UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the thirteen week period ended May 29, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 333-44969-01
DESA HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2940760
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2701 Industrial Drive, Bowling Green, KY 42101
(Address of principal executive offices) (Zip Code)
(270) 781-9600
(Registrant's telephone number, including area code)
Indicate by check 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 [ ]
As of July 9, 1999, there were 15,552,509 shares of Registrant's Common Stock,
$.01 par value per share, and 90,604 shares of the Registrant's Nonvoting Common
Stock, $.01 par value per share, outstanding.
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<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
FORM 10-Q
May 29, 199
INDEX
PART I Financial Information Page
<S> <C>
Item 1. Consolidated Financial Statements (Unaudited) 3
Consolidated Balance Sheets - May 29, 1999 and February 27, 1999 3
Consolidated Statements of Operations - Thirteen Weeks ended May
29, 1999 and May 30, 1998 4
Consolidated Statements of Stockholders' Equity (Deficit) 5
Consolidated Statements of Cash Flows - Thirteen Weeks ended May
29, 1999 and May 30, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II Other Information 22
Item 3. Defaults Upon Senior Securities 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
2
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<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
May 29 February 27
1999 1999
-------- --------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 763 $ 888
Accounts receivable, net 34,216 30,390
Inventories:
Raw materials 782 986
Work-in-process 8,428 6,376
Finished goods 52,153 37,891
-------- --------
61,363 45,253
Deferred tax assets 2,137 2,137
Other current assets 1,295 1,321
-------- --------
Total current assets 99,774 79,989
Property, plant and equipment:
Land 390 390
Buildings and improvements 6,137 6,173
Machinery and equipment 36,207 34,527
Furniture and fixtures 685 725
-------- --------
43,419 41,815
Less accumulated depreciation 27,141 26,182
-------- --------
16,278 15,633
Goodwill 81,364 81,882
Deferred tax assets 598 598
Other assets 24,970 25,250
======== ========
Total assets $ 222,984 $ 203,352
======== ========
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 37,986 $ 25,232
Accrued interest 6,348 3,075
Other accrued liabilities 6,924 10,732
Current portion of long-term debt 12,698 13,307
-------- --------
Total current liabilities 63,956 52,346
Long-term debt 297,388 285,138
Other liabilities 550 599
-------- --------
Total liabilities 361,894 338,083
Commitments
Series C redeemable preferred stock, $.01 par value;
authorized-- 40,000 shares; issued and outstanding--
19,990 shares at May 29, 1999 and February 27, 1999
(liquidation preference - $20,969,000 at May 29, 1999
and $20,371,000 at February 27, 1999) 17,272 17,207
Stockholders' equity (deficit):
Common stock, $.01 par value; authorized-- 50,000,000
shares; issued and outstanding-- 15,552,509 shares at
May 29, 1999 and 15,548,692 shares at 155 155
February 28, 1999
Nonvoting common stock, $.01 par value; authorized--
2,000,000 shares; issued and outstanding-- 90,604
shares at May 29, 1999 and February 27, 1999 1 1
Capital in excess of par value 98,009 97,984
Carryover predecessor basis adjustment (32,309) (32,309)
Retained earnings (deficit) (220,793) (216,742)
Accumulated other comprehensive loss (1,245) (1,027)
-------- --------
Total stockholders' equity (deficit) (156,182) (151,938)
-------- --------
Total liabilities and stockholders' equity (deficit) $ 222,984 $ 203,352
======== ========
</TABLE>
See accompanying notes
3
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<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
Consolidated Statements of Operations
(in thousands)
(Unaudited)
Thirteen Weeks Ended
May 29 May 30
1999 1998
---------- ----------
<S> <C> <C>
Net Sales $ 62,793 $ 40,754
Cost of Sales 44,451 29,609
---------- ----------
Gross Profit 18,342 11,145
Operating costs and expenses:
Selling 12,635 8,783
General and Administrative 3,602 2,868
Other 1,524 866
---------- ----------
17,761 12,517
---------- ----------
Operating Profit (loss) 581 (1,372)
Interest expense 6,628 6,492
---------- ----------
Loss before benefit for income taxes (6,047) (7,864)
Benefit for Income Taxes (2,659) (3,498)
---------- ----------
Net Loss (3,388) (4,366)
Less dividends and accretion on preferred stock 663 590
---------- ----------
Loss applicable to common stockholders $ (4,051) $ (4,956)
========== ==========
</TABLE>
See accompanying notes
4
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<TABLE>
<CAPTION>
DESA Holdings Corporation
Consolidated Statements of Stockholders' Deficit
($000's)
Cumulative
Nonvoting Capital in Carryover Other Total
Common Common Excess of Predecssor Accumulated Comprehensive Stockholders'
Stock Stock Par Value Adjustment Deficit Loss Deficit
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
February 27, 1999 $155 $1 $97,984 ($32,309) ($216,742) ($1,027) ($151,938)
Comprehensive loss:
Net Loss (3,388) (3,388)
Foreign currency
translation adjustment (218) (218)
---------------
Comprehensive loss (3,606)
---------------
Accretion of preferred stock (65) (65)
Dividends on preferred stock (598) (598)
Issuance of common stock 25 25
-------------------------------------------------------------------------------------- ---------------
Balance at
May 29, 1999 $155 $1 $98,009 ($32,309) ($220,793) ($1,245) ($156,182)
====================================================================================== ===============
</TABLE>
5
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<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Thirteen Weeks Ended
May 29 May 30
1999 1998
-------- ---------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (3,388) $ (4,366)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 959 427
Amortization 1,481 785
Deferred income taxes 0 (15)
Equity in undistributed earnings of joint venture (39) (39)
(Increase) decrease in operating assets:
Accounts receivable, net (3,826) 1,530
Inventories (16,110) (3,742)
Other current assets 26 (336)
Increase (decrease) in operating liabilities:
Accounts payable 12,754 4,509
Accrued interest 3,273 1,572
Other accrued liabilities (1,155) (8,126)
Income taxes payable (3,251) (4,265)
Other liabilities (49) 57
-------- ---------
Net cash used in operating activities $ (9,325) $ (12,009)
-------- ---------
Investing activities
Capital expenditures (1,604) (1,398)
Dividends received from joint venture 52 32
Other (224) (39)
-------- ---------
Net cash used in investing activities $ (1,776) $ (1,405)
-------- ---------
Financing activities
Increase in Working Capital Loan 13,516 15,179
Principal payments of Term Loans (1,875) (1,125)
Issuance of common stock 25 0
Payment of debt financing costs (688) (765)
-------- ---------
Net cash provided by financing activities 10,978 13,289
Effect of exchange rate changes on cash (2) 3
-------- ---------
Decrease in cash and cash equivalents for the period (125) (122)
Cash and cash equivalents at beginning of period 888 794
======== =========
Cash and cash equivalents at end of period $ $763 $ 672
======== =========
</TABLE>
See accompanying notes
6
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The interim consolidated financial statements for the periods presented herein
have not been audited by independent public accountants. In the opinion of
management of DESA Holdings Corporation (the "Company" or "Holdings"), all
adjustments (consisting only of normal recurring accruals) considered necessary
to present fairly the results of operations for the periods have been included.
