UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended February 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
OF 1934 For the transition period from ______ to ______
Commission File Number 333-44969-01
DESA HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 61-1251518
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
2701 Industrial Drive, Bowling Green, KY 42101
(Address of principal executive offices) (Zip Code)
(270) 781-9600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Title of Each Class Name of Exchange on Which Registered
Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant: (1) 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), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of May 25, 1999, the aggregate market value of the Common Stock of the
registrant held by non-affiliates of the registrant was $12,856,580.
Number of shares of the registrant's Common Stock at May 25, 1999: 15,552,509
Number of shares of the registrant's Nonvoting Common Stock at May 25, 1999:
90,604
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
1999 FORM 10-K ANNUAL REPORT
Table of Contents
<S> <C> <C>
PART I
Item 1. Business...........................................................................................4
Item 2. Properties........................................................................................15
Item 3. Legal Proceedings.................................................................................15
Item 4. Submission of Matters to a Vote of Security Holders...............................................15
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters..........................16
Item 6. Selected Consolidated Financial and Operating Information.........................................16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................18
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.........................................23
Item 8. Financial Statements and Supplementary Data.......................................................25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................................25
PART III
Item 10. Directors and Executive Officers of the Registrant................................................26
Item 11. Executive Compensation............................................................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................31
Item 13. Certain Relationships and Related Transactions....................................................32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................33
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT................................................................................35
SIGNATURES.......................................................................................................36
</TABLE>
2
<PAGE>
CERTAIN IMPORTANT FACTORS
This Annual Report on Form 10-K contains statements which constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places in
this Annual Report on Form 10-K and include statements regarding the strategies,
beliefs or current expectations of Desa Holdings Corporation (with its
consolidated subsidiaries, "DESA" or the "Company") and its management. Readers
are cautioned that any such forward looking statements are not guarantees of
future performance and involve risks and uncertainties, which could cause actual
results to differ materially from those in the forward looking statements. Such
factors include but are not limited to the Company's vulnerability to adverse
general economic and industry conditions because of its leverage, the Company's
ability to obtain future financing on acceptable terms, the Company's ability to
integrate acquired companies and to complete acquisitions on satisfactory terms,
the demand and price for the Company's products relative to production costs,
the seasonality of the Company's business and uncertainties regarding the
resolution of Year 2000 problems. The accompanying information contained in this
Annual Report on Form 10-K, including under the headings "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," identifies other important factors that could cause such
differences. The Company undertakes no obligation to release publicly the result
of any revision to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
<PAGE>
PART I
Item 1. Business.
DESA is a leading manufacturer and marketer of zone heating/home
comfort products and specialty products in the United States. Through its
ability to consistently offer consumers quality products with innovative
features at attractive price points, the Company has developed leading market
positions in (i) vent-free indoor heaters, (ii) vent-free hearth products, (iii)
outdoor heaters, (iv) consumer powder-actuated fastening systems, (v) electric
chain saws and (vi) motion sensor lighting. In fiscal 1999, approximately 93% of
the Company's sales were generated in the United States and 7% were generated in
international markets. Over 87% of the domestic sales were in product categories
where DESA is the market leader. The Company has grown rapidly with sales
increasing from $122.8 million in fiscal 1994 to $317.2 million in fiscal 1999,
representing a compound annual growth rate ("CAGR") of 21%. The Company's EBITDA
(as hereinafter defined) increased from $18.2 million, or 14.8% of sales, in
fiscal 1994, to $39.0 million, or 12.3% of sales, in fiscal 1999, representing a
CAGR of 21%. In addition, the Company's operating profit and cash flows provided
by (used in) operating, financing and investing activities changed from $15,450,
$11,892, ($8,866) and ($1,420), respectively, in 1994 to $30,366, $2,307,
$43,012 and ($45,233), respectively, in 1999. For the twelve months ended
February 27, 1999, the Company had sales of $317.2 million and EBITDA of $39.0
million.
The Company sells its products through multiple consumer and commercial
channels of distribution including the leading home centers, mass merchants,
warehouse clubs, hardware cooperatives, specialty heating distributors,
construction and industrial equipment dealers, farm supply outlets and natural
gas utilities under brand names well recognized by its customers. The Company's
strategy is to aggressively target the fastest growing retailers/distributors in
each channel and service these customers through a multi-brand approach to
capture the largest possible share of a given product market. In addition, the
Company has an established record of success in new product development and
product line extensions. Over the last five years, DESA has introduced over 100
new products and line extensions which generated approximately 42% of the
Company's sales growth over that time period.
Zone Heating Products (56% of Fiscal 1999 Net Sales)
The zone heating market is comprised of indoor gas heaters, hearth
products (gas logs, fireplaces and stoves) and outdoor heaters. DESA is a
leading manufacturer of vent-free indoor and outdoor zone heating products in
the United States. DESA's domestic zone heating business has experienced a CAGR
of 16% with gross revenues increasing from $86.4 million in fiscal 1994 to
$177.8 million in fiscal 1999. DESA markets its zone heating products under
well-known brand names such as Reddy(R), Remington(R), Vanguard(R), Master(R)
and Comfort Glow(R). The Company's zone heating business is organized into two
primary product categories:
o Indoor vent-free heating appliances and hearth products: Indoor heating
appliances include vent-free liquid propane and natural gas space
heaters which provide economical supplemental heat to a specific area
as distinguished from central heating systems which are used to heat
entire buildings. Vent-free hearth products such as gas logs,
fireplaces and stoves are utilized for both decorative and economic
heating. Vent-free products utilize a more efficient burner system
which avoids the need for outside venting, whereas vented products
require a discharging of emissions outside of the building.
o Outdoor heating appliances: Outdoor heating products consist of
portable units which generate heat by either using a fan to discharge
heated air to a specific area (forced air heaters) or emitting heat
throughout the surrounding area without the assistance of a fan
(convection heaters). Forced air heaters are fueled by kerosene,
propane or natural gas, while convection heaters are fueled only with
propane or natural gas. Outdoor heaters are used in both residential
and commercial applications. Residential applications include heating
otherwise unheated garages and workshops and outdoor work areas.
Commercial applications include heating factories, warehouses,
construction sites and agricultural areas.
4
<PAGE>
Specialty Products (44% of Fiscal 1999 Net Sales)
DESA's domestic specialty products business has experienced a CAGR of
31% with gross revenues increasing from $36.4 million in fiscal 1994 to $139.4
million in fiscal 1999. Specialty products include powder-actuated fastening
systems (tools and accessories) used to fasten wood to concrete or steel,
stapling/rivet tools and electrical products such as chain saws, portable
generators and home security products. These products are marketed under
well-known brand names such as Remington(R), Master(R), Powerfast(R) and
Heath/Zenith(R).
Competitive Strengths
Leading Market Positions in High Growth Segments. DESA is the domestic
market leader in outdoor heating appliances (77% market share), vent-free indoor
gas heating (69% market share), vent-free hearth products (42% market share),
powder-actuated fastening systems (85% share of the consumer market, which
constitutes 40% of the total domestic market) and electric chain saws (52%
market share). By leveraging its strong market positions and customer
relationships in established product lines, DESA has increased sales by
introducing related products or line extensions of existing products such as
vent-free gas logs (introduced in fiscal 1993), vent-free fireplaces (introduced
in fiscal 1995), fireboxes (introduced in fiscal 1997) and vent-free cast iron
stoves (introduced in fiscal 1997).
DESA's targeted market segments in the zone heating market have
exhibited strong historical growth. Vent-free indoor gas heater and hearth
products, the most rapidly growing segments in the $900 million zone heating
market, have grown at a CAGR of approximately 11% over the last six years driven
primarily by the increasing consumer trend towards heating with natural gas and
liquid propane. The outdoor heater market has achieved a CAGR of 8% over the
same period.
Strong Relationships with a Diversified Distribution and Customer Base.
DESA has organized its sales and marketing organizations by channels of
distribution. The Company has built strong, long-term relationships with some of
the most rapidly growing retailers, including Home Depot, Lowe's, Sears,
Wal-Mart, W.W. Grainger, Ace Hardware and TruServ. The Company's products are
designed to appeal to a variety of end-users, ranging from do-it-yourself
("DIY") consumers to professional home builders. By building strong
relationships with the leading retailers and distributors within each of the
Company's channels, DESA is well-positioned to participate in the continued
growth of these key customers.
Broad Portfolio of Products with Well-Recognized Brand Names. DESA
provides a broad offering of quality products under numerous brand names which
are well-recognized by its customers. The Company's key brands include:
Reddy(R), Remington(R), Vanguard(R), Master(R) and Comfort Glow(R) for zone
heating products, Remington(R) for powder-actuated fastening systems and
electric chain saws and Heath/Zenith(R) for motion sensor lighting. The Company
also manufactures products on a private label basis for W.W. Grainger, Sears,
John Deere and Homelite. DESA leverages its brand equity with its DIY consumers,
professionals and specialty dealers by continually providing its customers new
product offerings and product line extensions under its established brand names.
New Product Development Process. DESA offers consumers products with
innovative features at attractive price points. The quality and breadth of
DESA's customer relationships provide the Company with valuable market data that
serves as the foundation for the Company's new product development and product
line extension process. For example, the Company's line of hearth products was
initially introduced as the result of shifting consumer preferences away from
(i) wood-burning hearth products to gas technology and (ii) vented gas products
to vent-free units. Over the last five years, new product introductions and
product line extensions have accounted for approximately 42% of the Company's
sales growth.
Effective Cost Reduction Program and Strong Cash Flow. A core component
of the Company's strong financial performance over the last five years has been
a focused program to enhance margins through cost reduction. The Company has
exceeded its annual cost reduction goal of 3% of cost of sales in each of the
last three years.
The Company has been able to achieve its sales growth with efficient
use of working capital and low capital expenditures generating $163.1 million in
free cash flow (EBITDA (as hereinafter defined) less capital expenditures) for
the last five years.
Strong Management Team. DESA was founded in 1969. The top two
executives of the Company have worked together as a team for the last 14 years.
These individuals have served as the catalyst for instilling a spirit of
"continuous
5
<PAGE>
improvements" and achievement as a cultural standard within the Company. Senior
management is well-complemented by a broad team of experienced managers who have
been with DESA since 1985.
Business Strategy
DESA's objective is to continue to leverage its competitive strengths
to increase revenues and EBITDA. In addition, the Company believes there are
significant additional opportunities to enhance its overall market and
competitive position as follows:
Continue Aggressive Growth through DESA's Primary Channels and
Customers. DESA's distribution strategy is twofold: (i) establish breadth across
distribution channels; and (ii) achieve depth within each channel by fostering
and enhancing relationships with some of the most rapidly growing retailers in
such channel (such as Home Depot and Lowe's in the home center channel and
Wal-Mart and Sears in the mass merchant channel). While DESA has managed to gain
access to multiple channels of distribution, significant opportunities remain to
sell the Company's full product line through each of these customers.
Penetrate New Distribution Channels. Although DESA currently sells its
products through a broad distribution network, the Company believes there are
opportunities to increase the penetration in some of the Company's newer
channels such as plumbing supply outlets, building supply distributors, building
contractors and fireplace specialty stores. Management believes that these newer
channels represent attractive markets across the United States.
Capitalize on Favorable Trends for Gas Products. Recent housing
construction data reveals that over two-thirds of new homes today use gas as the
primary heating source compared to one-third of new homes ten years ago. The
American Gas Association estimates that approximately 60 million homes currently
use gas and the number of homes utilizing gas will grow to 80 million by the
year 2010. This growing preference for gas represents a significant growth
opportunity for DESA as all of its indoor heating products are fueled by natural
or propane gas. Additionally, by focusing on vent-free gas products, which have
lower installation costs and provide increased fuel efficiency compared to
vented products, the Company is well positioned to benefit from the fastest
growing segments of the zone heating market.
Increase Penetration of International Markets. Similar to the trend in
the United States, the global DIY markets are experiencing attractive growth
rates. Five of the ten largest home improvement retailers in the world are based
outside of the United States. However, international sales comprised only 7% of
DESA's total sales in fiscal 1999.
Make Selected Acquisitions. The Company intends to seek selective
acquisitions where it can expand its existing product portfolio, utilize its
diversified distribution channels and achieve operational synergies. Over the
last five years, 57% of the Company's sales growth has come through
acquisitions. Management believes that the markets in which it operates are
highly fragmented and there are numerous manufacturers of complementary products
which would make attractive acquisition candidates.
Products and Markets
DESA is the leader in a number of markets where its quality
manufacturing and innovative product design have resulted in a strong
competitive position. The Company's products are sold for both consumer and
commercial use utilizing multiple distribution channels and a variety of brand
names. The Company currently serves markets for zone heating products and
specialty products. Approximately 93% of the Company's 1999 sales were domestic
and 7% of sales were international.
Zone Heating Market
Market Overview. The zone heating market includes a broad range of
products that are used to heat limited areas as distinguished from central
heating systems which are used to heat entire buildings. The zone heating market
is currently estimated to be approximately $900 million in size, with hearth
products (i.e., vented gas hearth, vent-free gas hearth, wood fireplaces, wood
stoves/inserts, pellet stoves/inserts) accounting for $533 million or over 57%
of the total market; indoor gas heaters comprising $137 million; outdoor heaters
accounting for $63 million and accessories comprising $200 million.
6
<PAGE>
Market Outlook. DESA's strong market position in the vent-free segment
provides a solid foundation for further growth of the Company's business and
expansion into other categories (e.g. vented gas hearth) as a result of the
following factors:
Benefits of low-cost zone heating. Over the past decade, zone heating
products have become increasingly popular because: (i) propane and natural gas
are 50% to 70% cheaper on a BTU basis than electricity, (ii) consumers have
become aware of the cost advantage of zone heating versus central heating and
(iii) fireplaces are being used as both heating sources and decorative home
furnishing.
This growing preference for gas represents a growth opportunity for
DESA as almost all of its indoor heating products are fueled by natural or
propane gas. The market is still under-penetrated with only 4 million vent-free
indoor heating units having been sold over the last 10 years in North America
compared to over 60 million homes using gas in 1996. Gas hearth shipments have
been growing at a rate in excess of 30% per year for the past five years. Over
27 million homes have been plumbed for gas and have a fireplace, providing an
opportunity for gas log sales. In addition, 36 million homes are plumbed for gas
but do not have a fireplace, representing a significant opportunity for the
installation of vent-free fireplaces and logs.
Increased home center/hardware channel participation. Consumer
awareness of gas logs and gas fireplaces is currently only 67% and 20%,
respectively. Awareness of zone heating and hearth products is expected to
increase as these products gain wider distribution in home centers and hardware
stores. The potential for home improvement sales, through retrofitting or adding
a new fireplace, represents a meaningful market opportunity for hearth products.
DESA, with its strong home center and hardware co-op channel relationships and
portfolio of zone heating products, is well-positioned to capitalize on this
trend.
Favorable Regulatory Development. A positive development for vent-free
indoor heating products (heaters, gas logs, fireplaces, stoves) involves the
easing of state restrictions regarding the sale and use of these products. As of
last year, 43 of the 50 states in the United States permitted the sale and use
of vent-free indoor heating products. In the past year, California and New York
enacted legislation to allow the sale and use of vent-free indoor heating
products, subject to rules and guidelines being established by agencies in each
state. DESA's Vice President -- Sales and Vice President -- Engineering, who
represent the industry trade association (Gas Appliance Manufacturer's
Association, GAMA-Vent-Free Alliance), have successfully worked with the New
York state agency on the sale of vent-free products and are actively working
with state agencies in California to provide for the sale of vent-free products
in the future.
Indoor Heating Products
DESA's indoor zone heating products consist primarily of three product
categories: (i) vent-free natural gas and propane-fueled residential space
heaters; (ii) hearth products, including vent-free gas fireplaces and logs; and
(iii) direct vent products under the FMI (as hereinafter defined) brand. Sales
of these products have increased at a CAGR of 21% from fiscal 1994 to fiscal
1999.
Indoor Vent-Free Heaters
The Company's space heaters are generally wall-mounted and provide heat
to the surrounding area. Residential space heaters come in either vented or
vent-free versions. Vented heaters require a discharging of emissions outside of
the dwelling, while vent-free heaters utilize a more efficient burner system
which avoids the need for outside venting. Vent-free heaters are generally
smaller and more physically attractive than their vented counterparts. DESA has
been the market leader in vent-free gas heaters since 1983. Historically, DESA
has focused on vent-free models. Only 1% of the Company's indoor heating sales
in fiscal 1999 are vented units.
The Company offers seven sizes and forty-six models of vent-free gas
heaters ranging in output from 5,000 to 30,000 BTU/hour for use with natural gas
or liquefied propane. Key applications of these products include use in family
rooms, dens, kitchens and commercial offices. DESA's indoor vent-free heaters
are sold at retail prices, ranging from $149 to $349, which are significantly
lower than vented gas heaters.
7
<PAGE>
Heaters are classified into two different types: infrared and blue
flame. Infrared models employ ceramic plaque burners which glow red-orange while
in use and they produce radiant heat that warms people or objects in the room.
Blue flame models have a stainless steel burner hidden behind a darkened glass
front. When burning, a line of blue flame is visible across the width of the
heater. These models produce convection heat that warms the air and distributes
the heat throughout the room. Both infrared and blue flame models are available
with either manual or thermostatic control and with piezo ignition.
The Company has developed patented technology for its line of
thermostatic infrared models, known as Infra-Stat, which provides superior
features versus competitors' offerings. DESA's heaters incorporate a proprietary
feature of two separate controls to regulate both the heat output and the
thermostatic operation. Enhanced blue-flame models are available for heavy-duty
garage and workshop applications. Optional accessories such as floor bases and
fan accessories are also available.
Vent-Free Hearth Products
In 1993, DESA pioneered the introduction of vent-free gas technology to
hearth products with the introduction of a heat efficient vent-free decorative
gas log. Vent-free gas logs have provided DESA with a new product growth
opportunity. Vent-free represents an advancement in decorative gas log
technology and, more importantly, has allowed the Company to establish a
presence in the fast-growing hearth products market.
Vent-free gas logs, which retail for $200 to $300, are aesthetically
attractive and an economical source of heat since none of the heat generated is
lost through an open vent. Historically, decorative gas logs have required
venting (i.e., an open chimney damper) and were used primarily by individuals
who enjoyed the ambiance of a fireplace but wanted to avoid the trouble and
inconvenience associated with burning wood. DESA's vent-free logs utilize an
efficient burner system similar to vent-free heaters, and are thus less
expensive to install and operate than their vented counterparts.
In 1994, DESA combined the technology of blue flame heaters and gas
logs to create an aesthetically pleasing Mini-Hearth gas heater which retails
for $499. The Mini-Hearth utilizes a blue flame heater cabinet and burner to
which a decorative fibrous ceramic log has been added. A wooden mantle is placed
around the heater to create a fireplace effect. While the Mini-Hearth was
designed to be used as a zone heater rather than as a replacement for a formal
fireplace, the improved appearance has generated sales to customers who might
not have otherwise purchased a gas zone heater.
In 1995, DESA introduced a vent-free free-standing gas fireplace with
logs and a full sized mantle which is marketed as a traditional fireplace at a
retail price of approximately $1,000. DESA's vent-free fireplace does not
require venting and may be placed against any wall without structural
renovations. Traditional fireplace boxes must be mounted into an outside wall to
facilitate venting, requiring significant structural modifications to an
existing home. Furthermore, vent-free fireplace installation costs are highly
attractive relative to wood fireplaces (masonry and manufactured), which cost an
average of two to three times the cost of a vent-free fireplace, including
installation.
The Company's vent-free gas logs are offered in three sizes and
thirty-six models while vent-free gas fireplaces are offered in ten models and
mini-hearth products in six models.
Direct Vent Products
In August 1998, DESA acquired Fireplace Manufacturers Inc. ("FMI"), a
manufacturer of direct vent gas fireplaces and gas logs, as well as wood burning
metal fireplaces. FMI is located in Santa Ana, California.
With the acquisition of FMI, DESA is now competing in the vented hearth
market, which has annual sales in the United States in excess of $500 million.
DESA currently intends to take advantage of its position as a market leader in
vent free products as it competes in the vented hearth market.
8
<PAGE>
Outdoor Heating Products
DESA's line of outdoor heating products consists of portable units
which generate heat by either using a fan to discharge heated air to a specific
area (forced air heaters) or emitting heat throughout the surrounding area
without the assistance of a fan (convection heaters). Forced air heaters are
fueled by either kerosene, propane or natural gas, while convection heaters are
fueled only with propane or natural gas. Outdoor heaters are used in both
residential and commercial applications. Residential applications include
heating otherwise unheated garages and workshops. Commercial applications
include heating factories, warehouses, construction sites and agricultural
areas. Sales of outdoor heating products have increased at a CAGR of 8% from
fiscal 1994 to fiscal 1999.
Specialty Products
DESA's specialty products category consists of (i) specialty fastening
systems (i.e., powder-actuated tools and staple guns), (ii) electrical products
(i.e., chain saws and electric generators) which are sold to both DIY and
commercial customers, and (iii) home security products. The specialty product
category represents 44% of the Company's sales which have grown at a 31% CAGR
from fiscal 1994 to fiscal 1999.
Specialty Fastening Systems Products
Powder-actuated tools utilize a powder load to drive nails for
fastening wood to concrete or steel. The charge is activated using either a
trigger on the tool or by striking the tool with a hammer. The energy discharged
propels a piston inside the tool which in turn drives the nail. DESA sells two
powder-actuated tools targeted at the DIY market and six tools targeted at the
commercial market. The two consumer models retail for $19 to $79 and the six
commercial models retail for $129 to $199. Sales of powder loads and nail
accessories account for over 50% of this product category's revenues.
Market Overview. The total domestic powder-actuated tool market in
which DESA competes is approximately $80 million, consisting of $60 million in
the commercial market and $20 million in the DIY market. In fiscal 1998, DESA
had a market share of 85% in the DIY segment. The staple gun and related
accessories market size is approximately $110 million of which DESA has a modest
market share.
Electrical Products
DESA assembles and markets a line of electric chain saws and electric
generators. Electric chain saws are used primarily by homeowners for light-duty
pruning and trimming. The Company offers models retailing from $39 to $69. DESA
also maintains a modest presence in the portable electric generator market.
Nearly 56% of the Company's generator sales are made to W.W. Grainger who offers
this product line to end-users through its equipment catalog and industrial
supply outlets.
Market Overview. The domestic electric chain saw market is
approximately $20 million in size, and DESA is the market leader with a 52%
share. The electric chain saw market is mature and industry volume has been
reasonably stable over the past five years.
Home Security
The Company's home security products, marketed under the Heath/Zenith
brand, comprises three primary product lines: Motion Sensor Security Lighting,
Motion Sensor Decorative Lighting, and Wireless Doorbells.
Motion Sensor Security Lighting. Within its motion sensor security
lighting product line, which accounted for 51% of Heath/Zenith's 1999 revenues,
Heath/Zenith offers 58 stock keeping units ("SKUs") representing a variety of
security lighting products which appeal to various segments of the DIY market.
The Heath/Zenith standard motion sensor security lighting products retail from
$9.95 for promotional items up to $34.95 for a full-feature security light.
Heath/Zenith's primary focus is to de-emphasize promotional products and to
emphasize its high quality, high margin products that are made with metal
fixtures and hoods, and which contain such value-added features as Pulse Count,
Dual BriteTM, and 270(degree) activation capability.
9
<PAGE>
Market Overview. The $200 million North American residential outdoor
security lighting industry market is segmented into three categories: (i) motion
sensor security lighting, (ii) photocell (darkness activated) security lighting,
and (iii) standard (switch activated) security lighting. The motion sensor
security lighting segment has been the primary growth segment in the industry,
growing at a compounded annual growth rate that the Company believes to be
approximately 15% over the last five years. Since the introduction of motion
sensor security lighting, the product has established itself as an easy to
install, reliable, low-cost security product. As a result, motion sensor
products have steadily captured market share from standard and photocell
lighting as those traditional products are less effective crime deterrents and
more expensive and less convenient to operate.
Motion Sensor Decorative Lighting. With 38 SKUs, motion sensor
decorative lighting products represented approximately 26% of the Heath/Zenith's
1999 total revenue. The Heath/Zenith's motion sensor decorative lighting
products, which sell for retail prices ranging from $24.95 to $79.95, were
introduced in 1992 as part of management's strategy to move consumers to higher
price point products. Included in this product line are coach lanterns, cast
aluminum lanterns, brass lanterns and post lanterns.
Market Overview. The $400 million North American residential outdoor
decorative lighting industry is driven primarily by the home improvement and
remodeling industry. As a result, the overall retail outdoor decorative lighting
industry has benefited from the expansion in the home improvement industry and
DIY retail channel. Historically, the decorative lighting market was dominated
by standard (switch activated) lighting products. However, as customers become
more aware of the benefits of motion sensor lighting products such as energy
efficiency, crime deterrence, and convenience, they are requiring motion sensor
capabilities in their outdoor lighting products.
Wireless Doorbells. Wireless doorbell products and other wireless
control systems products represented approximately 22% of Heath/Zenith's 1999
total revenue. The Heath/Zenith's wireless doorbell products, which retail for
between $9.95 and $49.95, are positioned to take advantage of an underserved
market. Heath/Zenith has become the market leader in the wireless doorbell
industry by offering a diverse line of products and, most importantly, by
differentiating its product with a proprietary sound chip.
Market Overview. The wireless control systems industry is a diverse
industry that includes products ranging from home automation systems to garage
door openers to wireless doorbells. Heath/Zenith currently competes primarily in
the wireless doorbell segment of the residential wireless control systems
industry, estimated by the Company to be an industry with annual North American
sales of approximately $40 million.
International
In fiscal 1999, $22.7 million or 7% of DESA's gross sales were
generated in international markets such as Canada, Europe and the Far East. This
segment has grown at a CAGR of 7.3% from fiscal 1994 through fiscal 1999.
Although the global markets have not traditionally been an area of DESA's focus,
the Company believes that the international category represents a significant
opportunity for increased sales in the future. International markets have the
potential to far surpass the home improvement market in the United States.
DESA's strategy for the international markets has been to export
customized versions of its products to accommodate local electrical
requirements, government regulation and user preferences for its exported
products. DESA utilizes local distributors in each country to sell its products,
typically relying on more than one distributor in each country.
In 1990, DESA increased its presence in the foreign markets with the
purchase of Jennen B.V., its Dutch distributor of outdoor forced air heaters.
