UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended February 26, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
OF 1934 For the transition period from ______ to ______
Commission File Number 333-44969-01
DESA HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 61-1251518
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
2701 Industrial Drive, Bowling Green, KY 42101
(Address of principal executive offices) (Zip Code)
(270) 781-9600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Title of Each Class Name of Exchange on Which Registered
Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of May 19, 2000, the aggregate market value of the Common Stock of the
registrant held by non-affiliates of the registrant was $12,770,927.
Number of shares of the registrant's Common Stock at May 19, 2000: 16,217,537
Number of shares of the registrant's Nonvoting Common Stock at May 19, 2000:
90,604
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DESA HOLDINGS CORPORATION
1999 FORM 10-K ANNUAL REPORT
Table of Contents
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PART I
Item 1. Business 2
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 13
Item 6. Selected Consolidated Financial and Operating Information 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 21
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and Management 29
Item 13. Certain Relationships and Related Transactions 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT
SIGNATURES
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CERTAIN IMPORTANT FACTORS This Annual Report on Form 10-K contains statements
which constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Annual Report on Form 10-K and include statements regarding the
strategies, beliefs or current expectations of Desa Holdings Corporation (with
its consolidated subsidiaries, "DESA", "Holdings" or the "Company") and its
management. Readers are cautioned that any such forward looking statements are
not guarantees of future performance and involve risks and uncertainties, which
could cause actual results to differ materially from those in the forward
looking statements. Such factors include but are not limited to the Company's
vulnerability to adverse general economic and industry conditions because of its
leverage, the Company's ability to obtain future financing on acceptable terms,
the Company's ability to integrate acquired companies and to complete
acquisitions on satisfactory terms, the demand and price for the Company's
products relative to production costs, and the seasonality of the Company's
business. The accompanying information contained in this Annual Report on Form
10-K, including under the headings "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," identifies other
important factors that could cause such differences. The Company undertakes no
obligation to release publicly the result of any revision to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
PART I
Item 1. Business.
(a) GENERAL DEVELOPMENTS OF THE BUSINESS
DESA Holdings Corporation was incorporated under the laws of the State of
Delaware in 1993 and through its consolidated subsidiaries, is a leading
designer, manufacturer and marketer of zone heating/home comfort products and
specialty products in the United States. DESA has developed leading market
positions in (i) vent-free indoor heaters, (ii) vent-free hearth products, (iii)
outdoor heaters, (iv) consumer powder-actuated fastening systems, (v) electric
chain saws, (vi) motion sensor lighting and (vii) doorbells.
The Company sells its products through multiple consumer and commercial channels
of distribution including the leading home centers, mass merchants, warehouse
clubs, hardware cooperatives, specialty heating distributors, construction and
industrial equipment dealers, farm supply outlets and natural gas utilities
under brand names well recognized by its customers. The Company's strategy is to
aggressively target the fastest growing retailers/distributors in each channel
and service these customers through a multi-brand approach to capture the
largest possible share of a given product market. In addition, the Company
places a high emphasis on new product development and product line extensions.
In November / December 1999, DESA hired a new executive management team with
extensive experience in the heating appliance industry. This team is replacing
the former Chief Executive Officer and Chief Operating Officer who resigned in
November 1999, effective April 2000. As a result, DESA will reorganize in fiscal
2001 into three divisions, zone heating, specialty products and international.
The executive team consists of W. Michael Clevy (President and Chief Executive
Officer), Stephen L. Clanton (Chief Financial Officer), David B. Schumacher
(President - Zone Heating Division), James R. Wiese (President - Specialty
Products Division) and Augusto H. Millan (President - International Division).
On April 3, 2000, DESA acquired the assets of Trine Products Company ("Trine")
located in Bronx, New York for consideration of $11,097,000. Trine's annual
sales for their most recent year-end (June 30, 1999) were approximately $25
million. Trine produces a complete line of door
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chimes, and accessories for residential and commercial applications. Trine
products are sold through mass merchants, home centers, retail chains and
hardware cooperatives.