Interim results are not necessarily indicative of results for a full year. Sales
of the Company's zone heating products follow seasonal patterns that affect the
Company's results of operations.
The unaudited consolidated financial statements have been prepared by the
Company in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
The consolidated balance sheet presented as of February 27, 1999, has been
derived from the consolidated financial statements that have been audited by the
Company's independent auditors. The consolidated financial statements and notes
thereto included herein should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K.
2. Summary of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, DESA International, Inc. ("DESA") 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.
7
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
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.
Summarized Financial Information of DESA International, Inc.
(Unaudited)
DESA International, Inc. is the issuer of the 9 7/8% Senior Subordinated Notes.
The Company 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.
The following summarized consolidated financial information is being provided
for DESA International, Inc. as of May 29, 1999 and February 27, 1999 and for
the thirteen weeks ended May 29, 1999, and May 30, 1998.
Summarized consolidated balance sheet information (in thousands):
May 29, February 27,
1999 1999
---------- ---------
Assets
Current assets $207,652 $ 187,892
Net fixed assets 16,278 15,633
Goodwill, net 80,234 80,744
Deferred tax assets 598 598
Other assets 24,970 25,250
-------- ---------
$329,732 $ 310,117
======== =========
Liabilities and stockholders' equity (deficit)
Current liabilities $ 62,911 $ 51,939
Long-term debt 165,250 153,000
9 7/8% Senior Subordinated Notes 130,000 130,000
Other liabilities 550 599
Stockholders' equity (deficit) (28,979) (25,421)
-------- ---------
$329,732 $ 310,117
======== =========
8
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Summarized consolidated statements of operations information (in thousands):
Thirteen Weeks Ended
May 29, May 30,
1999 1998
-------- --------
Net Sales 62,793 40,754
Loss before income taxes (5,999) (7,856)
Net loss (3,340) (4,358)
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, 2000. 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.
9
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DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Financing Arrangements
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 were increased by .75% under the Term A and Working Capital
facilities and by .625% under the Term B, Acquisition and Acquisition B
facilities. 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 (an increase from $15,000,000) for any
Clean-Up Period. The Amendment further provides for an additional $15,000,000
unsecured line of credit to DESA International, Inc. (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 end of
each interest period. In connection with the Amendment, Holdings paid an
amendment fee of approximately $550,000, which has been deferred and will be
amortized over the remaining life of the Credit Facility.
In conjunction with the Amendment, the sponsors 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.
10
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DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Financing Arrangements (continued)
Outstanding borrowings consist of the following (interest rates noted are as of
May 29, 1999) (in thousands):
<TABLE>
<CAPTION>
May 29, February 27,
1999 1999
-------- ----------
<S> <C> <C>
9 7/8% Senior Subordinated Notes due 2007 (A) $130,000 $ 130,000
NationsBank and various banks Term A Loan (B) 43,250 44,875
NationsBank and various banks Term B Loan (C) 48,500 48,750
NationsBank and various banks Working Capital Loan Commitment (D) 36,198 22,682
NationsBank and various banks Acquisition Loan (E) 20,000 20,000
NationsBank and various banks Acquisition B Loan (F) 30,000 30,000
Note payable related to acquisition of Heath (G) 2,138 2,138
-------- ---------
Total outstanding borrowings 310,086 298,445
Less current portion of long-term debt 12,698 13,307
-------- ---------
Total long-term debt $297,388 $ 285,138
======== =========
</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 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 2.25% or LIBOR
plus 3.25% at the option of the Holdings. Interest is payable on a
quarterly basis under the prime rate option or at the end of each LIBOR
period. Once repaid, the Term A Loan may not be reborrowed.
(C) The Term B Loan is payable in quarterly installments through November
26, 2004, and accrues interest at the prime rate plus 2.50% or LIBOR
plus 3.50% 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. 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 2.25% or LIBOR plus 3.25%, 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. Holdings can utilize letters
of credit under the Working Capital Loan Commitment up to $10 million.
As of May 29, 1999, letters of credit of $1,920,000 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 of1/2of 1% per annum on the
daily unutilized Working Capital Loan Commitment.
11
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DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Financing Arrangements (continued)
(E) 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 2.50% or
LIBOR plus 3.50% at the option of Holdings. 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 2.50% or
LIBOR plus 3.50% at the option of Holdings. Once repaid, the
Acquisition B Loan may not be reborrowed.
(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 May
29, 1999, DESA can incur additional indebtedness of $26.4 million.
12
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DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Comprehensive Income
As of March 2, 1997, the Company 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 the
Company's net income or stockholders' deficit. FAS 130 requires the Company's
foreign currency translation adjustment, which prior to adoption was reported
separately in stockholders' 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 May 29, 1999 and
February 27, 1999 the cumulative other comprehensive loss consisted solely of
the Company's foreign currency translation adjustment.
Comprehensive loss consisted of the following (in thousands):
Thirteen Weeks Ended
May 29, May 30,
1999 1998
-------- --------
Net Loss $(3,318) $(4,366)
Net change in foreign currency
translation adjustment (218) (133)
-------- --------
Comprehensive Loss $(3,606) $(4,499)
======== ========
5. Segment Information
The Company 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.
Corporate expenses include 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 the Company that are identified with the
operations in each product segment. Corporate assets include primarily cash,
deferred income taxes and deferred financing costs.
13
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DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Segment Information (continued)
Operational results and other financial data for the two business segments for
the periods ended May 29, 1999 and May 30, 1998 are presented below (in
thousands):
<TABLE>
<CAPTION>
Zone
Heating Specialty General
Products Products Corporate Total
Thirteen weeks ended May 29, 1999
<S> <C> <C> <C> <C>
Net sales $20,664 $42,129 --- $ 62,793
Operating profit (loss) (2,304) 3,964 (1,079) 581
Depreciation and amortization 1,105 935 400 2,440
Identifiable assets 113,307 95,941 13,736 222,984
Capital expenditures 974 602 28 1,604
Thirteen weeks ended May 30, 1998
Net sales $ 9,669 $31,085 --- $ 40,754
Operating profit (loss) (3,605) 3,246 (1,013) (1,372)
Depreciation and amortization 383 461 368 1,212
Identifiable assets 68,475 73,816 16,783 159,074
Capital expenditures 1,263 117 18 1,398
</TABLE>
14
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DESA HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
This quarterly report on Form 10-Q of Desa Holdings Corporation (the
"Company," which includes its consolidated subsidiaries unless the context
indicates otherwise contains statements which constitute forward looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Those statements appear in a number of places in this report
and include statements regarding the strategies, plans, beliefs or current
expectations of the Company and its management and other statements that are not
historical facts. Readers are cautioned that any such forward looking statements
are not guaranties of future performance and involve risks and uncertainties,
and that actual results may differ materially from those set forth in such
forward looking statements as a result of various factors. 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 Company undertakes no obligation to release publicly
the results of any revisions to these forward looking statements that may be
made to reflect errors or circumstances that occur after the date hereof.