Located in Rotterdam, it was subsequently renamed as DESA Europe B.V. and
currently serves as the Company's European headquarters.
Sales, Marketing and Distribution
Sales. DESA has organized its domestic sales force by channels of
distribution and product categories in order to optimize the effectiveness of
its selling efforts. DESA management believes that such a structure enhances the
Company's
10
<PAGE>
relationships with key channel participants by: (i) enabling the sales force to
develop specific customer insights regarding specialized needs and (ii) creating
a sense of partnership through customized attention and focus.
<TABLE>
<CAPTION>
Approximate Number
DESA Sales Channel of of Sales
Organization Distribution Products Marketed Representatives
<S> <C> <C> <C>
General Consumer........... Mass Merchants Indoor Heating 120
Hardware Co-ops Hearth Products
Home Centers Outdoor Heating
Warehouse Stores
Catalog Showrooms
Agricultural Supply
Specialty Heating.......... Utilities Indoor Heating 40-50
Propane Marketers Hearth Products
Specialty Distributors
Appliance Distributors
Construction............... Equipment Distributors Outdoor Heating 40-50
Equipment Renters Generators
Specialty Products......... Mass Merchants Specialty Fastening Systems 100
Hardware Co-ops Electrical Products
Home Centers Home Security
Warehouse Stores
Catalog Showrooms
Agricultural Supply
</TABLE>
The sales representative organizations report to DESA's regional managers
who, in turn, report to that channel's Sales Director who report to the Chief
Operating Officer.
Marketing. The Company's marketing staff utilizes a variety of traditional
and innovative programs to increase consumer awareness and augment sales. DESA
uses limited national advertising and relies instead on local customer
advertising through newspapers and circular flyers. DESA has also created a
broad national network of independent, factory-trained service centers to
provide local support to customers and end-users.
Distribution. The Company's significant customers include all of the major
home center accounts. The Company's consumer channels, which include home
centers, mass merchants, warehouse clubs and hardware co-ops, are the most
important channel for DESA's products and were responsible for 78% of its fiscal
1999 domestic sales. Other channels, including specialty heating, farm,
construction and industrial, contributed 22% of domestic sales in fiscal 1999.
Key customers include Home Depot and Lowe's, two of the major home centers
in the country; Ace and TruServ, leaders in the hardware co-op market; Sears and
Wal-Mart/Sam's, major mass merchandisers, and W.W. Grainger, a major industrial
supply company. Consistent with industry practices, the Company does not operate
under a long-term written supply contract with any of its customers.
Competition
Each of the industries in which the Company manufactures and sells products
is highly competitive. Although competitive factors vary by product line,
competition in all product lines is based primarily on product quality, product
innovation,
11
<PAGE>
customer service and price. The Company also believes that a manufacturer's
relationship with its distributors and principal customers is a key factor in
the industries in which the Company competes.
The Company competes with a number of manufacturers in the heating products
industry. Within this industry, there are several manufacturers of gas heaters
and numerous producers of gas logs, pre-engineered fireplaces and solid fuel
heaters. The Company also competes with a number of manufacturers in the
specialty tool industry. The Company believes that it is a market leader in the
outdoor heating appliance, vent-free indoor gas heating and hearth and DIY
powder-actuated fastener and electric chain saw markets and believes that its
experience, well-recognized brand names, comprehensive product offerings and
strong customer relationships give it a competitive advantage with respect to
these products.
The Company's competitors offer a number of products which directly compete
with or can be utilized as substitutes for the products manufactured by the
Company. No assurance can be given that the future sales of such competitive
products will not adversely affect the market for the Company's products. In
addition, certain of the Company's competitors, particularly in the specialty
tool industry, are larger and better capitalized than the Company.
Management Information Systems
DESA maintains an advanced MIS utilizing customized software for its
manufacturing and engineering design. The Company also has established Customer
Electronic Data Interchange for order entry by major accounts. These systems
provide "real-time" information in regards to work-in-process inventory and
provides detailed labor reporting to enable the Company to identify potential
labor cost savings. For product development and engineering, employees utilize a
state-of-the-art three dimensional CAD/CAM system.
The Company has completed the process of reviewing its computer and
operational systems to identify and determine the extent to which any such
systems were vulnerable to potential errors and failures as a result of the
"Year 2000" problem. The Year 2000 problem is a result of computer programs
being written using two digits, rather than four digits, to identify years. The
Year 2000 presented several potential risks to the Company: (i) that the
Company's internal systems may not function properly, (ii) that suppliers'
computer systems may not function properly and, consequently, deliveries of
required parts may be delayed, (iii) that customers' computer systems may not
function properly and, consequently, orders or payments for the Company's
products may be delayed, and (iv) that the Company's bank's computer systems
could malfunction, disrupting the Company's orderly posting of deposits, funds
transfers and payments. The occurrence of any one or more of these events could
have a material adverse effect on the Company's financial condition and results
of operations. The Company does not have any contingency plans to address the
Year 2000 problem if the efforts described below did not fully resolve the
problem.
The Company has written all of its internal MIS applications, rather than
buying applications from vendors, and has chosen to modify those applications
internally to appropriately address the Year 2000 problem. Management believes
that the Company's MIS staff was able to modify all such applications prior to
March 1, 1999 and that the appropriate system testing has been performed. No
embedded systems used in manufacturing require any modification for Year 2000
compliance. Review of embedded systems used for quality control was completed in
January 1999. The expenses of the Company's efforts to identify and address any
Year 2000 problems are not expected to exceed $100,000, of which $37,000 has
already been spent, exclusive of staff time.
The Company has identified critical parts and materials suppliers and is
beginning a program to contact such suppliers to evaluate the extent of the Year
2000 risk to the Company's continued timely receipt of parts and materials
deliveries. Management believes that such efforts will allow the Company to
identify any risk of parts or materials shortages and either to find alternative
suppliers or to order sufficient quantities of critical parts and materials
prior to the Year 2000 so as to avoid adverse effects on the Company's financial
condition and results of operations, although there can be no assurances that
such efforts will be successful.
The Company is also engaged in discussions with certain major customers to
ensure that EDI formats function properly notwithstanding the advent of the Year
2000. EDI is the primary method by which customers place orders for the
Company's products. Such discussions are completed, in the case of the Company's
major home center customers, and are well advanced
12
<PAGE>
with other major customers using EDI, and management believes that transmission
of orders from these major customers will not be significantly affected by the
advent of the Year 2000, although there can be no assurances in this regard.
Management does not, however, have sufficient information regarding the internal
systems of all of its customers to form an opinion as to whether such customers
will be able to timely place such orders or to timely pay for products. The
purchasing patterns of existing and potential customers may be affected by Year
2000 problems that could cause unexpected fluctuations in the Company's sales
volumes.
Manufacturing
Indoor and Outdoor Heating Products. DESA's manufacturing processes include
metal fabrication, painting, assembly and product testing. In general, DESA
cuts, forms and coats the product housing, assembles the various components such
as motors, fans, electrical parts and burners, packages the final product and
ships it to customers. Punch presses, welding, powder coated painting and
assembly systems are mechanized with state-of-the-art equipment utilizing
robotics to permit high volume output with minimum labor content.
Specialty Fastening Systems. DESA manufactures and packages the nails
(pins) for sale with its powder-actuated tool product line. Powder-actuated
tools are sourced from a manufacturing joint venture with Continental/Midland,
Inc. and loads are purchased from a third party. Powerfast(R) stapling products
are sourced from Asian manufacturers.
Electrical Tools. DESA assembles electric chain saws from components made
to its specifications by third-party suppliers. Electric generators are
assembled on a chassis by connecting gasoline engines purchased from Honda and
Briggs & Stratton with an alternator purchased from a European supplier.
Home Security. Heath/Zenith designs and manufactures its products through
its Hong Kong based subsidiary, Heath Company Ltd., which provides purchasing,
engineering, contract manufacturing, administration and assembly. Heath/Zenith
uses subcontractors in China who assemble products according to predetermined
specifications and ship assembled products to Heath Ltd. Heath/Zenith owns all
the tooling utilized in the production of its products. Finished products are
shipped to the Company's warehouse in Manchester, Tennessee and a public
warehouse in Reno, Nevada and distributed throughout North America directly to
customers.
Trademarks, Patents and Licenses
The success of the Company's various businesses depends in part on the
Company's ability to exploit certain proprietary designs, trademarks and brand
names on an exclusive basis in reliance upon the protections afforded by
applicable copyright, patent and trademark laws and regulations. The loss of
certain of the Company's rights to such designs, trademarks and brand names or
the inability of the Company to protect effectively or enforce such rights could
adversely affect the Company.
Backlog and Warranty
The Company's backlog consists of cancelable orders and is dependent upon
trends in consumer demand throughout the year. Customer order patterns vary from
year to year, largely because of annual differences in consumer end-product
demand, marketing strategies, overall economic conditions and weather
conditions. Orders for the Company's products are generally subject to
cancellation until shipment. As a result, comparison of backlog as of any date
in a given year with the backlog at the same date in a prior year is not
necessarily indicative of sales trends. Moreover, the Company does not believe
that backlog is necessarily indicative of the Company's future results of
operations or prospects.
The Company's warranty policy is to accept returns of products with defects
in materials or workmanship. The Company will also accept returns of incorrectly
shipped goods where the Company has been notified on a timely basis and, in
certain cases, to maintain customer good will. During fiscal 1999, warranty
costs amounted to approximately 2.1% of sales.
13
<PAGE>
Environmental Liability
The Company is subject to various evolving federal, state and local
environmental laws and regulations governing, among other things, emissions to
air, discharge to waters and the generation, handling, storage, transportation,
treatment and disposal of hazardous and non-hazardous substances and wastes.
These laws and regulations provide for substantial fees and sanctions for
violations and, in many cases could require the Company to remediate a site to
meet applicable legal requirements. A Phase I environmental audit of the
Company's manufacturing facilities was completed on August 9, 1997 and did not
identify any material matters. The Company believes, although there can be no
assurance, that liabilities relating to environmental matters will not have a
material adverse effect on its future financial position or results of
operations.
Employees
DESA's zone heating products operation is seasonal. As a result, the number
of workers employed by the Company at any particular point in time varies. The
work force is accustomed to seasonal layoffs of two to four months. In 1999,
total employment averaged 1,023 with a low of 508 employees in March and a peak
of 1,469 employees in September.
The hourly labor force in Bowling Green, Kentucky is represented by the
Sheet Metal Workers International Association (AFL-CIO) under a three-year
contract expiring in June 2001. The Manchester and Shelbyville, Tennessee
facilities and Santa Ana, California are non-union plants.
The hourly labor force in Bowling Green, Kentucky is covered by a defined
benefit pension plan. All other employees are covered by a defined contribution
plan (401K). All workers are covered by self-insured medical plans.
FMI/UHI
On August 19, 1998, the Company consummated the acquisitions of Fireplace
Manufacturers Incorporated ("FMI") and the worldwide rights (except in China) to
distribute Universal Heating, Inc.'s and its affiliates' ("UHI") indoor heating
products. FMI is a Santa Ana, California, based manufacturer of wood-burning
metal fireplaces, decorative gas appliances with refractory-lined fireboxes,
direct vent gas fireplaces, and related chimney flues. UHI, based in Yorba
Linda, California, is a privately held manufacturer of indoor gas heating
products. The aggregate purchase price for the acquisitions was approximately
$38,368,000 including non-compete payments. These acquisitions were accounted
for under the purchase method of accounting.
The Company financed these acquisitions with the proceeds of a $26,292,500
advance under its senior credit facility and $12,075,500 of the proceeds from
the issuance of approximately 1,860,677 additional shares of the Common Stock by
the Company. The additional equity was sold to existing stockholders of the
Company at a per share price of approximately $6.49.
In August 1998, the Company became party to an agreement to negotiate in
good faith for the purpose of entering into a joint venture to manufacture
various products in China. Pursuant to the terms of the joint venture under
negotiation, UHI intends to contribute manufacturing facilities located in China
in exchange for a 60% interest in the joint venture and a preferred interest in
an additional $7 million of profits of the joint venture. The Company intends to
contribute $3 million in cash for a 40% interest in the joint venture, which
will be subordinate to UHI's $7 million preferred interest in profits. The
Company intends to finance its $3 million contribution to the joint venture
through indebtedness under the Credit Facility.
14
<PAGE>
Item 2. Properties.
The Company's Bowling Green, Kentucky facility serves as the corporate
headquarters as well as the manufacturing site for DESA's zone heating products,
both indoor and outdoor. The principal executive offices for the Company are
located at 2701 Industrial Drive, Bowling Green, Kentucky 42102, telephone:
(270) 781-9600. The Company also leases warehouse space in Bowling Green,
Kentucky and Manchester, Tennessee as needed. The facility in Shelbyville,
Tennessee is the manufacturing headquarters for the production of hearth
products. The manufacturing facility in Manchester, Tennessee produces the
specialty tools sold by DESA. In addition to these manufacturing facilities, the
Company leases sales offices and warehouse locations in Toronto, Canada,
Rotterdam, Holland and Hong Kong, China.
<TABLE>
<CAPTION>
Location Square Footage Ownership Function
<S> <C> <C> <C>
Bowling Green, Kentucky...................... 225,000 Owned Corporate Headquarters
28 acres Manufacturing, Engineering, Distribution
Shelbyville, Tennessee....................... 123,000 Leased Manufacturing
14 acres
Manchester, Tennessee........................ 107,850 Leased Manufacturing, Distribution
7 acres
Toronto, Canada.............................. 9,400 Leased Sales offices, Distribution
Rotterdam, Holland........................... 5,200 Leased Sales offices, Distribution
Hong Kong, China............................. 9,100 Leased Procurement, Distribution
Santa Ana, California........................ 101,125 Leased Manufacturing, Distribution
</TABLE>
Management believes its facilities are in good condition and that the
facilities are adequate for its operating needs for the foreseeable future
without significant modifications or capital investment.
Item 3. Legal Proceedings.
DESA is a party to various litigation in the normal course of its business
activities, none of which is expected to have a material adverse effect on the
Company. Although the Company has not experienced significant product liability
claims to date, the Company carries occurrence-based product liability insurance
coverage with a $101 million limit, $250,000 self insured retention ("SIR") and
an aggregate annual capped SIR exposure to DESA of $1 million.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
16
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
There is no established public trading market for the Company's Common
Stock or the Nonvoting Common Stock.
There are 74 holders of the Company's Common Stock and 1 holder of the
Company's Nonvoting Common Stock as of May 25, 1999. The Company has not paid
any dividends on any class of common equity in the last two years and is
prohibited from doing so by the terms of the senior credit facility.
On December 31, 1998, the Company issued approximately 1,140 shares of
Series C 12% Preferred Stock to existing stockholders, as a dividend on
outstanding shares of the same class. Were such issuance a sale of securities
within the meaning of the Securities Act of 1933, as amended, such sale would be
exempt from registration under the Securities Act of 1933, as amended, pursuant
to Rule 506 thereunder.
Item 6. Selected Consolidated Financial and Operating Information.
Set forth below are selected historical consolidated financial data and
other historical consolidated operating data of DESA. The summary historical
consolidated financial data as of February 27, 1999 and February 28, 1998 and
for each of the years in the three year period ended February 27, 1999 have been
derived from the audited consolidated financial statements of DESA which have
been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere in this Annual Report. The summary historical consolidated financial
data as of March 2, 1996 and February 25, 1995 and for the two year period ended
March 2, 1996 have been derived from the audited consolidated financial
statements of DESA which have also been audited by Ernst & Young LLP, but which
are not included elsewhere herein. The information presented below is qualified
in its entirety by, and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto included elsewhere in
this Annual Report.
16
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
-----------
1999 1998(1)(9) 1997 1996(1)(2) 1995
---- ---------- ---- ---------- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operating Data:
Net sales(3) $ 317,237 $ 224,169 $ 209,105 $ 186,324 $ 172,501
Cost of sales 213,828 145,486 130,890 116,217 107,484
--------- --------- --------- --------- ---------
Gross profit 103,409 78,683 78,215 70,107 65,017
Operating costs and expenses 73,043 50,191 45,257 37,828 35,975
--------- --------- --------- --------- ---------
Operating profit 30,366 28,492 32,958 32,279 29,042
Interest expense 27,864 17,327 14,509 7,073 5,777
--------- --------- --------- --------- ---------
Income before provision for income
taxes 2,502 11,165 18,449 25,206 23,265
Income taxes 1,166 5,545 7,733 10,703 10,064
--------- --------- --------- --------- ---------
Income before extraordinary
item 1,336 5,620 10,716 14,503 13,201
Extraordinary item(4) -- 2,308 -- 2,638 --
--------- --------- --------- --------- ---------
Net income 1,336 3,312 10,716 11,865 13,201
Less dividends and accretion on
preferred stock 2,480 607 716 853 900
--------- --------- --------- --------- ---------
Net income (loss) available for common
stockholders $ (1,144) $ 2,705 $ 10,716 $ 11,012 $ 12,301
========= ========= ========= ========= =========
Ratio of earnings to fixed charges(5) 1.1x 1.6x 2.2x 4.0x 4.4x
Other Data:
EBITDA(6) $ 38,953 $ 33,204 $37,49 $36,57 $ 33,156
EBITDA margin(7) 12.3% 14.8% 17.9% 19.6% 19.2%
Capital expenditures $ 4,462 $ 5,475 $ 2,770 $ 2,122 $ 1,499
Depreciation 3,589 2,456 2,432 2,332 2,148
Amortization 4,998 2,256 2,104 1,963 1,966
Net cash provided by (used in)
operating activities 2,307 1,146 18,398 19,375 18,337
Net cash provided by (used in)
investing activities (45,233) (45,980) (2,882) (2,060) (2,176)
Net cash provided by (used in)
financing activities 43,012 40,590 (10,599) (17,989) (1,651)
Balance Sheet Data (at period end):
Cash and cash equivalents 888 794 $ 5,058 $ 145 $ 16,170
Working capital (deficit)(8) 27,643 27,095 (8,566) (1,194) 9,738
Total assets 203,352 155,636 91,984 85,545 107,259
Long-term debt (less current
portion) 285,138 261,105 130,600 149,709 49,700
Redeemable preferred stock 17,207 14,661 -- -- --
Stockholders' equity (deficit) (151,938) (162,407) (84,754) (95,402) 16,194
- ----------
<FN>
(1) DESA was party to recapitalizations in November 1997 and January 1996 which impacted interest expense,
stockholders' equity (deficit) and long term debt.
(2) 53-week fiscal year.
(3) Net sales constitute gross sales net of an accrual for returns and allowances and cash discounts.
(4) Extraordinary items relate to the write-off of unamortized deferred financing costs at the time the
Company refinanced its existing debt obligations and other expenditures related to the recapitalization
transactions in fiscal years 1998 and 1996.
17
<PAGE>
(5) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges.
Fixed charges consist of interest expense, amortization of deferred financing cost and 33% of rent expense
from operating leases which the Company believes is a reasonable approximation of the interest factor
included in the rent.
(6) EBITDA is defined as income before taxes plus interest expense and depreciation as well as amortization of
intangibles and deferred charges. EBITDA is presented because it is a widely accepted financial indicator
of a leveraged company's ability to service and/or incur indebtedness and because management believes that
EBITDA is a relevant measure of the Company's ability to generate cash without regard to the Company's
capital structure or working capital needs. However, EBITDA should not be considered as an alternative to
net income as a measure of a company's operating results or to cash flows from operating activities as a
measure of liquidity. EBITDA as presented may not be comparable to similarly titled measures used by other
companies, depending upon the non-cash charges included. When evaluating EBITDA, investors should also
consider other factors which may influence operating and investing activities, such as changes in
operating assets and liabilities and purchases of property and equipment.
(7) EBITDA margin is defined as EBITDA divided by net sales.
(8) The Company's business is subject to a pattern of seasonal fluctuation. As such, the Company's needs for
working capital tend to peak in the second and third fiscal quarters.
(9) Includes Heath/Zenith data for the period from February 4, 1998 (date of acquisition) to February 28,
1998.
(10) Includes FMI and UHI data for the period from August 19, 1998 (date of acquisitions) through February 27,
1999.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Introduction
The following discussion should be read in conjunction with "Selected
Consolidated Financial and Operating Information" and the audited Consolidated
Financial Statements of DESA and the notes thereto included elsewhere in this
Annual Report.
The Company is organized into two primary product categories: (a) Zone
Heating Products (56% of fiscal 1999 net sales), which includes indoor room
heaters, hearth products and outdoor heaters, and (b) Specialty Products (44% of
fiscal 1999 net sales), which includes powder-actuated fastening systems (tools
and accessories), electrical products and home security products. The Company
records sales upon shipment of products to its customers. Net sales constitute
gross sales net of an accrual for returns and allowances and cash discounts.
The Company has experienced strong historical growth, with net sales
and EBITDA increasing at CAGRs of 21% and 21%, respectively, from fiscal 1994 to
fiscal 1999. In addition, the Company's operating profit and cash flows provided
by (used in) operating, financing and investing activities changed from $15,450,
$11,892, ($8,866) and ($1,420), respectively, in 1994 to $30,366, $2,307,
$43,012, ($45,233), respectively, in 1999. The Company's growth has been driven
by strong performance across all product categories from new product
introductions, internally generated growth and the recent acquisitions of
Heath/Zenith, FMI and UHI. The Company has made six acquisitions from fiscal
1993 to fiscal 1999. Since fiscal 1994, new product introductions have generated
approximately 42% of the Company's sales growth. The Company focuses on its new
product development efforts on products that (i) are complementary to its
current product offerings or that utilize the Company's established
technologies, and (ii) can be sold through the Company's well-established
distribution channels. The Company's strategy is to introduce its new hearth
products in the specialty heating channel (i.e., liquid propane distributors and
natural gas utilities) and then expand the distribution to the consumer channel
(i.e., home centers and mass merchandisers). As part of this strategy, the
Company began selling its line of vent-free fireplace products, introduced to
the specialty heating channel in fiscal 1995, to Lowe's in fiscal 1997 and to
Home Depot in fiscal 1998.
Zone heating product revenues have been driven by factors such as (i)
the effectiveness of zone heating products for area heating, (ii) the increased
availability of these products as a result of the growth in home improvement
retailers, (iii) the cost efficiency of natural gas and propane as heating
fuels, (iv) favorable regulatory trends and (v) seasonal weather conditions.
Specialty tools revenues have been driven by demand of DIY consumers and
commercial contractors.
18
<PAGE>
In fiscal 1999, approximately $22.7 million or 7% of DESA's net sales
were generated outside the U.S. DESA adapts its domestic product line to
accommodate local requirements, government regulations and user preferences in
each international market.
Principally due to sales of zone heating products, DESA's business is
seasonal, as depicted by the following table which sets forth certain operating
results of DESA for each of the four consecutive fiscal quarters in the periods
ending February 27, 1999, February 28, 1998 and March 1, 1997 (dollars in
thousands):
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
Fiscal 1999
Total Net Sales . $ 40,754 $ 75,416 $134,679 $ 66,388 $317,237
Operating Profit
(loss) ....... (1,372) 8,746 22,580 412 30,366
Fiscal 1998
Total Net Sales . $ 24,754 $ 65,635 $103,015 $ 30,765 $224,169
Operating Profit
(loss) ....... 72 12,157 20,375 (4,112) 28,492
Fiscal 1997
Total Net Sales . $ 24,267 $ 60,021 $ 89,299 $ 35,518 $209,105
Operating Profit 319 12,220 18,546 1,873 32,958
Approximately 66% of annual sales occur in the second and third fiscal
quarters (June-November) as the Company's zone heating customers place early
booking orders for shipment in anticipation of the winter selling season.
Approximately 46% of the Company's annual sales volume are booked in the
five-month period of March through July.
DESA has not historically been capital intensive. The Company has focused
on investing in programs which either reduce operating costs or facilitate new
product development. The Company has a long-standing cost reduction program and
has exceeded its annual cost reduction goal of 3% of cost of sales in each of
the last three fiscal years. Historically, the Company's cost reduction efforts
have been focused on indoor vent-free heaters and outdoor heaters. In fiscal
1999, the Company's cost reduction efforts are focused on some of its newer
products, such as vent-free hearth products.
Historical Capital Expenditures
(dollars in thousands)
Fiscal Year
-------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ -------
Replacement Expenditures, Cost
Reduction Programs, New Products
and Capacity .................... $1,499 $2,122 $2,770 $4,402 $4,226
Acquisitions/Buildings/Other .... 664 -- -- 1,073 236
------ ------ ------ ------ ------
Total Capital Expenditures ...... $2,163 $2,122 $2,770 $5,475 $4,462
====== ====== ====== ====== ======
19
<PAGE>
Results of Operations
The following table sets forth certain income statement information for
DESA for the fiscal years ended February 27, 1999, February 28, 1998 and March
1, 1997.
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------------------
Percentage Percentage Percentage
1999 of Net Sales 1998 of Net Sales 1997 of Net Sales
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ................ $317,237 100.0% $224,169 100.0% $209,105 100.0%
Cost of sales ............ 213,828 67.4% 145,486 64.9% 130,890 62.6%
--------------------------------------------------------------------------
Gross profit ............. 103,409 32.6% 78,683 35.1% 78,215 37.4%
Operating costs and
expenses ............ 73,043 23.0% 50,191 22.4% 45,257 21.6%
--------------------------------------------------------------------------
Operating profit ......... 30,366 9.6% 28,492 12.7% 32,958 15.8%
Interest expense ......... 27,864 8.8% 17,327 7.7% 14,509 6.9%
--------------------------------------------------------------------------
Income before provision
for income taxes .... 2,502 0.8% 11,165 5.0% 18,449 8.9%
Provision for income taxes 1,166 0.4% 5,545 2.5% 7,733 3.7%
--------------------------------------------------------------------------
Income before
extraordinary item .. 1,336 0.4% 5,620 2.5% 10,716 5.2%
Extraordinary item ....... -- 0.0% 2,308 1.0% -- 0.0%
--------------------------------------------------------------------------
Net income ............... $ 1,336 0.4% $ 3,312 1.5% $ 10,716 5.2%
==========================================================================
</TABLE>
Year Ended February 27, 1999 Compared to the Year Ended February 28, 1998
Net Sales. Net sales increased 41.5% from $224.2 million for the year ended
February 28, 1998 to $317.2 million for the year ended February 27, 1999. Zone
heating product sales increased 2.3% from $173.8 million to $177.8 million as a
result of higher hearth product sales due to increased market penetration and
the introduction of new products including the Direct Vent Fireplace, tempered
by the extremely warm 1998/1999 winter. Specialty product sales increased 177%
from $50.4 million to $139.4 million due primarily to the acquisition of the
Heath/Zenith business and the continued growth in the consumer channel for
powder-actuated tools and electric chain saws.