(b) FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
The Company operates in two reportable business segments, zone heating products
and specialty products. For additional information about the segments, see Note
13 of Notes to Consolidated Financial Statements included in Item 8 of Part II
of this report.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
PRODUCTS
Zone Heating Products (56% of Fiscal 2000 Net Sales)
The zone heating market is comprised of indoor gas heaters, hearth products (gas
logs, fireplaces and stoves) and outdoor heaters. DESA is a leading manufacturer
of vent-free indoor and outdoor zone heating products in the United States. DESA
markets its zone heating products under well-known brand names such as Reddy(R),
Remington(R), Vanguard(R), Master(R) and Comfort Glow(R). The Company's zone
heating business is organized into two primary product categories:
o Indoor vent-free heating appliances and hearth products: Indoor heating
appliances include vent-free liquid propane and natural gas space
heaters which provide economical supplemental heat to a specific area
as distinguished from central heating systems which are used to heat
entire buildings. Vent-free hearth products such as gas logs,
fireplaces and stoves are utilized for both decorative and economic
heating. Vent-free products utilize a more efficient burner system
which avoids the need for outside venting, whereas vented products
require a discharging of emissions outside of the building.
o Outdoor heating appliances: Outdoor heating products consist of
portable units which generate heat by either using a fan to discharge
heated air to a specific area (forced air heaters) or emitting heat
throughout the surrounding area without the assistance of a fan
(convection heaters). Forced air heaters are fueled by kerosene,
propane or natural gas, while convection heaters are fueled only with
propane or natural gas. Outdoor heaters are used in both residential
and commercial applications. Residential applications include heating
otherwise unheated garages, workshops and outdoor work areas.
Commercial applications include heating factories, warehouses,
construction sites and agricultural areas.
Specialty Products (44% of Fiscal 2000 Net Sales)
DESA's specialty products business includes powder-actuated fastening systems
(tools and accessories) used to fasten wood to concrete or steel, stapling/rivet
tools and electrical products such as chain saws, portable generators and home
security products. These products are marketed under well-known brand names such
as Remington(R), Master(R), Powerfast(R) and Heath/Zenith(R).
STRATEGY
DESA's objective is to continue to leverage its competitive strengths to
increase revenues and EBITDA (as hereinafter defined). In addition, the Company
believes there are significant opportunities to enhance its overall market and
competitive position as follows:
Implementation of Lean Enterprise processes. DESA has committed to implement
Lean Enterprise processes throughout its organization. Lean Enterprise processes
focus on improving
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the value the Company provides to its customers, the value stream that creates
customer driven performance, manufacturing flow from raw materials to delivered
goods, demand pull approach to manufacturing and improved overall product
quality. DESA expects to realize benefits from lower manufacturing and overhead
costs, reduced lead times, reduced inventory levels and improved product quality
and customer service.
Continue Aggressive Growth through DESA's Primary Distribution Channels and
Customers. DESA's distribution strategy is twofold: (i) establish breadth across
distribution channels; and (ii) achieve depth within each channel by fostering
and enhancing relationships with some of the most rapidly growing retailers in
such channel (such as Home Depot and Lowe's in the home center channel and
Wal-Mart and Sears in the mass merchant channel). While DESA has managed to gain
access to multiple channels of distribution, significant opportunities remain to
sell the Company's full product line through each of these customers.
Penetrate New Distribution Channels. Although DESA currently sells its products
through a broad distribution network, the Company believes there are
opportunities to increase the penetration in some of the Company's newer
channels such as plumbing supply outlets, building supply distributors, HVAC
distributors, building contractors and fireplace specialty stores. Management
believes that these newer channels represent attractive markets across the
United States.
Capitalize on Favorable Trends for Gas Products. Management believes that there
is an increasing homeowner preference for gas which represents a significant
growth opportunity for DESA as all of its indoor heating products are fueled by
natural or propane gas. Additionally, by focusing on vent-free gas products,
which have lower installation costs and provide increased fuel efficiency
compared to vented products, the Company is well positioned to benefit from the
fastest growing segments of the zone heating market.