The following discussion of the Company's results of operations and
financial condition for the thirteen week periods ending May 29, 1999, and May
30, 1998, should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto contained herein, as well as for
the fiscal year ended February 27, 1999, included in the Company's Annual Report
on Form 10-K.
Overview
The Company 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. 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.
Sales of the Company's zone heating products follow seasonal patterns
that affect the Company's results of operations. Demand for the Company's zone
heating products has been historically highest in the third quarter, as
consumers prepare for winter. Consequently, the Company's net sales and
Company's fiscal operating profit have also been historically highest during the
Company's fiscal third quarter. Management believes that the Company's results
of operations will continue to follow this pattern; there can be no assurance,
however, that third quarter results will always surpass those of the first and
second quarters, or that any improvement shown will be as great as that shown in
previous years. In particular, unusually warm weather in the fall may reduce
demand for zone heating products.
The Company's net sales and operating profit of zone heating products
in its current fiscal year may be adversely affected by warm weather during the
preceding winter, which can result in higher inventory carryover by the
Company's customers. Last winter was unusually warm and, consequently, net sales
and operating profit of zone heating products were below normal
15
<PAGE>
levels; however net sales and operating profits of zone heating products were
above the prior year results.
Sales of the Company's specialty products do not follow a significant
seasonal pattern and are not affected by weather patterns. Historically, these
sales have followed a relatively level quarterly pattern.
Results of Operations
Thirteen Week Period Ended May 29, 1999, Compared to the Thirteen Week Period
Ended May 30, 1998
Net sales. Net sales in the thirteen weeks ended May 29, 1999, ("first
quarter 2000") were $62.8 million, an increase of 54% or $22.0 million compared
to the thirteen weeks ended May 30, 1998 ("first quarter 1999"). Zone heating
products had net sales of $20.7 million in the first quarter 2000, an increase
of 114% or $11.0 million from the first quarter 1999. This increase is primarily
in hearth product sales due to the acquisition of Fireplace Manufacturers Inc.
and increased fireplace product demand in the propane marketer/utility
distribution channel.
Specialty products had net sales of $42.1 million in the first quarter
2000, an increase of 36% or $11.0 million over first quarter 1999, due to an
increased market demand for generators related to the fear of year 2000 problems
and new product sales for the electric pole saw.
Cost of Sales. For first quarter 2000, cost of sales was $44.5 million,
an increase of $14.8 million or 50% from first quarter 1999, attributable to the
higher net sales for the period. Cost of sales was 71% of net sales in first
quarter 2000 compared to 73% for first quarter 1999. This decrease is because of
(i) product mix with proportionately higher sales of zone heating products,
which are sold at higher margins, and (ii) lower manufacturing overhead per unit
of zone heating products, as a result of higher first quarter production levels
in this year compared to a year ago.
Selling, General and Administrative Expenses. For first quarter 2000,
selling, general and administrative expenses were $17.8 million, an increase of
$5.2 million or 42% from first quarter 1999, primarily attributable to the net
sales increase. As a percentage of net sales, selling, general and
administrative expenses were 28% for first quarter 2000 compared to 31% in first
quarter 1999. This lower level is associated with increased sales which absorbed
more of the fixed expenses in the engineering and administration areas.
Operating Profit. Operating profit was $.6 million for first quarter
2000 compared to an operating loss of $1.4 million for first quarter 1999, an
improvement of $2.0 million. Operating loss attributable to zone heating
products was $2.3 million for first quarter 2000, favorable by $1.3 million from
first quarter 1999. This is a result of the increased sales and higher factory
overhead absorption offset by higher selling costs associated with the sales
increase. Specialty products operating profit was $4.0 million for the first
quarter 2000, an increase of $.7 million over first quarter 1999. This increase
is attributable to increased sales of specialty products and their related
contribution margins.
EBITDA for the first quarter 2000 was $3.0 million, an increase of $3.2
million over the first quarter 1999 loss of $.2 million. EBITDA is defined as
income before income taxes plus interest expense and depreciation as well as
amortization expense associated with intangibles and deferred charges. EBITDA is
presented because it is a widely accepted financial indicator of a
16
<PAGE>
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 as defined by generally accepted
accounting principles.
Interest Expense. Interest expense for first quarter 2000 was $6.6
million, an increase of $.1 million or 2%.
Income Tax. The income tax rate was 44% for first quarter 2000, equal
to the rate for first quarter 1999.
Net Income. Net loss was $3.4 million for first quarter 2000 compared
to net loss of $4.4 million for first quarter 1999, an improvement of $1.0
million. This improvement is attributable to higher sales volume in both Zone
heating and Specialty products.
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 revolving 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 prior winter and current fall weather conditions affecting the level
of sales of heating products, general economic conditions, and other factors
beyond the Company's control.
Net cash used in operating activities for the year to date 2000 was
$9.3 million compared to net cash used of $12.0 million for the year to date
1999. This positive reduction of $2.7 million reflects the higher accounts
payable balance of $38.0 million.
Net cash used in investing activities was $1.8 million for the year to
date 2000, compared to $1.4 million for the year to date 1999. This higher cash
used for investing activities reflects the higher capital expenditures of $1.6
million for the year to date 2000 compared to $1.4 million for the year to date
1999. Net cash provided by financing activities for the year to date 2000 was
$11.0 million, compared to $13.3 million for the year to date 1999 due to the
increase in the working capital loan.
The Credit Facility provides for commitments in an aggregate amount of
up to $216.8 million. Borrowings outstanding under the Credit Facility were
$177.9 million on May 29, 1999. Outstanding letters of credit and foreign
currency contracts established to facilitate merchandise purchases were $1.9
million and $4.0 million, respectively, on May 29, 1999. The Company had the
ability to incur additional indebtedness of $26.4 million at May 29, 1999 under
the 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'
17
<PAGE>
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. The Company is now in compliance with all
its covenants under the Credit Facility
As part of the Amendment, Holdings' interest rates on all existing
outstanding borrowings were increased by .75% under the Term A and Working
Capital facilities and by .625% under the Term B, Acquisition and Acquisition B
facilities. 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 (an increase from $15,000,000) for any
Clean-Up Period. The Amendment further provides for an additional $15,000,000
unsecured line of credit to DESA International, Inc. (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 end of
each interest period. In connection with the Amendment, Holdings paid an
amendment fee of approximately $550,000, which has been deferred and will be
amortized over the remaining life of the Credit Facility.