Cost of Sales. Cost of sales increased 47% from $145.5 million in fiscal
year 1998 to $213.8 million in fiscal year 1999. The increase was driven
primarily by sales growth of 41.5% for the same period. Gross profit margin, as
a percentage of sales, declined from 35.1% to 32.6%. Gross margins were
negatively affected by a shift in product mix, competitive pricing pressures,
and less favorable manufacturing variances due to lower zone heating production
volume partially offset by cost reductions.
Operating Costs and Expenses. Operating costs and expenses increased 45.4%
from $50.2 million in fiscal year 1998 to $73.0 million in fiscal year 1999. The
increase is primarily a result of sales growth of 41.5%. Operating costs and
expenses increased modestly as a percentage of sales from 22.4% in fiscal 1998
to 22.5% in fiscal 1999.
Operating Profit. Operating profit increased by 6.7% from $28.5 million in
fiscal 1998 to $30.4 million in fiscal 1999 due to the factors mentioned above.
Interest Expense. Interest expense increased 60.8% from $17.3 million in
fiscal 1998 to $27.9 million in fiscal 1999. The higher interest expense relates
to the increased borrowings associated with the recapitalization in November
1997 (the "Recapitalization") and the acquisition loan advances for the
purchases of FMI, UHI and Heath/Zenith.
Income Taxes. Income taxes decreased by 70.7% from $4.1 million in fiscal
1998 to $1.2 million in fiscal 1999, primarily as the result of the increase in
interest expense discussed above. The overall effective income tax rate
decreased from 50%
20
<PAGE>
in fiscal 1998 to 47% in fiscal 1999. The effective tax rate is greater than the
statutory rate due to the non-tax deductibility of goodwill amortization.
Net Income. Net income decreased 67.4% from $3.3 million in fiscal 1998
to $1.1 million in fiscal 1999.
Year Ended February 28, 1998 Compared to the Year Ended March 1, 1997
Net Sales. Net sales increased 7.2% from $209.1 million for the year ended
March 1, 1997 to $224.2 million for the year ended February 28, 1998. Zone
heating product sales increased 3.7% from $167.6 million to $173.8 million as a
result of higher hearth product sales due to increased market penetration and
the introduction of new products including the Compact Fireplace, Logmate and
Fireplace Stove, tempered by the extremely warm 1997/1998 winter. Specialty
product sales increased 21.5% from $41.5 million to $50.4 million due primarily
to the acquisition of the Heath/Zenith business and the continued growth in the
consumer channel for powder actuated tools and electric chain saws.
Cost of Sales. Cost of sales increased 11.2% from $130.9 million in fiscal
year 1997 to $145.5 million in fiscal year 1998. The increase was driven
primarily by sales growth of 7.2% for the same period. Gross profit margin, as a
percentage of sales, declined from 37.4% to 35.1%. Gross margins were negatively
affected by a shift in product mix, competitive pricing pressures, and less
favorable manufacturing variances partially offset by cost reductions and margin
improvements resulting from sales growth.
Operating Costs and Expenses. Operating costs and expenses increased 10.9%
from $45.3 million in fiscal year 1997 to $50.2 million in fiscal year 1998. The
increase is primarily a result of sales growth of 7.2%. Operating Costs and
expenses increased as a percentage of sales from 21.6% in fiscal 1997 to 22.4%
in fiscal 1998 due to key account volume rebates and increased freight expenses
to improve customer services levels.
Operating Profit. Operating profit decreased by 13.6% from $33.0 million in
fiscal 1997 to $28.5 million in fiscal 1998 due to the factors mentioned above.
Interest Expense. Interest expense increased 19.4% from $14.5 million in
fiscal 1997 to $17.3 million in fiscal 1998. The higher interest expense relates
to the increased borrowings associated with the Recapitalization in November
1997.
Income Taxes. Income taxes decreased by 28.3% from $7.7 million in fiscal
1997 to $5.5 million in fiscal 1998, primarily as the result of the decrease in
operating profit and the increase in interest expense discussed above. The
overall effective income tax rate increased from 42% in fiscal 1997 to 50% in
fiscal 1998, primarily due to the mix of domestic and foreign income and higher
state taxes. The effective tax rate is greater than the statutory rate due to
the non-tax deductibility of goodwill amortization.
Net Income. Net income decreased 69.1% from $10.7 million in fiscal 1997 to
$3.3 million in fiscal 1998. The reduction reflects the extraordinary item
associated with the Recapitalization in November 1997.
Liquidity and Capital Resources
The Company's primary cash needs have been for working capital, capital
expenditures and debt service requirements. The Company's sources of liquidity
have been cash flows from operations and borrowings under its credit facilities.
The Company's business is subject to a pattern of seasonal fluctuation. The
Company's needs for working capital and the corresponding debt levels tend to
peak in the second and third fiscal quarters. The amount of sales generated
during the second and third fiscal quarters generally depends upon a number of
factors, including the level of retail sales for heating products during the
fall and winter, weather conditions affecting the level of sales of heating
products, general economic conditions, and other factors beyond the Company's
control.
Cash provided by operating activities for fiscal 1999 was $2.3 million
compared to $1.1 million for fiscal 1998, an increase of $1.2 million.
Inventories as of February 27, 1999 were $4.9 million higher than the amount at
February 28, 1998 to support higher specialty product sales and zone heating
product carryover inventory related to the warm 1998/1999 winter.
21
<PAGE>
The increase in accounts receivable from $20.8 million at February 28, 1998 to
$30.4 million at February 27, 1999 is attributable to receivables acquired in
the FMI acquisition and higher fourth quarter sales than a year ago. The aging
of the Company's receivables was not materially affected by the FMI acquisition.
Net cash provided by operating activities was $2.3 million, $1.1 million and
$18.4 million for fiscal years 1999, 1998 and 1997 respectively.
Net cash used in investing activities decreased from $46.0 million for
fiscal 1998 to $45.2 million for fiscal 1999. These expenditures consisted
primarily of $40.7 million for the acquisition of FMI and Universal in fiscal
1999 while the 1998 period reflects the acquisition of Heath/Zenith for $40.3
million.
Net cash (used in) provided by financing activities increased from $40.6
million provided in fiscal 1998 to $43.0 million provided in fiscal 1999 due
primarily to the proceeds of the acquisition loans utilized for the FMI and
Universal acquisitions while the 1998 period reflects the Recapitalization in
November 1997.
Concurrently with the Recapitalization (as hereinafter defined), the
Company's wholly owned subsidiary, DESA International, Inc., issued 97/8% Senior
Subordinated Notes due 2007 ("the Old Notes"), guaranteed by the Company, for
$130.0 million in gross proceeds, and entered into a $100.0 million senior
secured term loan facility (the "Term Loan Facility") and a $75.0 million senior
secured revolving credit facility (the "Working Capital Facility," and together
with the Term Loan Facility and certain other facilities, the "Credit
Facility"). The Term Loan Facility is comprised of two tranches, each in the
aggregate principal amount of $50.0 million. The Working Capital Facility
provides revolving loans in an aggregate amount of up to $75.0 million. Upon
closing of the Recapitalization, the Company borrowed the full amount available
under the Term Loan Facility and $35.5 million under the Working Capital
Facility. Borrowings under the Working Capital Facility were used partially to
refinance seasonal borrowings outstanding under the Company's existing credit
facility. The amount remaining available under the Working Capital Facility is
available to fund the working capital requirements of the Company. Proceeds to
the Company from the issuance of the Old Notes and from initial borrowings under
the Credit Facility, less the repayment of the existing credit facility and
other indebtedness, and transaction expenses, were used to partially finance the
Recapitalization and the fees and expenses of DESA incurred in connection
therewith. To provide additional financing to fund the Recapitalization, DESA
raised (i) $73.8 million through the sale to J.W. Childs Equity Partners, L.P.
("Childs") and certain other investors, including UBS Capital LLC (together with
Childs, the "Equity Investors") of DESA Common Stock (representing 89.6% of the
outstanding shares upon completion of the Recapitalization), (ii) $14.6 million
through the issuance to Childs and the other Equity Investors of the DESA
Preferred Stock and (iii) $3.0 million through the issuance of 463,232 warrants
to purchase DESA Nonvoting Common Stock at an exercise price of $.01 per share.
In addition, existing stockholders retained DESA Common Stock valued at $8.6
million (representing 10.4% of the outstanding shares upon completion of the
Recapitalization). The above transactions have been accounted for as a
recapitalization (the "Recapitalization"), with all amounts paid to the former
shareholders recorded as a reduction in stockholders equity (deficit).
The proceeds of the Old Notes, the DESA Preferred Stock, the DESA warrants,
the DESA Common Stock and the initial borrowings under the Credit Facility were
used to finance the purchase of all previously outstanding shares of DESA's
capital stock, to refinance outstanding indebtedness of the Company and to pay
fees and expenses incurred in connection with the Recapitalization.
Borrowings under the Credit Facility bear interest at a rate per annum
equal (at the Company's option) to a margin over either a base rate or LIBOR.
The Working Capital Facility will mature six years after the closing date. The
two tranches of the Term Loan Facility will be amortized over a six-year and a
seven-year period, respectively. The Credit Facility and the guarantees thereof
are secured by substantially all assets of DESA (including the capital stock of
the Company) and its direct and indirect domestic subsidiaries and a pledge of
the capital stock of all the Company's direct and indirect subsidiaries, subject
to certain limitations with respect to foreign subsidiaries. The Credit Facility
contains customary covenants and events of default, including substantial
restrictions on the Company's ability to make dividends or distributions to
stockholders. The Company can utilize letters of credit under the Working
Capital Facility up to $10,000,000. As of February 27, 1999, letters of credit
of $0.7 million are outstanding under the Working Capital Facility.
The Company entered into an agreement for a $15.0 million line of credit
(the "Line of Credit") on May 25, 1999, which matures on May 31, 2001. The Line
of Credit is unsecured and is unconditionally guaranteed by J.W. Childs Equity
Partners, L.P., a shareholder of the Company. Borrowings under the Line of
Credit bear interest at an annual rate equal to either (at the
22
<PAGE>
Company's option) a margin over a base rate or a margin over LIBOR. The Line of
Credit contains customary covenants and events of default.
The DESA Preferred Stock bears cumulative dividends at the rate of 12% per
annum (payable semi-annually). Dividends will compound to the extent not paid.
Subject to restrictions imposed by the Indenture dated November 26, 1997 (the
"Indenture"), the Credit Facility and other documents relating to the Company's
indebtedness, DESA may exchange the DESA Preferred Stock for junior subordinated
notes (the "Exchange Notes") having substantially the same terms as the DESA
Preferred Stock. The Indenture permits DESA, under certain circumstances, to
exchange all outstanding DESA Preferred Stock for Exchange Notes in an aggregate
principal amount equal to the aggregate liquidation preference of the DESA
Preferred Stock so exchanged. The Exchange Notes will require DESA to make
semi-annual interest payments thereon at a rate of 12% per annum. Subject to
compliance with the debt agreements of the Company, such payments must be in
cash. The Indenture restricts, but does not prohibit, the Company from making
such cash interest payments. Under the Exchange Notes, DESA may defer the
payment of interest payable on or before November 30, 2001, with any such
deferred interest bearing interest at 12% per annum, compounded semi-annually.
DESA will be required to make a catch-up payment immediately prior to the first
interest payment date after the fifth anniversary of the date of issuance to the
extent the aggregate amount of such deferred interest exceeds an amount equal to
one year's interest on the originally issued Exchange Notes. The Indenture
restricts, but does not prohibit, the ability of DESA to make such catch-up
payment.
The acquisition of Heath/Zenith, consummated in February 1998, was financed
with the proceeds of the $20 million Acquisition Facility included in the Credit
Facility and with $7.0 million in additional equity contributed to the Company
by DESA. On May 13, 1998, the Company entered into an agreement to acquire 92.1%
of the issued and outstanding common stock of FMI for an aggregate purchase
price of approximately $25.7 million. As of such date, DESA already owned the
remaining 7.9% of FMI's issued and outstanding common stock. In connection with
the acquisition of FMI, DESA entered into non-compete agreements with three
officers of FMI, each with a term of three years. DESA paid such officers an
aggregate of $3.05 million, included in the aggregate purchase price. Also, in
April 1998, the Company entered into a letter of intent with UHI to acquire the
worldwide rights (except in China) to distribute Universal's indoor and outdoor
heating products and to form a joint venture to manufacture various products in
China that will be marketed by the Company. Such worldwide rights have been
acquired for approximately $13 million. The Company expects to pay approximately
$3 million dollars in connection with the formation of the joint venture. The
Company financed these acquisitions with the proceeds of the $30 million
Acquisition B Facility which has been added to the Credit Facility.
Management believes that cash flow from operations and availability under
the Working Capital Facility and Line of Credit will provide adequate funds for
the Company's foreseeable working capital needs, planned capital expenditures
and debt service obligations. The Company's ability to fund its operations and
make planned capital expenditures, to make scheduled debt payments, to refinance
indebtedness and to remain in compliance with all of the financial covenants
under its debt agreements depends on its future operating performance and cash
flow, which in turn, are subject to prevailing economic conditions and to
financial, business and other factors, some of which are beyond its control.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Market risks relating to the Company's operations result primarily from
changes in interest rates. The Company also has limited foreign currency risk
associated with its Canadian, European, and Hong Kong operations. A portion of
the Company's operations consists of purchasing and sales activities in foreign
jurisdictions. The Company manufactures it's products in the United States,
purchases products in Europe, China, and Japan and sells the products primarily
in the United States, Canada, and Europe. As a result, the Company's financial
results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in the foreign markets in which the
Company operates. The Company employs established policies and procedures to
manage its exposure to fluctuations in interest rates and the value of the
foreign currencies. Interest rate and foreign currency transactions are used
only to the extent considered necessary to meet the Company's objectives. The
Company does not utilize derivative financial instruments for trading or other
speculative purposes.
23
<PAGE>
Interest Rate Risk
The Company's interest rate risk management objective is to limit the
impact of interest rate changes on its earnings and cash flow and to lower its
overall borrowing cost. To achieve its objectives, the Company regularly
evaluates the amount of its variable rate debt as a percentage of its aggregate
debt. The Company manages its exposure to interest rate fluctuations in its
variable rate debt through interest rate swap agreements. These agreements
effectively convert interest rate exposure from variable rates to fixed rates of
interest without the exchange of the underlying principal amounts. In fiscal
1999, the Company entered into interest rate swap agreements with Nations Bank
to manage its exposure to interest rate fluctuations. The interest rate swap
agreements provide for payment by the Company of fixed rates of interest based
on three month LIBOR (4.75% at February 27, 1999). Notional principal amounts of
these agreements total $125 million, of which $75 million terminates in November
1999 and $50 million terminates in August 2001. The agreements terminating in
August 2001 may be canceled at the option of Nations Bank in February 2000. The
notional amounts are used to measure the interest to be paid or received and do
not represent the amount of exposure to credit loss. Net proceeds to the Company
of $100,000 were recorded as adjustments to interest expense in fiscal 1999.
The following table summarizes the carrying amounts and estimated fair
values the Company's remaining financial instruments at February 27, 1999 and
February 28, 1998 (bracketed amount represents an asset):
February 27, 1999 February 28, 1998
---------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(in thousands)
Bank debt $ 166,307 $ 166,307 $ 134,355 $ 134,355
Senior subordinated notes 130,000 102,700 130,000 135,525
Note payable 2,138 2,138 2,000 2,000
Interest rate swap agreements -- (438) -- --
Based on the average outstanding amount of variable rate indebtedness of
the Company in FY 1999 a one percentage point change in the interest rates for
the Company's variable rate debt would have impacted the Company's FY 1999
interest expense by an aggregate of approximately $1.6 million, after giving
effect to the Company's interest rate swap agreements.
Foreign Currency Exchange Rate Risk
The Company does not conduct a significant portion of its manufacturing or
sales activity in foreign markets. The Company's reported financial results
could be affected, however, by factors such as changes in foreign currency
exchange rates in the markets where it operates. When the U.S. dollar
strengthens against such foreign currencies, the reported U.S. dollar value of
local currency operating profits generally decreases; when the U.S. dollar
weakens against such foreign currencies, the reported U.S. dollar value of local
currency operating profits generally increases. The Company utilizes foreign
exchange forward contracts to mitigate the short-term effect of movements in
currency exchange rates on the Company's foreign currency based inventory
purchases. The Company regularly hedges by entering into foreign exchange
forward contracts, approximately 85% to 95% of its budgeted (future) net foreign
currency purchase transactions over a period of 4 quarters. Gains and losses
related to qualifying hedges of foreign currency risk exposure are recorded when
the related inventory is purchased. Because the Company does not have
significant foreign operations, the Company does not believe it is necessary to
enter into any other derivative financial instruments to reduce its exposure to
foreign currency exchange rate risk.
24
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Reference is made to the Consolidated Financial Statements and
Supplementary Schedules contained in Part IV hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
25
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth the name, age and position of each of
the Company's directors, directors designate, executive officers and other
significant employees. All of the Company's officers are elected annually and
serve at the discretion of the Board of Directors.
Name Age Positions
- ---- --- ---------
Raymond B. Rudy........... 68 Chairman and Director
Terry G. Scariot.......... 50 Chief Executive Officer, President, Director
John M. Kelly............. 49 Chief Operating Officer
John W. Childs............ 57 Director
Adam L. Suttin............ 31 Director
Michael Greene............ 37 Director
Joseph J. Incandela....... 52 Director
Edward G. Patrick......... 52 Vice President of Finance, Treasurer
Scott M. Nehm............. 49 Vice President, Controller
Raymond B. Rudy was appointed the Company's Chairman in April 1999. Mr.
Rudy has been a Managing Director of JWCA since July 1995. Prior to that time,
he was Deputy Chairman and Director of Snapple Beverage Corporation from 1992
until the company was sold in 1994. From 1987 to 1989, Mr. Rudy was President of
Best Foods Subsidiaries of CPC International. From 1984 to 1986, Mr. Rudy was
Chairman, President and CEO of Arnold Foods Company, Inc. He is Chairman of
Beltone Electronics Corp., Vice Chairman of Empire Kosher Poultry, Inc. and a
director of International DiverseFoods, Inc., Widmer Brothers Brewing Company
and American Safety Razor Company.
Terry G. Scariot joined AMCA International ("AMCA") Consumer and
Automotive Products Division as Vice President -- Finance in early 1984 and
became Chief Financial Officer of DESA International, Inc. in March 1985. He was
appointed President of DESA International, Inc. in March 1996 and joined the
Board of Directors in December 1996. Mr. Scariot was appointed the Company's
Chief Executive Officer in April 1999. Prior to joining AMCA, Mr. Scariot held
positions of increasing responsibility in financial and manufacturing management
at Monsanto Industrial Chemicals Company, Rockwell International's Automotive
Products Group, and Gulf and Western's Bonney Forge Division. In October 1979,
Mr. Scariot served as a member of the Board of Directors and Chief Financial
Officer for The Massillon Steel Casting Company. Mr. Scariot received his
Bachelor of Science degree in finance and MBA from the University of Missouri.
John M. Kelly joined DESA Industries in Canada in 1972. After
successful management assignments in sales, manufacturing services, and
administration, he was appointed General Sales Manager in 1976 and General
Manager in 1977. In 1983, Mr. Kelly was promoted to Vice President -- North
American Sales for AMCA's Consumer Products Division. In 1984, his
responsibilities were expanded to include the entire marketing function. He
became DESA's senior sales and marketing Executive Vice President in North
America in March 1985. Mr. Kelly assumed the role of Executive Vice President in
March 1996, responsible for worldwide sales and marketing and engineering. Mr.
Kelly was appointed Chief Operating Officer in April 1999. He majored in
Economics at the University of Toronto.
John W. Childs has been President of JWCA since July 1995. Prior to
that time, he was an executive at Thomas H. Lee Company from May 1987, most
recently holding the position of Senior Managing Director. Prior to
26
<PAGE>
that, Mr. Childs was with the Prudential Insurance Company of America where he
held various executive positions in the investment area ultimately serving as
Senior Managing Director in charge of the Capital Markets Group. He is a
director of Big V Supermarkets, Inc., Quality Stores, Inc., Chevys Holdings,
Inc., Beltone Electronics Corp., Pan Am International Academy, Inc., American
Safety Razor Company and The Edison Project, Inc.
Adam L. Suttin has been a Managing Director of JWCA since January 1998,
and has been with JWCA since July 1995. Prior to that time, he was an executive
at Thomas H. Lee Company from August 1989, most recently holding the position of
Associate. He is a director of Quality Stores, Inc., American Safety Razor
Company and Empire Kosher Poultry, Inc.
Michael Greene is a Managing Director of UBS Capital, which is the
private equity subsidiary of the Union Bank of Switzerland. Mr. Greene has
worked in Union Bank of Switzerland's private equity and leveraged finance
business since he joined Union Bank of Switzerland in 1990. Mr. Greene serves on
the board of directors of CBP Resources, Inc. and Metrocall, Inc.
Joseph J. Incandela, elected a Director of the Company in April 1999,
served as a Managing Director of the Thomas H. Lee Company, a Boston based
private equity investment company from 1992-1998. Mr. Incandela was CEO of
Darling International Corp., Chairman and CEO of Amerace Corp. and President and
CEO of Conductron Corp. during the period of 1983 through 1991. Prior to 1983
Mr. Incandela served as a General Manager of the Thomas & Betts Corporation's
Electronic Connector Products Division. Mr. Incandela serves on the Board of
Directors of Morgan Grenfell Smallcap Fund Inc. and Southern Energy Homes Corp.
Mr. Incandela has a Bachelor of Arts in Economics from Wagner College.
Edward G. Patrick has been associated with DESA International, Inc. and
its predecessor company since January 1985, joining the company as Director of
Credit and Accounts Receivable. In May of 1991, he was appointed Treasurer and
in January 1995 appointed Vice President of Finance. Prior to joining DESA, Mr.
Patrick held financial positions with Benchmark Tool Company, a Subsidiary of
Shopsmith Inc. (1981-1985), McGraw Edison Company (1975-1981), and General
Motors Corp. (1972-1975). Mr. Patrick received his Bachelor's Degree from
Northeast Missouri State University.
Scott M. Nehm has been with DESA and the predecessor operation since
1982. In January 1995, he was appointed Vice President, Controller. Prior to
DESA, Mr. Nehm has held positions of increasing responsibility in financial
management at Modine Manufacturing Company (1971-1973), Koehring Company
(1974-1979), and Allied Products Inc. (1980-1981). Mr. Nehm has a CPA
Certificate, BBA and MBA degrees from the University of Wisconsin in Accounting,
Finance and Marketing.
27
<PAGE>
Item 11. Executive Compensation.
The following table sets forth compensation earned for all services
rendered to the Company during fiscal 1997, fiscal 1998 and fiscal 1999 as
applicable, by the Company's chief executive officers and the most highly
compensated executive officer other than the Company's chief executive officers
(collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
Annual Compensation Long-Term
Compensation
Awards
------------
Number of
Other Annual Securities
Fiscal Salary Bonus(1) Compensation Underlying
Year ($) ($) ($) Options
------ ------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert H. Elman............................ 1999 600,961 -- 128,327(4) 614,133(11)
Chairman, Chief Executive Officer (2) 1998 612,115 630,000 106,808(4) --
1997 565,385 820,000 112,233(4) --
Terry G. Scariot........................... 1999 297,391 -- 26,719(5) 277,822
Chief Executive Officer, President (2) 1998 274,946 240,000 26,856(6) --
1997 249,400 120,000 16,203(7) --
John M. Kelly.............................. 1999 297,391 -- 47,224(8) 277,822
Chief Operating Officer(3) 1998 274,946 240,000 37,788(9) --
1997 249,400 120,000 29,203(10) --
- ----------
<FN>
(1) Annual bonuses are indicated for the year in which they were earned and accrued. Annual bonuses for any year are
generally paid in the following fiscal year.
(2) Mr. Elman retired as of April 5, 1999 and Mr. Scariot was elected Chief Executive Officer on that date.
(3) Mr. Kelly was elected Chief Operating Officer on April 5, 1999. Previously, he was Executive Vice President.
(4) Includes $52,761 for life insurance.
(5) Includes $7,034 for tax planning.
(6) Includes $7,370 for country club memberships.
(7) Includes $4,796 for tax planning.
(8) Includes $27,714 for medical expenses.
(9) Includes $22,378 for medical expenses.
(10) Includes $16,739 for medical expenses.
(11) Mr. Elman's options were cancelled on April 5, 1999.
</FN>
</TABLE>
28
<PAGE>
The Company granted the options set forth and described in the following
table to the Named Executive Officers in fiscal 1999:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Annual Rates of Stock
Number of % of Total Price Appreciation for
Securities Options/SARs Option Term
Underlying Granted to Exercise of ----------------------
Option/SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
---- ----------- ------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert H. Elman 614,133 44.9 6.49 (1) -- --
Terry G. Scariot 277,822(2) 20.3 6.49 8/31/2009 1,133,983 2,873,735
John M. Kelly 277,833(2) 20.3 6.49 8/31/2009 1.133,983 2,873,735
<FN>
(1) Mr. Elman's options were cancelled on April 5, 1999.
(2) The vesting and execisability of Mr. Scariot's and Mr. Kelly's options are subject to certain performance conditions
relating to the Company's EBITDA in the period from fiscal years 1999 to 2003.
</FN>
</TABLE>
The following table sets forth the number of securities underlying the
options held by the Named Executive Officers at the end of fiscal 1999:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
(e) Value of
Unexercised in-the-
(d) Number of Securities Money
Underlying Unexercised Options/SARs at
Options/SARs at Fiscal Fiscal Year-End ($)
(b) Shares Acquired (c) Value Year-End (#) Exercisable
(a) Names on Exercise (#) Realized ($) Exercisable/Unexercisable /Unexercisable
--------- ------------------- ------------ ------------------------- --------------
<S> <C> <C> <C> <C>
Robert H. Elman -- -- 0/614,133(1) --
Terry G. Scariot -- -- 0/277,822 --
John M. Kelly -- -- 0/277,822 --
<FN>
(1) Mr. Elman's options were cancelled on April 5, 1999.