Increase Penetration of International Markets. Similar to the trend in the
United States, the global do-it-yourself ("DIY") markets are experiencing
attractive growth rates. Four of the ten largest home improvement retailers in
the world are based outside of the United States. However, international sales
comprised only 5% of DESA's total sales in fiscal 2000. The Company is
accelerating development of products suitable for international markets.
Make Strategic Acquisitions. The Company intends to seek selective acquisitions
where it can expand its existing product portfolio, utilize its diversified
distribution channels and achieve operational synergies. Over the last five
years, 58% of the Company's sales growth has come through acquisitions.
Management believes that the markets in which it operates are highly fragmented
and there are numerous manufacturers of complementary products that would make
attractive acquisition candidates.
PRODUCTS AND MARKETS
DESA is the leader in a number of markets where its quality manufacturing and
innovative product design have resulted in a strong competitive position. The
Company's products are sold for both consumer and commercial use utilizing
multiple distribution channels and a variety of brand names. The Company
currently serves markets for zone heating products and specialty products.
Approximately 95% of the Company's 2000 sales were domestic and 5% of sales were
international.
Zone Heating
Market Overview
The zone heating market includes a broad range of products that are used to heat
limited areas as distinguished from central heating systems that are used to
heat entire buildings. The zone heating market is currently estimated to be
approximately $1.0 billion in size, with hearth products
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(i.e., vented gas hearth, vent-free gas hearth, wood fireplaces, wood
stoves/inserts, pellet stoves/inserts) accounting for more than half of the
total market; indoor gas heaters, outdoor heaters, and accessories comprise the
remainder of this segment.
Market Outlook
DESA's strong market position in the vent-free segment provides a solid
foundation for further growth of the Company's business and expansion into other
categories (e.g. vented gas hearth) as a result of the following factors:
Benefits of low-cost zone heating. Over the past decade, zone heating products
have become increasingly popular because: (i) propane and natural gas are
significantly cheaper on a BTU basis than electricity, (ii) consumers have
become aware of the cost advantage of zone heating versus central heating and
(iii) fireplaces are being used as both heating sources and decorative home
furnishing. This growing preference for gas represents a growth opportunity for
DESA as almost all of its indoor heating products are fueled by natural or
propane gas. Management believes the market is under-penetrated. Gas hearth
shipments have been growing at a rate in excess of 30% per year for the past
five years. Management estimates that there are over 27 million homes have been
plumbed for gas and have a fireplace, providing an opportunity for gas log
sales. In addition, an estimated 36 million homes are plumbed for gas but do not
have a fireplace, representing a significant opportunity for the installation of
vent-free fireplaces and logs.
Increased home center/hardware channel participation. Management estimates that
consumer awareness of gas logs and gas fireplaces is currently only 67% and 20%,
respectively. Awareness of zone heating and hearth products is expected to
increase as these products gain wider distribution in home centers and hardware
stores. The potential for home improvement sales, through retrofitting or adding
a new fireplace, represents a meaningful market opportunity for hearth products.
DESA, with its strong home center and hardware co-op channel relationships and
portfolio of zone heating products, is well-positioned to capitalize on this
trend.
Favorable Regulatory Development. A positive development for vent-free indoor
heating products (heaters, gas logs, fireplaces, stoves) involves the easing of
state restrictions regarding the sale and use of these products. As of last
year, 47 of the 50 states in the United States permitted the sale and use of
vent-free indoor heating products. This is up from 43 states in the previous
year, following the trend towards an easing of restrictions by state
governments.
Indoor Heating Products
DESA's indoor zone heating products consist primarily of three product
categories: (i) vent-free natural gas and propane-fueled residential space
heaters; (ii) hearth products, including vent-free gas fireplaces and logs; and
(iii) direct vent products under the FMI (as hereinafter defined) brand.
