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 September 2, 2000
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 61-1251518
(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 October 6, 2000, there were 16,372,566 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.
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
FORM 10-Q
September 2, 2000
INDEX
PAGE
<S> <C> <C>
PART I Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - September 2, 2000 and February 26, 2000 2
Consolidated Statements of Operations - Thirteen and Twenty-seven Weeks 3
ended September 2, 2000 and Thirteen and Twenty-six Weeks
ended August 28, 1999
Consolidated Statements of Stockholders' Equity (Deficit)-Twenty-seven 4
Weeks ended September 2, 2000
Consolidated Statements of Cash Flows - Twenty-seven Weeks 5
ended September 2, 2000 and Twenty-six Weeks
ended August 28, 1999
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 12
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II Other Information
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
September 2, February 26,
2000 2000
-------------- --------------
(in thousands) (in thousands)
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 955 $ 173
Accounts receivable, net 80,526 32,921
Inventories:
Raw materials 692 209
Work-in-process 15,719 9,756
Finished goods 68,169 50,192
--------- ---------
84,580 60,157
Deferred tax assets 1,743 1,743
Other current assets 3,300 2,003
--------- ---------
Total current assets 171,104 96,997
Property, plant and equipment:
Land 526 525
Buildings and improvements 6,399 6,294
Machinery and equipment 41,292 39,361
Furniture and fixtures 1,117 1,090
--------- ---------
49,334 47,270
Less accumulated depreciation 32,926 30,574
--------- ---------
16,408 16,696
Goodwill, net 96,214 93,818
Other assets 20,408 22,266
--------- ---------
Total assets $ 304,134 $ 229,777
========= =========
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 64,898 $ 37,040
Accrued interest 3,889 5,233
Other accrued liabilities 15,119 13,225
Current portion of long-term debt 68,124 23,500
--------- ---------
Total current liabilities 152,030 78,998
Long-term debt 265,250 265,846
Other liabilities 15,715 15,629
--------- ---------
Total liabilities 432,995 360,473
Commitments and contingencies
SeriesC redeemable preferred stock, $.01 par value; authorized--
40,000 shares; issued and outstanding-- 23,805 shares at September 2,
2000 and at February 26, 2000 (liquidation preference - $24,306,000a
at September 2, 2000 and $22,882,000 at February 26, 2000) 21,410 19,937
Stockholders' equity (deficit):
Common stock, $.01 par value; authorized-- 50,000,000 shares; issued and
outstanding-- 16,372,566 shares at September 2, 2000 and 15,562,656 shares 164 155
at February 26, 2000
Nonvoting common stock, $.01 par value; authorized-- 3,000,000
shares; issued and outstanding-- 90,604 shares at September 2, 2000
and February 26, 2000 1 1
Capital in excess of par value 103,330 98,075
Carryover predecessor basis adjustment (32,309) (32,309)
Accumulated deficit (218,880) (214,518)
Accumulated other comprehensive loss (2,577) (2,037)
--------- ---------
Total stockholders' equity (deficit) (150,271) (150,633)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 304,134 $ 229,777
========= =========
</TABLE>
See accompanying notes
2
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
Thirteen Weeks Thirteen Weeks Twenty-seven Weeks Twenty-six Weeks
Ended Ended Ended Ended
September 2, 2000 August 28, 1999 September 2, 2000 August 28, 1999
----------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales $ 110,622 $ 97,924 $ 181,241 $ 160,717
Cost of sales 72,347 65,349 121,974 109,800
--------- --------- --------- ---------
Gross profit 38,275 32,575 59,267 50,917
Operating costs and expenses:
Selling 20,261 16,559 35,403 29,194
General and administrative 4,621 3,446 9,037 7,048
Other 1,727 1,540 3,461 3,064
--------- --------- --------- ---------
26,609 21,545 47,901 39,306
--------- --------- --------- ---------
Operating profit 11,666 11,030 11,366 11,611
Interest expense 8,420 7,334 16,612 13,962
--------- --------- --------- ---------
Income (loss) before provision
(benefit) for income taxes 3,246 3,696 (5,246) (2,351)
Provision (benefit) for income taxes 1,552 1,720 (2,438) (939)
--------- --------- --------- ---------