In conjunction with the Amendment, the sponsors 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.
The Company expects that capital expenditures during fiscal 2000 will
be approximately $5.0 million. Capital expenditures are expected to be funded
from internally generated cash flows and by borrowings under the Credit
Facility.
Management believes that cash flow from operations and availability
under the Credit Facility will provide adequate funds for the Company's
foreseeable working capital needs, planned capital expenditures and debt service
obligations. 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
$30,000,000 for any Clean-Up Period. As of May 29, 1999, approximately $6.2
million of working capital borrowings have been classified as current as a
result of the Clean-Up requirement. Such amount may be reborrowed after
compliance with the Clean-Up Period. The Company's ability to fund its
operations, make planned capital expenditures, make scheduled debt payments,
finance indebtedness and 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.
Year 2000
18
<PAGE>
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 have not fully resolved the
problem.
The Company has written all of its internal management information
systems ("MIS") applications, rather than buying applications from vendors, and
chose 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 the appropriate system
testing has been performed. No embedded systems used in manufacturing required
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 electronic data interchange ("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 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 volume.
19
<PAGE>
Item 3. Quantitative and Qualitative Disclosures 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. There have been no material changes in the market risk to
which the Company is exposed since the end of the Company's preceding fiscal
year.
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):
<TABLE>
<CAPTION>
February 27, 1999 February 28, 1998
------------------ -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
(in thousands)
<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>
20
<PAGE>
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.
21
<PAGE>
PART II Other Information
Item 3. Defaults Upon Senior Securities
(a) On February 28, 1999, the Company failed to meet the total leverage
ratio financial covenant under the Credit Facility, an event of default
thereunder. Said event of default continued until the Credit Facility was
amended on May 25, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment and Waiver No. 4 to the Loan Documents
dated as of May 25, 1999 by and among the Company,
DESA International, Inc., NationsBank, N.A., UBS
Securities LLC, Banc of America Securities LLC et al
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated April 1, 1999
reporting under Item 5 the resignation of the Company's Chairman and Chief
Executive Officer and the election of replacements therefor and of a Chief
Operating Officer, all on March 30, 1999. The Company filed no other reports on
Form 8-K during the period for which this report is made.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DESA HOLDINGS CORPORATION
By:
Dated: July 13, 1999 /s/ Terry G. Scariot
Terry G. Scariot
Chief Executive Officer and President
Dated: July 13, 1999 /s/ Edward G. Patrick
Edward G. Patrick
Vice President of Finance and Treasurer
(Principal Financial Officer)
Dated: July 13, 1999 /s/ Scott M. Nehm
Scott M. Nehm
Vice President and Controller
(Chief Accounting Officer)
23
EXHIBIT 10
EXECUTION COPY
AMENDMENT AND WAIVER NO. 4 TO THE LOAN DOCUMENTS
As of May 25, 1999
AMENDMENT AND WAIVER NO. 4 TO THE LOAN DOCUMENTS dated as of
May 25, 1999 to 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 and Amendment No. 3 to the
Loan Documents dated as of May 26, 1998, the "Credit Agreement") among Desa
International, Inc., a Delaware corporation (the "Borrower"), Desa Holdings
Corporation, a Delaware corporation (the "Parent Guarantor"), 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 (the "Administrative Agent") for the
Lender Parties thereunder. Capitalized terms not otherwise defined herein shall
have the same meanings as specified therefor in the Credit Agreement.
PRELIMINARY STATEMENTS
(1) The Borrower has requested that the Lender Parties agree
(a) to amend the Credit Agreement and the other Loan Documents in order, among
other things, (i) to permit the establishment of an unsecured line of credit to
the Borrower from NationsBank, N.A. (the "Childs Guaranteed Line of Credit") in
an aggregate principal amount of up to $15,000,000, which line of credit shall
be available for two years and all amounts outstanding from time to time under
which shall be unconditionally and irrevocably guaranteed by J.W. Childs Equity
Partners, L.P., and (ii) to modify the requirements of each of the financial
covenants set forth in Section 5.04 of the Credit Agreement for each of the
remaining Measurement Periods through the Term B Termination Date and (b) to
waive any and all Defaults and Events of Default under Section 6.01(c) and
6.01(d) of the Credit Agreement that have occurred and are continuing as a
result of the failure by the Borrower or the Parent Guarantor, as the case may
be, to comply with the requirements of Section 2.01(g) of the Credit Agreement
for the Clean-Up Period occurring between January 1, 1999 and May 30, 1999 and
the requirements set forth in Section 5.04(a) of the Credit Agreement for a
maximum Total Leverage Ratio at all times during the Measurement Period ended
February 28, 1999.
(2) The Lender Parties have indicated their willingness to
agree, among other things, to the amendments and waivers of the Credit Agreement
described above in Preliminary Statement (1) on the terms and subject to the
satisfaction of the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements contained herein, the parties hereto hereby
agree as follows:
<PAGE>
-2-
SECTION 1. Amendments of Certain Provisions of the Credit
Agreement. The Credit Agreement is, upon the occurrence of the Amendment
Effective Date (as hereinafter defined), hereby amended as follows:
(a) The definition of "Adjusted Funded Debt" set forth in
Section 1.01 of the Credit Agreement is hereby amended (i) to add after
the clause reference "(a)" in the second line thereof the new subclause
reference "(i)" and (ii) to add after the language "the Parent
Guarantor Preferred Stock on such date" in the seventh line thereof the
new language "and (ii) the aggregate principal amount of all "Loans"
outstanding under the Childs Guaranteed Line of Credit on such date".
(b) The definition of "Consolidated Cash Interest Expense" set
forth in Section 1.01 of the Credit Agreement is hereby amended to add
after the language "of such Person and its Subsidiaries for such
period" in the third line thereof the new language "and, in the case of
the Borrower, all interest expense (net of interest income) paid or
payable on all "Loans" outstanding under the Childs Guaranteed Line of
Credit during such period".
(c) The definition of "Consolidated EBITDA" set forth in
Section 1.01 of the Credit Agreement is hereby amended to restate
clause (d) thereof in its entirety to read as follows:
"(d) the pro forma cost savings and operating income
annualization adjustments of $5,100,000 for the Measurement
Period ending in February 1999, $3,600,000 for the Measurement
Period ending in May 1999 and $1,700,000 for the Measurement
Period ending in August 1999".