Indoor Vent-Free Heaters. The Company's space heaters are generally wall-mounted
and provide heat to the surrounding area. Residential space heaters come in
either vented or vent-free versions. Vented heaters require a discharging of
emissions outside of the dwelling, while vent-free heaters utilize a more
efficient burner system that avoids the need for outside venting. Vent-free
heaters are generally smaller and more physically attractive than their vented
counterparts. DESA has been the market leader in vent-free gas heaters since
1983. Historically, DESA has focused on vent-free models.
The Company offers seven sizes and forty-six models of vent-free gas heaters
ranging in output from 5,000 to 30,000 BTU/hour for use with natural gas or
liquefied propane. Key applications of these products include use in family
rooms, dens, kitchens and commercial offices. DESA's indoor vent-free heaters
are sold at retail prices that are significantly lower than vented gas heaters.
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Heaters are classified into two different types: infrared and blue flame.
Infrared models employ ceramic plaque burners that glow red-orange while in use
and they produce radiant heat that warms people or objects in the room. Blue
flame models have a stainless steel burner hidden behind a darkened glass front.
When burning, a line of blue flame is visible across the width of the heater.
These models produce convection heat that warms the air and distributes the heat
throughout the room. Both infrared and blue flame models are available with
either manual or thermostatic control and with piezo ignition.
The Company has developed patented technology for its line of thermostatic
infrared models, known as Infra-Stat, which management believes provides
superior features versus competitors' offerings. DESA's heaters incorporate a
proprietary feature of two separate controls to regulate both the heat output
and the thermostatic operation. Enhanced blue-flame models are available for
heavy-duty garage and workshop applications. Optional accessories such as floor
bases and fan accessories are also available.
Vent-Free Hearth Products. In 1993, DESA pioneered the introduction of vent-free
gas technology to hearth products with the introduction of a heat efficient
vent-free decorative gas log. Vent-free gas logs have provided DESA with a new
product growth opportunity. Vent-free represents an advancement in decorative
gas log technology and, more importantly, has allowed the Company to establish a
presence in the fast-growing hearth products market.
Vent-free gas logs are aesthetically attractive and an economical source of heat
since none of the heat generated is lost through an open vent. Historically,
decorative gas logs have required venting (i.e., an open chimney damper) and
were used primarily by individuals who enjoyed the ambiance of a fireplace but
wanted to avoid the trouble and inconvenience associated with burning wood.
DESA's vent-free logs utilize an efficient burner system similar to vent-free
heaters, and are thus less expensive to install and operate than their vented
counterparts.
This development was followed by combining the technology of blue flame heaters
and gas logs to create an aesthetically pleasing Mini-Hearth gas heater. The
Mini-Hearth utilizes a blue flame heater cabinet and burner to which a
decorative fibrous ceramic log has been added. A wooden mantle is placed around
the heater to create a fireplace effect. While the Mini-Hearth was designed to
be used as a zone heater rather than as a replacement for a formal fireplace,
the improved appearance has generated sales to customers who might not have
otherwise purchased a gas zone heater.
DESA introduced a vent-free free-standing gas fireplace with logs and a full
sized mantle which is marketed as a traditional fireplace. DESA's vent-free
fireplace does not require venting and may be placed against any wall without
structural renovations. Traditional fireplace boxes must be mounted into an
outside wall to facilitate venting, requiring significant structural
modifications to an existing home. Furthermore, vent-free fireplace installation
costs are highly attractive relative to wood fireplaces (masonry and
manufactured), which cost an average of two to three times the cost of a
vent-free fireplace, including installation.
The Company's vent-free gas logs are offered in three sizes and thirty-six
models while vent-free gas fireplaces are offered in ten models and mini-hearth
products in six models.
Direct Vent Products. In August 1998, DESA acquired Fireplace Manufacturers Inc.
("FMI"), a manufacturer of direct vent gas fireplaces and gas logs, as well as
wood burning metal fireplaces. FMI is located in Santa Ana, California.
With the acquisition of FMI, DESA is now competing in the vented hearth market,
which has annual sales in the United States of approximately $400 million. DESA
currently intends to take advantage of its position as a market leader in vent
free products as it competes in the vented hearth market.