Net income (loss) 1,694 1,976 (2,808) (1,412)
Less dividends and accretion on preferred stock 764 685 1,553 1,348
--------- --------- --------- ---------
Income (loss) applicable to common stockholders $ 930 $ 1,291 $ (4,361) $ (2,760)
========= ========= ========= =========
</TABLE>
See accompanying notes
3
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
(Unaudited)
Carryover Accumulated
Nonvoting Capital in Predecessor Other Total
Common Common Excess of Basis Accumulated Comprehensive Stockholders'
Stock Stock Par Value Adjustment Deficit Loss Deficit
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
February 26, 2000 $155 $1 $98,075 ($32,309) ($214,518) ($2,037) ($150,633)
Comprehensive loss:
Net Loss (2,808) (2,808)
Net change in
foreign currency
translation adjustment (540) (540)
--------
Comprehensive loss (3,348)
--------
Accretion of preferred stock (130) (130)
Dividends on preferred stock (1,424) (1,424)
Issuance of common stock 9 5,255 5,264
--------------------------------------------------------------------------- --------
Balance at
September 2, 2000 $164 $1 $103,330 ($32,309) ($218,880) ($2,577) ($150,271)
=========================================================================== ========
</TABLE>
See accompanying notes
4
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Twenty-seven Weeks Twenty-six Weeks
Ended Ended
September 2, 2000 August 28, 1999
--------------------- ------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (2,808) $ (1,412)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 2,352 2,305
Amortization 3,214 2,980
Equity in undistributed earnings of joint venture (102) (119)
Change in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable, net (43,419) (33,881)
Inventories (19,062) (27,542)
Other current assets (1,164) (811)
Accounts payable 25,613 21,337
Accrued interest (1,308) 568
Other accrued liabilities 3,390 4,592
Income taxes payable (2,722) (910)
Other liabilities 3 176
-------- --------
Net cash used in operating activities (36,013) (32,717)
-------- --------
Investing activities
Capital expenditures (1,064) (2,918)
Dividends received from joint venture 65 106
Net cash paid for acquisition of businesses (11,448) 0
Other 15 (390)
-------- --------
Net cash used in investing activities (12,432) (3,202)
-------- --------
Financing activities
Increase in working capital loan 38,544 38,930
Increase in Guaranteed Line of Credit 9,900 0
Decrease in note payable (1,878) (64)
Principal payments of term loans (4,200) (1,875)
Principal payments of acquisition loans (4,375) 0
Proceeds from acquisition loans 6,000 0
Issuance of common stock 5,264 25
Payment of debt financing costs (23) (703)
-------- --------
Net cash provided by financing activities 49,232 36,313
Effect of exchange rate changes on cash (5) (5)
-------- --------
Increase in cash and cash equivalents for the period 782 389
Cash and cash equivalents at beginning of period 173 888
-------- --------
Cash and cash equivalents at end of period $ 955 $ 1,277
======== ========
</TABLE>
See accompanying notes
5
<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 auditors. In the opinion of management of
DESA Holdings Corporation (with its consolidated subsidiaries, "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. 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 the
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 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 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 26, 2000, 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 BV, DESA Industries of V.I., Inc., Heath Company Limited and Desico,
S.A. De C.V. All significant intercompany accounts and transactions have been
eliminated. DESA's 50% interest in a joint venture is accounted for using the
equity method.
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.
6
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Summarized Financial Information of DESA International, Inc.
DESA is the issuer of the 9 7/8% Senior Subordinated Notes. The Company has not
presented separate financial statements and other disclosures concerning DESA
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 as of September 2, 2000 and February 26, 2000, and for the thirteen and
twenty-seven weeks ended September 2, 2000 and thirteen and twenty-six weeks
ended August 28, 1999.