(d) The definition of "Fixed Charge Coverage Ratio" set forth
in Section 1.01 of the Credit Agreement is hereby amended to restate
clause (a) thereof in its entirety to read as follows:
"(a) (i) Consolidated EBITDA of the Parent Guarantor and its
Subsidiaries for such period plus (ii) the aggregate principal
amount of all "Loans" made under the Childs Guaranteed Line of
Credit during such period, the proceeds of which are used to
pay or prepay outstanding Term Advances, Acquisition Advances
and/or Acquisition B Advances in accordance with the terms of
this Agreement, less (iii) the aggregate amount of all Capital
Expenditures made by the Parent Guarantor and its Subsidiaries
during such period."
(e) The definition of "Loan Value" set forth in Section 1.01
of the Credit Agreement is hereby amended to delete the figure
"$15,000,000" in clause (i) of the proviso clause thereto and to
substitute therefor the new figure "$30,000,000".
(f) The following definitions set forth in Section 1.01 of the
Credit Agreement are hereby amended and restated in their entirety to
read as follows:
""Applicable Margin" means at any time and from time
to time, a percentage per annum equal to the applicable
percentage set forth below for the Performance Level set forth
below:
<PAGE>
-3-
<TABLE>
<CAPTION>
Alternate Eurodollar Alternate Eurodollar
Base Rate Rate Base Rate Rate
Advances Advances Advances Advances
Under Under Term Under Term Under Term
Term A and A and B, Acquisition B, Acquisition
Working Working and and
Performance Capital Capital Acquisition B Acquisition B
Level Facilities Facilities Facilities Facilities
<S> <C> <C> <C> <C>
I 0.500% 1.500% 1.125% 2.125%
II 0.750% 1.750% 1.125% 2.125%
III 1.000% 2.000% 1.375% 2.375%
IV 1.500% 2.500% 1.750% 2.750%
V 2.000% 3.000% 2.250% 3.250%
VI 2.250% 3.250% 2.500% 3.500%
</TABLE>
The Applicable Margin for each Alternate Base Rate Advance
shall be determined by reference to the Performance Level in
effect from time to time and the Applicable Margin for each
Eurodollar Rate Advance shall be determined by reference to
the Performance Level in effect on the first day of each
Interest Period for such Advance.
"Applicable Percentage" means, at any time and from
time to time, a percentage per annum equal to the applicable
percentage set forth below for the Performance Level set forth
below:
Performance Level Commitment Fee
I 0.325%
II 0.375%
III 0.375%
IV 0.500%
V 0.500%
VI 0.500%
The Applicable Percentage for the Commitment Fee shall be
determined by reference to the Performance Level in effect
from time to time.
"Performance Level" means Performance Level I,
Performance Level II, Performance Level III, Performance Level
IV, Performance Level V or Performance Level VI, as the
context may require. For purposes of determining the
Performance Level at any date of
<PAGE>
-4-
determination, no change in the Performance Level shall be
effective until three Business Days after the date on which
the Administrative Agent receives Consolidated financial
statements of the Parent Guarantor and its Subsidiaries
pursuant to (and satisfying all of the requirements of)
Section 5.03(c) or 5.03(d) reflecting such change and the
related certificate pursuant to such Section; provided,
however, that if the Parent Guarantor has not submitted to the
Administrative Agent all of the information required under
this definition as and when required under Section 5.03(c) or
5.03(d), as the case may be, the Performance Level shall be
deemed to be at Performance Level VI for so long as such
information has not been submitted.
"Performance Level V" means, at any date of
determination, that (a) the Performance Level does not meet
the requirements of Performance Level I, Performance Level II,
Performance Level III or Performance Level IV and (b) the
Parent Guarantor and its Subsidiaries shall have maintained a
Senior Leverage Ratio of less than 4.00:1 as of the last day
of the most recently completed Measurement Period prior to
such date."
(g) Section 1.01 of the Credit Agreement is hereby further
amended to add the following new definitions:
""Amendment No. 4 Effective Date" means the first
date on which all of the conditions precedent to the
effectiveness of Amendment and Waiver No. 4 to the Loan
Documents were satisfied.
"Childs Guaranteed Line of Credit" means the
unsecured line of credit to the Borrower from NationsBank
(and/or its successors and assigns) in an aggregate principal
amount of up to $15,000,000, which line of credit has a
maturity date of May 31, 2001 and all amounts outstanding from
time to time under which are unconditionally and irrevocably
guaranteed by Childs.
"Childs Guaranteed LOC Documents" means,
collectively, (a) the credit agreement dated as of May 26,
1999 between the Borrower and NationsBank, as the initial
lender thereunder, (b) all promissory notes issued to
NationsBank (and, if applicable, its successors and assigns)
and evidencing indebtedness of the Borrower under the Childs
Guaranteed Line of Credit and (c) the guaranty dated May 26,
1999 of Childs in favor of NationsBank (and, if applicable,
its successors and assigns), in each case as such agreement,
instrument or other document may be amended, supplemented or
otherwise modified from time to time after the Amendment No. 4
Effective Date in accordance with the terms hereof and
thereof.
"Performance Level VI" means, at any date of
determination, that the Performance Level does not meet the
requirements of Performance Level I, Performance Level II,
Performance Level III, Performance Level IV or Performance
Level V."
(h) Section 2.01(g) of the Credit Agreement is hereby amended
to delete the language "$24,000,000 for the Clean-Up Period occurring
in 1998 and $15,000,000 for any Clean-Up Period thereafter" at the end
of such Section and to substitute therefor the new figure
"$30,000,000".
<PAGE>
-5-
(i) Section 2.06(b)(vi) of the Credit Agreement is hereby
amended to delete the figure "$15,000,000" in the fourth line thereof
and to substitute therefor the new figure "$30,000,000".
(j) Section 5.02(b) of the Credit Agreement is hereby amended
(i) to delete the word "and" at the end of subclause (iv)(I) thereof,
(ii) to delete the punctuation "." at the end of subclause (iv)(J)
thereof and to substitute therefor the new phrase ", and" and (iii) to
add the following new subclause (iv)(K) thereto:
"(K) Debt under the Childs Guaranteed LOC Documents."