</FN>
</TABLE>
Employment Arrangements with Executive Officers
Mr. Scariot is currently employed pursuant to an employment agreement
which carries a three-year term. Under this agreement, Mr. Scariot currently
receives a salary of $315,360. Mr. Kelly is currently employed pursuant to an
employment agreement which carries a three-year term. Under this agreement, Mr.
Kelly currently receives a salary of $315,360. Pursuant to these employment
agreements, the salary of each of Messrs. Scariot and Kelly will be subject to
annual increases at the discretion of the Board of Directors of the Company.
Messrs. Scariot and Kelly are eligible to participate in an executive bonus plan
which was instituted for fiscal 1999, 2000, 2001, 2002 and 2003. Messrs. Scariot
and Kelly also participate in an option plan which will allow management to earn
up to 12.5% of the fully diluted equity of DESA upon achievement of
pre-determined performance targets.
29
<PAGE>
Director Compensation
No director received any compensation for his services as director in
fiscal year 1999. Mr. Incandela receives a director's fee of $10,000 per year
plus a $1,000 per meeting attended and has been granted options to purchase
10,000 shares of the Company's Common Stock at $6.49 per share. Said options
vest annually in equal installments over three years.
Change of Control Arrangement
In the event of a change of control of the Company after which the
employment of Messrs. Scariot and Kelly with the Company is not continued,
Messrs. Scariot and Kelly will be entitled to change of control benefits unless
the equity investment of each of Messrs. Scariot and Kelly in DESA shall have
tripled in value. Such benefits comprise twelve months of salary and fringe
benefits and a pro-rated portion of any bonus for which the executive would
otherwise be eligible.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors of the Company
comprises Messrs. Rudy, Scariot and Greene. Prior to his retirement, Mr. Elman
served on the Committee as well. Mr. Scariot is an executive officer of the
Company. Mr. Rudy is a Managing Director of JWCA and Mr. Greene is a Managing
Director of UBS Capital.
Board Compensation Committee Report on Executive Compensation
It is the Compensation Committee's responsibility to review, recommend
and approve the Company's compensation policies and programs, including all
compensation for the Chief Executive Officer and the other executive officers of
the Company. The Compensation Committee administers the Company's 1998 Stock
Option Plan. The Chief Executive Officer of the Company does not participate in
Committee decisions regarding his compensation.
The purpose of the 1998 Stock Option Plan is to encourage key
employees, officers and directors of the Company who render services of special
importance to, and who have contributed or are expected to contribute materially
to the success of, the Company to continue their association with the Company by
providing favorable opportunities for them to participate in the ownership of
the Company and in its future growth. The Compensation Committee made stock
option grants to Messrs. Elman, Scariot and Kelly in fiscal 1999.
The Compensation Committee determined the salary levels of the
Company's executive officers, including the Chief Executive Officer, for fiscal
1999, as well as the amounts of bonuses paid in fiscal 1999 for performance in
fiscal 1998. The compensation policies implemented by the Compensation
Committee, which combine base salary and incentive compensation in the form of
cash bonuses and long-term stock options, are designed to achieve the operating
and acquisition strategies and goals of the Company. In particular, in
determining bonuses paid in 1999 in respect of 1998 and salary levels for fiscal
1999, the Compensation Committee took into account the past or expected future
contributions of each executive officer to the Company's strategic goals,
especially the efforts of each such officer in connection with Recapitalization,
and the acquisitions of Heath/Zenith and FMI/UHI.
COMPENSATION COMMITTEE
RAYMOND B. RUDY, Chairman
TERRY G. SCARIOT
MICHAEL GREENE
30
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information regarding the beneficial
ownership of the Common Stock of DESA by each person known to the Company to be
the beneficial owner of more than five percent of the common stock of DESA, each
director of the Company, each Named Executive Office and all directors and
executive officers of the Company as a group. Except as otherwise indicated, the
beneficial owners of the voting stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares. The business address for each executive officer of the Company is
in care of the Company.
<TABLE>
<CAPTION>
Shares
Beneficially
Name and Address Owned Percent
---------------- ------------ -------
<S> <C> <C>
J.W. Childs Equity Partners, L.P.(1)
One Federal Street
Boston, Massachusetts....................................................... 9,971,929 63.1%
UBS Capital LLC(2)
299 Park Avenue
New York, New York.......................................................... 2,923,718 18.6
John W. Childs(1)(3)(4)
One Federal Street
Boston, Massachusetts....................................................... 10,373,889 65.7
Raymond B. Rudy(1)(3)(5)
One Federal Street
Boston, Massachusetts....................................................... 9,999,549 63.3
Adam L. Suttin(1)(3)(6)
One Federal Street
Boston, Massachusetts....................................................... 10,011,771 63.4
Michael Greene(7)
299 Park Avenue
New York, New York.......................................................... 2,923,718 18.6
Terry G. Scariot.............................................................. 109,450 *
John M. Kelly................................................................. 109,450 *
Robert H. Elman(8)............................................................ 377,602 2.4
All Directors and executive officers as a group (8
persons)(1)(2)(3)(4)(5)(6)(7)............................................... 13,652,088 86.2
- ----------
<FN>
* Less than 1.0%
(1) Includes 148,572 shares deemed beneficially owned by Childs pursuant to warrants.
(2) Includes 43,504 shares deemed beneficially owned by UBS Capital pursuant to warrants.
(3) Includes shares beneficially owned by Childs, as to which Messrs. Childs, Rudy and Suttin may be deemed
also to be beneficial owners.
(4) Includes 6,501 shares deemed beneficially owned by Mr. Childs pursuant to warrants.
(5) Includes 336 shares deemed beneficially owned by Mr. Rudy pursuant to warrants.
(6) Includes 585 shares deemed beneficially owned by Mr. Suttin pursuant to warrants.
(7) Includes shares beneficially owned by UBS Capital, as to which Mr. Greene may also be deemed to be a
beneficial owner.
(8) Includes 177,494 shares owned by Mr. Elman's family.
</FN>
</TABLE>
31
<PAGE>
Item 13. Certain Relationships and Related Transactions
At the closing of the Recapitalization, the Company entered into a
management agreement with JWCA providing for payment by the Company to JWCA of
(i) a $2.55 million advisory and financing fee in consideration of JWCA's
services regarding the planning, structuring and negotiation of the
Recapitalization and related financing and (ii) an annual management fee of
$189,000 in consideration of JWCA's ongoing provision of certain consulting and
management advisory services. Payments under this management agreement may be
made only to the extent permitted by the Credit Facility and the Indenture. The
management agreement is for a five-year term, automatically renewable for
successive extension terms of one year, unless JWCA or the Company shall give
notice of termination.
At the closing of the Recapitalization, the Company entered into a
management agreement with UBS Capital providing for payment by the Company to
UBS Capital of (i) a $0.7 million advisory and financing fee in consideration of
UBS Capital's services regarding the planning, structuring and negotiation of
the Recapitalization and related financing and (ii) an annual management fee of
$51,000 in consideration of UBS Capital's ongoing provision of certain
consulting and management advisory services. Payments under this management
agreement may be made only to the extent permitted by the Credit Facility and
the Indenture. The management agreement is for a five-year term, automatically
renewable for successive extension terms of one year, unless UBS Capital or the
Company shall give notice of termination.
Pursuant to the Recapitalization Agreement, concurrently with the closing
of the Recapitalization, the Company, the Equity Investors and the Existing
Stockholders (the "Stockholders") entered into a Stockholders Agreement (the
"Stockholders Agreement"). Subject to certain exceptions, the Stockholders
Agreement restricts the right of the Stockholders to transfer any DESA Common
Stock or Warrants or other vested rights to acquire DESA Common Stock
(collectively, the "Subject Securities") without the consent of the holders of a
majority of the Subject Securities at the time held by Childs and its affiliates
and associates (the "JWC Holders"). DESA and the JWC Holders have certain rights
of first refusal with respect to Subject Securities. In addition, the
Stockholder Agreement provides for certain so-called "tag-along," "drag-along"
and "piggyback registration" rights. In addition, the Stockholder Agreement
provides each Stockholder with certain preemptive rights. The Stockholder
Agreement also obligates DESA and the Stockholders to take all necessary actions
to include certain nominees of the JWC Holders (who could constitute a majority
of the board of directors) and one nominee of UBS Capital LLP on the Company's
board of directors and to ensure that certain representatives of the other
Stockholders may attend meetings. The Stockholders Agreement also restricts the
Company's right to enter into agreements with JWC Holders without the consent of
the other Stockholders.
DESA and its subsidiaries expect to enter into a tax sharing agreement
providing (among other things) that each of the subsidiaries will reimburse DESA
for its share of income taxes determined as if such subsidiary had filed its tax
returns separately from DESA.
32
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Document
----------- -----------------------
<S> <C> <C>
2.1 Recapitalization Agreement, dated as of October 8, 1997, among J.W. Childs *
Equity Partners, L.P., Desa Holdings Corporation and each Stockholder of Desa
Holdings Corporation named therein
2.2 Stock Purchase Agreement, dated as of January 12, 1998, by and among Heath *
Holding Corp., its Shareholders and Optionholders and the Company
2.3 Agreement and Plan of Reorganization, dated May 13, 1998 by and among the **
Company, FMI Acquisition, Inc., Fireplace Manufactuers, Inc et al.
3.1 Articles of Incorporation of the DESA International, Inc. *
3.1A Articles of Incorporation of the Company *
3.2 By-laws of the DESA International, Inc. *
3.2A By-laws of the Company *
4.1 Indenture, dated as of November 26, 1997, by and among the Company, DESA *
International, Inc., and Marine Midland Bank relating to $130,000,000 of
the Company's 9 7/8% Senior Subordinated Notes Due 2007
4.2 Registration Rights Agreement, dated as of November 26, 1997 by and among *
the Company, DESA International, Inc., NationsBanc Montgomery Securities,
Inc. and UBS Securities LLC
4.3 Purchase Agreement, dated as of November 21, 1997, by and among the *
Company,DESA International, Inc., NationsBanc Montgomery Securities, Inc.
and UBS Securities LLC
4.4 Global Note Payable to CEDE & Co. *
4.5 Company Guarantee *
10.1 Credit Agreement, dated as of November 26, 1997 by and among the Company, *
DESA International, Inc., NationsBank, N.A., UBS Securities LLC
and NationsBanc Montgomery Securities, Inc.
10.2 Management Incentive Plans of the Company, dated March 1, 1997 *
10.3 Sales Compensation and Incentive Plan of the Company for FY 1998 *
10.4 Services Agreement between the Company and Hamilton Ryker Company *
10.5 Services Agreement between the Company and Manpower Services *
10.6 Representative Manufacturer's Representative Agreement
33
<PAGE>
<CAPTION>
Exhibit No. Description of Document
----------- -----------------------
<S> <C> <C>
10.15 Intellectual Property Agreement between the Company and Worgas Bruciatori *
SRL dated December 1, 1996
10.16 Intellectual Property Agreement between the Company and Valor Limited dated *
May 21, 1996
10.17 Intellectual Property Agreement between the Company and Remington Arms *
Company dated August 29, 1969
10.18 Intellectual Property Agreement between the Company and Remington Arms *
Company dated January 29, 1988
10.19 Lease Agreement between the Company and Shelbyville Industrial Spec. *
Building - WRS Partnership
10.20 Agreement to produce and sell finished goods between the Company and *
Tangible/Shinn Fu
10.21 Agreement to produce and sell finished goods between the Company and BYSE *
10.22 Agreement to produce and sell finished goods between the Company and NU- *
TEC
10.23 Agreement to produce and sell finished goods between the Company and *
International Pin
10.24 Agreement to produce and sell finished goods between the Company and *
Kingsman Industries
10.25 Agreement to produce and sell finished goods between the Company and Sealey *
10.26 Agreement to produce and sell finished goods between the Company and *
Hudson Manufacturing
10.27 Agreement to produce and sell finished goods between the Company and *
Sengoka Works, Ltd
10.28 Employment Agreement, dated as of November 26, 1997, between the Company *
and Robert H. Elman
10.29 Employment Agreement, dated as of November 26, 1997, between the Company *
and John M. Kelly
10.30 Employment Agreement, dated as of November 26, 1997, between the Company *
and Terry G. Scariot
10.31 The Company's 1998 Stock Option Plan ***
10.32 The Company's Stockholders Agreement dated as of November 26, 1997 among ***
the Company and the persons named therein
10.33 The Company's Amended and Restated Stockholders Agreement dated as of ****
October 9, 1998 among the Company and the persons named therein
10.34 The Company's Purchase Agreement dated as of October 9, 1998 among the ****
Company and the persons named therein
10.35 Preferred Stock Tagalong Agreement dated as of October 9, 1998 among the ****
Company and the persons named therein
10.36 Form of Warrant ****
34
<PAGE>
<CAPTION>
Exhibit No. Description of Document
----------- -----------------------
<S> <C> <C>
10.37 Amendment and Waiver No. 4 to the Loan Documents dated as of May 25, 1999 Filed
by and among the Company, DESA International, Inc., NationsBank, N.A., UBS herewith
Securities LLC, Banc of America Securities LLC et al.
27 Financial Data Schedule Filed
herewith
- ----------
<FN>
* Incorporated by reference to the Company's Registration Statement on Form S-4 filed on August 5,
1998 (File No. 333-44969)
** Incorporated by reference to the Company's Statement on Schedule 13D in respect of the common stock
of Fireplace Manufacturers, Inc. filed on June 5, 1998
*** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended August
29, 1998
**** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended
November 28, 1998
</FN>
</TABLE>
(b) Financial Statements
DESA HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Auditors.....................................F-1
Consolidated Balance Sheets at February 27, 1999 and
February 28, 1998..................................................F-2
Consolidated Statements of Income for the fiscal years ended
February 27,1999, February 28, 1998 and March 1, 1997..............F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
fiscal years ended February 27, 1999, February 28, 1998 and
March 1, 1997......................................................F-5
Consolidated Statements of Cash Flows for the fiscal years ended
February 27, 1999, February 28, 1998 and March 1, 1997.............F-7
(c) Financial Statement Schedules
SCHEDULE II - Valuation and Qualifying Accounts
(d) Reports on Form 8-K
The Company filed a report on Form 8-K on April 1, 1999 announcing the
retirement of its Chairman and Chief Executive Officer.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy materials have been sent to security holders.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
DESA Holdings Corporation
By: /s/ Terry G. Scariot
Name: Terry G. Scariot
Title: Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
/s/ Terry G. Scariot Chief Executive Officer, May 28, 1999
Terry G. Scariot President and Director
(Principal Executive Officer)
/s/ Raymond B. Rudy Chairman May 28, 1999
Raymond B. Rudy
/s/ John M. Kelly Chief Operating Officer May 28, 1999
John M. Kelly
/s/ John W. Childs Director May 28, 1999
John W. Childs
/s/ Adam L. Suttin Director May 28, 1999
Adam L. Suttin
______________________ Director May __, 1999
Michael Greene
/s/ Joseph J. Incandela Director May 28, 1999
Joseph J. Incandela
/s/ Edward G. Patrick Vice President of Finance and May 28, 1999
Edward G. Patrick Treasurer (Principal Financial
Officer)
/s/ Scott M. Nehm Vice President and Controller May 28, 1999
Scott M. Nehm (Principal Accounting Officer)
36
<PAGE>
<TABLE>
<CAPTION>
Financial Statements:
<S> <C>
Report of Independent Auditors....................................................... F-1
Consolidated Balance Sheets at February 27, 1999 and February 28, 1998............... F-2
Consolidated Statements of Income for the fiscal years ended February 27,
1999, February 28, 1998 and March 1, 1997................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal years
ended February 27, 1999, February 28, 1998 and March 1, 1997................ F-5
Consolidated Statements of Cash Flows for the fiscal years ended February
27, 1999, February 28, 1998 and March 1, 1997............................... F-7
</TABLE>
<PAGE>
Consolidated Financial Statements
DESA Holdings Corporation
Fiscal years ended February 27, 1999,
February 28, 1998 and March 1, 1997
with Report of Independent Auditors
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
DESA Holdings Corporation
We have audited the accompanying consolidated financial statements and schedule
of DESA Holdings Corporation as listed in the accompanying index to the
financial statements (Item 14(a)). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements listed in the accompanying index to the
financial statements (Item 14(a)) present fairly, in all material respects, the
consolidated financial position of DESA Holdings Corporation at February 27,
1999 and February 28, 1998, and the consolidated results of its operations and
cash flows for each of the three years in the period ended February 27, 1999, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects the information set forth therein.
New York, New York
May 25, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
DESA Holdings Corporation
Consolidated Balance Sheets
February 27, February 28,
1999 1998
------------------------------------
(In Thousands, Except
Number of Shares)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 888 $ 794
Accounts receivable, net 30,390 20,838
Inventories:
Raw materials 986 1,257
Work-in-process 6,376 8,908
Finished goods 37,891 30,191
-----------------------------------
45,253 40,356
Deferred tax assets 2,137 3,730
Other current assets 1,321 1,440
-----------------------------------
Total current assets 79,989 67,158
Property, plant and equipment:
Land 390 390
Buildings and improvements 6,173 5,241
Machinery and equipment 34,527 29,891
Furniture and fixtures 725 630
-----------------------------------
41,815 36,152
Less accumulated depreciation 26,182 22,593
-----------------------------------
15,633 13,559
Goodwill, net 81,882 63,430
Deferred tax assets 598 --
Other assets, net 25,250 11,489
-----------------------------------
Total assets $ 203,352 $ 155,636
===================================
F-2
<PAGE>
<CAPTION>
February 27, February 28,
1999 1998
------------------------------------
(In Thousands, Except
Number of Shares)
<S> <C> <C>
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 25,232 $ 15,035
Accrued interest 3,075 5,725
Other accrued liabilities 10,732 14,004
Income taxes payable -- 49
Current portion of long-term debt 13,307 5,250
-----------------------------------
Total current liabilities 52,346 40,063
Long-term debt 285,138 261,105
Deferred tax liabilities -- 1,781
Other liabilities 599 433
-----------------------------------
Total liabilities 338,083 303,382
Commitments
Series C redeemable preferred stock, $.01 par value;
authorized--40,000 shares at February 27, 1999 and
February 28, 1998; issued and outstanding--19,990
shares at February 27, 1999 and 17,600 shares at
February 28, 1998 (liquidation preference--
$20,371,000 at February 27, 1999 and $18,144,000 at
February 28, 1998)
17,207 14,661
Stockholders' equity (deficit):
Common stock, $.01 par value; authorized--
50,000,000 shares at February 27, 1999 and February
28, 1998; issued and outstanding--15,548,692 shares
at February 27, 1999 and 13,688,015 shares at
February 28, 1998
155 137
Nonvoting common stock, $.01 par value; authorized--
3,000,000 shares at February 27, 1999 and
February 28, 1998; issued and outstanding--90,604
shares at February 27, 1999 and February 28, 1998 1 1
Capital in excess of par value 97,984 85,926
Carryover predecessor basis adjustment (32,309) (32,309)
Retained earnings (deficit) (216,742) (215,598)
Accumulated other comprehensive loss (1,027) (564)
-----------------------------------
Total stockholders' equity (deficit) (151,938) (162,407)
-----------------------------------
Total liabilities and stockholders' equity (deficit) $ 203,352 $ 155,636
===================================
See accompanying notes
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
DESA Holdings Corporation
Consolidated Statements of Income
Fiscal year ended
February 27, February 28, March 1,
1999 1998 1997
-------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net sales $ 317,237 $ 224,169 $ 209,105
Cost of sales 213,828 145,486 130,890
-------------------------------------------
Gross profit 103,409 78,683 78,215
Operating costs and expenses:
Selling 54,084 36,081 31,353
General and administrative 13,597 11,199 11,303
Other 5,362 2,911 2,601
-------------------------------------------
73,043 50,191 45,257
-------------------------------------------
Operating profit 30,366 28,492 32,958
Interest expense 27,864 17,327 14,509
-------------------------------------------
Income before provision for income taxes 2,502 11,165 18,449
Provision for income taxes 1,166 5,545 7,733
-------------------------------------------
Income before extraordinary item 1,336 5,620 10,716
Extraordinary loss, net of income tax benefit -- (2,308) --
-------------------------------------------
Net income 1,336 3,312 10,716
Less dividends and accretion on preferred stock 2,480 607 --
-------------------------------------------
Income (loss) available to common stockholders $ (1,144) $ 2,705 $ 10,716
===========================================
See accompanying notes.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
DESA Holdings Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
Non Carryover Accumulated Total
voting Capital in Predecessor Retained Other Stockholders'
Common Common Excess of Basis Earnings Comprehensive Equity
Stock Stock Par Value Adjustment (Deficit) Loss (Deficit)
--------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 2, 1996 $ 234 $ 18 $26,514 $(32,309) $ (89,829) $ (30) $ (95,402)
Comprehensive income:
Net income -- -- -- -- 10,716 -- 10,716
Foreign currency translation adjustment -- -- -- -- -- (278) (278)
---------
Comprehensive income -- -- -- -- -- -- 10,438
Exercise of stock options 2 -- 208 -- -- -- 210
---------------------------------------------------------------------------
Balance at March 1, 1997 236 18 26,722 (32,309) (79,113) (308) (84,754)
Comprehensive income:
Net income -- -- -- -- 3,312 -- 3,312
Foreign currency translation adjustment -- -- -- -- -- (256) (256)
---------
Comprehensive income -- -- -- -- -- -- 3,056
Exercise of stock options -- -- 5 -- -- -- 5
Exercise of stock options simultaneously
with the Recapitalization 2 -- 148 -- -- -- 150
Tax benefit on exercise of stock options -- -- 177 -- -- -- 177
Repurchase of common stock during the
Recapitalization (223) (17) (18,276) -- (139,190) -- (157,706)
Issuance of common stock during the Recapitalization 112 -- 73,703 -- -- -- 73,815
Expenses attributable to the Recapitalization -- -- (6,536) -- -- -- (6,536)
Issuance of warrants during the Recapitalization -- -- 3,002 -- -- -- 3,002
Issuance of common stock 11 -- 7,050 -- -- -- 7,061
Repurchase of common stock (1) -- (69) -- -- -- (70)
Dividends on preferred stock -- -- -- -- (544) -- (544)
Accretion of preferred stock -- -- -- -- (63) -- (63)
---------------------------------------------------------------------------
Balance at February 28, 1998 137 1 85,926 (32,309) (215,598) (564) (162,407)
Comprehensive income:
Net income -- -- -- -- 1,336 -- 1,336
Foreign currency translation adjustment -- -- -- -- -- (463) (463)
---------
Comprehensive income -- -- -- -- -- -- 873
Accretion of preferred stock -- -- -- -- (253) -- (253)
Dividends on preferred stock -- -- -- -- (2,227) -- (2,227)
Issuance of common stock 18 -- 12,058 -- -- -- 12,076
---------------------------------------------------------------------------
Balance at February 27, 1999 $155 $ 1 $97,984 $(32,309) $(216,742) $(1,027) $(151,938)
===========================================================================
See accompanying notes.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
DESA Holdings Corporation
Consolidated Statements of Cash Flows
Fiscal year ended
February 27, February 28, March 1,
1999 1998 1997
-------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 1,336 $ 3,312 $ 10,716
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,589 2,456 2,432
Amortization 4,998 2,256 2,104
Deferred income taxes 271 (36) --
Equity in undistributed earnings of joint venture (170) (157) (132)
Extraordinary item -- 2,308 --
(Increase) decrease in operating assets, net of
effects of acquisitions:
Accounts receivable, net (7,888) 131 (2,315)
Inventories (1,212) (6,996) (811)
Other current assets 211 (153) (337)
Increase (decrease) in operating liabilities:
Accounts payable 8,592 (7,646) 7,107
Accrued interest (2,512) 4,437 798
Other accrued liabilities (5,025) 512 (1,492)
Income taxes payable (49) 565 346
Other liabilities 166 157 (18)
-----------------------------------------------
Net cash provided by operating activities 2,307 1,146 18,398
-----------------------------------------------
Investing activities
Capital expenditures (4,462) (5,475) (2,770)
Dividends received from joint venture 170 157 132
Cash paid for acquisitions, net of cash acquired (40,694) (40,294) --
Additional fees paid in conjunction with acquisition
of Heath (263) -- --
Other 26 (368) (244)
-----------------------------------------------
Net cash used in investing activities (45,223) (45,980) (2,882)
-----------------------------------------------
F-6
<PAGE>
<CAPTION>
DESA Holdings Corporation
Consolidated Statements of Cash Flows (continued)
Fiscal year ended
February 27, February 28, March 1,
1999 1998 1997
-------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Financing activities
Proceeds from debt $ -- $ 265,500 $ --
Proceeds from issuance of Series C
Redeemable Preferred Stock -- 14,598 --
Proceeds from issuance of warrants -- 3,002 --
Proceeds from issuance of common stock -- 73,815 --
Repurchase of common stock -- (157,706) --
Repayment of Term Loans -- (183,095) --
Payment of expenses attributable to the
Recapitalization -- (17,670) --
Increase (decrease) in revolving loan -- 43,000 (2,759)
Increase (decrease) in working capital loan 7,202 (20,020) --
Principal payments of Term Loans (5,250) (7,980) (8,050)
Proceeds from Acquisition Loans 30,000 20,000 --
Payments for repurchase of common stock -- (70) --
Exercise of stock options -- 155 210
Proceeds from issuance of common stock 12,076 7,061 --
Payment of debt financing costs (1,016) -- --
------------------------------------------------
Net cash provided by (used in) financing activities 43,012 40,590 (10,599)
Effect of exchange rate changes on cash (2) (20) (4)
------------------------------------------------
Increase (decrease) in cash and cash equivalents
for the year 94 (4,264) 4,913
Cash and cash equivalents at beginning of year 794 5,058 145
------------------------------------------------
Cash and cash equivalents at end of year $ 888 $ 794 $ 5,058
================================================
See accompanying notes
</TABLE>
F-7
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements
Fiscal years ended February 27, 1999, February 28, 1998 and March 1, 1997
1. Organization and Basis of Presentation
DESA Holdings Corporation ("Holdings") was formed in 1993 by a group of
investors led by Hicks, Muse, Tate & Furst ("Hicks Muse") and certain management
shareholders. Hicks Muse owned 60% of the outstanding voting shares of Holdings
with the remaining shares owned by the management shareholders. In December
1993, Holdings acquired all of the outstanding common shares of DESA
International, Inc. ("DESA") (the "Restructuring" transaction). This
Restructuring met the criteria under the Emerging Issues Task Force Issue No.