Summarized consolidated balance sheet information (in thousands):
September 2, February 26,
2000 2000
----------------------------------
Assets:
Current assets $ 275,987 $ 205,265
Net fixed assets 16,408 16,696
Goodwill, net 95,125 92,713
Other assets 20,408 22,266
-------------------------------
$ 407,928 $ 336,940
===============================
Liabilities and stockholders' deficit:
Current liabilities $ 151,529 $ 78,554
Long-term debt 135,250 134,004
9 7/8% Senior Subordinated Notes 130,000 130,000
Other liabilities 15,715 15,629
Stockholders' deficit (24,566) (21,247)
-------------------------------
$ 407,928 $ 336,940
===============================
Summarized consolidated statements of operations information (in thousands):
<TABLE>
<CAPTION>
September 2, August 28, September 2, August 28,
2000 1999 2000 1999
(Thirteen (Thirteen (Twenty-seven (Twenty-six
Weeks) Weeks) Weeks) Weeks)
------------------------------------ -------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 110,622 $ 97,924 $ 181,241 $ 160,717
Income (loss) before
income taxes $ 3,254 $ 3,745 $ (5,216) $ (2,254)
Income (loss) applicable
to common stockholders $ 1,702 $ 2,025 $ (2,778) $ (1,315)
</TABLE>
7
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Financing Arrangements
Outstanding borrowings consist of the following (in thousands):
<TABLE>
<CAPTION>
September 2, February 26,
2000 2000
---------------------------------------
<S> <C> <C>
9 7/8% Senior Subordinated Notes due 2007 (A) $130,000 $130,000
Bank of America and various banks Term A Loan (B) 34,000 37,500
Bank of America and various banks Term B Loan (C) 47,250 47,750
Bank of America and various banks Term C Loan (D) 5,800 --
Bank of America and various banks Working Capital Loan
Commitment (E) 63,924 25,379
Bank of America and various banks Acquisition Loan (F) 17,000 18,750
Bank of America and various banks Acquisition B Loan (G) 25,500 28,125
Note payable related to acquisition of Heath (H) -- 1,842
Guaranteed Line of Credit (I) 9,900 --
-------- --------
Total outstanding borrowings 333,374 289,346
Less current portion of long-term debt 68,124 23,500
-------- --------
Total long-term debt $265,250 $265,846
======== ========
<FN>
(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. 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 2.00% or LIBOR plus 3.00% at the option of
DESA. 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 9.47% in year to
date fiscal 2001 and 8.03% in fiscal year 2000. 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 2.25% or LIBOR plus 3.25% at the option of
DESA. 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 9.72% in year to
date fiscal 2001 and 8.52% in fiscal year 2000. Once repaid, the Term B Loan may not
be reborrowed.
(D) The Term C Loan is payable in quarterly installments and commenced in May 2000 and
extends through November 26, 2003, and accrues interest at the prime rate plus 2.25%
or LIBOR plus 3.25% at the option of DESA. 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 9.68% in year to date fiscal 2001. Once repaid, the Term C Loan may
not be reborrowed.
8
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(E) 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 2.00% or
LIBOR plus 3.00%, at the option of DESA. The weighted average interest rate was 9.41%
in year to date fiscal 2001 and 8.60% in fiscal year 2000. Interest is payable on a
quarterly basis under the prime rate option or at the end of each LIBOR period. DESA
can utilize letters of credit under the Working Capital Loan Commitment up to $10
million. As of September 2, 2000 and February 26, 2000, letters of credit of $8.7
million and $1.5 million were 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.
(F) The Acquisition Loan is payable in quarterly installments which commenced in February
2000 and extend through November 26, 2003, and accrues interest, which is payable
quarterly, at the prime rate plus 2.25% or LIBOR plus 3.25% at the option of DESA.
The weighted average interest rate was 9.69% in year to date fiscal 2001 and 8.22% in
fiscal year 2000. Once repaid, the Acquisition Loan may not be reborrowed.
(G) The Acquisition B Loan is payable in quarterly installments which commenced in
February 2000 and extend through November 26, 2003 and accrues interest, which is
payable quarterly, at the prime rate plus 2.25% or LIBOR plus 3.25% at the option of
DESA. The weighted average interest rate was 9.74% in year to date 2001 and 8.05% in
fiscal year 2000. Once repaid, the Acquisition B Loan may not be reborrowed.
(H) The note payable is due on December 31, 2008 and accrues interest, which is payable
semi-annually at a rate of 7.5% per annum. DESA 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 March 2000,
the loan was fully satisfied through reductions of principal for certain payments
made under the terms of the note.