(k) Section 5.02(j) of the Credit Agreement is hereby amended
(i) to delete the word "and" at the end of subclause (i)(B) thereof,
(ii) to add the word "and" at the end of subclause (i)(C) thereof after
the phrase "of Surviving Debt", (iii) to add the following new
subclause (i)(D) thereto:
"(D) the prepayment of the "Loans" outstanding under the
Childs Guaranteed Line of Credit, in whole or in part;
provided that at the time of any such prepayment, (1) no
Default shall have occurred and be continuing or shall occur
as a result thereof and (2) if the aggregate principal amount
of one or more of such "Loans" was included in the
determination of the Fixed Charge Coverage Ratio for any
Measurement Period under subclause (a)(ii) of the definition
of "Fixed Charge Coverage Ratio" set forth in Section 1.01,
then such "Loans" may not be prepaid until such time as the
Parent Guarantor or the Borrower shall deliver to the Lender
Parties Consolidated financial statements of the Parent
Guarantor and its Subsidiaries pursuant to (and satisfying all
of the requirements of) Section 5.03(c) and 5.03(d), and the
related compliance certificate pursuant to such Section, which
demonstrate that the Parent Guarantor is in compliance with
the requirements of Section 5.04(b) to maintain a minimum
Fixed Charge Coverage Ratio of 1.00:1 without including the
aggregate principal amount of any "Loans" made under the
Childs Guaranteed Line of Credit which are being prepaid in
the calculation of the numerator of the Fixed Charge Coverage
Ratio for the Measurement Period reflected in such compliance
certificate",
(iv) to add after the language "any term or condition of" in clause
(ii) thereof the new subclause reference "(A)" and (v) to add after the
phrase "any Surviving Debt" at the end of clause (ii) thereof the
following new language:
", the Subordinated Notes Documents, the Parent Guarantor
Preferred Stock or the Junior Exchange Notes or (B) the Childs
Guaranteed LOC Documents, in the case of this subclause
(ii)(B), in any manner that, either individually or in the
aggregate, could reasonably be expected to have a Material
Adverse Effect or to adversely affect the rights or interests
of the Administrative Agent or any Lender Party under or in
respect of the Loan Documents".
(l) Section 5.03(e) of the Credit Agreement is hereby amended
(i) to delete the phrase "no later than 30 days" in the second line
thereof and to substitute therefor the new phrase "no later than 60
days" and (ii) to delete the phrase "on a monthly basis" in the fourth
line thereof and to substitute therefor the new phrase "on a quarterly
basis".
<PAGE>
-6-
(m) Section 5.04 of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:
"SECTION 5.04. Financial Covenants. So long as any
Advance shall remain unpaid, any Letter of Credit shall be
outstanding or any Lender Party shall have any Commitment
hereunder, the Parent Guarantor will:
(a) Total Leverage Ratio. Maintain a Total
Leverage Ratio as of the last day of each Measurement
Period of not more than the amount set forth below
for each Measurement Period set forth below:
Measurement Period
Ending In Ratio
------------------ --------
May 1999 7.25:1
August 1999 7.50:1
November 1999 7.90:1
February 2000 7.20:1
May 2000 6.90:1
August 2000 6.75:1
November 2000 6.75:1
February 2001 6.40:1
May 2001 6.25:1
August 2001 6.10:1
November 2001 5.75:1
February 2002 5.50:1
May 2002 5.50:1
August 2002 5.25:1
November 2002 5.00:1
February 2003 4.75:1
<PAGE>
-7-
Measurement Period
Ending In Ratio
------------------ --------
May 2003 4.50:1
August 2003 4.50:1
November 2003 and
thereafter 4.25:1
(b) Fixed Charge Coverage Ratio. Maintain a
Fixed Charge Coverage Ratio as of the last day of
each Measurement Period of not less 1.00:1.
(c) Interest Coverage Ratio. Maintain an
Interest Coverage Ratio as of the last day of each
Measurement Period of not less than the amount set
forth below for each Measurement Period set forth
below:
Measurement Period
Ending In Ratio
------------------ --------
May 1999 1.40:1
August 1999 1.35:1
November 1999 1.35:1
February 2000 1.45:1
May 2000 1.50:1
August 2000 1.55:1
November 2000 1.55:1
February 2001 1.65:1
May 2001 1.70:1
August 2001 1.75:1
November 2001 1.75:1
February 2002 1.90:1
May 2002 2.00:1
August 2002 2.00:1
<PAGE>
-8-
Measurement Period
Ending In Ratio
------------------ --------
February 2003 2.00:1
May 2003 2.25:1
August 2003 2.25:1
November 2003 2.25:1
February 2004 2.25:1
May 2004 2.25:1
August 2004 2.25:1
November 2004 and
thereafter 2.50:1"
(n) Section 6.01 of the Credit Agreement is hereby amended (i)
to add after the punctuation ";" at the end of subsection (o) thereof
the word "or" and (ii) to add the following new Section 6.01(p):
"(p) any "Event of Default" (as defined in the Childs
Guaranteed LOC Documents) shall have occurred and be
continuing under the Childs Guaranteed LOC Documents;".
(o) Schedule III to the Credit Agreement is hereby deleted in
its entirety.
SECTION 2. Waiver of Certain Provisions of the Credit
Agreement. Any and all Defaults and Events of Default under Sections 6.01(c) and
6.01(d) of the Credit Agreement that have occurred and are continuing as a
result of (a) the failure of the Parent Guarantor and the Borrower to deliver
projected Consolidated financial statements of the Parent Guarantor and its
Subsidiaries on a monthly basis for the Fiscal Year ending February 26, 2000,
(b) the failure of the Parent Guarantor to maintain a Total Leverage Ratio for
the Measurement Period ended February 28, 1999 of 6.75:1 in accordance with
Section 5.04(a) of the Credit Agreement and (c) the failure of the Borrower to
reduce the sum of the aggregate principal amount of all Working Capital
Advances, Letter of Credit Advances and Swing Line Advances outstanding during
the Clean-Up Period occurring between January 1, 1999 and May 30, 1999 to not
more than $15,000,000 in accordance with Section 2.01(g) of the Credit Agreement
are, on and as of the Amendment Effective Date, hereby waived by the Lender
Parties.
<PAGE>
-9-
SECTION 3. Conditions Precedent to the Effectiveness of this
Amendment and Waiver. This Amendment and Waiver shall become effective as of the
first date (the "Amendment Effective Date") on which each of the following
conditions precedent shall have been satisfied:
(a) The Administrative Agent shall have received counterparts
of this Amendment and Waiver executed by the Borrower, the Parent
Guarantor and the Required Lenders or, as to any of the Lender Parties,
advice satisfactory to the Administrative Agent that such Lender Party
has executed this Amendment and Waiver.
(b) The Administrative Agent and each of the Lender Parties
shall have received true and complete copies, certified by the
Borrower, of all of the Childs Guaranteed LOC Documents, which in each
case shall be in form and substance reasonably satisfactory to the
Lender Parties. All of the conditions precedent to the effectiveness of
the Childs Guaranteed LOC Documents shall have been satisfied or shall
be satisfied concurrently with the effectiveness of this Amendment and
Waiver.