88-16, "Basis in Leveraged Buyout Transactions". Consequently, management's
entire residual interest in Holdings was valued at its predecessor basis and is
shown as a Carryover Basis Adjustment of $32,308,744, which reduces
stockholders' equity (deficit) on the consolidated balance sheets whereas Hicks
Muse's residual interest was valued at fair value.
On November 26, 1997, J.W. Childs Equity Partners, L.P. and certain other
investors (collectively, the "Investors") acquired 89.6% of the outstanding
shares of Holdings. In connection with such transaction, Holdings issued to the
Investors 11,373,973 shares of $.01 par value common stock, for aggregate
consideration of $73.8 million ($6.49 per share) and 17,600 shares of $.01 par
value Series C redeemable preferred stock (the "Preferred Stock") and warrants
to purchase 463,232 shares of Holdings' nonvoting common stock (the "Warrants")
in exchange for aggregate consideration of $17.6 million. In addition, certain
of Holdings' existing stockholders retained a portion of their existing shares
of capital stock which have a total value of $8.6 million ($6.49 per share) and
represent 10.4% of the outstanding shares of Holdings.
Holdings used such proceeds, together with a portion of the proceeds borrowed by
its wholly-owned subsidiary, DESA, under new term loans and a working capital
loan facility (the "Credit Facility") with NationsBank, N.A. ("NationsBank") as
administrative agent, to repurchase 89.6% of its outstanding common stock and
nonvoting common stock for $157,706,000 ($6.53 per share, inclusive of
$1,119,000 (or $.04 per share) relating to a purchase price adjustment for net
working capital that was higher at the closing date than originally estimated at
the measurement date). The remaining proceeds from the Credit Facility and the
proceeds from the issuance by DESA of $130,000,000 of Senior Subordinated Notes
were used to repay the outstanding amounts under Holdings' existing credit
agreement (see Notes 6 and 8).
F-8
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Basis of Presentation (continued)
The above described transactions have been accounted for as a recapitalization
(the "Recapitalization") with all amounts paid to the former shareholders
recorded as reductions in stockholders' equity (deficit).
2. Company Operations
Holdings is engaged in the manufacturing and marketing of various consumer
product lines, including zone heating products and specialty products primarily
throughout the United States and Europe. Two significant customers, which
operate in the hardware homecenter industry, accounted for 29% and 11% of net
sales, respectively, in fiscal year 1999, 17% and 13% of net sales,
respectively, in fiscal year 1998 and 13% and 11% of net sales, respectively, in
fiscal year 1997. The receivable balances from these two customers collectively
represented 37% and 25% of Holdings' accounts receivable at February 27, 1999
and February 28, 1998.
Other than a small amount of goodwill, Holdings has no assets, operations or
cash flows independent of DESA and, accordingly, separate financial statements
for DESA have not been provided as management believes that such financial
statements are not material to an investor. Holdings has fully and
unconditionally guaranteed the Credit Facility and the Senior Subordinated Notes
(see Note 6).
3. Summary of Significant Accounting Policies
Fiscal Year
Holdings' fiscal year ends on the Saturday closest to February 28. The fiscal
years for the consolidated financial statements included herein ended on
February 27, 1999 (52 weeks), February 28, 1998 (52 weeks) and March 1, 1997 (52
weeks).
F-9
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Consolidation
The accompanying consolidated financial statements include the accounts of DESA
Holdings Corporation and its wholly-owned subsidiary, DESA International, Inc.,
and all of its wholly- owned subsidiaries, including DESA Industries of Canada,
Inc., DESA Europe B.V., DESA Industries of V.I., Inc., and Heath Company
Limited. All significant intercompany accounts and transactions have been
eliminated. DESA's 50% interest in a joint venture is accounted for using the
equity method.
Cash Equivalents
Holdings considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. The cost of all
inventories in the United States is valued using the last-in, first-out ("LIFO")
method while the cost of all foreign inventories is valued using the first-in,
first-out ("FIFO") method. Holdings believes the LIFO method results in a better
matching of current costs with current revenues. At February 27, 1999 and
February 28, 1998, approximately 82% of the total inventories are costed at
LIFO. The effect of using the LIFO method in fiscal years 1999, 1998 and 1997
was to increase pre-tax income by $541,000, $284,000 and $278,000, respectively.
If the LIFO method of valuing inventories was not used, total inventories would
have been $1,198,000 and $657,000 lower than reported at February 27, 1999 and
February 28, 1998, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and betterments
are capitalized whereas maintenance and repairs are expensed as incurred. Upon
disposition, the asset cost and related accumulated depreciation are removed
from the accounts, and any resulting gain or loss is included in income.
F-10
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Depreciation of plant and equipment is determined on the straight-line basis
over the following estimated useful lives:
Buildings and improvements 33 years
Machinery and equipment 5-12 years
Furniture and fixtures 5-10 years
Tooling and molds 2-3 years
Income Taxes
Holdings accounts for income taxes using the liability method. Deferred income
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes and are determined based on tax rates
expected to be in effect when the taxes are actually paid or refunds received.
Financing Costs
Financing costs are amortized using the interest method over the life of the
related debt instrument. The amortization of these financing costs is included
in other operating expenses in the consolidated statements of income.
Goodwill
Goodwill is amortized on the straight-line basis over 40 years and is recorded
at cost less accumulated amortization. Holdings reviews the recoverability of
its goodwill by comparing the unamortized carrying value to anticipated
undiscounted future cash flows. Any impairment is charged to expense when such
determination is made. Accumulated amortization at February 29, 1999 and
February 28, 1998 was $6,809,000 and $4,828,000, respectively, and amortization
expense for fiscal years 1999, 1998 and 1997 was $1,981,000, $1,168,000 and
$1,118,000, respectively.
F-11
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Warranty Costs
Holdings warrants its products against defects in design, materials and
workmanship generally for six months to two years, depending on the product. A
provision for estimated future costs related to warranty expense is recorded on
an accrual basis when products are shipped.
Foreign Currency Translation
All assets, liabilities and results of operations are measured in the primary
currency ("functional currency") in which each entity conducts its business.
Assets and liabilities denominated in a currency other than the functional
currency are remeasured and stated in the functional currency based on current
or historical exchange rates. Gains or losses arising therefrom are included in
net income. Adjustments resulting from translating foreign functional currency
assets and liabilities into U.S. dollars, based on current exchange rates, are
recorded in a separate component of stockholders' equity (deficit) called
"Accumulated other comprehensive loss" and are included in determining
comprehensive income. Revenues and expenses are translated into U.S. dollars at
average monthly exchange rates. The Canadian dollar has been determined to be
the functional currency for DESA's Canadian subsidiary, the Netherlands Guilder
for its European subsidiary and the Hong Kong dollar for its Hong Kong
subsidiary.
Derivative Financial Instruments
Gains and losses related to interest rate protection agreements used to convert
floating rate debt to a fixed rate basis are recorded over the lives of the
agreements as an adjustment to interest expense (see Note 7).
Holdings utilizes forward exchange foreign currency contracts to reduce foreign
exchange risks that arise from exchange rate movements between the dates that
foreign currency transactions for the purchase of inventories are entered into
and the date they are consummated. Gains and losses related to qualifying hedges
of foreign currency risk exposure are deferred and recorded as adjustments to
the carrying amounts of the related assets when the hedge transactions occur.
F-12
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Impact of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 must first be applied in the first
quarter of fiscal years that begin after June 15, 1999. FAS 133 will require
Holdings to recognize all derivatives on the consolidated balance sheets at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivatives change
in fair value will immediately be recognized in earnings. Management has
determined that FAS 133 will not have a significant effect on the earnings and
financial position of the Company.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results can differ from those estimates.
4. Acquisitions
On February 4, 1998, Holdings purchased all of the issued and outstanding stock
of Heath Holding Corp. ("Heath") for an aggregate purchase price of $42,365,000.
The purchase price consisted of $40,365,000 in cash and a $2,000,000 junior
subordinated note payable. In fiscal 1999, Holdings incurred an additional
$263,000 of expenses related to the acquisition of Heath. Such expenses have
been included as an addition to goodwill. Heath is engaged in the manufacturing
and distribution of motion-sensor lighting products and wireless home-controlled
devices, all of which are included in the Specialty Products segment of the
Company. Holdings accounted for such acquisition using the purchase method.
F-13
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
4. Acquisitions (continued)
The fair value of the assets acquired and liabilities assumed at February 4,
1998 is summarized as follows (in thousands):
Current assets $ 25,757
Property, plant and equipment 458
Other assets 3,428
Goodwill 22,974
Current liabilities (9,989)
----------
$ 42,628
==========
Certain adjustments were recorded during fiscal 1999 to finalize purchase
accounting.
The acquisition of Heath was financed through the issuance by Holdings of
1,081,852 shares of its common stock to certain of the Investors, borrowings of
$20,000,000 under the NationsBank Acquisition Loan Commitment, the issuance of a
$2,000,000 note to H.I.G. Investment Group, L.P. and certain other note holders,
and additional borrowings under the NationsBank Working Capital Loan Commitment.
The goodwill related to the acquisition of Heath is being amortized over 40
years.
On August 19, 1998, Holdings consummated two acquisitions. Holdings acquired all
of the outstanding stock of Fireplace Manufacturers, Inc. ("FMI"), which then
merged into DESA, for a net cash purchase price of $25,734,000. The purchase
price includes non-compete agreements, with certain executives of FMI, covering
a three-year period for aggregate payments of $3,050,000. Holdings also acquired
the worldwide rights (except in China) to distribute Universal Heating, Inc.'s
and its affiliates' ("UHI") indoor heating products, through DESA U.S. Inc.,
which then merged into DESA, for a cash purchase price of $12,634,000, including
non-compete payments of $1,998,000. Holdings financed the two acquisitions, both
of which are involved in the manufacturing and marketing of zone heating
products, through borrowings of $26,292,500 under the Credit Facility
(Acquisition Loan B) and the issuance of 1,860,677 shares of Common Stock to
existing stockholders for $12,075,500.
Holdings accounted for such acquisitions using the purchase method and,
accordingly, the results of operations of such acquisitions have been included
in Holdings' results of operations from the acquisition dates.
F-14
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
4. Acquisitions (continued)
The following summarizes the fair value of the assets acquired and liabilities
assumed at August 19, 1998 for the two acquisitions (in thousands):
Current assets $ 4,450
Property, plant and equipment 1,201
Other intangible assets 15,734
Goodwill 20,043
Current liabilities (3,060)
----------
$ 38,368
==========
This allocation is preliminary and will be adjusted as necessary based upon
further analysis of both acquisitions.
The following unaudited supplemental pro forma information is presented as if
the acquisitions of FMI and UHI had been completed as of March 1, 1998 and March
2, 1997 and as if the acquisition of Heath had been completed as of March 2,
1997 and March 3, 1996 (in thousands):
Fiscal year ended
February 27, February 28, March 1,
1999 1998 1997
----------------------------------------------
Net sales $329,944 $333,991 $253,520
Operating profit 30,462 34,519 29,990
Income before extraordinary item 852 7,119 7,132
Net income 852 4,811 7,132
5. Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of $1,628,000
and $1,517,000 at February 27, 1999 and February 28, 1998, respectively.
F-15
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
6. Financing Arrangements
As part of the Recapitalization discussed in Note 1, Holdings entered into a new
credit agreement on November 26, 1997 with NationsBank, UBS Securities LLC and
Nationsbanc Montgomery Securities, Inc. (the "Lenders"), which was amended in
May 1998, that consists of a Working Capital Loan Commitment of up to
$75,000,000 (which includes a Swing-Line Loan Commitment of up to $5,000,000), a
Term A Loan Commitment ("Term A Loan") of $50,000,000, a Term B Loan Commitment
("Term B Loan") of $50,000,000, an Acquisition Loan Commitment of up to
$20,000,000 and an Acquisition B Loan Commitment of up to $30,000,000
(collectively, the "Credit Facility"). Also, in connection with the
Recapitalization, DESA issued $130,000,000 aggregate principal amount of Senior
Subordinated Notes to qualified institutional buyers, as defined in Rule 144A
under the Securities Exchange Act of 1933.
The Credit Facility requires a Clean-Up Period, as defined, under the Working
Capital Loan Commitment, for a period of 30 consecutive days occurring between
January 1 and May 30 in each calendar year commencing January 1, 1998. During
the Clean-Up Period, the sum of Working Capital advances, Letter of Credit
advances and Swing Line loan advances outstanding shall not exceed $24,000,000
in 1998 and $15,000,000 for any Clean-Up Period thereafter. Holdings failed to
comply with the requirements for the Clean-Up Period occurring between January
1, 1999 and May 30, 1999 (See Note 21).
Holdings had no outstanding balance drawn against the $5,000,000 Swing-Line Loan
Commitment at February 27, 1999 and February 28, 1998. The Swing-Line Loan,
which accrues interest monthly at the prime rate plus 1.25% per annum, extends
to the earlier of November 26, 2003 or 30 days after the requested borrowing.
After the expiration of the Swing-Line Loan period, the $5,000,000 Commitment
remains as part of the Working Capital Loan Commitment of $75,000,000.
Commencing in fiscal 1999, the required annual payments under the Term A and
Term B Term Loans are increased by 50% of any excess cash flows at the end of
the fiscal year, as defined. No excess cash flow payments were required in
fiscal 1999.
F-16
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
6. Financing Arrangements (continued)
This credit agreement includes various restrictive covenants which, among other
things, prohibit payment of dividends to common stockholders, set maximum limits
on capitalized lease obligations and capital expenditures, require minimum
consolidated EBITDA (as defined) levels, and set consolidated interest coverage,
fixed charge coverage and leverage ratios. At February 27, 1999, Holdings had
failed to comply with the requirements the Total Leverage Ratio (See Note 21).
Substantially all of Holdings' consolidated assets are pledged under the Credit
Facility and Senior Subordinated Notes.
<TABLE>
<CAPTION>
Outstanding borrowings consist of the following (in thousands):
February 27, February 28,
1999 1998
----------------------------
<S> <C> <C>
9 7/8% Senior Subordinated Notes due 2007 (A) $130,000 $130,000
NationsBank and various banks Term A Loan (B) 44,875 49,125
NationsBank and various banks Term B Loan (C) 48,750 49,750
NationsBank and various banks Working Capital Loan Commitment (D) 22,682 15,480
NationsBank and various banks Acquisition Loan (E) 20,000 20,000
NationsBank and various banks Acquisition B Loan (F) 30,000 --
Note payable related to acquisition of Heath (G) 2,138 2,000
-------------------------
Total outstanding borrowings 298,445 266,355
Less current portion of long-term debt 13,307 5,250
-------------------------
Total long-term debt $285,138 $261,105
=========================
</TABLE>
(A) The Senior Subordinated Notes are payable on December 15, 2007 and accrue
interest at a rate of 9.875% per annum. Interest is payable semi-annually
on June 15 and December 15, commencing on June 15, 1998. The Senior
Subordinated Notes can be redeemed prior to the mandatory redemption date
based upon the occurrence of certain events, as defined. DESA is the issuer
of the Senior Subordinated Notes, which are fully and unconditionally
guaranteed by Holdings.
(B) The Term A Loan is payable in quarterly installments through November 26,
2003 and accrues interest at the prime rate plus 1.50% or LIBOR plus 2.50%
at the option of Holdings. Interest is payable on a quarterly basis under
the prime rate option or at the end of each LIBOR period. The weighted
average interest rate was 7.85% and 8.16% in 1999 and 1998, respectively.
Once repaid, the Term A Loan may not be reborrowed.
F-17
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
6. Financing Arrangements (continued)
(C) The Term B Loan is payable in quarterly installments through November 26,
2004, and accrues interest at the prime rate plus 1.875% or LIBOR plus
2.875% at the option of Holdings. Interest is payable on a quarterly basis
under the prime rate option or at the end of each LIBOR period. The
weighted average interest rate was 8.27% and 8.53% in 1999 and 1998,
respectively. Once repaid, the Term B Loan may not be reborrowed.
(D) The Working Capital Loan Commitment is payable at any time at the option of
Holdings prior to November 26, 2003 and accrues interest at the prime rate
plus 1.50% or LIBOR plus 2.50%, at the option of Holdings. The weighted
average interest rate was 7.96% and 8.25% in 1999 and 1998, respectively.
Interest is payable on a quarterly basis under the prime rate option or at
the end of each LIBOR period. Holdings can utilize letters of credit under
the Working Capital Loan Commitment up to $10 million. As of February 27,
1999 and February 28, 1998, letters of credit of $718,000 and $2,291,000,
respectively, are outstanding under the Working Capital Loan Commitment.
Borrowings are generally limited to specific percentages of eligible trade
receivables and inventory. Holdings pays commitment fees of 1/2 of 1% per
annum on the daily unutilized Working Capital Loan Commitment.
(B) The Acquisition Loan is payable in quarterly installments commencing in
February 2000 and extending through November 26, 2003 and accrues interest,
which is payable quarterly, at the prime rate plus 1.875% or LIBOR plus
2.875% at the option of Holdings. The weighted average interest rate was
8.27% and 8.25% in 1999 and 1998, respectively. Once repaid, the
Acquisition Loan may not be reborrowed.
(F) The Acquisition B Loan is payable in quarterly installments commencing in
February 2000 and extending through November 26, 2003 and accrues interest,
which is payable quarterly, at the prime rate plus 1.875% or LIBOR plus
2.875%, at the option of Holdings. The weighted average interest rate was
8.33% in 1999. Once paid, the Acquisition B Loan may not be reborrowed.
F-18
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
6. Financing Arrangements (continued)
(G) The note payable is due on December 31, 2008 and accrues interest, which is
payable semi-annually beginning June 30, 1998, at a rate of 7.5% per annum.
Holdings may elect, upon written notice, to defer any interest payments, in
which event such interest payments shall effectively convert to principal
and accrue interest at a rate of 7.5% per annum. In fiscal 1999, $138,000
of interest payments were deferred and were converted into principal.
In accordance with the terms of the Credit Facility, the ability of DESA to
incur additional indebtedness is limited, as defined. At February 27, 1999, DESA
can incur additional indebtedness of $29.0 million.
Cash payments for interest for the fiscal years ended February 27, 1999,
February 28, 1998 and March 1, 1997 were $30,514,000, $12,890,000 and
$13,656,000, respectively.
The following table shows the required future repayments under the Company's
financing arrangements (in thousands):
Fiscal years ending:
2000 $ 13,307
2001 29,375
2002 23,500
2003 23,500
2004 35,225
Thereafter 173,538
---------
$ 298,445
=========
7. Financial Instruments
Holdings' financial instruments recorded on the consolidated balance sheets
include cash and cash equivalents, accounts receivable, accounts payable and
debt obligations. Due to their short-term maturity, the carrying amounts of cash
and cash equivalents, accounts receivable and accounts payable approximate fair
market value.
F-19
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
7. Financial Instruments (continued)
The following table summarizes the carrying amounts and estimated fair values of
Holdings' remaining financial instruments at February 27, 1999 and February 28,
1998 (bracketed amount represents an asset) (in thousands):
<TABLE>
<CAPTION>
February 27, 1999 February 28, 1998
------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
Bank debt $ 166,307 $ 166,307 $ 134,355 $ 134,355
Senior subordinated notes 130,000 102,700 130,000 135,525
Note payable 2,138 2,138 2,000 2,000
Interest rate swap agreements -- (438) -- --
</TABLE>
Methods and assumptions used in estimating fair values are as follows:
Bank Debt: The carrying amounts of Holdings' variable rate bank borrowings for
revolving loans and term loans approximate their fair values.
Senior Subordinated Notes: The fair value of DESA's fixed rate borrowings are
estimated based on quoted market prices.
Note Payable: The carrying amount of Holdings' note payable approximates fair
value because the effective rate of interest approximates the rate at which
Holdings could borrow funds with similar remaining maturities.
Interest Rate Swap Agreements: The fair value of the interest rate swap
agreements reflect the estimated amount that Holdings would receive at February
27, 1999 if such contracts were terminated based on quoted market prices.
F-20
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
7. Financial Instruments (continued)
Derivative Financial Instruments
In fiscal 1999, Holdings entered into interest rate swap agreements with
NationsBank to manage its exposure to interest rate fluctuations. The interest
rate swap agreements effectively convert interest rate exposure from variable to
fixed rates of interest without the exchange of the underlying principal
amounts. The interest rate swap agreements provide for the payment by Holdings
of fixed rates of interest based on three month LIBOR (4.75% at February 27,
1999). Notional principal amounts of these agreements total $125 million, of
which $75 million terminates in November 1999 and $50 million terminates in
August 2001. The agreements terminating in August 2001 may be canceled at the
option of NationsBank in February 2000. The notional amounts are used to measure
the interest to be paid or received and do not represent the amount of exposure
to credit loss. Net payments of $100,000 were recorded as adjustments to
interest expense in fiscal 1999.
Foreign Exchange Contracts
At February 27, 1999, Holdings had forward exchange foreign currency contracts,
with maturities ranging from June 1999 to September 1999, to purchase
approximately $3.7 million in foreign currencies to cover future payments to
component suppliers.
8. Series C Redeemable Preferred Stock
Holdings is authorized to issue 40,000 shares of $.01 par value Preferred Stock
which have no voting rights, except under limited conditions, as defined. Such
Preferred Stock has a mandatory redemption date on November 30, 2009 at its
liquidation value of $1,000 per share plus accrued and unpaid dividends. The
liquidation value is adjustable based upon the occurrence of certain future
events, as defined. Such Preferred Stock was initially recorded on the
consolidated balance sheets at $14,598,000 (this amount is net of the fair value
assigned to the Warrants of $3,002,000--see Note 9) and is being accreted to its
face value of $17,600,000 over its term. The accretion of Preferred Stock is
shown as a reduction to retained earnings (deficit) on the consolidated
statements of stockholders' equity (deficit).
F-21
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
8. Series C Redeemable Preferred Stock (continued)
The holders of Preferred Stock are entitled to receive cumulative dividends at a
rate of 12% per annum. Such dividends are payable as and when declared by
Holdings' Board of Directors in cash or via the issuance of additional shares of
Preferred Stock at a value of $1,000 per share if a cash dividend is not
declared prior to any May 31 or November 30 before its redemption. In June and
December 1998, Holdings issued 1,250 and 1,140 shares of Preferred Stock as
dividends-in-kind. At February 27, 1999 and February 28, 1998, accrued dividends
(included in other accrued liabilities) on such Preferred Stock were $381,000 or
$19.06 per share and $544,000 or $30.91 per share, respectively.
9. Income Taxes
Significant components of Holdings' deferred tax liabilities and assets are as
follows (in thousands):
February 27, February 28,
1999 1998
--------------------------------
Deferred tax liabilities:
Depreciation and amortization $ 1,880 $ 2,142
Inventory reserves, including LIFO 454 --
------------------------
Total gross deferred tax liabilities 2,334 2,142
------------------------
Deferred tax assets:
Allowance for doubtful accounts 514 538
Inventory reserves, including LIFO -- 38
Accrued expenses 2,076 3,154
Net operating loss carryforwards 3,002 471
Other--net 98 128
------------------------
Total gross deferred tax assets 5,690 4,329
Valuation allowance (621) (238)
------------------------
Net deferred tax (assets) $(2,735) $(1,949)
========================
Shown in consolidated balance sheets as:
Current deferred tax (assets) $(2,137) $(3,730)
Noncurrent deferred tax liability (assets) (598) 1,781
------------------------
Net deferred tax (assets) $(2,735) $(1,949)
========================
F-22
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
Holdings has net operating loss carryforwards of approximately $2,112,000
available to offset future taxable income which expire in 2019. Holdings also
has Federal net operating loss carryforwards of $4,365,000 acquired in the
acquisition of Heath which expire from 2004 through 2017, $8,000 of minimum tax
credit carryforwards which have an unlimited carryforward period and state net
operating loss carryforwards of $27 million which expire during the next six
years. The Federal net operating loss and minimum tax credit carryforwards
acquired in the acquisition of Heath are subject to limitations imposed by the
Internal Revenue Code.
Management has evaluated the need for a valuation allowance against the deferred
tax assets and has determined that all of the deductible temporary differences,
except $621,000, will be utilized as charges against reversals of future taxable
temporary differences and future taxable income. Accordingly, Holdings has
recorded a $621,000 valuation allowance to reserve for all of the state net
operating loss carryforwards acquired in the Heath acquisition which may not be
realized during the carryforward period. If this net operating loss carryforward
is realized, the reduction of the valuation allowance will be charged against
the goodwill from the Heath acquisition.
The provision for income taxes consists of the following (in thousands):
Fiscal Year
1999 1998 1997
-----------------------------------------
Current:
Federal $ 438 $ 2,530 $ 5,821
State and local -- 648 1,110
Foreign 457 908 802
-----------------------------------------
895 4,086 7,733
-----------------------------------------
Deferred:
Federal 215 (38) --
State and local 56 2 --
-----------------------------------------
271 (36) --
-----------------------------------------
$ 1,166 $ 4,050 $ 7,733
=========================================
F-23
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
The income statement classification of the provision (benefit) for income taxes
is as follows (in thousands):
Fiscal Year
1999 1998 1997
--------------------------------------
Income tax expense attributable to
continuing operations $ 1,166 $ 5,545 $ 7,733
Extraordinary item -- (1,495) --
-------------------------------------
$ 1,166 $ 4,050 $ 7,733
=====================================
Included in earnings before income tax expense and extraordinary item for the
years ended February 27, 1999, February 28, 1998 and March 1, 1997 are foreign
earnings of $2,739,000, $1,249,000 and $1,688,000, respectively.
Undistributed earnings of Holdings' foreign subsidiaries amounted to
approximately $6,860,000 and $1,672,000 at February 27, 1999 and February 28,
1998. Approximately $6,468,000 of those earnings are considered to be
permanently reinvested and, accordingly, no provision for U.S. federal and state
income taxes has been provided thereon. Upon distribution of those earnings in
the form of dividends or otherwise, Holdings would be subject to both U.S.
income taxes (net of foreign tax credits) and withholding taxes payable to the
various foreign countries. In the event that these permanently reinvested
earnings are distributed, it is estimated that U.S. federal and state income
taxes, net of foreign tax credits, of approximately $2,052,000 would be due.
The effective income tax rate differs from the statutory rate as follows (in
thousands):
Fiscal Year
1999 1998 1997
-----------------------------------
Federal income tax at statutory rate $ 876 $ 3,908 $ 6,457
State income tax, net of federal benefit 36 591 722
Foreign income taxes (benefit) (502) 471 212
Goodwill amortization 599 387 387
Other--net 157 188 (45)
----------------------------------
Provision for income taxes $ 1,166 $ 5,545 $ 7,733
==================================
F-24
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
Cash payments for income taxes for the years ended February 27, 1999, February
28, 1998 and March 1, 1997 were $1,883,000, $5,154,000 and $7,387,000,
respectively.