(I) The Guaranteed Line of Credit loan is payable at any time at the option of DESA prior
to March 5, 2001, and accrues interest at the prime rate plus .25% or LIBOR plus
1.75%, at the option of DESA. 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 8.64% in year to date fiscal 2001.
</FN>
</TABLE>
In accordance with the terms of the Credit Facility, the ability of the Company
to incur additional indebtedness is limited, as defined. At September 2, 2000,
the Company can incur additional indebtedness of $2.4 million.
9
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Comprehensive Income (Loss)
Comprehensive income (loss) consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 2, August 28, September 2, August 28,
2000 1999 2000 1999
(Thirteen (Thirteen (Twenty-seven (Twenty-six
Weeks) Weeks) Weeks) Weeks)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,694 $ 1,976 $(2,808) $(1,412)
Net change in foreign
currency translation
adjustment (386) (84) (540) (302)
--------------------------------------------------------------------------
Comprehensive
income (loss) $ 1,308 $ 1,892 $(3,348) $(1,714)
--------------------------------------------------------------------------
</TABLE>
As of September 2, 2000 and August 28, 1999 the accumulated other comprehensive
loss consisted solely of the Company's foreign currency translation adjustment.
5. Segment Information
In March 2000, the Company reorganized into three divisions. Each division is
comprised of dedicated operational resources required to support their specific
product and geographic categories, and shared administrative resources for
certain corporate functions. The divisions are: (a) zone heating division, which
includes indoor room heaters, hearth products and outdoor heaters sold in the
United States, (b) specialty products division, which includes specialty tools
and home security products sold in the United States and all products sold in
Canada and (c) international division, which includes zone heating and specialty
products sold in all geographic areas other than the United States and Canada.
Zone heating division and specialty products division are reportable segments.
Identifiable assets are those assets of the Company that are identified with the
operations in each segment. Prior amounts have been reclassified to conform to
the current year's presentation. Operating results and other financial data for
the business segments for the periods ended September 2, 2000 and August 28,
1999 are presented below (in thousands):
<TABLE>
<CAPTION>
Specialty
Zone Heating Products
Division Division Other Total
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Thirteen weeks ended September 2, 2000:
Net sales $ 63,726 $ 44,715 $ 2,181 $110,622
Operating profit (loss) 8,782 3,506 (622) 11,666
Depreciation and amortization 2,112 822 56 2,990
Identifiable assets 166,226 129,575 8,333 304,134
Capital expenditures 391 97 138 626
Thirteen weeks ended August 28, 1999:
Net sales $ 48,764 $ 46,549 $ 2,611 $ 97,924
Operating profit (loss) 5,699 5,634 (303) 11,030
Depreciation and amortization 2,142 652 51 2,845
Identifiable assets 141,938 113,063 9,415 264,416
Capital expenditures 1,059 255 0 1,314
10
<PAGE>
<CAPTION>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Specialty
Zone Heating Products
Division Division Other Total
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Twenty-seven weeks ended September 2, 2000:
Net sales $ 87,595 $ 90,749 $ 2,897 $181,241
Operating profit (loss) 5,030 7,818 (1,482) 11,366
Depreciation and amortization 3,862 1,592 112 5,566
Identifiable assets 166,226 129,575 8,333 304,134
Capital expenditures 755 171 138 1,064
Twenty-six weeks ended August 28, 1999:
Net sales $ 69,170 $ 88,129 $ 3,418 $160,717
Operating profit (loss) 1,538 11,088 (1,015) 11,611
Depreciation and amortization 3,906 1,276 103 5,285
Identifiable assets 141,938 113,063 9,415 264,416
Capital expenditures 2,196 722 0 2,918
</TABLE>
6. Acquisition
On April 3, 2000, DESA acquired the assets of Trine Products Company ("Trine")
located in Bronx, New York for consideration of approximately $11.0 million. The
Company financed the acquisition through borrowings of $6.0 million and the
issuance of common stock for $5.0 million. The Company accounted for such
acquisition using the purchase method and has preliminarily allocated the
purchase price to the net assets acquired based on estimated fair values. The
results of operations have been included in Holdings' results of operations from
the acquisition date.
11
<PAGE>
DESA HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 that 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
guarantees 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 and the
seasonality of the Company's business. 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 and twenty-seven week period ended September 2, 2000
and the thirteen and twenty-six week period ended August 28, 1999, 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 26, 2000, included in the Company's Annual Report on Form 10-K.