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Outdoor Heating Products
DESA's line of outdoor heating products consists of portable units which
generate heat by either using a fan to discharge heated air to a specific area
(forced air heaters) or emitting heat throughout the surrounding area without
the assistance of a fan (convection heaters). Forced air heaters are fueled by
either kerosene, propane or natural gas, while convection heaters are fueled
only with propane or natural gas. Outdoor heaters are used in both residential
and commercial applications. Residential applications include heating garages
and workshops. Commercial applications include heating factories, warehouses,
construction sites and agricultural areas.
Specialty Products
DESA's specialty products category consists of (i) home security products, (ii)
specialty fastening systems (i.e., powder-actuated tools and staple guns), and
(iii) electrical products (i.e., chain saws and electric generators). These
products are sold to both DIY and commercial customers. The specialty product
category represents 44% of the Company's sales which have grown at a 36%
compound annual growth rate ("CAGR") from fiscal 1995 to fiscal 2000.
Home Security
The Company's home security products, marketed under the Heath/Zenith brand, are
comprised of three primary product lines: Motion Sensor Security Lighting,
Motion Sensor Decorative Lighting, and Wireless Doorbells.
Motion Sensor Security Lighting. Within its motion sensor security lighting
product line, Heath/Zenith offers approximately 58 stock keeping units ("SKUs")
representing a variety of security lighting products which appeal to various
segments of the DIY market. Heath/Zenith's primary focus is to de-emphasize
promotional products and to emphasize its high quality, high margin products
that are made with metal fixtures and hoods, and which contain such value-added
features as Pulse Count, Dual BriteTM, and 270(degree) activation capability.
Market Overview. The estimated $200 million North American residential outdoor
security lighting industry market is segmented into three categories: (i) motion
sensor security lighting, (ii) photocell (darkness activated) security lighting,
and (iii) standard (switch activated) security lighting. The motion sensor
security lighting segment has been the primary growth segment in the industry,
growing at a CAGR that the Company believes to be approximately 15% over the
last five years. Since the introduction of motion sensor security lighting, the
product has established itself as an easy to install, reliable, low-cost
security product. As a result, motion sensor products have steadily captured
market share from standard and photocell lighting as those traditional products
are less effective crime deterrents and more expensive and less convenient to
operate.
Motion Sensor Decorative Lighting. There are approximately 38 SKUs in the motion
sensor decorative lighting products category. Heath/Zenith's motion sensor
decorative lighting products were introduced in 1992 as part of management's
strategy to move consumers to higher price point products. Included in this
product line are coach lanterns, cast aluminum lanterns, brass lanterns and post
lanterns.
Market Overview. Management believes the North American residential outdoor
decorative lighting industry to be approximately $400 million. The market is
primarily driven by the home improvement and remodeling industry. As a result,
the overall retail outdoor decorative lighting industry has benefited from the
expansion in the home improvement industry and DIY retail channel. Historically,
the decorative lighting market was dominated by standard (switch activated)
lighting products. However, as customers become more aware of the benefits of
motion sensor
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lighting products such as energy efficiency, crime deterrence, and convenience,
they are requiring motion sensor capabilities in their outdoor lighting
products.
Wireless Doorbells. Management believes Heath/Zenith's wireless doorbell
products are positioned to take advantage of an underserved market. Heath/Zenith
has become the market leader in the wireless doorbell industry by offering a
diverse line of products and, most importantly, by differentiating its product
with a proprietary sound chip.
Market Overview. The wireless control systems industry is a diverse industry
that includes products ranging from home automation systems to garage door
openers to wireless doorbells. Heath/Zenith currently competes primarily in the
wireless doorbell segment of the residential wireless control systems industry,
estimated by the Company to be an industry with annual North American sales of
approximately $40 million.
Specialty Fastening Systems Products
Powder-actuated tools utilize a powder load to drive nails for fastening wood to
concrete or steel. The charge is activated using either a trigger on the tool or
by striking the tool with a hammer. The energy discharged propels a piston
inside the tool which in turn drives the nail. DESA sells two powder-actuated
tools targeted at the DIY market and six tools targeted at the commercial
market. There are two consumer models and six commercial models. Sales of powder
loads and nail accessories account for over 50% of this product category's
revenues.