(c) The Administrative Agent and each of the Lender Parties
shall have received true and complete copies, certified by the
Borrower, of agreements, in form and substance reasonably satisfactory
to the Lender Parties, duly executed by each of J.W. Childs Associates
L.P. and UBS Management, Inc., in which J.W. Childs Associates L.P. and
UBS Management, Inc., respectively, have agreed to defer payment of any
and all management fees owing to them under its Management Agreement
until such time as the Administrative Agent and the Lender Parties
shall have received the Consolidated financial statements of the Parent
Guarantor and its Subsidiaries for the Fiscal Year ending February 26,
2000 and the certificates and other documents required to be delivered
together with such Consolidated financial statements pursuant to
Section 5.03(d) of the Credit Agreement and then only if (i) such
Consolidated financial statements (and the related compliance
certificate) reflect that the Consolidated EBITDA of the Parent
Guarantor and its Subsidiaries for such Fiscal Year is not less than
$51,600,000 and (ii) at such time no Default has occurred and is
continuing or would result from the payment of such deferred management
fees to J.W. Childs Associates L.P. or UBS Management, Inc.
(d) All of the consents, approvals and authorizations of, and
notices and filings to or with, and other actions by, any governmental
or regulatory authority or any other Person necessary in connection
with any aspect of any of the Loan Documents (as amended and otherwise
modified hereby), the Childs Guaranteed LOC Documents or any of the
other transactions contemplated thereby or hereby to occur on or prior
to the Amendment Effective Date shall have been obtained (without the
imposition of any conditions that are not reasonably acceptable to the
Lender Parties) and shall remain in full force and effect; all
applicable waiting periods shall have expired without any action being
taken by any competent authority; and no law, rule or regulation shall
be applicable in the reasonable judgment of the Lender Parties that
restrains, prevents or imposes materially adverse conditions upon any
aspect of any of the Loan Documents (as amended and otherwise modified
hereby), the Childs Guaranteed LOC Documents or any of the other
transactions contemplated thereby or hereby to occur on or prior to the
Amendment Effective Date.
(e) The representations and warranties contained in each of
the Loan Documents shall be correct in all material respects on and as
of the Amendment Effective Date, before and after giving effect to this
Amendment and Waiver, as though made on and as of such date (except (i)
for any such
<PAGE>
-10-
representation and warranty that, by its terms, refers to a specific
date other than the Amendment 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 Credit Agreement shall be deemed to refer to the Consolidated
financial statements of the Parent Guarantor and its Subsidiaries most
recently delivered to the Administrative Agent and the Lender Parties
pursuant to Sections 5.03(c) and 5.03(d) on or prior to the Amendment
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 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 Administrative Agent
and the Lender Parties pursuant to Section 5.03(e) on or prior to the
Amendment Effective Date).
(f) No event shall have occurred and be continuing, or shall
result from the effectiveness of this Amendment and Waiver, that
constitutes a Default, other than the Defaults and Events of Default
that are or are to be expressly waived pursuant to Section 2.
(g) No change, development, event or circumstance relating to
or affecting the Parent Guarantor or any of its Subsidiaries or any of
their respective property, assets or businesses shall have occurred,
and no additional information shall have come to the attention of the
Administrative Agent or the Lender Parties, since May 6, 1999 that,
either individually or in the aggregate, could reasonably be expected
to have a Material Adverse Effect.
(h) The Borrower shall have paid to the Administrative Agent,
for the ratable account of each of the Lenders that has executed and
delivered a counterpart of this Amendment and Waiver to the
Administrative Agent on or prior to the Amendment Effective Date (or
advised the Administrative Agent in a manner satisfactory to it that
such Lender has executed this Amendment and Waiver on or prior to the
Amendment Effective Date), an amendment fee of 0.25% on the aggregate
Commitments of such Lender.
(i) All of the accrued fees and expenses of the Administrative
Agent and the Lender Parties (including the accrued fees and expenses
of counsel for the Administrative Agent) shall have been paid in full.
(j) The Administrative Agent shall have received on or before
the Amendment Effective Date the following, each dated such date
(unless otherwise specified), in form and substance reasonably
satisfactory to the Required Lenders (unless otherwise specified) and
in sufficient copies for each Lender Party:
(i) Certified copies of the resolutions of the Board
of Directors of the Borrower and the Parent Guarantor
approving this Amendment and Waiver, the Childs Guaranteed
Line of Credit and the Childs Guaranteed LOC Documents and the
transactions contemplated hereby and thereby (and which have
not been delivered to the Lender Parties prior to the
Amendment Effective Date), and of all documents evidencing
other necessary corporate action and governmental and other
third party approvals and consents, if any, with respect to
this Amendment and Waiver, the Childs Guaranteed Line of
Credit and the Childs Guaranteed LOC Documents and the
transactions contemplated hereby and thereby (and which have
not been delivered to the Lender Parties prior to the
Amendment Effective Date).
<PAGE>
-11-
(ii) A certificate of the Borrower and the Parent
Guarantor, signed on behalf of the Borrower and the Parent
Guarantor, respectively, by its President or a Vice President
and its Secretary or any Assistant Secretary, dated the
Amendment Effective Date (the statements made in which
certificate shall be true on and as of the Amendment Effective
Date), certifying as to:
(A) the absence of any amendments to the
charter of such Person since the date of the
Secretary of State's certificate referred to in
Section 3.01(j)(iv) of the Credit Agreement, or any
steps taken by the board of directors (or persons
performing similar functions) or the shareholders of
such Person to effect or authorize any further
amendment, supplement or other modification thereto;
(B) the accuracy and completeness of the
bylaws of such Person as in effect on the date on
which the resolutions of the board of directors (or
persons performing similar functions) of such Person
referred to in clause (i) of this Section 3(j) were
adopted and on the Amendment Effective Date (a copy
of which, if different from the bylaws of such Person
most recently delivered to the Lender Parties prior
to the Amendment Effective Date, shall be attached to
such certificate);
(C) the due incorporation and good standing
of such Person as a corporation organized under the
laws of the jurisdiction of its incorporation, and
the absence of any proceeding (either pending or
contemplated) for the dissolution, liquidation or
other termination of the existence of such Person or
any of its Subsidiaries;
(D) the accuracy in all material respects of
the representations and warranties made by such
Person in the Loan Documents to which it is or is to
be a party as though made on and as of the Amendment
Effective Date, before and after giving effect to
this Amendment and Waiver, 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 the Amendment 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 Credit Agreement shall be deemed to
refer to the Consolidated financial statements of the
Parent Guarantor and its Subsidiaries most recently
delivered to the Administrative Agent and the Lender
Parties pursuant to Sections 5.03(c) and 5.03(d) on
or prior to the Amendment 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 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
Administrative Agent and the Lender Parties pursuant
to Section 5.03(e) on or prior to the Amendment
Effective Date); and
(E) the absence of any event occurring and
continuing, or resulting from the effectiveness of
this Amendment and Waiver, that would constitute a
<PAGE>
-12-
Default, other than the Defaults and Events of
Default that are or are to be expressly waived
pursuant to Section 2.
