly, there was no goodwill
amortization in 1997.
Prior to the fourth quarter of 1996, the Company evaluated the
recoverability of goodwill by determining whether the amortization of the
goodwill balance over its remaining amortization period could be
recovered through undiscounted future operating cash flows of the
acquired operations. In the fourth quarter of 1996, the Company changed
its method for evaluating the recoverability of goodwill to a method
whereby the carrying amount is compared to its estimated fair value, and
any excess carrying amount is determined to be
13
<PAGE> 14
impaired. Based on an evaluation of the recoverability of goodwill at
December 31, 1996, the Company concluded that its unamortized balance of
goodwill, $79.7 million, was impaired and has recorded a pre-tax charge
for such amount in the 1996 consolidated statement of operations.
INTEREST EXPENSE, NET
Interest expense increase approximately $308,000, or 6.3%, to $5.2
million for the three months ended June 30 , 1997 from $4.9 million for
the three months ended June 30, 1996. Short-term and long-term
borrowings increased by approximately $7.3 million, net of a $6.9 million
reduction for a related party transaction (see Note 6 - Related Party
Transaction).
DEBT RESTRUCTURING FEES AND EXPENSES
The accompanying statements of operations reflect certain restructuring
fees and expenses consisting of professional fees and expense directly
related to the debt restructuring and reorganization. For the three
months ended June 30, 1997 the Company incurred approximately $1.6
million in restructuring fees and expenses.
INCOME TAXES
The Company's income tax benefit for the three months ended June 30, 1997
was calculated at an effective rate of 38% before being offset by an
increase in the tax valuation allowance. Management of the Company
cannot be assured that the net deferred income tax asset will be
realized. Therefore, the deferred tax asset has been fully reserved.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 WITH SIX MONTHS ENDED JUNE
30, 1996
NET SALES
Net sales for the six months ended June 30, 1997 decreased approximately
$8.2 million, or 10.1%, to $73.5 million from $81.8 million for the six
months ended June 30, 1996. The sales decline is primarily attributable
to a $6.2 million decrease in the Company's gift division sales for the
six months ended June 30, 1997 compared to the gift division sales for
the six months ended June 30, 1996. As discussed in Note 8 to the
Condensed Consolidated Financial Statements, order bookings through for
the gift division September 1997 have declined approximately 50% from the
comparable 1996 period. Accordingly, the Company expects to experience
continued weakening in sales from the gift division during 1997.In
addition, the gift division was negatively impacted by delivery problems
for product offerings sourced from other manufacturers. The liquidity
shortages faced by the Company in 1997 significantly impacted the
Company's ability to service its customer base. Given the limited
resources, the Company attempted to service its most significant
customers.
GROSS PROFIT
Gross profit decreased approximately $4.7 million, or 22.1%, to $16.5
million for the six months ended June 30, 1997, compared to $21.1 million
for the six months ended June 30, 1996. Gross profit as a percentage of
sales decreased to 22.4% for the six months ended June 30, 1997 from
25.8% for the six months ended June 30, 1996. The decrease primarily
resulted from the decline in the Company's gift division sales which
accounted for approximately $3.4 million of the decrease in gross profit.
Historically, gross profit margins achieved on products in the gift
division have been higher than those earned on the Company's other
product lines. The Company also experienced efficiency losses in its cut
and-sew plants as a result of liquidity constraints negatively impacting
raw material purchases.
14
<PAGE> 15
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased approximately $5.2
million, or 21.4%, to $18.9 million for the six months ended June 30,
1997 from $24.1 million for the six months ended June 30, 1996. SG&A
expenses decreased as a percentage of sales to 25.8% for the six months
ended June 30, 1997 from 29.4% million for the six months ended June 30,
1996. This decrease in SG&A expenses was due to a decrease in salaries
and benefit expenses of approximately $860,000 and decreases in other
variable general and administrative expenses of approximately $2.2
million for the six months ended June 30, 1997. Additionally, the 1996
results included approximately $2.1 million of goodwill amortization. As
discussed above, the Company wrote-off its unamortized goodwill at
December 31, 1996 and accordingly, there was no goodwill amortization in
1997.
OTHER INCOME AND EXTRAORDINARY GAIN
During 1996, two of the Company's officers who were members of the Board
of Directors resigned. Subsequent to their resignation, certain
allegations concerning wrongful acts were made by the Company and certain
stockholders. On March 11, 1997, in consideration of the release and
discharge from all claims, damages, and all causes of action, the two
former officers and members of the Board of Directors returned to the
Company 965,101 shares of the Company's Class A Common Stock, 6,900
shares of the Company's Class F Common Stock, $6.9 million of the
Company's Senior Notes and $448,000 in cash. The Company recorded
approximately $3.7 million as other income and approximately $3.6 million
in the first quarter of 1997, as a result of this settlement and
forgiveness of debt.