Market Overview. The total domestic powder-actuated tool market in which DESA
competes is approximately $90 million, consisting of $60 million in the
commercial market and $30 million in the DIY market. In fiscal 1999, DESA had a
market share of 88% in the DIY segment. The staple gun and related accessories
market size is approximately $110 million of which DESA has a modest market
share.
Electrical Products
DESA assembles and markets a line of electric chain saws that are used primarily
by homeowners for light-duty pruning and trimming. The Company offers several
models including an extended reach polesaw.
DESA traditionally maintains a modest presence in the portable electric
generator market. Approximately 39% of the Company's generator sales are made to
W.W. Grainger who offers this product line to end-users through its equipment
catalog and industrial supply outlets.
Market Overview. The domestic electric chain saw market is approximately $40
million in size, and DESA is the market leader with a 54% share. The electric
chain saw market is mature and industry volume has been reasonably stable over
the past five years.
International
In fiscal 2000, $19.5 million or 5% of DESA's gross sales were generated in
international markets such as Canada, Europe and the Far East. Although the
global markets have not traditionally been an area of DESA's focus, the Company
believes that the international category represents a significant opportunity
for increased sales in the future. International markets have the potential to
surpass the home improvement market in the United States.
DESA's strategy for the international markets has been to export customized
versions of its products to accommodate local electrical requirements,
government regulation and user preferences for its exported products. DESA
utilizes local distributors in each country to sell its products, typically
relying on more than one distributor in each country.
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Sales, Marketing and Distribution
Sales. DESA has organized its domestic sales force by channels of distribution
and product categories in order to optimize the effectiveness of its selling
efforts. DESA management believes that such a structure enhances the Company's
relationships with key channel participants by (i) enabling the sales force to
develop specific customer insights regarding specialized needs and (ii) creating
a sense of partnership through customized attention and focus.
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DESA Sales Channel of Distribution Products Marketed Approximate
Organization Number of Sales
Representatives
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General Consumer Mass Merchants Indoor Heating 120
Hardware Co-ops Hearth Products
Home Centers Outdoor Heating
Warehouse Stores
Catalog Showrooms
Agricultural Supply
Specialty Heating Utilities Indoor Heating 40-50
Propane Marketers Hearth Products
Specialty Distributors
Appliance Distributors
Construction Equipment Distributors Outdoor Heating 50-60
Equipment Renters Generators
Specialty Products Mass Merchants Specialty Fastening Systems 100
Hardware Co-ops Electrical Products
Home Centers Warehouse Home Security
Stores
Catalog Showrooms
Agricultural Supply
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Marketing. The Company's marketing staff utilizes a variety of traditional and
innovative programs to increase consumer awareness and augment sales. DESA uses
limited national advertising and relies instead on local customer advertising
through newspapers and circular flyers. DESA has also created a broad national
network of independent, factory-trained service centers to provide local support
to customers and end-users.
Distribution. The Company's significant customers include all of the major home
center accounts. The Company's consumer channels, which include home centers,
mass merchants, warehouse clubs and hardware co-ops, are the most important
channel for DESA's products and were responsible for 68% of its fiscal 2000
domestic sales. Other channels, including specialty heating, farm, construction
and industrial, contributed 32% of domestic sales in fiscal 2000.
Significant Customers
Significant customers include Home Depot and Lowe's, the two largest home
centers in the world, who accounted for 25% and 13% of net sales in fiscal year
2000, respectively. Ace and TruServ, leaders in the hardware co-op market; Sears
and Wal-Mart/Sam's, major mass
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merchandisers; and W.W. Grainger, a major industrial supply company are also
major customers. Consistent with industry practices, the Company does not
operate under a long-term written supply contract with any of its customers.