10. Comprehensive Income
As of March 2, 1997, Holdings adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130
established new rules for the reporting and display of comprehensive income and
its components; however, the adoption of FAS 130 has had no effect on Holdings'
net income or stockholders' equity (deficit). FAS 130 requires Holdings' foreign
currency translation adjustment which, prior to adoption, was reported
separately in stockholders' equity (deficit), to be included in other
comprehensive income. Amounts reported in prior year financial statements have
been reclassified to conform with the requirements of FAS 130. As of February
27, 1999, the cumulative other comprehensive loss consisted solely of Holdings'
foreign currency translation adjustment.
11. Stockholders' Equity (Deficit)
Warrants Issued with Series C Redeemable Preferred Stock
The Warrants issued in conjunction with the Recapitalization entitle the holders
to purchase 463,232 shares of Holdings' nonvoting common stock for $.01 per
share and are exercisable at any time prior to their expiration on November 30,
2009. Such Warrants have been recorded at their fair value at the time of
issuance of $3,002,000 as an addition to capital in excess of par value and a
reduction to the carrying value of the Preferred Stock.
Stock Option Plan
In March 1994, Holdings established the 1994 Stock Option Plan which provided
for the issuance of incentive stock options or nonqualified stock options for
1,169,261 shares of common stock. The stock options were granted to key
employees or eligible nonemployees, as defined, as determined by the Option
Committee of the Board of Directors, and the term of the options could not
exceed ten years from the grant date. The exercise price of the incentive
options was equal to or greater than the fair market value of the common stock
on the date of grant, and the exercise price of the nonqualified options was
determined by the Option Committee.
F-25
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
11. Stockholders' Equity (Deficit) (continued)
In fiscal 1998 and 1997, Holdings issued incentive options to purchase 49,385
shares and 215,000 shares, respectively, of common stock, of which 49,385
incentive options and 15,000 incentive options, respectively, vest in three
equal annual installments commencing on the first anniversary date. The
remaining 200,000 incentive options issued in fiscal 1997 vested immediately
upon grant. The weighted average fair value of an option granted during the year
was $0.34 and $0.12 for the years ended February 28, 1998 and March 1, 1997,
respectively. All of the outstanding options under the 1994 Plan were exercised
in November 1997 as part of the 1998 Recapitalization.
The following is a summary of Holdings' incentive options under the 1994 Stock
Option Plan:
Number of
Shares
---------
Outstanding at March 1, 1997 56,000
Granted on April 1, 1997 at $2.00 per share 21,000
Granted on August 25, 1997 at $2.00 per share 28,385
Exercised in 1998 at $1.00 per share (56,000)
Exercised in 1998 at $2.00 per share (49,385)
-------
Outstanding at February 28, 1998 --
=======
In March 1998, Holdings adopted the 1998 Stock Option Plan, which was
subsequently amended and restated in September 1998. The 1998 Stock Option Plan
terminates in ten years from its date of inception and provides for the issuance
of incentive options or nonqualified stock options for 1,462,222 shares of
common stock. The stock options may be granted to key employees, as defined, as
determined by the Compensation Committee of the Board of Directors, and the term
of the options cannot exceed ten years from the grant date, except for employees
who own stock possessing more than 10% of the combined voting power of all
classes of stock of Holdings, for whom the term of the options is five years.
Certain options vest as follows: 5% at the end of year one, 10% at the end of
year two, 60% at the end of year three, 80% at the end of year four and 100% at
the end of year five. The other options vest in nine years and six months from
the date of grant and are subject to acceleration provisions based upon the
attainment of certain future financial performance goals.
F-26
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
11. Stockholders' Equity (Deficit) (continued)
The exercise price of the incentive options shall be equal to or greater than
the fair market value of the common stock on the date of grant, except for
employees who own stock possessing more than 10% of the combined voting power of
all classes of stock, for whom the exercise price cannot be less than 110% of
the fair market value of the common stock on the date of grant.
The exercise price of the nonqualified options is determined by the Compensation
Committee of the Board of Directors.
The following is a summary of Holdings' incentive options under the 1998 Stock
Option Plan:
Number of
Shares
----------
Outstanding at February 28, 1998 --
Granted on March 19, 1998 at $6.49 per share 177,000
Granted on July 17, 1998 at $6.49 per share 10,750
Granted on September 1, 1998 at $6.49 per share 1,179,777
Canceled in fiscal 1999 (13,000)
---------
Outstanding at February 27, 1999 1,354,527
=========
None of the options were exercisable at February 27, 1999.
Of these above options issued, 187,750 options vest as follows: 5% at the end of
year one, 10% at the end of year two, 60% at the end of year three, 80% at the
end of year four and 100% at the end of year five. The other options vest in
nine years and six months from the date of grant and are subject to acceleration
provisions based upon the attainment of certain future financial performance
goals. As of February 27, 1999, the performance goals had not been met and, as
such, no vesting of options was accelerated.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation ("FAS 123") requires Holdings to either adopt a fair value based
method of expense recognition for all stock based compensation awards, or
provide pro forma net income information as if the recognition and measurement
provisions of FAS 123 had been adopted.
F-27
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
11. Stockholders' Equity (Deficit) (continued)
Holdings decided to account for its stock based compensation awards following
the provisions of Accounting Principles Board Opinion No. 25 ("APB 25") for
stock issued to employees. APB 25 requires compensation expense to be recognized
only if the market price of the underlying stock exceeds the exercise price on
the date of grant. Holdings' stock based awards consist of stock options with an
exercise price equal to market price on the date of grant. As such, Holdings has
not recorded compensation expense in connection with these awards.
The weighted average fair value of an option granted for the year ended February
27, 1999 was $2.42. The fair value of the options was estimated at the date of
grant using a minimum value method and the following assumptions:
Fiscal Year
1999 1998 1997
-----------------------------------------
Risk-free interest rate 5.32% 6.31% 5.84%
Average life 5 years 3 years 3 years
Dividend yield 0% 0% 0%
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Holdings' pro forma
net income is as follows (in thousands):
Fiscal Year
1999 1998 1997
-----------------------------------------
Pro forma net (loss) income available
for common stockholders $(1,280) $2,700 $10,702
F-28
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
11. Stockholders' Equity (Deficit) (continued)
Shares Reserved for Issuance
At February 27, 1999, 107,695 shares of common stock were reserved for the
exercise and future grant of stock options. At February 27, 1999 and February
28, 1998, 90,604 shares of common stock were reserved for issuance upon
conversion of the nonvoting common stock. At February 27, 1999 and February 28,
1998, 463,232 shares of nonvoting common stock were reserved for issuance upon
exercise of outstanding warrants.
12. Pension Plans
All eligible salaried employees are covered by a defined contribution plan
("401k"). After an employee has been employed for six months, Holdings
contributes 2% of their salary. Holdings matches an additional 50% of
participant contributions up to a maximum contribution of 1%. The cost of this
plan was $366,000, $325,000 and $299,000 for the fiscal years ended February 27,
1999, February 28, 1998 and March 1, 1997, respectively.
Holdings has a defined benefit pension plan covering substantially all of its
industrial employees. The defined benefits are based on a service multiplier
that is multiplied by years of credited service. Holdings' funding policy is
consistent with the requirements of federal laws and regulations.
Assets of the 401k and deferred benefit pension plans are invested in securities
of governmental agencies, common stocks, insurance contracts and mutual funds.
F-29
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
12. Pension Plans (continued)
The following table sets forth the funded status of Holdings' defined benefit
plan and the amount recognized in Holdings' consolidated balance sheets as of
February 27, 1999 and February 28, 1998 (in thousands):
1999 1998
-----------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 2,217 $ 1,878
Service cost 120 94
Interest cost 170 149
Amendments 194 --
Actuarial loss 161 134
Benefits paid (57) (38)
-----------------------
Benefit obligation at end of year 2,805 2,217
-----------------------
Change in plan assets
Fair value of plan assets at beginning of year 2,665 2,081
Actual return on plan assets 210 408
Employer contributions 165 214
Benefits paid (57) (38)
-----------------------
Fair value of plan assets at end of year 2,983 2,665
-----------------------
Reconciliation of funded status of the plan
Funded status of the Plan 178 448
Unrecognized net actuarial loss 198 29
Unrecognized net transition liability 18 25
Unrecognized prior service cost 306 139
-----------------------
Net prepaid asset $ 700 641
=======================
F-30
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
12. Pension Plans (continued)
Fiscal Year
1999 1998 1997
-----------------------------------------
Weighted average assumptions
Discount rate 7.25% 7.50% 8.00%
Expected return on plan assets 9.00 9.00 9.00
A summary of Holdings' net periodic pension cost related to the defined benefit
plan for fiscal years 1999, 1998 and 1997 is as follows (in thousands):
Fiscal Year
1999 1998 1997
-------------------------------
Service cost--benefits earned during the year $ 120 $ 94 $ 85
Interest cost on projected benefit obligation 170 149 136
Expected return on plan assets (218) (181) (145)
Net amortization and deferral 33 25 29
------------------------------
Net pension cost $ 105 $ 87 $ 105
==============================
13. Extraordinary Item
In connection with the Recapitalization (see Note 1), Holdings recorded an
extraordinary loss of $2,308,000, net of an income tax benefit of $1,495,000,
related to the write-off of the unamortized balance of deferred financing costs
associated with a prior refinancing.
14. Lease Commitments
Holdings leases certain machinery, office and manufacturing facilities for
periods up to five years under operating lease agreements. Total rent expense
for fiscal 1999, 1998 and 1997 was approximately $3,299,000, $2,718,000 and
$1,624,000, respectively.
F-31
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
14. Lease Commitments (continued)
Future minimum lease payments under all noncancellable operating leases at
February 27, 1999 are as follows (in thousands):
Fiscal years ending:
2000 $ 2,641
2001 1,846
2002 1,233
2003 1,009
2004 848
Thereafter 2,561
-------
Total minimum lease payments $10,138
=======
15. Other Assets
Other assets as of February 27, 1999 and February 28, 1998 consist of the
following, net of related amortization (in thousands):
1999 1998
------------------------
Non-compete agreements $ 4,219 $ --
Trademarks and intellectual property 9,903 --
Deferred financing costs 10,230 10,785
Other 898 704
------------------------
$25,250 $11,489
========================
16. Other Operating Expenses
Other operating expenses includes the amortization of deferred financing costs,
amortization of goodwill and management fees.
F-32
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
17. Segment Information
In fiscal 1999, Holdings adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information" ("FAS
131"). FAS 131 superseded FASB Statement No. 14, "Financial Reporting for
Segments of a Business Enterprise". FAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. FAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of FAS 131 did not affect
results of operations or financial position, but did affect the disclosure of
segment information. Prior year information has been changed to conform to the
provisions of FAS 131.
Holdings is organized into two primary product categories: (a) zone heating
products, which include indoor room heaters, hearth products and outdoor heaters
and (b) specialty products, which include specialty tools and home security
products.
Holdings evaluates performance and allocates resources based on the reportable
segments operating profit or loss. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies (see Note 3).
Corporate expense includes corporate headquarters staff, a modest portion of the
cost of certain support functions, including accounting, management information
systems, human resources and treasury and the amortization of deferred financing
costs.
Identifiable assets are those assets of Holdings that are identified with the
operations in each product segment. Corporate assets include primarily cash,
deferred income taxes and deferred financing costs.
F-33
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
17. Segment Information (continued)
Operational results and other financial data for the two business segments for
the years ended February 27, 1999, February 28, 1998 and March 1, 1997 are
presented below (in thousands):
Zone
Heating Specialty General
Products Products Corporate Total
--------------------------------------------
Year ended February 27, 1999
Net sales $177,815 $139,422 $ -- $317,237
Operating profit (loss) 19,239 15,412 (4,285) 30,366
Depreciation and amortization 4,904 2,072 1,611 8,587
Segment assets (2) 107,227 81,029 15,096 203,352
Capital expenditures 3,675 694 93 4,462
Year ended February 28, 1998 (1)
Net sales 173,753 50,416 -- 224,169
Operating profit (loss) 28,428 5,435 (5,371) 28,492
Depreciation and amortization 3,143 481 1,088 4,712
Segment assets (1) 68,650 71,128 15,858 155,636
Capital expenditures 4,619 744 112 5,475
Year ended March 1, 1997
Net sales 167,625 41,480 -- 209,105
Operating profit (loss) 35,079 3,568 (5,689) 32,958
Depreciation and amortization 3,262 288 986 4,536
Segment assets 61,611 19,107 11,266 91,984
Capital expenditures 2,432 332 6 2,770
(1) Reflects acquisition of home security business, which was acquired on
February 4, 1998--see Note 4.
(2) Reflects acquisitions of FMI and UHI, which were acquired on August 19,
1998--see Note 4.
F-34
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
17. Segment Information (continued)
Financial information relating to Holdings' operations by geographic area is as
follows (in thousands):
Net Sales
-----------------------------------------
Fiscal Year Ended
February 27, February 28, March 1,
1999 1998 1997
-----------------------------------------
United States $294,581 $206,194 $191,917
Foreign 22,656 17,975 17,188
----------------------------------------
Consolidated $317,237 $224,169 $209,105
========================================
Long-Lived Assets
-----------------------------------------
February 27, February 28, March 1,
1999 1998 1997
-----------------------------------------
United States $122,086 $ 87,878 $ 56,108
Foreign 679 600 244
----------------------------------------
Consolidated $122,765 $ 88,478 $ 56,352
========================================
18. Related Party Transactions
Pursuant to a monitoring and oversight agreement, Holdings paid Hicks Muse
$237,000 and $211,000 in fiscal years 1998 and 1997, respectively, for certain
financial advisory services provided to Holdings.
F-35
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
18. Related Party Transactions (continued)
Pursuant to the 1998 Recapitalization, Holdings entered into management
agreements with J.W. Childs Associates L.P. and UBS Capital Management Inc. (the
"Advisors") which provide for aggregate annual management fees of $240,000 as
consideration for ongoing consulting and management advisory services. Under
these agreements, the Advisors were paid an aggregate of $284,000 and $81,000 in
fiscal 1999 and 1998, respectively. Payments may be made to the extent permitted
by the Credit Facility and Indenture. The agreements extend for a period of five
years upon which they shall automatically extend for successive periods of one
year each, unless terminated by Holdings or the Advisors.
19. Litigation
Holdings is subject to legal proceedings and claims which arise in the ordinary
course of its business and have not been formally adjudicated. In the opinion of
management, settlement of these actions when ultimately concluded will not have
a material adverse effect on the results of operations, cash flows or financial
condition of Holdings.
20. Summarized Financial Information of DESA International, Inc. (Unaudited)
DESA International, Inc. is the issuer of the 9 7/8% Senior Subordinated Notes.
Holdings has not presented separate financial statements and other disclosures
concerning DESA International, Inc. because management has determined that such
information is not material to holders of the Senior Subordinated Notes.
F-36
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
20. Summarized Financial Information of DESA International, Inc. (Unaudited)
(continued)
The following summarized consolidated financial information is being provided
for DESA International, Inc. as of February 27, 1999 and February 28, 1998 and
for the fiscal years ended February 27, 1999, February 28, 1998 and March 1,
1997.
Summarized consolidated balance sheet information (in thousands):
February 27, February 28,
1999 1998
--------------------------
Assets
Current assets $ 187,892 $ 189,040
Net fixed assets 15,633 13,559
Goodwill, net 80,744 62,259
Deferred tax assets 598 --
Other assets 25,250 11,489
-----------------------
$ 310,117 $ 276,347
=======================
Liabilities and stockholders' equity (deficit)
Current liabilities $ 51,939 $ 39,519
Long-term debt 153,000 131,105
9 7/8% Senior Subordinated Notes 130,000 130,000
Deferred tax liabilities -- 1,781
Other liabilities 599 433
Stockholders' equity (deficit) (25,421) (26,491)
-----------------------
$ 310,117 $ 276,347
=======================
F-37
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
20. Summarized Financial Information of DESA International, Inc. (Unaudited)
(continued)
Summarized consolidated statements of operations information (in thousands):
Fiscal year ended
February 27, February 28, March 1,
1999 1998 1997
--------------------------------------------
Net sales $317,237 $224,169 $209,105
Income before income taxes 2,698 11,198 18,482
Net income 1,532 3,345 (1) 10,749
(1) Includes an extraordinary loss of $2,308,000, net of an income tax benefit
of $1,405,000
21. Subsequent Events
Amendment to Credit Facility
On May 25, 1999, Holdings entered into Amendment and Waiver No. 4 to the Loan
Documents (the "Amendment"), an amendment to their Credit Facility, which waives
Holdings' failure to comply with the Clean-Up Period occurring between January
1, 1999 and May 30, 1999 and their failure to comply with the requirements of
the Total Leverage Ratio at February 27, 1999.
As part of the Amendment, Holdings' interest rates on all existing outstanding
borrowings under the credit facility were increased by 1/4%. In addition, the
Amendment modified the financial covenants, including the total leverage ratio,
the fixed charge coverage ratio and the interest coverage ratio. The Amendment
also modified the Clean-Up Period requirement to provide that during the
Clean-Up Period, the sum of Working Capital advances, Letter of Credit advances
and Swing Line loan advances outstanding shall not exceed $30,000,000 for any
Clean-Up Period. The Amendment further provides for an additional $15,000,000
unsecured line of credit to DESA (the "Childs Guaranteed Line of Credit") from
NationsBank, N.A., which is unconditionally and irrevocably guaranteed by J.W.
Childs Equity Partners, L.P., as evidenced by a promissory note issued by DESA
to NationsBank, N.A. The Childs Guaranteed Line of Credit has a maturity date of
May 31, 2001 and bears interest at the prime rate plus 0.25%, payable quarterly,
or based on LIBOR plus 1.75%, payable at the end of each
F-38
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
21. Subsequent Events (continued)
Amendment to Credit Facility (continued)
interest period. In connection with the Amendment, Holdings paid an amendment
fee of approximately $550,000 which will be deferred and amortized over the
remaining life of the Credit Facility.
In conjunction with the Amendment, the Advisors have agreed to defer any
obligation of Holdings to pay management fees under their respective management
agreements until Holdings' fiscal year 2000 financial statements have been
delivered to the Lenders. At such time, Holdings will be obligated to pay such
management fees only if the Consolidated EBITDA, as defined, of Holdings for
fiscal year 2000 is greater than $51,600,000 and no Default, as defined, has
occurred under the Credit Agreement, as amended.
F-39
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - Valuation and Qualifying
Accounts DESA International, Inc.
February 27, 1999
COL. A COL. B COL. C COL. D COL. E
-------------------------------------
Additions
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to Deductions - Balance at
Description Beginning of Period Costs and Expenses Other Accounts Describe End of Period
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended February 27, 1999:
Deducted from assets accounts:
Allowance for doubtful accounts $1,517,000 $ 49,000 (2) $202,000 (1) $140,000 $1,628,000
Year Ended February 28,1998:
Deducted from asset accounts:
Allowance for doubtful accounts 936,000 (143,000)(3) 747,000 (1) 23,000 1,517,000
Year Ended March 1,1997:
Deducted from assets accounts:
Allowance for doubtful accounts 1,108,000 (63,000) (1) 109,000 936,000
- -------------------------------
<FN>
(1) Uncollectible accounts written off, net of recovery.
(2) Part of net assets acquired from FMI.
(3) Part of net assets acquired from Heath Holding Corp.
</FN>
</TABLE>
EXHIBIT 10.37
CREDIT AGREEMENT
Dated as of May 26, 1999
DESA INTERNATIONAL, INC., a Delaware corporation (the
"Borrower"), and NATIONSBANK, N.A. (together with its successors and assigns,
the "Lender"), agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. Certain Defined Terms. Capitalized terms not
otherwise defined in this Agreement shall have the same meanings as specified
therefor in the Credit Agreement dated as of November 26, 1997 (as amended and
otherwise modified by Amendment and Waiver No. 1 dated as of January 23, 1998,
Letter Waiver No. 2 dated as of April 9, 1998, Amendment No. 3 to the Loan
Documents dated as of May 26, 1998 and Amendment and Waiver No. 4 to the Loan
Documents dated as of May 21, 1999, the "Existing Credit Agreement") among the
Borrower, Desa Holdings Corporation, as parent guarantor thereunder, the lender
parties party thereto, UBS Securities LLC, as a co-arranger and documentation
agent thereunder, Banc of America Securities LLC (formerly NationsBanc
Montgomery Securities LLC), as a co-arranger and syndication agent thereunder,
and NationsBank, N.A., as administrative agent for the lender parties
thereunder. As used in this Agreement, the following terms shall have the
following meanings (such meanings to be equally applicable to both the singular
and plural forms of the terms defined):
"Applicable Lending Office" means the Lender's Domestic
Lending Office in the case of a Base Rate Loan and the Lender's
Eurodollar Lending Office in the case of a Eurodollar Rate Loan.
"Available Assets" has the meaning specified in Section 8 of
the Guaranty.
"Base Rate" means a fluctuating interest rate per annum in
effect from time to time, which rate per annum shall at all times be
equal to the higher of:
(a) the rate of interest announced publicly by
NationsBank, N.A., in New York, New York, from time to time,
as the NationsBank prime rate; and
(b) 0.50% per annum above the Federal Funds Rate.
"Base Rate Loan" means a Loan that bears interest as provided
in Section 2.06(a)(i).
"Business Day" means a day of the year on which banks are not
required or authorized by law to close in New York City and, if the
applicable Business Day relates to any Eurodollar Rate Loans, on which
dealings are carried on in the London interbank market.
"Commitment" has the meaning specified in Section 2.01.
"Convert", "Conversion" and "Converted" each refers to a
conversion of Loans of one Type into Loans of the other Type pursuant
to Section 2.07 or 2.08.
"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be
given or time elapse or both.
<PAGE>
"Domestic Lending Office" means the office of the Lender
specified as its "Domestic Lending Office" opposite its name on
Schedule I hereto, or such other office of the Lender as the Lender may
from time to time specify to the Borrower.
"Effective Date" has the meaning specified in Section 3.01.
"Eurocurrency Liabilities" has the meaning assigned to that
term in Regulation D of the Board of Governors of the Federal Reserve
System, as in effect from time to time.
"Eurodollar Lending Office" means the office of the Lender
specified as its "Eurodollar Lending Office" opposite its name on
Schedule I hereto, or such other office of the Lender as the Lender may
from time to time specify to the Borrower.
"Eurodollar Rate" means, for any Interest Period for a
Eurodollar Rate Loan, an interest rate per annum equal to the rate per
annum obtained by dividing (a) the rate per annum appearing on page
3750 (or any successor page) of the Dow Jones Markets Telerate Screen
as the London interbank offered rate for deposits in U.S. dollars at
11:00 A.M. (London time) two Business Days before the first day of such
Interest Period and for a term comparable to such Interest Period;
provided that, if for any reason such rate is not available, the term
"Eurodollar Rate" shall mean, for any Interest Period for a Eurodollar
Rate Loan, the rate per annum appearing on Reuters Screen LIBO Page as
the London interbank offered rate for deposits in U.S. dollars at
approximately 11:00 A.M. (London time) two Business Days before the
first day of such Interest Period for a term comparable to such
Interest Period (and, if more than one rate is specified on Reuters
Screen LIBO Page at such time, the applicable rate shall be the
arithmetic mean of all such rates), by (b) a percentage equal to 100%
minus the Eurodollar Rate Reserve Percentage for such Interest Period.
"Eurodollar Rate Loan" means a Loan that bears interest as
provided in Section 2.06(a)(ii).
"Eurodollar Rate Reserve Percentage" means, for any Interest
Period for a Eurodollar Rate Loan, the reserve percentage applicable
two Business Days before the first day of such Interest Period under
regulations issued from time to time by the Board of Governors of the
Federal Reserve System (or any successor) for determining the maximum
reserve requirement (including, without limitation, any emergency,
supplemental or other marginal reserve requirement) for a member bank
of the Federal Reserve System in New York City with respect to
liabilities or assets consisting of or including Eurocurrency
Liabilities (or with respect to any other category of liabilities that
includes deposits by reference to which the interest rate on Eurodollar
Rate Loans is determined) having a term equal to such Interest Period.
"Events of Default" has the meaning specified in Section 5.01.
"Federal Funds Rate" means, for any period, a fluctuating
interest rate per annum equal for each day during such period to the
weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds
brokers, as published for such day (or, if such day is not a Business
Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any day that is a
Business Day, the average of the quotations for such day on such
transactions received by the Lender from three Federal funds brokers of
recognized standing selected by it.
"Guarantor" means J.W. Childs Equity Partners, L.P., a
Delaware limited partnership.
2
<PAGE>
"Guaranty" has the meaning specified in Section 3.01(e)(ii).
"Indemnified Party" has the meaning specified in Section
6.04(b).
"Interest Period" means, for each Eurodollar Rate Loan, the
period commencing on the date of such Eurodollar Rate Loan or the date
of the Conversion of any Base Rate Loan into such Eurodollar Rate Loan
and ending on the last day of the period selected by the Borrower
pursuant to the provisions below and, thereafter, each subsequent
period commencing on the last day of the immediately preceding Interest
Period and ending on the last day of the period selected by the
Borrower pursuant to the provisions below. The duration of each such
Interest Period shall be one week or one, two, three or six months, as
the Borrower may, upon notice received by the Lender not later than
12:00 Noon (Charlotte, North Carolina time) on the third Business Day
prior to the first day of such Interest Period, select; provided,
however, that:
(a) the Borrower may not select any Interest Period
that ends after the Termination Date;
(b) whenever the last day of any Interest Period
would otherwise occur on a day other than a Business Day, the
last day of such Interest Period shall be extended to occur on
the next succeeding Business Day, provided, however, that, if
such extension would cause the last day of such Interest
Period to occur in the next following calendar month, the last
day of such Interest Period shall occur on the next preceding
Business Day; and
(c) whenever the first day of any Interest Period
occurs on a day of an initial calendar month for which there
is no numerically corresponding day in the calendar month that
succeeds such initial calendar month by the number of months
equal to the number of months in such Interest Period, such
Interest Period shall end on the last Business Day of such
succeeding calendar month.
"Internal Revenue Code" means the Internal Revenue Code of
1986, as amended from time to time, and the regulations promulgated and
rulings issued thereunder.