Overview
In March 2000, the Company reorganized into three divisions. Each division is
comprised of dedicated operational resources required to support their specific
product and geographic categories, and shared administrative resources for
certain corporate functions. The divisions are: (a) zone heating division, which
includes indoor room heaters, hearth products and outdoor heaters sold in the
United States, (b) specialty products division, which includes specialty tools
and home security products sold in the United States and all products sold in
Canada and (c) international division, which includes zone heating and specialty
products sold in all geographic areas other than the United States and Canada.
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 fiscal third quarter, as
consumers prepare for winter. Consequently, the Company's net sales and the
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.
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.
On April 3, 2000, DESA acquired the assets of Trine Products Company ("Trine")
located in Bronx, New York for consideration of approximately $11.0 million. The
Company financed the acquisition through borrowings of $6.0 million and the
issuance of common stock for $5.0 million. Trine's annual sales for their most
recent year-end (June 30, 1999) were approximately $25 million. Trine produces a
complete line of door chimes, and accessories for residential and commercial
applications. Trine products are sold through mass merchants, home centers,
retail chains and hardware cooperatives.
12
<PAGE>
Results of Operations
Thirteen Week Period Ended September 2, 2000, Compared to the Thirteen Week
Period Ended August 28, 1999
Net sales. Net sales in the thirteen weeks ended September 2, 2000 ("second
quarter 2001") were $110.6 million, an increase of 13.0% or $12.7 million
compared to the thirteen weeks ended August 28, 1999 ("second quarter 2000").
Zone heating division had net sales of $63.7 million in second quarter 2001, an
increase of 30.7% or $15.0 million from the second quarter 2000. This increase
is primarily due to increased indoor heating and hearth product sales volumes.
Specialty products division had net sales of $44.7 million in the second quarter
2001, a decrease of 3.9% or $1.8 million from second quarter 2000, due to an
increase in home security product sales and the acquisition of Trine offset by a
reduction in generator sales from the prior year's sales that had been inflated
by consumer year 2000 concerns.
Cost of Sales. Cost of sales for second quarter 2001 was $72.3 million, an
increase of $7.0 million or 10.7% from second quarter 2000. The increase was
attributable to the higher unit sales for the period. Cost of sales was 65.4% of
net sales in second quarter 2001 compared to 66.7% for second quarter 2000.
Selling, General and Administrative Expenses. For second quarter 2001, selling,
general and administrative expenses were $26.6 million, an increase of $5.1
million or 23.5% from second quarter 2000. The proportional increase is
primarily attributable to direct selling costs associated with the net sales
increase. As a percentage of net sales, selling, general and administrative
expenses were 24.1% for second quarter 2001 compared to 22.0% in second quarter
2000. The increase as a percent of net sales is primarily the result of the
timing of sales related costs and a change in the product and customer mix
related to sales program costs compared to second quarter 2000.
Operating Profit. Operating profit was $11.7 million for second quarter 2001
compared to $11.0 million for second quarter 2000, an increase of $.7 million.
Operating profit attributable to zone heating products was $8.8 million for
second quarter 2001, an increase of $3.1 million or 54.1% from second quarter
2000. The increase is primarily the result of increased sales and favorable
changes in sales mix. Specialty products operating profit was $3.5 million for
the second quarter 2001, a decrease of $2.1 million or 37.8% from second quarter
2000. This decrease is primarily attributable to the decline in net sales,
redundant costs related to the planned integration of Trine and increased sales
program costs resulting from a change in the customer and product mix in second
quarter 2001.
EBITDA. EBITDA for the second quarter 2001 was $14.7 million, an increase of $.8
million or 5.6% from second quarter 2000. EBITDA is defined as income (loss)
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 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 second quarter 2001 was $8.4 million, an
increase of $1.1 million from second quarter 2000. The increase is primarily
attributable to market interest rate increases and higher levels of working
capital borrowing in support of increased sales.
Income Taxes. The effective income tax rate was 47.8% for second quarter 2001,
an increase of 1.3% compared to the second quarter 2000 rate of 46.5%. The
increase is primarily due to a change in the mix of foreign and domestic income
and an increase in non-deductible goodwill during fiscal year 2001.