INTEREST EXPENSE, NET
Interest expense increase approximately $899,000, or 9.4%, to $10.4
million for the six months ended June 30 , 1997 from $9.5 million for the
six months ended June 30, 1996. Short-term and long-term borrowings
increased by approximately $7.3 million, net of a $6.9 million reduction
for a related party transaction (see Note 6 - Related Party Transaction).
INCOME TAXES
The Company's income tax benefit for the six months ended June 30, 1997
was calculated at an effective rate of 38% before being offset by an
increase in the tax valuation allowance. Management of the Company
cannot be assured that the net deferred income tax asset will be
realized. Therefore the deferred tax asset has been fully reserved.
DEBT RESTRUCTURING FEES AND EXPENSES
The accompanying statements of operations reflect certain restructuring
fees and expenses consisting of professional fees and expense directly
related to the debt restructuring and reorganization. For the six months
ended June 30, 1997 the Company incurred approximately $1.6 million in
restructuring fees and expenses.
SEASONALITY
The Company's business is seasonal in nature with its highest sales
levels historically occurring during the third and fourth fiscal
quarters, which includes the holiday selling season.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1997, the Company experienced significant
liquidity constraints as a result of poor operating performance during
the fourth quarter of 1996 and a December 31, 1996 payment of the $8.125
million interest on the Company's Senior Notes. Additionally, the
Company experienced a significant reduction in vendor trade credit and
was forced to operate on a cash-in-advance or cash-on-delivery basis.
As a
15
<PAGE> 16
result, the Company was unable to service all of its customers. Also,
operating efficiencies of the Company's plants were negatively impacted
due to the restricted raw material purchasing ability. The comprehensive
restructuring plan discussed herein provided additional liquidity to the
Company through the $20 million secured term loan facility. Additionally,
the committed post-petition term loans form Magten will provide additional
liquidity. Finally, the Company expects to receive debtor-in-possession
financing from Congress Financial Corporation ("Congress") on terms
substantially conforming with the Company's revolving credit facility
("Revolving Credit Facility") with Congress. Management believes that
these sources of liquidity combined with operating cash flow will be
adequate to service the working capital needs of the Company as well as
funding operating losses at the Rug Barn. In the event that a
restructuring and the related financing are not consummated, the ability
of the Company to continue as a going concern is doubtful.
The Company's Revolving Credit Facility provides for a revolving loan
facility and letters of credit based on specified levels of underlying
collateral with a maximum principal amount equal to the lesser of (a) $50
million or (b) a specified borrowing base, which is based on eligible
receivables and inventory of the Company and its operating subsidiaries
("Borrowing Subsidiaries"). The Revolving Credit Facility (or a similar
credit facility) is essential for the Company's working capital needs.
The Company is required to maintain a minimum adjusted tangible net
worth, as defined, and the payment of cash dividends on the Company's
common stock is prohibited in accordance with the Revolving Credit
Facility. Further, there are limitations on the Company's ability to
incur additional indebtedness and make loans, advances and investments.
On May 23, 1997, the Revolving Credit Facility was amended for, among
other things, changes in certain covenants including the tangible net
worth calculation. There were no Events of Default (as defined) under
the Revolving Credit Facility, as amended, at June 30, 1997.
On June 30, 1997, the Company had approximately $2.6 million available
for borrowing under the Revolving Credit Facility borrowing base formula
based on underlying collateral. Borrowings under the Revolving Credit
Facility are made on a daily basis for requirements for that business day
and repayments are made on a daily basis by cash collections from trade
accounts receivables.
Cash used in operating activities was approximately $14.7 million for the
six months ended June 30, 1997 compared to use of cash of $8.2 million
for the six months ended June 30, 1996. The principal reason for the
change is due to the timing of the Company's $8.1 million interest
payment paid in the first quarter of 1997 on its Senior Notes. The
company did not make its scheduled interest payment due on June 30, 1997
on its Senior Notes. Inventories increased $6.5 million during the first
six months of 1997 compared to an increase of $1.7 million during the
same period in 1996. The Company used approximately $3.1 million to
reduce trade payables as a result of decreasing support from the
Company's vendors.
Cash used in investing activities was approximately $787,000 for the six
months ended June 30, 1997 compared to $4.0 million used for the six
months ended June 30, 1996. The Company used $1.1 million for the six
months ended June 30, 1997 for purchases of property and equipment
compared to $1.9 million used for the first six months of 1996. This
reduction in capital expenditures is a result of the Company's limited
liquidity. Cash used for long-term assets decreased by approximately
$2.4 million in the first six months of 1997 compared to the first six
months of 1996. This resulted from ongoing systems conversions programs
which were cut back in 1997 due to liquidity constraints.