Competition
Each of the business segments in which the Company manufactures and sells
products is highly competitive. Although competitive factors vary by product
line, competition in all product lines is based primarily on product quality,
product innovation, customer service and price. The Company also believes that a
manufacturer's relationship with its distributors and principal customers is a
key factor in the business segments in which the Company competes.
The Company competes with a number of manufacturers in the heating products
industry. Within this industry, there are several manufacturers of gas heaters
and numerous producers of gas logs, pre-engineered fireplaces and solid fuel
heaters. The Company also competes with a number of manufacturers in the
specialty tool industry. The Company believes that it is a market leader in the
outdoor heating appliance, vent-free indoor gas heating and hearth and DIY
powder-actuated fastener, doorbell and electric chain saw markets and believes
that its experience, well-recognized brand names, comprehensive product
offerings and strong customer relationships give it a competitive advantage with
respect to these products.
The Company's competitors offer a number of products which directly compete with
or can be utilized as substitutes for the products manufactured by the Company.
No assurance can be given that the future sales of such competitive products
will not adversely affect the market for the Company's products. In addition,
certain of the Company's competitors, particularly in the specialty tool
industry, are larger and better capitalized than the Company.
Management Information Systems ("MIS")
DESA maintains an advanced MIS utilizing customized software for its
manufacturing and engineering design. The Company also has established Customer
Electronic Data Interchange for order entry by major accounts. These systems
provide "real-time" information in regards to work-in-process inventory and
provide detailed labor reporting to enable the Company to identify potential
labor cost savings. For product development and engineering, employees utilize a
state-of-the-art three dimensional CAD/CAM system.
Manufacturing
Indoor and Outdoor Heating Products. DESA's manufacturing processes include
metal fabrication, painting, assembly and product testing. In general, DESA
cuts, forms and coats the product housing, assembles the product using the
various components such as motors, fans, electrical parts and burners, packages
the final product and ships it to customers. Punch presses, welding, powder
coated painting and assembly systems are mechanized with state-of-the-art
equipment utilizing robotics to permit high volume output with minimum labor
content.
Specialty Fastening Systems. DESA manufactures and packages the nails (pins) for
sale with its powder-actuated tool product line. Powder-actuated tools are
sourced from a manufacturing joint venture with Continental/Midland, Inc. and
loads are purchased from a third party. Powerfast(R) stapling products are
sourced from Asian manufacturers.
Electrical Tools. DESA assembles electric chain saws from components made to its
specifications by third-party suppliers. Electric generators are assembled on a
chassis by connecting gasoline engines purchased from Honda and Briggs &
Stratton with an alternator purchased from a European supplier.
10
<PAGE>
Home Security. Heath/Zenith designs and manufactures its products through its
Hong Kong based subsidiary, Heath Company Ltd., which provides purchasing,
engineering, contract manufacturing, administration and assembly. Heath/Zenith
uses subcontractors in China who assemble products according to predetermined
specifications and ship assembled products to Heath Ltd. Heath/Zenith owns all
the tooling utilized in the production of its products. Finished products are
shipped to the Company's warehouse in Manchester, Tennessee and a public
warehouse in Reno, Nevada and distributed throughout North America directly to
customers.
Raw Materials
The Company purchases raw materials and components from a variety of vendors and
generally most items are available from multiple sources. Major raw materials
and components include coil steel, valves, burners, controls, paint, motors,
fans, electrical parts, loads and packaging materials. Management believes that
the materials used in the production of the Company's products are available at
competitive prices from an adequate number of alternative suppliers and does not
believe that the loss of any single supplier would have a material adverse
effect on the Company's business.
Trademarks, Patents and Licenses
The success of the Company's various businesses depends in part on the Company's
ability to exploit certain proprietary designs, trademarks and brand names on an
exclusive basis in reliance upon the protections afforded by applicable
copyright, patent and trademark laws and regulations. The loss of certain of the
Company's rights to such designs, trademarks and brand names or the inability of
the Company to protect effectively or enforce such rights could adversely affect
the Company.