Net Income. Net income was $1.7 million for second quarter 2001 compared to net
income of $2.0 million for second quarter 2000, a decrease of $.3 million. The
decrease is primarily attributable to higher selling, general and administrative
expenses and interest, offset by increased sales volumes and related margins.
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Twenty-seven Week Period Ended September 2, 2000, Compared to the Twenty-six
Week Period Ended August 28, 1999
Net sales. Net sales in the twenty-seven weeks ended September 2, 2000 ("year to
date 2001") were $181.2 million, an increase of 12.8% or $20.5 million compared
to the twenty-six weeks ended August 28, 1999 ("year to date 2000"). Zone
heating division had net sales of $87.6 million in year to date 2001, an
increase of 26.6% or $18.4 million from the year to date 2000. This increase is
primarily due to increased indoor heating and hearth product sales volumes.
Specialty products division had net sales of $90.7 million in the year to date
2001, an increase of 3.0% or $2.6 million from year to date 2000, due to an
increase in home security product sales and the acquisition of Trine offset by a
reduction in generator sales from the prior year's sales that had been inflated
by consumer year 2000 concerns.
Cost of Sales. Cost of sales for year to date 2001 was $122.0 million, an
increase of $12.2 million or 11.1% from year to date 2000. The increase was
attributable to the higher unit sales for the period. Cost of sales was 67.3% of
net sales in year to date 2001 compared to 68.3% for year to date 2000.
Selling, General and Administrative Expenses. For year to date 2001, selling,
general and administrative expenses were $47.9 million, an increase of $8.6
million or 21.9% from year to date 2000. The proportional increase is primarily
attributable to direct selling costs associated with the net sales increase. As
a percentage of net sales, selling, general and administrative expenses were
26.4% for year to date 2001 compared to 24.5% in year to date 2000. The increase
as a percent of net sales is primarily the result of the timing of sales related
costs and a change in the product and customer mix related to sales program
costs compared to year to date 2000.
Operating Profit. The operating profit was $11.4 million for year to date 2001
compared to $11.6 million for year to date 2000, a decrease of $.2 million.
Operating profit attributable to zone heating products was $5.0 million for year
to date 2001, an increase of $3.5 million or 227.0% from year to date 2000. The
increase is primarily the result of increased sales and favorable changes in
sales mix. Specialty products operating profit was $7.8 million for year to date
2001, a decrease of $3.3 million or 29.5% from year to date 2000. This decrease
is primarily attributable to the decline in net sales, redundant costs related
to the planned integration of Trine and increased sales program costs resulting
from a change in the customer and product mix.
EBITDA. EBITDA for the year to date 2001 was $16.9 million, approximately the
same as year to date 2000. EBITDA is defined as income (loss) 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 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 year to date 2001 was $16.6 million, an
increase of $2.7 million from year to date 2000. The increase is primarily
attributable to market interest rate increases and higher levels of working
capital borrowing in support of increased sales.
Income Taxes. The effective income tax rate was 46.5% for year to date 2001, an
increase of 6.5% compared to the year to date 2000 rate of 40.0%. The increase
is primarily due to a change in the mix of foreign and domestic income and an
increase in non-deductible goodwill during fiscal year 2001.
Net Loss. Net loss was $2.8 million for year to date 2001 compared to a net loss
of $1.4 million for year to date 2000, an increase of $1.4 million. The increase
is primarily attributable to higher selling, general and administrative expenses
and interest, offset by increased sales volumes and related margins.
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, borrowings under its revolving credit
facilities and the Guaranteed Line of Credit. 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
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generally depends upon a number of factors, including the level of retail sales
for heating products during the prior winter, 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 year to date 2001 was $36.0 million
compared to net cash used of $32.7 million for year to date 2000. This increased
use of cash in year to date 2001 was primarily due to higher sales and
production in year to date 2001 that resulted in increased accounts receivable
and inventory, offset by higher accounts payable.
Net cash used in investing activities was $12.4 million for year to date 2001,
compared to $3.2 million in year to date 2000. The use of cash in investing
activities in year to date 2001 reflects the acquisition of Trine for $11.4
million. Net cash provided by financing activities in year to date 2001 was
$49.2 million, compared to $36.3 million for year to date 2000. Cash provided by
financing activities in year to date 2001 reflects the proceeds of a term loan
and sale of common stock related to the Trine acquisition and increases in the
working capital loan and the Guaranteed Line of Credit associated with the net
increase in working capital.