(iii) A certificate of the Secretary or an Assistant
Secretary of the Borrower and the Parent Guarantor certifying
the names and true signatures of the officers of the Borrower
or the Parent Guarantor authorized to sign this Amendment and
Waiver and the other documents to be delivered hereunder.
(iv) Projections, prepared by management of the
Parent Guarantor and the Borrower, of Consolidated balance
sheets, income statements and cash flows statements of the
Parent Guarantor and its Subsidiaries on a quarterly basis for
the period between March 1, 1999 and February 26, 2000 and on
an annual basis for each Fiscal Year thereafter through the
Term B Termination Date.
(v) A favorable opinion of Sullivan & Worcester,
counsel for Childs and the Parent Guarantor and its
Subsidiaries, in form and substance reasonably satisfactory to
the Lender Parties.
(vi) Such other opinions, certificates, documents and
information as the Administrative Agent or any of the Lender
Parties through the Administrative Agent may reasonably
request.
The effectiveness of this Amendment and Waiver is further conditioned upon the
accuracy of all of the factual matters described herein. This Amendment and
Waiver is subject to the provisions of Section 9.01 of the Credit Agreement.
SECTION 4. Reference to and Effect on the Loan Documents. (a)
On and after the Amendment Effective Date, each reference in the Credit
Agreement to "this Agreement", "hereunder", "hereof" or words of like import
referring to the Credit Agreement, and each reference in the Notes and the other
Loan Documents to "the Credit Agreement", "thereunder", "thereof" or words of
like import referring to the Credit Agreement, shall mean and be a reference to
the Credit Agreement, as amended and otherwise modified hereby.
(b) The Credit Agreement, the Notes and each of the other Loan
Documents, as amended and otherwise modified by the amendments and waivers
specifically provided above in Sections 1 and 2, are and shall continue to be in
full force and effect and are hereby in all respects ratified and confirmed.
Without limiting the generality of the foregoing, the Collateral Documents and
all of the Collateral described therein do and shall continue to secure the
payment of all Obligations of the Loan Parties under and in respect of the Loan
Documents, as amended and otherwise modified by this Amendment and Waiver.
(c) The execution, delivery and effectiveness of this
Amendment and Waiver shall not, except as expressly provided herein, operate as
a waiver of any right, power or remedy of any Secured Party or any Agent under
any of the Loan Documents, nor constitute a waiver of any provision of any of
the Loan Documents.
<PAGE>
-13-
SECTION 5. Costs and Expenses. The Borrower hereby agrees to
pay, upon demand, all costs and expenses of the Administrative Agent (including,
without limitation, the reasonable fees and expenses of counsel for the
Administrative Agent) in connection with the preparation, execution, delivery,
administration, modification and amendment of this Amendment and Waiver and the
other documents, instruments and agreements to be delivered hereunder or in
connection herewith, all in accordance with the terms of Section 9.04 of the
Credit Agreement.
SECTION 6. Execution in Counterparts. This Amendment and
Waiver 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
Amendment and Waiver by telecopier shall be effective as delivery of a manually
executed counterpart of this Amendment and Waiver.
SECTION 7. Governing Law. This Amendment and Waiver shall be
governed by, and construed in accordance with, the laws of the State of New
York.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment and Waiver to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
The Borrower
DESA INTERNATIONAL, INC.
By
Name:
Title:
The Parent Guarantor
DESA HOLDINGS CORPORATION
By
Name:
Title:
<PAGE>
-14-
The Administrative Agent
NATIONSBANK, N.A., as Administrative Agent
By
Name:
Title:
The Lender Parties
NATIONSBANK, N.A., as a Lender,
the Swing Line Bank and the Issuing Bank
By
Name:
Title:
UNION BANK OF SWITZERLAND,
NEW YORK BRANCH
By
Name:
Title:
By
Name:
Title:
HELLER FINANCIAL, INC.
By
Name:
Title:
<PAGE>
-15-
IMPERIAL BANK, CALIFORNIA
BANKING CORPORATION
By
Name:
Title:
BANKBOSTON, N.A.
By
Name:
Title:
DRESDNER BANK AG, NEW YORK
AND GRAND CAYMAN BRANCHES
By
Name:
Title:
By
Name:
Title:
FIRST SOURCE FINANCIAL LLP
BY FIRST SOURCE FINANCIAL, INC.,
as Agent/Manager
By
Name:
Title:
FLEET NATIONAL BANK
By
Name:
Title:
<PAGE>
-16-
GENERAL ELECTRIC CAPITAL
CORPORATION
By
Name:
Title:
NATIONAL CITY BANK
By
Name:
Title:
FLEET BUSINESS CREDIT
CORPORATION
By
Name:
Title:
COMERICA BANK
By
Name:
Title:
VAN KAMPEN PRIME
RATE INCOME TRUST
By
Name:
Title:
<PAGE>
-17-
SENIOR DEBT PORTFOLIO, by
BOSTON MANAGEMENT AND
RESEARCH, as Investment Advisor
By
Name:
Title:
MORGAN STANLEY DEAN WITTER
PRIME INCOME TRUST
By
Name:
Title:
PILGRIM PRIME RATE TRUST, by
PILGRIM INVESTMENTS, INC.,
as Investment Manager
By
Name:
Title:
ML CBO IV (CAYMAN), by
HIGHLAND CAPITAL MANAGEMENT
L.P., as Collateral Manager
By
Name:
Title:
BOEING CAPITAL CORPORATION
By
Name:
Title:
<PAGE>
-18-
BANK POLSKA KASA OPIEKI S.A. -
PEKAO S.A. GROUP, NEW YORK
BRANCH
By
Name:
Title:
PARIBAS CAPITAL FUNDING LLC
By
Name:
Title:
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<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-26-2000
<PERIOD-END> MAY-29-1999
<CASH> 763
<SECURITIES> 0
<RECEIVABLES> 35,883
<ALLOWANCES> (1,667)
<INVENTORY> 61,363
<CURRENT-ASSETS> 99,774
<PP&E> 43,419
<DEPRECIATION> 27,141
<TOTAL-ASSETS> 222,984
<CURRENT-LIABILITIES> 63,956
<BONDS> 297,388
17,272
0
<COMMON> 156
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<TOTAL-LIABILITY-AND-EQUITY> 222,984
<SALES> 62,793
<TOTAL-REVENUES> 62,793
<CGS> 44,451
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<INTEREST-EXPENSE> 6,628
<INCOME-PRETAX> (6,047)
<INCOME-TAX> (2,659)
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