Cash provided by financing activities was approximately $14.2 million for
the six months ended June 30, 1997 compared to $12.0 million for the six
months ended June 30, 1996. This change is primarily due to the
operating losses for 1997 and additional working capital requirements.
See Footnote 7 - Capital Restructuring Plan.
16
<PAGE> 17
INFLATION
Although the operations of the Company are generally influenced by
economic conditions, the Company does not believe that inflation had a
material effect on the results of operations during the six months ended
June 30, 1997 and 1996. The Company has been historically able to
mitigate the impact of the increases in the spot market prices of cotton
through fixed price purchase contracts.
EFFECT OF COMPLIANCE WITH ENVIRONMENTAL PROTECTION PROVISIONS
Compliance with Federal, State and local provisions that have been
enacted or adopted regulating the discharge of materials in the
environment, or otherwise relating to protection of the environment, has
not had, and is not expected to have, a material adverse effect on the
capital expenditures, net income or competitive position of the Company.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this Item 2 (Management's Discussion and
Analysis of Financial Condition and Results of Operations) that are not
historical facts are forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995.
The Company cautions readers of this Quarterly Report on Form 10-Q that a
number of important factors could cause the Company's actual results in
1997 and beyond to differ materially from those expressed in any such
forward-looking statements. These factors include, without limitation,
the general economic and business conditions affecting the retail
industry, the Company's ability complete its plan of reorganization,
competition from a variety of firms ranging from small manufacturers to
large textile mills, the seasonality of the Company's sales, the
volatility of the Company's raw material cost, the Company's dependence
on key personnel and the risk of loss of a material customer or a
significant license. These and other factors are more fully described in
the Company's previous filings with the Securities and Exchange
Commission including, without limitation, the Company's Prospectus dated
November 10, 1995.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 29, 1997, a fixture supplier of the Company filed suit seeking
$1.9 million against the Company claiming that the Company failed to
fulfill its obligations under a supply arrangement. Prayed damages are
approximately $1.9 million. Management of the Company intends on
vigorously defending the suit. Further, management expects to contest
the claim during the course of its Chapter 11 case. Management does not
expect that the ultimate settlement of the claim will have a material
adverse impact on the Company.
As contemplated by the Company's capital restructuring plan, the Company
filed a pre-negotiated filing under the provisions of Chapter 11 of the
United States Bankruptcy Code on September 29, 1997. See Note 7 to the
Condensed Consolidated Financial Statements contained in Part I of this
Form 10-Q.
The Company is involved in various routine legal proceedings incidental
to the conduct of its business. Management believes that none of these
legal proceedings, except for the pre-negotiated Chapter 11 filing, could
have a material adverse impact on the financial condition or results of
operations of the Company.
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) The Company did not make a scheduled interest payment of
approximately $7.7 million on its Series B 13% Senior Notes due on
June 30, 1997. The principal amount of the Senior Notes is $118.1
million. The terms of the indenture governing the Company's Senior
Notes provide that such a failure to pay interest when due results
in an event of default on such indebtedness and as a result, the
holders of these debt securities are entitled to accelerate the debt
represented thereby. In addition, under the indenture, as a
consequence of the Chapter 11 bankruptcy filing by the Company, the
indebtedness under the Senior Notes was automatically accelerated
and became immediately due and payable.
(b) The Company did not make a scheduled dividend payment in kind
of approximately $1.9 million on its Redeemable Preferred Stock
($0.01 par value).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
SEE EXHIBIT INDEX.
(B) REPORTS ON FORM 8-K
NONE
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
Decorative Home Accents, Inc.
-----------------------------
(Registrant)
Date: November 14, 1997 /s/ Jay N. Baker
----------------- -----------------------------
Jay N. Baker*
Chief Financial Officer
* Duly authorized to sign on behalf of the Registrant.
19
<PAGE> 20
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------
<S> <C>
27 Financial data schedule
</TABLE>
20
<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, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-31-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 621
<SECURITIES> 0
<RECEIVABLES> 30,770
<ALLOWANCES> 4,697
<INVENTORY> 39,033
<CURRENT-ASSETS> 68,441
<PP&E> 41,075
<DEPRECIATION> (9,922)
<TOTAL-ASSETS> 120,217
<CURRENT-LIABILITIES> 159,866
<BONDS> 118,100
53,554
0
<COMMON> 9
<OTHER-SE> (127,043)
<TOTAL-LIABILITY-AND-EQUITY> 120,217
<SALES> 37,629
<TOTAL-REVENUES> 37,269
<CGS> 29,224
<TOTAL-COSTS> 29,224
<OTHER-EXPENSES> 9,555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,225)
<INCOME-PRETAX> (7,979)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,979)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,979)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