"Loan" means a Loan by the Lender to the Borrower pursuant to
Article II, and refers to a Base Rate Loan or a Eurodollar Rate Loan
(each of which shall be a "Type" of Loan).
"LOC Documents" means, collectively, this Agreement, the Note
and the Guaranty.
"LOC Material Adverse Effect" means (a) a Material Adverse
Effect or (b) a material adverse effect on (i) the assets, business,
condition (financial or otherwise), operations, performance, properties
or prospects of the Borrower or the Guarantor, (ii) the rights and
remedies of the Lender under any LOC Document or (iii) the ability of
any LOC Party to perform its Obligations under any LOC Document to
which it is or is to be a party.
"LOC Parties" means the Borrower and the Guarantor.
"Note" means a promissory note of the Borrower payable to the
order of the Lender, in substantially the form of Exhibit A hereto,
evidencing the aggregate indebtedness of the Borrower to the Lender
resulting from the Loans made by the Lender hereunder.
"Notice of Loan" has the meaning specified in Section 2.02.
3
<PAGE>
"Other Taxes" has the meaning specified in Section 2.12(b).
"Taxes" has the meaning specified in Section 2.12(a).
"Termination Date" means the earlier of (a) May 31, 2001 and
(b) the date of termination in whole of the Commitment pursuant to
Section 2.04 or 5.01.
SECTION 1.02. Computation of Time Periods. In this Agreement,
in the computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each mean "to but excluding".
ARTICLE II
AMOUNTS AND TERMS OF THE LOANS
SECTION 2.01. The Loans. The Lender agrees, on the terms and
conditions hereinafter set forth, to make Loans to the Borrower from time to
time on any Business Day during the period from the Effective Date until the
Termination Date in an aggregate amount not to exceed $15,000,000 (the
"Commitment"). Each Loan shall be in a minimum amount of $250,000 or an integral
multiple of $100,000 in excess thereof. Within the limits of the Commitment, the
Borrower may borrow under this Section 2.01, prepay pursuant to Section 2.09 and
reborrow under this Section 2.01.
SECTION 2.02. Making the Loans. (a) Each Loan shall be made on
notice, given not later than 12:00 Noon (Charlotte, North Carolina time) on the
third Business Day prior to the date of the proposed Loan in the case of a
Eurodollar Rate Loan, or the first Business Day prior to the date of the
proposed Loan in the case of a Base Rate Loan, by the Borrower to the Lender.
Each such notice of a Loan (a "Notice of Loan") shall be by telephone, confirmed
immediately in writing, or telecopier or telex, specifying therein the requested
(i) date of such Loan, (ii) Type of such Loan, (iii) aggregate amount of such
Loan, and (iv) in the case of a Eurodollar Rate Loan, initial Interest Period
for such Loan. Upon fulfillment of the applicable conditions set forth in
Article III, the Lender will make such funds available to the Borrower at its
Applicable Lending Office.
(b) Anything in subsection (a) above to the contrary
notwithstanding, (i) the Borrower may not select Eurodollar Rate Loans for any
Loan if the amount of such Loan is less than $250,000 or if the obligation of
the Lender to make Eurodollar Rate Loans shall then be suspended pursuant to
Section 2.07 or 2.10(c) and (ii) no more than five separate Eurodollar Rate
Loans may be outstanding at any time.
(c) Each Notice of Loan shall be irrevocable and binding on
the Borrower. In the case of any Loan that the related Notice of Loan specifies
it to be a Eurodollar Rate Loan, the Borrower shall indemnify the Lender against
any loss, cost or expense incurred by the Lender as a result of any failure to
fulfill on or before the date specified in the Notice of Loan for such Loan the
applicable conditions set forth in Article III and if, as a result of such
failure, the related Loan is not made on such date, the Borrower will pay to the
Lender an amount equal to the present value (calculated in accordance with this
Section 2.02(c)) of interest for the Interest Period specified in such Notice of
Loan on the amount of such Loan, at a rate per annum equal to the excess of (a)
the Eurodollar Rate that would have been in effect for such Interest Period over
(b) the Eurodollar Rate applicable on the date of determination to a deemed
Interest Period ending on the last day of such Interest Period. The present
value of such additional interest shall be calculated by discounting the amount
of such interest for each day in the Interest Period specified in such Notice of
Loan from such day to the date of such repayment or termination at an interest
rate per annum equal to the interest rate determined pursuant to the immediately
preceding sentence, and by adding all such amounts for all such days during such
4
<PAGE>
period. The determination by the Lender of such amount of interest shall be
conclusive and binding, absent manifest error.
SECTION 2.03. Commitment Fee. The Borrower agrees to pay to
the Lender a commitment fee on the average daily unused portion of the
Commitment at a rate per annum equal to 0.375%, payable in arrears quarterly on
the last Business Day of each February, May, August and November, commencing May
31, 1999, and on the Termination Date.
SECTION 2.04. Termination or Reduction of the Commitments. The
Borrower shall have the right, upon at least five Business Days' notice to the
Lender, to terminate in whole or reduce in part the unused portion of the
Commitment, provided that each partial reduction shall be in the minimum amount
of $250,000 or an integral multiple of a $100,000 in excess thereof.
SECTION 2.05. Repayment. The Borrower shall repay to the
Lender on the Termination Date the aggregate principal amount of the Loans then
outstanding.
SECTION 2.06. Interest. (a) Scheduled Interest. The Borrower
shall pay interest on the unpaid principal amount of each Loan from the date of
such Loan until such principal amount shall be paid in full, at the following
rates per annum:
(i) Base Rate Loans. During such periods as such Loan is a
Base Rate Loan, a rate per annum equal at all times to the sum of (x)
the Base Rate in effect from time to time plus (y) 0.25% per annum,
payable in arrears quarterly on the last Business Day of each February,
May, August and November during such periods and on the date such Base
Rate Loan shall be Converted or paid in full.
(ii) Eurodollar Rate Loans. During such periods as such Loan
is a Eurodollar Rate Loan, a rate per annum equal at all times during
each Interest Period for such Loan to the sum of (x) the Eurodollar
Rate for such Interest Period for such Loan plus (y) 1.75% per annum,
payable in arrears on the last day of such Interest Period and, if such
Interest Period has a duration of more than three months, on each day
that occurs during such Interest Period every three months from the
first day of such Interest Period and on the date such Eurodollar Rate
Loan shall be Converted or paid in full.
(b) Default Interest. Upon the occurrence and during the
continuance of a Default under Section 5.01(a) or 5.01(f), the Borrower shall
pay interest on (i) the unpaid principal amount of each Loan, payable in arrears
on the dates referred to in clause (a)(i) or (a)(ii) above, at a rate per annum
equal at all times to 2% per annum above the rate per annum required to be paid
on such Loan pursuant to clause (a)(i) or (a)(ii) above and (ii) to the fullest
extent permitted by law, the amount of any interest, fee or other amount payable
hereunder that is not paid when due, from the date such amount shall be due
until such amount shall be paid in full, payable in arrears on the date such
amount shall be paid in full and on demand, at a rate per annum equal at all
times to 2% per annum above the rate per annum required to be paid, in the case
of interest, on the Type of Loan on which such interest has accrued pursuant to
clause (a)(i) or (a)(ii) above, and, in all other cases, on Base Rate Loans
pursuant to clause (a)(i) above.
SECTION 2.07. Interest Rate Determination. (a) The Lender
shall give prompt notice to the Borrower of the applicable interest rate
determined by the Lender for purposes of Section 2.06(a)(i) or (ii).
(b) If, with respect to any Eurodollar Rate Loans, the Lender
determines that the Eurodollar Rate for any Interest Period for such Loans will
not adequately reflect the cost to the Lender of making, funding or maintaining
the Eurodollar Rate Loans for such Interest Period, the Lender shall forthwith
so notify the Borrower, whereupon (i) each such Eurodollar Rate Loan will
automatically, on the last day of
5
<PAGE>
the then existing Interest Period therefor, Convert into a Base Rate Loan, and
(ii) the obligation of the Lender to make, or to Convert Loans into, Eurodollar
Rate Loans shall be suspended until the Lender shall notify the Borrower that
the circumstances causing such suspension no longer exist.
(c) If the Borrower shall fail to select the duration of any
Interest Period for any Eurodollar Rate Loans in accordance with the provisions
contained in the definition of "Interest Period" in Section 1.01, the Lender
will forthwith so notify the Borrower and such Loans will automatically, on the
last day of the then existing Interest Period therefor, Convert into Base Rate
Loans.
(d) On the date on which the unpaid principal amount of any
Eurodollar Rate Loan shall be reduced, by payment or prepayment or otherwise, to
less than $250,000, such Loans shall automatically Convert into Base Rate Loans.
(e) Upon the occurrence and during the continuance of any
Default under Section 5.01(a) or 5.01(f) or any Event of Default, (i) each
Eurodollar Rate Loan will automatically, on the last day of the then existing
Interest Period therefor, Convert into a Base Rate Loan and (ii) the obligation
of the Lender to make, or to Convert Loans into, Eurodollar Rate Loans shall be
suspended.
SECTION 2.08. Optional Conversion of Loans. The Borrower may
on any Business Day, upon notice given to the Lender not later than 12:00 Noon
(Charlotte, North Carolina time) on the third Business Day prior to the date of
the proposed Conversion and subject to the provisions of Sections 2.07 and
2.10(c), Convert any Loan of one Type into a Loan of the other Type; provided,
however, that any Conversion of a Eurodollar Rate Loan into a Base Rate Loan
shall be made only on the last day of the Interest Period for such Eurodollar
Rate Loan then in effect, any Conversion of a Base Rate Loan into a Eurodollar
Rate Loan shall be in an amount not less than the minimum amount specified in
Section 2.02(b) and no Conversion of any Loan shall result in more separate
Loans than permitted under Section 2.02(b). Each such notice of a Conversion
shall, within the restrictions specified above, specify (i) the date of such
Conversion, (ii) the Loan to be Converted, and (iii) if such Conversion is into
a Eurodollar Rate Loan, the duration of the initial Interest Period for such
Loan. Each notice of Conversion shall be irrevocable and binding on the
Borrower.
SECTION 2.09. Optional Prepayments. The Borrower may, upon at
least one Business Day's notice in the case of Base Rate Loans and three
Business Days' notice in the case of Eurodollar Rate Loans, in each case to the
Lender received not later than 12:00 Noon (Charlotte, North Carolina time)
stating the proposed date and aggregate principal amount of the prepayment, and
if such notice is given the Borrower shall, prepay the outstanding principal
amount of the Loans in whole or in part, together with accrued interest to the
date of such prepayment on the aggregate principal amount so prepaid; provided,
however, that (x) each partial prepayment shall be in a minimum aggregate
principal amount of $250,000 or an integral multiple of $100,000 in excess
thereof and (y) if any prepayment of a Eurodollar Rate Loan shall be made other
than on the last day of an Interest Period therefor, the Borrower shall also pay
any amounts owing pursuant to Section 6.04(c).
SECTION 2.10. Increased Costs, Etc. (a) If, due to either (i)
the introduction of or any change in or in the interpretation of any law or
regulation or (ii) the compliance with any guideline or request from any central
bank or other governmental authority (whether or not having the force of law),
there shall be any increase in the cost to the Lender of agreeing to make or of
making, funding or maintaining Eurodollar Rate Loans (excluding for purposes of
this Section 2.10 any such increased costs resulting from (i) Taxes or Other
Taxes (as to which Section 2.12 shall govern) and (ii) changes in the basis of
taxation of overall net income or overall gross income by the United States or
by the foreign jurisdiction or state under the laws of which the Lender is
organized or has its Applicable Lending Office or any political subdivision
thereof), then the Borrower shall from time to time, upon demand by the Lender,
pay to the Lender additional amounts
6
<PAGE>
sufficient to compensate the Lender for such increased cost; provided, however,
that the Borrower shall not be responsible for costs under this Section 2.10(a)
arising more than 90 days prior to receipt by the Borrower of the certificate
from the Lender pursuant to this Section 2.10(a) with respect to such costs; and
provided further that the Lender claiming additional amounts under this Section
2.10(a) agrees to use reasonable efforts (consistent with its internal policy
and legal and regulatory restrictions) to designate a different Applicable
Lending Office if the making of such a designation would avoid the need for, or
reduce the amount of, such increased cost that may thereafter accrue and would
not, in the reasonable judgment of the Lender, be otherwise disadvantageous to
the Lender. A certificate as to the amount of such increased cost (together with
a schedule setting forth in reasonable detail the calculation thereof) submitted
to the Borrower by the Lender, shall be conclusive and binding for all purposes,
absent manifest error. In determining such amount, the Lender may use any
reasonable averaging and attribution methods.
(b) If the Lender determines that compliance with any law or
regulation or any guideline or request from any central bank or other
governmental authority (whether or not having the force of law) affects or would
affect the amount of capital required or expected to be maintained by the Lender
or any corporation controlling the Lender and that the amount of such capital is
increased by or based upon the existence of the Lender's commitment to lend
hereunder and other commitments of this type, then, upon demand by the Lender,
the Borrower shall pay to the Lender, from time to time as specified by the
Lender, additional amounts sufficient to compensate the Lender or such
corporation in the light of such circumstances, to the extent that the Lender
reasonably determines such increase in capital to be allocable to the existence
of the Lender's commitment to lend hereunder; provided, however, that the
Borrower shall not be responsible for costs under this Section 2.10(b) arising
more than 90 days prior to receipt by the Borrower of the certificate from the
Lender pursuant to this Section 2.10(b) with respect to such costs. A
certificate as to such amounts (together with a schedule setting forth in
reasonable detail the calculation thereof) submitted to the Borrower by the
Lender shall be conclusive and binding for all purposes, absent manifest error.
In determining such amount, the Lender may use any reasonable averaging and
attribution methods.
(c) Notwithstanding any other provision of this Agreement, if
the introduction of or any change in or in the interpretation of any law or
regulation shall make it unlawful, or any central bank or other governmental
authority shall assert that it is unlawful, for the Lender or its Eurodollar
Lending Office to perform its obligations hereunder to make Eurodollar Rate
Loans or to continue to fund or maintain Eurodollar Rate Loans hereunder, then,
on notice thereof and demand therefor by the Lender to the Borrower, (i) each
Eurodollar Rate Loan will automatically, upon such demand, Convert into a Base
Rate Loan and (ii) the obligation of the Lender to make, or to Convert Loans
into, Eurodollar Rate Loans shall be suspended until the Lender shall notify the
Borrower that the Lender has determined that the circumstances causing such
suspension no longer exist; provided, however, that, before making any such
demand, the Lender agrees to use reasonable efforts (consistent with its
internal policy and legal and regulatory restrictions) to designate a different
Eurodollar Lending Office if the making of such a designation would allow the
Lender or its Eurodollar Lending Office to continue to perform its obligations
to make Eurodollar Rate Loans or to continue to fund or maintain Eurodollar Rate
Loans and would not, in the judgment of the Lender, be otherwise disadvantageous
to the Lender.
SECTION 2.11. Payments and Computations. (a) The Borrower
shall make each payment hereunder and under the Note, irrespective of any right
of counterclaim or set-off, not later than 12:00 Noon (Charlotte, North Carolina
time) on the day when due in U.S. dollars to the Lender for the account of its
Applicable Lending Office, in same day funds.
(b) The Borrower hereby authorizes the Lender, if and to the
extent payment owed to the Lender is not made when due hereunder or under the
Note, to charge from time to time against any or all of the Borrower's accounts
with the Lender any amount so due. The Lender hereby agrees to notify the
Borrower
7
<PAGE>
promptly after any such setoff and application shall be made by the Lender;
provided, however, that the failure to give such notice shall not affect the
validity of such charge.
(c) All computations of interest and fees shall be made by the
Lender on the basis of a year of 360 days, in each case for the actual number of
days (including the first day but excluding the last day) occurring in the
period for which such interest or fees are payable. Each determination by the
Lender of an interest rate or fee hereunder shall be conclusive and binding for
all purposes, absent manifest error.
(d) Whenever any payment hereunder or under the Note shall be
stated to be due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of payment of interest or commitment fees,
as the case may be; provided, however, that, if such extension would cause
payment of interest on or principal of Eurodollar Rate Loans to be made in the
next following calendar month, such payment shall be made on the next preceding
Business Day.
SECTION 2.12. Taxes. (a) Any and all payments by the Borrower
hereunder or under the Note shall be made, in accordance with Section 2.11, free
and clear of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities with
respect thereto, excluding, in the case of the Lender, taxes that are imposed on
its overall net income by the United States and taxes that are imposed on its
overall net income (and franchise taxes imposed in lieu thereof) by the state or
foreign jurisdiction under the laws of which the Lender is organized or any
political subdivision thereof and taxes that are imposed on its overall net
income (and franchise taxes imposed in lieu thereof) by the state or foreign
jurisdiction of the Lender's Applicable Lending Office or any political
subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions,
charges, withholdings and liabilities in respect of payments hereunder and under
the Note being hereinafter referred to as "Taxes"). If the Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder or under the Note to the Lender, (i) the sum payable shall be
increased as may be necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
2.12) the Lender receives an amount equal to the sum it would have received had
no such deductions been made, (ii) the Borrower shall make such deductions and
(iii) the Borrower shall pay the full amount deducted to the relevant taxation
authority or other governmental authority in accordance with applicable law.
(b) In addition, the Borrower hereby agrees to pay any present
or future stamp, documentary, excise, property or similar taxes, charges or
levies that arise from any payment made hereunder or under the Note or from the
execution, delivery or registration of, performing under, or otherwise with
respect to, this Agreement or the Note (hereinafter referred to as "Other
Taxes").
(c) The Borrower shall indemnify the Lender for and hold it
harmless against the full amount of Taxes and Other Taxes, and the full amount
of taxes of any kind imposed by any jurisdiction on amounts payable under this
Section 2.12, imposed on or paid by the Lender and any liability (including
penalties, additions to tax, interest and expenses) arising therefrom or with
respect thereto. This indemnification shall be made within 30 days from the date
on which the Lender makes written demand therefor.
(d) Within 30 days after the date of any payment of Taxes, the
Borrower shall furnish to the Lender, at its address referred to in Section
6.02, the original or a certified copy of a receipt evidencing such payment, to
the extent such a receipt is issued therefor, or other written proof of payment
thereof that is reasonably satisfactory to the Lender. In the case of any
payment hereunder or under the Note by or on behalf of the Borrower through an
account or branch outside the United States or by or on behalf of the Borrower
by a payor that is not a United States person, if the Borrower determines that
no Taxes are payable in respect
8
<PAGE>
thereof, the Borrower shall furnish, or shall cause such payor to furnish, to
the Lender, at its address referred to in Section 6.02, an opinion of counsel
acceptable to the Lender stating that such payment is exempt from Taxes. For
purposes of this subsection (d) and subsection (e) of this Section 2.14, the
terms "United States" and "United States person" shall have the meanings
specified in Section 7701 of the Internal Revenue Code.
SECTION 2.15. Use of Proceeds. The proceeds of the Loans shall
be available (and the Borrower agrees that it shall use such proceeds) solely
(i) to provide working capital from time to time to the Borrower and its
Subsidiaries and (ii) if and to the extent necessary to maintain the minimum
Fixed Charge Coverage Ratio for any Measurement Period set forth in Section
5.04(b) of the Existing Credit Agreement and incorporated by reference herein
under Section 4.01, to pay or prepay Term Advances, Acquisition Advances and/or
Acquisition B Advances outstanding from time to time under the Existing Credit
Agreement.
ARTICLE III
CONDITIONS TO EFFECTIVENESS AND LENDING
SECTION 3.01. Conditions Precedent to Effectiveness of Section
2.01. Section 2.01 of this Agreement shall become effective on and as of the
first date (the "Effective Date") on which the following conditions precedent
have been satisfied:
(a) The Lender shall have received a true and complete copy of
Amendment and Waiver No. 4 to the Existing Credit Agreement dated as of
May 25, 1999. All of the conditions precedent to the effectiveness of
such Amendment and Waiver No. 4 shall have been satisfied or shall be
satisfied concurrently with the effectiveness of this Agreement.
(b) All governmental and third party consents and approvals
necessary in connection with any LOC Document or any of the
transactions contemplated thereby shall have been obtained (without the
imposition of any conditions that are not acceptable to the Lender) and
shall remain in effect, and no law or regulation shall be applicable in
the reasonable judgment of the Lender that restrains, prevents or
imposes materially adverse conditions upon any LOC Document or any of
the transactions contemplated thereby.
(c) The Borrower shall have paid all accrued fees and expenses
of the Lender (including the accrued fees and expenses of counsel to
the Lender).
(d) On the Effective Date, the following statements shall be
true and the Lender shall have received a certificate signed by a duly
authorized officer of the Borrower, dated the Effective Date, stating
that:
(i) The representations and warranties contained in,
and incorporated by reference from the Existing Credit
Agreement into, this Agreement and the other LOC Documents are
correct in all material respects on and as of the Effective
Date (except (i) for any such representation and warranty
that, by its terms, refers to a specific date other than the
Effective Date, in which case as of such specific date, (ii)
that the Consolidated financial statements of the Parent
Guarantor and its Subsidiaries referred to in Section 4.01(f)
of the Existing Credit Agreement shall be deemed to refer to
the Consolidated financial statements of the Parent Guarantor
and its Subsidiaries most recently delivered to the Lender on
or prior to the Effective Date and (iii) that the projected
Consolidated financial statements of the Parent Guarantor and
its Subsidiaries referred to in Section 4.01(h) of the
Existing Credit Agreement shall be deemed to refer to the
projected Consolidated financial statements of the
9
<PAGE>
Parent Guarantor and its Subsidiaries most recently delivered
to the Lender on or prior to the Effective Date), and
(ii) No event has occurred and is continuing that
constitutes a Default.
(e) The Lender shall have received on or before the Effective
Date the following, each dated such day and in form and substance
satisfactory to the Lender:
(i) The Note to the order of the Lender.
(ii) A guaranty in favor of the Lender (as amended,
supplemented or other wise modified from time to time in
accordance with its terms, the "Guaranty"), duly executed by
the Guarantor.
(iii) Certified copies of the resolutions of the
Board of Directors of the Borrower and of the Guarantor
approving this Agreement, the Note and the Guaranty, and of
all documents evidencing other necessary corporate action and
governmental approvals, if any, with respect to this
Agreement, the Note and the Guaranty.
(iv) A certificate of the Secretary or an Assistant
Secretary of each of the Borrower and the Guarantor certifying
the names and true signatures of the officers of the Borrower
or the Guarantor, as the case may be, authorized to sign the
LOC Documents to which it is or is to be a party and the other
documents to be delivered in connection herewith.
(v) A favorable opinion of Sullivan & Worcester,
counsel for the Guarantor and the Parent Guarantor and its
Subsidiaries.
SECTION 3.02. Conditions Precedent to Each Loan. The
obligation of the Lender to make a Loan shall be subject to the conditions
precedent that the Effective Date shall have occurred and on the date of such
Loan (a) the following statements shall be true (and each of the giving of the
applicable Notice of Loan and the acceptance by the Borrower of the proceeds of
such Loan shall constitute a representation and warranty by the Borrower that
both on the date of such notice and on the date of such Loan such statements are
true):
(i) the representations and warranties contained in, and
incorporated by reference from the Existing Credit Agreement into, this
Agreement and the other LOC Documents are correct in all material
respects on and as of the date of such Loan, before and after giving
effect to such Loan and to the application of the proceeds therefrom,
as though made on and as of such date (except (i) for any such
representation and warranty that, by its terms, refers to a specific
date other than date of such Loan, in which case as of such specific
date, (ii) that the Consolidated financial statements of the Parent
Guarantor and its Subsidiaries referred to in Section 4.01(f) of the
Existing Credit Agreement shall be deemed to refer to the Consolidated
financial statements of the Parent Guarantor and its Subsidiaries most
recently delivered to the Lender on or prior to the date of such Loan
and (iii) that the projected Consolidated financial statements of the
Parent Guarantor and its Subsidiaries referred to in Section 4.01(h) of
the Existing Credit Agreement shall be deemed to refer to the projected
Consolidated financial statements of the Parent Guarantor and its
Subsidiaries most recently delivered to the Lender on or prior to the
date of such Loan), and
(ii) no event has occurred and is continuing, or would result
from such Loan or from the application of the proceeds therefrom, that
constitutes a Default;
10
<PAGE>
and (b) the Lender shall have received (i) a certificate of the Guarantor,
signed by a duly authorized officer thereof, certifying that the Guarantor has
Available Assets on such date in excess of 105% of the aggregate principal
amount of all Loans outstanding on such date, after giving effect to such Loan
and to the application of proceeds therefrom, and (ii) such other approvals,
opinions or documents as the it shall have reasonably requested.
ARTICLE IV
INCORPORATION BY REFERENCE
SECTION 4. 01 Incorporation by Reference. (a) All of the
representations and warranties and covenants of the Existing Credit Agreement
(including, without limitation, all defined terms used therein and exhibits and
schedules to the Existing Credit Agreement referred to therein) are specifically
incorporated herein by reference with the same force and effect as if the same
were set out in this Agreement in full. Except as otherwise provided herein:
(i) all references in such incorporated provisions to the
"Administrative Agent" (other than in Sections 5.01(m), (n) and (o),
5.02(b)(iii) and 5.02(d)(v)), a "Lender Party", the "Lender Parties"
(other than in Sections 5.01(o), 5.02(b)(ii) and 5.02(e)(v)), a
"Lender" or the "Lenders" or words of similar import , to "this
Agreement", "hereof", "hereto" or "hereunder" or words of similar
import or to a "Note" or the "Notes", "thereof", "thereto" or
"thereunder" or words of similar import shall, without further
reference, mean and refer to the Lender under this Agreement, to this
Agreement and to the Note, respectively;
(ii) all references in such incorporated provisions to the
"Borrower" or to "Material Adverse Effect" shall, without further
reference, mean and refer to the Borrower hereunder and to LOC Material
Adverse Effect, respectively;
(iii) for purposes of the representations and warranties in
Sections 4.01(a), (b), (c), (d), (e), (i), (j), (k), (l) and (ee) of
the Existing Credit Agreement, all references in such incorporated
provisions to a "Loan Party" or words of similar import, to a "Loan
Document", the "Loan Documents", "thereof", "thereto" or "thereunder"
or words of similar import or to an "Advance", the "Advances", a
"Borrowing" or the "Borrowing" or words of similar import shall,
without further reference, mean and refer to a LOC Party, to a LOC
Document or the LOC Documents, as appropriate, and to a Loan or the
Loans, as appropriate, respectively;
(iv) for purposes of the first sentence of each of Sections
5.01, 5.02, 5.03 and 5.04, all references in such incorporated
provisions to an "Advance", a "Letter of Credit" or words of similar
import or to a "Commitment" or words of similar import shall, without
further reference, mean and refer to a Loan or the Commitment
hereunder, respectively; and
(v) except as otherwise provided in subclauses (i), (ii),
(iii) and (iv) above, the defined terms used in the incorporated
provisions shall have the meanings ascribed thereto in the Existing
Credit Agreement.