The Credit Facility provides for commitments in an aggregate amount of up to
$204.6 million. Borrowings outstanding under the Credit Facility were $193.5
million on September 2, 2000. Outstanding letters of credit and foreign currency
contracts established to facilitate merchandise purchases were $8.7 million and
$4.9 million, respectively, at September 2, 2000. The Company had the ability to
incur additional indebtedness of $2.4 million at September 2, 2000 under the
Credit Facility. The Company is in compliance with all of its covenants under
the Credit Facility.
The Company entered into an agreement for a $15.0 million Guaranteed Line of
Credit on May 25, 1999. On July 28, 2000 the Guaranteed Line of Credit was
amended to mature on March 5, 2001 and to replace J. W. Childs Equity Partners,
L.P. with UBS Capital LLC, shareholder of the Company, as guarantor. Borrowings
under the Line of Credit bear interest at an annual rate equal to either (at the
Company's option) a margin over a base rate or a margin over LIBOR. The
Guaranteed Line of Credit contains customary covenants and events of default.
The Company expects that capital expenditures during fiscal 2001 will be
approximately $4.0 million. Capital expenditures are expected to be funded from
internally generated cash flows and from borrowings under the Credit Facility.
Management believes that cash flow from operations, availability under the
Credit Facility and the Guaranteed Line of Credit will provide adequate funds
for the Company's foreseeable working capital needs, planned capital
expenditures and debt service obligations. Additionally, the Company reviews
potential acquisitions and relationships from time to time and may be required
to seek additional debt to fund any acquisition. 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
September 2, 2000, approximately $33.9 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, make desired acquisitions, refinance 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.
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 its products in the United States and
Hong Kong, 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.
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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 periodic review of the cost of interest rate swap agreements and
interest rate cap agreements relative to the perceived interest rate risk. At
September 2, 2000, the Company did not have an interest rate swap or interest
rate cap agreement in place.
The following table summarizes the carrying amounts and estimated fair values
the Company's remaining financial instruments at September 2, 2000 and February
26, 2000 (bracketed amount represents an asset):
<TABLE>
<CAPTION>
September 2, 2000 February 26, 2000
Carrying Amount Fair Value Carrying Amount Fair Value
------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Bank debt $193,474 $193,474 $157,504 $157,504
Senior subordinated notes 130,000 98,475 130,000 96,850
Guaranteed Line of
Credit loan 9,900 9,900 -- --
Note payable -- -- 1,842 1,842
Foreign exchange contracts -- 633 -- 473
</TABLE>
Based on the average outstanding amount of variable rate indebtedness of the
Company in FY 2000 a one percentage point change in the interest rates for the
Company's variable rate debt would have impacted the Company's fiscal 2000
interest expense by an aggregate of approximately $1.9 million.
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 four quarters. Gains and losses related to qualifying hedges of
foreign currency risk exposures 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.
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PART II Other Information
Item 2. Changes in Securities and Use of Proceeds
During July and August 2000, options representing 1,034 shares were issued to
employees at an aggregate exercise price of $6,700. On August 4, 2000, 38,462
shares were sold to a non-employee director at an aggregate sale price of
$250,000. These shares are exempt from registration under Section 4(2) of the
Securities Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment No. 5 to the Loan Documents dated as of
April 7, 2000 to the Credit Agreement dated as of
November 26, 1997 by and among the Company, DESA
International, Inc., the Lender Parties party
thereto, UBS Securities LLC, Banc of America
Securities LLC (formerly NationsBanc Montgomery
Securities LLC) and Bank of America, N.A. (formerly
NationsBank, N.A.).
10.2 Amendment No. 1 to the Credit Agreement dated as of
July 28, 2000 to the Credit Agreement dated as of May
26, 1999 between DESA International, Inc. and Bank of
America, N.A. (formerly NationsBank, N.A.).
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the period for which this report
is made.
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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: October 11, 2000 /s/ Stephen L. Clanton
Stephen L. Clanton
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
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