Similarly, to the extent any word or phrase is defined in this Agreement, any
such word or phrase appearing in any of the provisions so incorporated by
reference from the Existing Credit Agreement shall have the meaning given to it
in this Agreement. The incorporation by reference into this Agreement of certain
of the terms and provisions of the Existing Credit Agreement is for convenience
only, and this Agreement and the Existing Credit Agreement shall at all times
be, and be deemed to be and be treated as, separate and distinct
11
<PAGE>
loan obligations. The incorporation by reference into this Agreement of certain
of the terms and provisions of the Existing Credit Agreement shall not be
affected or impaired by any subsequent expiration or termination of the Existing
Credit Agreement.
(b) The Borrower, by its execution of this Agreement, hereby
agrees to amend and restate this Agreement at the request of the Lender to set
forth in full the provisions incorporated by reference herein from the Existing
Credit Agreement and to modify the terms and provisions of this Agreement, as
appropriate, to provide for the inclusion of additional lenders upon any
assignment or proposed assignment by the Lender of its rights and obligations
hereunder effected in accordance with Section 6.07. In addition, the Borrower
hereby agrees to notify the Lender promptly and in any event within three
Business Days of any amendment, supplement or other modification to the Existing
Credit Agreement and, at the request of the Lender, to enter into any amendment
or supplement to this Agreement proposed by the Lender to incorporate comparable
amendments, supplements or other modifications to this Agreement.
ARTICLE V
EVENTS OF DEFAULT
SECTION 5.01. Events of Default. If any of the following
events ("Events of Default") shall occur and be continuing:
(a) (i) the Borrower shall fail to pay any principal of any
Loan when the same shall become due and payable or (ii) the Borrower
shall fail to pay any interest on any Loan, or any LOC Party shall fail
to make any other payment under any LOC Document, in each case under
this clause (ii) within three Business Days after the same becomes due
and payable; or
(b) any representation or warranty made by any LOC Party or
any Loan Party (or any of their respective officers) under (or
incorporated by reference into) or in connection with any LOC Document
shall prove to have been incorrect in any material respect when made;
or
(c) (i) the Borrower or the Parent Guarantor, as the case may
be, shall fail to perform or observe any term, covenant or agreement
contained in Section 2.14 herein or Section 5.01(e), 5.01(f), 5.01(g),
5.01(l), 5.01(m), 5.01(n) or 5.01(o), 5.02, 5.03 or 5.04 of the
Existing Credit Agreement, as incorporated by reference herein pursuant
to Section 4.01, or (ii) the Guarantor shall fail to perform or observe
any term, covenant or agreement contained in the Guaranty; or
(d) the Borrower or the Parent Guarantor shall fail to perform
any other term, covenant or agreement contained in any LOC Document on
its part to be performed or observed if such failure shall remain
unremedied for 30 days; or
(e) (i) any LOC Party or the Parent Guarantor or any of its
Subsidiaries shall fail to pay any principal of, premium or interest on
or any other amount payable in respect of one or more items of Debt of
the LOC Parties and the Parent Guarantor and its Subsidiaries
(excluding Debt outstanding hereunder) that is outstanding in an
aggregate principal or notional amount of at least $3,500,000 when the
same becomes due and payable (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise), and such failure shall
continue after the applicable grace period, if any, specified in the
agreements or instruments relating to all such Debt; or (ii) any other
event shall occur or condition shall exist under the agreements or
instruments relating to one or more items of Debt of the LOC Parties
and the Parent Guarantor and its Subsidiaries (excluding Debt
outstanding
12
<PAGE>
hereunder) that is outstanding in an aggregate principal or notional
amount of at least $3,500,000, and such other event or condition shall
continue after the applicable grace period, if any, specified in all
such agreements or instruments, if the effect of such event or
condition is to accelerate, or to permit the acceleration of, the
maturity of such Debt or otherwise to cause, or to permit the holder
thereof to cause, such Debt to mature; or (iii) one or more items of
Debt of the LOC Parties and the Parent Guarantor and its Subsidiaries
(excluding Debt outstanding hereunder) that is outstanding in an
aggregate principal or notional amount of at least $3,500,000 shall be
declared to be due and payable or required to be prepaid or redeemed
(other than by a regularly scheduled or required prepayment or
redemption), purchased or defeased, or an offer to prepay, redeem,
purchase or defease such Debt shall be required to be made, in each
case prior to the stated maturity thereof; or
(f) any LOC Party, the Parent Guarantor or any of the Material
Subsidiaries shall generally not pay its debts as such debts become
due, or shall admit in writing its inability to pay its debts
generally, or shall make a general assignment for the benefit of
creditors; or any proceeding shall be instituted by or against any LOC
Party, the Parent Guarantor or any of the Material Subsidiaries seeking
to adjudicate it a bankrupt or insolvent, or seeking liquidation,
winding up, reorganization, arrangement, adjustment, protection, relief
or composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking the entry
of an order for relief or the appointment of a receiver, trustee or
other similar official for it or for any substantial part of its
property and, in the case of any such proceeding instituted against it
(but not instituted by it) that is being diligently contested by it in
good faith, either such proceeding shall remain undismissed or unstayed
for a period of 45 days or any of the actions sought in such proceeding
(including, without limitation, the entry of an order for relief
against, or the appointment of a receiver, trustee, custodian or other
similar official for, it or any substantial part of its property) shall
occur; or any LOC Party, the Parent Guarantor or any of the Material
Subsidiaries shall take any corporate action to authorize any of the
actions set forth above in this subsection (f); or
(g) one or more judgments or orders for the payment of money
in excess of $3,500,000 shall be rendered against, any LOC Party, the
Parent Guarantor or any of its Subsidiaries and either (i) enforcement
proceedings shall have been commenced by any creditor upon such
judgment or order or (ii) there shall be any period of 15 consecutive
days during which a stay of enforcement of any such judgment or order,
by reason of a pending appeal or otherwise, shall not be in effect; or
(h) one or more nonmonetary judgments or orders shall be
rendered against any LOC Party, the Parent Guarantor or any of its
Subsidiaries that is reasonably likely to have a LOC Material Adverse
Effect, and there shall be any period of 10 consecutive days during
which a stay of enforcement of such judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect; or
(i) (i) any provision of any LOC Document after delivery
thereof pursuant to Section 3.01 shall for any reason cease to be valid
and binding on or enforceable against any LOC Party intended to be a
party to it, or any such LOC Party shall so state in writing, or (ii)
any provision of any Loan Document after delivery thereof pursuant to
Section 3.01 or 5.01(o) of the Existing Credit Agreement shall for any
reason cease to be valid and binding on or enforceable against any Loan
Party intended to be a party to it, or any such Loan Party shall so
state in writing; or
(j) (i) the Childs Investors shall at any time for any reason
cease to be the record and beneficial owner of the number of shares of
Voting Stock representing at least 40% of the combined voting power of
all of the Voting Stock of the Parent Guarantor (on a fully diluted
basis); (ii) any "person" or "group" (each as used in Section 13(d)(3)
and 14(d)(2) of the Securities Exchange Act of
13
<PAGE>
1934, as amended) becomes the "beneficial owner" (as defined in Rule
13d-3 of the Securities Exchange Act of 1934, as amended) of (A) Voting
Stock in the Parent Guarantor (including through securities convertible
into or exchangeable for such Voting Stock) representing a percentage
of the combined voting power of all of the Voting Stock in the Parent
Guarantor (on a fully diluted basis) that is equal to or greater than
the percentage of such combined voting power legally and beneficially
owned by the Childs Investors (on a fully diluted basis) or (B) shares
of capital stock (or other ownership or profit interests) in the Parent
Guarantor representing a percentage of the capital stock (or other
ownership or profit interests) in the Parent Guarantor (on a fully
diluted basis) outstanding at such time that is equal to or greater
than the aggregate shares of capital stock (or other ownership or
profit interests) in the Parent Guarantor legally and beneficially
owned by the Childs Investors (on a fully diluted basis) at such time;
(iii) any Person or two or more Persons acting in concert other than
the Childs Investors shall have acquired by contract or otherwise, or
shall have entered into a contract or arrangement that, upon
consummation, will result in its or their acquisition of the power to
exercise, directly or indirectly, a controlling influence over the
management or policies of the Parent Guarantor; (iv) (A) Childs shall
cease to have the ability to appoint at least one-half of the members
of the board of directors of the Parent Guarantor or (ii) any "person"
or "group" (each as used in Sections 13(d)(3) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended) other than Childs shall
otherwise acquire the ability, directly or indirectly, to elect a
majority of the board of directors of the Parent Guarantor; or (v) with
respect to any pledge or other security agreement covering all or any
portion of the shares of capital stock of (or other ownership or profit
interests in) the Parent Guarantor that are owned beneficially and of
record by any of the Equity Investors or their nominees (other than up
to 40% of the issued and outstanding capital stock of (or other
ownership or profit interests in) the Parent Guarantor (on a fully
diluted basis)), any secured party or pledgee thereunder shall become
the holder of record of any such shares (except in the case of a
registration of the pledge of such shares (or other interests) to such
secured party or pledgee solely in its capacity as a pledgee) or shall
receive dividends or other cash or cash equivalent distributions
(including, without limitation, stock repurchases) in respect thereof,
or shall proceed to exercise voting or other consensual rights in
respect thereof (whether by proxy, voting or other similar arrangement
or otherwise), or shall otherwise commence to realize upon such shares
(or other interests); or
(k) the Parent Guarantor shall fail to own 100% of the capital
stock of the Borrower; or
(l) any ERISA Event shall have occurred with respect to a Plan
and the sum (determined as of the date of occurrence of such ERISA
Event) of the Insufficiency of such Plan and the Insufficiency of any
and all other Plans with respect to which an ERISA Event shall have
occurred and then exist (or the liability of the Guarantor, the Loan
Parties and the ERISA Affiliates related to such ERISA Event) exceeds
$3,500,000; or
(m) the Guarantor, any Loan Party or any ERISA Affiliate shall
have been notified by the sponsor of a Multiemployer Plan that it has
incurred Withdrawal Liability to such Multiemployer Plan in an amount
that, when aggregated with all other amounts required to be paid to
Multiemployer Plans by the Guarantor, the Loan Parties and the ERISA
Affiliates as Withdrawal Liability (determined as of the date of such
notification), exceeds $3,500,000 or requires payments exceeding
$1,000,000 per annum; or
(n) the Guarantor, any Loan Party or any ERISA Affiliate shall
have been notified by the sponsor of a Multiemployer Plan that such
Multiemployer Plan is in reorganization or is being terminated, within
the meaning of Title IV of ERISA, and as a result of such
reorganization or termination the aggregate annual contributions of the
Guarantor, the Loan Parties and the ERISA Affiliates to all
Multiemployer Plans that are then in reorganization or being terminated
have been or
14
<PAGE>
will be increased over the amounts contributed to such Multiemployer
Plans for the plan years of such Multiemployer Plans immediately
preceding the plan year in which such reorganization or termination
occurs by an amount exceeding $1,000,000;
then, and in any such event, the Lender (i) may, by notice to the Borrower,
declare the Commitment and the obligation of the Lender to make Loans to be
terminated, whereupon the same shall forthwith terminate, and (ii) may, by
notice to the Borrower, declare the Note, all interest thereon and all other
amounts payable under this Agreement to be forthwith due and payable, whereupon
the Note, all such interest and all such amounts shall become and be forthwith
due and payable, without presentment, demand, protest or further notice of any
kind, all of which are hereby expressly waived by the Borrower; provided,
however, that in the event of an actual or deemed entry of an order for relief
with respect to the Borrower under the Federal Bankruptcy Code, (A) the
Commitment and the obligation of the Lender to make Loans shall automatically be
terminated and (B) the Note, all such interest and all such amounts shall
automatically become and be due and payable, without presentment, demand,
protest or any notice of any kind, all of which are hereby expressly waived by
the Borrower.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. Amendments, Etc. No amendment or waiver of any
provision of this Agreement or the Note, nor consent to any departure by the
Borrower therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Lender, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
SECTION 6.02. Notices, Etc. All notices and other
communications provided for hereunder shall be in writing (including telecopier,
telegraphic or telex communication) and mailed, telecopied, telegraphed, telexed
or delivered, if to the Borrower, at its address at 2701 Industrial Drive,
Bowling Green, Kentucky 42101, Attention: President; if to the Lender, at its
Domestic Lending Office specified opposite its name on Schedule I hereto; or in
the case of each party, at such other address as shall be designated by such
party in a written notice to the other party. All such notices and
communications shall, when mailed, telecopied or telegraphed be effective when
deposited in the mails, telecopied or delivered to the telegraph company,
respectively, except that notices and communications to the Lender pursuant to
Article II or III shall not be effective until received by the Lender. Delivery
by telecopier of an executed counterpart of any amendment or waiver of any
provision of this Agreement or any other LOC Document to be executed and
delivered hereunder shall be effective as delivery of an originally executed
counterpart thereof.
SECTION 6.03. No Waiver; Remedies. No failure on the part of
the Lender to exercise, and no delay in exercising, any right hereunder or under
the Note shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right preclude any other or further exercise thereof or the
exercise of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 6.04. Costs and Expenses. (a) The Borrower agrees to
pay on demand all costs and expenses of the Lender in connection with the
preparation, execution, delivery, administration, modification and amendment of
the LOC Documents and the other documents to be delivered hereunder and
thereunder, including, without limitation, (A) all due diligence,
transportation, computer, duplication, consultant and audit expenses and (B) the
reasonable fees and expenses of counsel for the Lender with respect thereto and
with respect to advising the Lender as to its rights and responsibilities under
the LOC Documents. The Borrower further agrees to pay on demand all costs and
expenses of the Lender, if any (including, without limitation, reasonable
counsel fees and expenses), in connection with the enforcement (whether through
15
<PAGE>
negotiations, legal proceedings or otherwise) of this the LOC Documents and the
other documents to be delivered hereunder and thereunder, including, without
limitation, the reasonable fees and expenses of counsel for the Lender in
connection with the enforcement of rights under this Section 6.04(a).
(b) The Borrower agrees to indemnify and hold harmless the
Lender and each of its Affiliates and its officers, directors, employees, agents
and advisors (each, an "Indemnified Party") from and against any and all claims,
damages, losses, liabilities and expenses (including, without limitation,
reasonable fees and expenses of counsel) that may be incurred by or asserted or
awarded against any Indemnified Party, in each case arising out of or in
connection with or by reason of (including, without limitation, in connection
with any investigation, litigation or proceeding or preparation of a defense in
connection therewith) (i) any LOC Documents, any of the transactions
contemplated herein or therein or the actual or proposed use of the proceeds of
the Loans or (ii) the actual or alleged presence of Hazardous Materials on any
property of the Borrower or any of its Subsidiaries or any Environmental Action
relating in any way to the Borrower or any of its Subsidiaries, except to the
extent such claim, damage, loss, liability or expense is found in a final,
non-appealable judgment by a court of competent jurisdiction to have resulted
from such Indemnified Party's gross negligence or willful misconduct. In the
case of an investigation, litigation or other proceeding to which the indemnity
in this Section 6.04(b) applies, such indemnity shall be effective whether or
not such investigation, litigation or proceeding is brought by any LOC Party,
any Loan Party, its directors, equityholders or creditors or an Indemnified
Party or any other Person, whether or not any Indemnified Party is otherwise a
party thereto and whether or not the transactions contemplated hereby are
consummated. The Borrower also agrees not to assert any claim against the
Lender, any of its affiliates, or any of its respective directors, officers,
employees, attorneys and agents, on any theory of liability, for special,
indirect, consequential or punitive damages arising out of or otherwise relating
to LOC Documents, any of the transactions contemplated herein or therein or the
actual or proposed use of the proceeds of the Loans.
(c) If any payment of principal of, or Conversion of, any
Eurodollar Rate Loan is made by the Borrower to or for the account of the Lender
other than on the last day of the Interest Period for such Loan, as a result of
a payment or Conversion pursuant to Section 2.07(d) or (e), 2.09 or 2.10(c),
acceleration of the maturity of the Note pursuant to Section 5.01 or for any
other reason, the Borrower shall pay to the Lender an amount equal to the
present value (calculated in accordance with this Section 6.04(c)) of interest
for the remaining portion of the relevant Interest Period on the amount of such
Loan, at a rate per annum equal to the excess of (i) the Eurodollar Rate that
would have been in effect for such Interest Period over (ii) the Eurodollar Rate
applicable on the date of determination to a deemed Interest Period ending on
the last day of such Interest Period. The present value of such additional
interest shall be calculated by discounting the amount of such interest for each
day in the relevant Interest Period from such day to the date of such repayment
or termination at an interest rate per annum equal to the interest rate
determined pursuant to the immediately preceding sentence, and by adding all
such amounts for all such days during such period. The determination by the
Lender of such amount of interest shall be conclusive and binding, absent
manifest error.
(d) Without prejudice to the survival of any other agreement
of the Borrower hereunder, the agreements and obligations of the Borrower
contained in Sections 2.10, 2.12 and 6.04 shall survive the payment in full of
principal, interest and all other amounts payable hereunder and under the Note.
SECTION 6.05. Right of Set-off. Upon (i) the occurrence and
during the continuance of any Event of Default and (ii) the making of the
request by or the actions of the Lender specified by Section 5.01 to declare the
Note due and payable pursuant to the provisions of Section 5.01, the Lender and
each of its affiliates is hereby authorized at any time and from time to time,
to the fullest extent permitted by law, to set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by the Lender or such affiliate to
or for the credit or the account of the Borrower against any and all of the
obligations of the Borrower now or hereafter existing under this
16
<PAGE>
Agreement and the Note held by the Lender, whether or not the Lender shall have
made any demand under this Agreement or the Note and although such obligations
may be unmatured. The Lender agrees promptly to notify the Borrower after any
such set-off and application, provided that the failure to give such notice
shall not affect the validity of such set-off and application. The rights of the
Lender and its affiliates under this Section 6.05 are in addition to other
rights and remedies (including, without limitation, other rights of set-off)
that the Lender and its affiliates may have.
SECTION 6.06. Binding Effect. This Agreement shall become
effective (other than Section 2.01, which shall only become effective upon
satisfaction of the conditions precedent set forth in Section 3.01) when it
shall have been executed by the Borrower and the Lender and, thereafter, shall
be binding upon and inure to the benefit of the Borrower and the Lender and
their respective successors and assigns, except that the Borrower shall not have
the right to assign its rights hereunder or any interest herein without the
prior written consent of the Lender.
SECTION 6.07. Assignments and Participations. (a) The Lender
may assign to one or more Persons reasonably satisfactory to the Borrower all or
a portion of its rights and obligations under this Agreement (including, without
limitation, all or a portion of its Commitment, the Loans owing to it and the
Note held by it). In connection with any such assignment, the Borrower agrees to
execute and deliver such documentation as the Lender or any such permitted
assignee may reasonably request to evidence such assignment and the rights and
obligations of such assignee hereunder.
(b) The Lender may sell participations to one or more banks or
other entities (other than any LOC Party or any of its affiliates) in or to all
or a portion of its rights and obligations under this Agreement (including,
without limitation, all or a portion of its Commitment, the Loans owing to it
and the Note held by it); provided, however, that (i) the Lender's obligations
under this Agreement (including, without limitation, its Commitment hereunder)
shall remain unchanged, (ii) the Lender shall remain solely responsible to the
other parties hereto for the performance of such obligations, (iii) the Lender
shall remain the holder of the Note for all purposes of this Agreement, (iv) the
Borrower, shall continue to deal solely and directly with the Lender in
connection with the Lender's rights and obligations under this Agreement and (v)
no participant under any such participation shall have any right to approve any
amendment or waiver of any provision of this Agreement or the Note, or any
consent to any departure by the Borrower therefrom, except to the extent that
such amendment, waiver or consent would reduce the principal of, or interest on,
the Note or any fees or other amounts payable hereunder, in each case to the
extent subject to such participation, or postpone any date fixed for any payment
of principal of, or interest on, the Note or any fees or other amounts payable
hereunder, in each case to the extent subject to such participation.
(c) The Lender may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section
6.07, disclose to the assignee or participant or proposed assignee or
participant, any information relating to any LOC Party or any Loan Party
furnished to the Lender by or on behalf of the Borrower.
(d) Notwithstanding any other provision set forth in this
Agreement, the Lender may at any time create a security interest in all or any
portion of its rights under this Agreement (including, without limitation, the
Loans owing to it and the Note held by it) in favor of any Federal Reserve Bank
in accordance with Regulation A of the Board of Governors of the Federal Reserve
System.
SECTION 6.08. Governing Law. This Agreement and the Note shall
be governed by, and construed in accordance with, the laws of the State of New
York.
17
<PAGE>
SECTION 6.09. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Agreement by telecopier shall be effective as delivery of a manually executed
counterpart of this Agreement.
SECTION 6.10. Jurisdiction, Etc. (a) Each of the parties
hereto hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court or
federal court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement, the Note or the Guaranty, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in any such New York State court or, to
the extent permitted by law, in such federal court. Each of the parties hereto
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Nothing in this Agreement shall affect any
right that any party may otherwise have to bring any action or proceeding
relating to this Agreement or the Note in the courts of any jurisdiction.
(b) Each of the parties hereto irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement, the Note or
the Guaranty in any New York State or federal court. Each of the parties hereto
hereby irrevocably waives, to the fullest extent permitted by law, the defense
of an inconvenient forum to the maintenance of such action or proceeding in any
such court.
SECTION 6.11. Waiver of Jury Trial. Each of the Borrower and
the Lender hereby irrevocably waives all right to trial by jury in any action,
proceeding or counterclaim (whether based on contract, tort or otherwise)
arising out of or relating to this Agreement or any other LOC Document, the
Loans or the actions of the Lender in the negotiation, administration,
performance or enforcement thereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
DESA INTERNATIONAL, INC.
By
Name:
Title:
NATIONSBANK, N.A.
By
Name:
Title:
18
<PAGE>
SCHEDULE I
APPLICABLE LENDING OFFICES
Name of Lender
NATIONSBANK, N.A.
Domestic Lending Office:
Credit: Administrative:
Dave Strickert Kathy Mumpower
NationsBank, N.A. NationsBank, N.A.
100 North Tryon Street, 13th Floor One Independence Center
Charlotte, N.C. 28255 101 North Tryon Street, 15th Floor
Tel: (704) 386-8109 Charlotte, N.C. 28255
Fax: (704) 386-9911 Tel: (704) 386-6837
Fax: (704) 388-9436
Eurodollar Lending Office:
Credit: Administrative:
Dave Strickert Kathy Mumpower
NationsBank, N.A. NationsBank, N.A.
100 North Tryon Street, 13th Floor One Independence Center
Charlotte, N.C. 28255 101 North Tryon Street, 15th Floor
Tel: (704) 386-8109 Charlotte, N.C. 28255
Fax: (704) 386-9911 Tel: (704) 386-6837
Fax: (704) 386-9436
<PAGE>
EXHIBIT A - FORM OF
PROMISSORY NOTE
U.S.$15,000,000 Dated: _______________, 1999
FOR VALUE RECEIVED, the undersigned, DESA INTERNATIONAL, INC.,
a Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of
NATIONSBANK, N.A. (the "Lender") for the account of its Applicable Lending
Office on the Termination Date (each as defined in the Credit Agreement referred
to below) the principal sum of U.S.$15,000,000 or, if less, the aggregate
principal amount of the Loans made by the Lender to the Borrower pursuant to the
Credit Agreement dated as of May 26, 1999 between the Borrower and the Lender
(as amended or modified from time to time, the "Credit Agreement"; the terms
defined therein being used herein as therein defined) outstanding on the
Termination Date.
The Borrower promises to pay interest on the unpaid principal
amount of each Loan from the date of such Loan until such principal amount is
paid in full, at such interest rates, and payable at such times, as are
specified in the Credit Agreement.
Both principal and interest are payable in lawful money of the
United States of America to the Lender in same day funds. Each Loan owing to the
Lender by the Borrower pursuant to the Credit Agreement, and all payments made
on account of principal thereof, shall be recorded by the Lender and, prior to
any transfer hereof, endorsed on the grid attached hereto which is part of this
Promissory Note.
This Promissory Note is the Note referred to in, and is
entitled to the benefits of, the Credit Agreement. The Credit Agreement, among
other things, (i) provides for the making of Loans by the Lender to the Borrower
from time to time during the period from the Effective Date until the
Termination Date in an aggregate amount not to exceed at any time outstanding
the U.S. dollar amount first above mentioned, the indebtedness of the Borrower
resulting from each such Loan being evidenced by this Promissory Note, and (ii)
contains provisions for acceleration of the maturity hereof upon the happening
of certain stated events and also for prepayments on account of principal hereof
prior to the maturity hereof upon the terms and conditions therein specified.
DESA INTERNATIONAL, INC.
By
Name:
Title:
<PAGE>
LOANS AND PAYMENTS OF PRINCIPAL
===============================================================================
Amount of
Amount of Principal Paid Unpaid Principal Notation
Date Loan or Prepaid Balance Made By
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-END> FEB-27-1999
<CASH> 888
<SECURITIES> 0
<RECEIVABLES> 32,018
<ALLOWANCES> (1,628)
<INVENTORY> 45,253
<CURRENT-ASSETS> 79,989
<PP&E> 41,815
<DEPRECIATION> 26,182
<TOTAL-ASSETS> 203,352
<CURRENT-LIABILITIES> 52,346
<BONDS> 285,138
17,207
0
<COMMON> 156
<OTHER-SE> (152,094)
<TOTAL-LIABILITY-AND-EQUITY> 203,352
<SALES> 317,237
<TOTAL-REVENUES> 317,237
<CGS> 213,828
<TOTAL-COSTS> 213,828
<OTHER-EXPENSES> 73,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,864
<INCOME-PRETAX> 2,502
<INCOME-TAX> 1,166
<INCOME-CONTINUING> 1,336
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,336
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