Backlog and Warranty
The Company's backlog consists of cancelable orders and is dependent upon trends
in consumer demand throughout the year. Customer order patterns vary from year
to year, largely because of annual differences in consumer end-product demand,
marketing strategies, overall economic conditions and weather conditions. Orders
for the Company's products are generally subject to cancellation until shipment.
As a result, comparison of backlog as of any date in a given year with the
backlog at the same date in a prior year is not necessarily indicative of sales
trends. Moreover, the Company does not believe that backlog is necessarily
indicative of the Company's future results of operations or prospects. The
Company's backlog of orders was approximately $16.7 million at February 26, 2000
compared to $35.0 million at February 27, 1999. The decline is primarily due to
a $20.0 million decrease in generator order backlog. The increase in generator
orders in fiscal 2000 was primarily driven by increased demand for generators
related to concerns of year 2000 computer problems.
The Company's warranty policy is to accept returns of products with defects in
materials or workmanship. The Company will also accept returns of incorrectly
shipped goods where the Company has been notified on a timely basis and, in
certain cases, to maintain customer good will. During fiscal years 2000 and
1999, warranty costs amounted to approximately 2.0% and 2.1%, respectively, of
sales.
Environmental Liability
The Company is subject to various evolving federal, state and local
environmental laws and regulations governing, among other things, emissions to
air, discharge to waters and the generation, handling, storage, transportation,
treatment and disposal of hazardous and non-hazardous substances and wastes.
These laws and regulations provide for substantial fees and sanctions for
violations and, in many cases could require the Company to remediate a site to
meet applicable legal requirements. A Phase I environmental audit of the
Company's
11
<PAGE>
manufacturing facilities was completed on August 9, 1997 and did not identify
any material matters. The Company believes, although there can be no assurance,
that liabilities relating to environmental matters will not have a material
adverse effect on its future financial position or results of operations.
Employees
DESA's zone heating products operation is seasonal. As a result, the number of
workers employed by the Company at any particular time varies. The work force is
accustomed to seasonal layoffs of two to four months. In 2000, total employment
averaged 1,384 with a low of 1,085 employees in February and a peak of 1,668
employees in September.
The hourly labor force in Bowling Green, Kentucky is represented by the Sheet
Metal Workers International Association (AFL-CIO) under a three-year contract
expiring in June 2001. The Company considers its labor relations to be good. The
Manchester and Shelbyville, Tennessee and Santa Ana, California facilities are
non-union plants.
The hourly labor force in Bowling Green, Kentucky is covered by a defined
benefit pension plan. All other employees are covered by a defined contribution
plan (401K). All workers are covered by self-insured medical plans.
Item 2. Properties.
The principal executive offices for the Company are located at 236 Public
Square, Suite 103, Franklin, Tennessee 37064, telephone: (615) 599-6501.The
Bowling Green, Kentucky facility serves as the administrative services offices
as well as the manufacturing site for DESA's zone heating products, both indoor
and outdoor. The Company also leases warehouse space in Bowling Green, Kentucky
and Manchester, Tennessee as needed. The facilities in Shelbyville, Tennessee
and Santa Ana, California manufacture the hearth products sold by DESA. The
manufacturing facility in Manchester, Tennessee produces the specialty tools
sold by DESA. In addition to these manufacturing facilities, the Company leases
sales offices and warehouse locations in Toronto, Canada, Rotterdam, Holland and
Hong Kong, China.
<TABLE>
<CAPTION>
Location Square Footage Ownership Function
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Franklin, Tennessee 2,000 Leased Corporate Headquarters
Bowling Green, Kentucky 225,000 Owned Corporate and zone heating
28 acres Administrative offices,
Manufacturing, Engineering,
Distribution
Bowling Green, Kentucky 450,000 Leased Specialty products administrative
21 acres offices, Distribution
Shelbyville, Tennessee 123,000 Leased Manufacturing
14 acres
Manchester, Tennessee 107,850 Leased Manufacturing, Distribution
7 acres
Toronto, Canada 9,400 Leased Sales offices, Distribution
Rotterdam, Holland 5,200 Leased Sales offices, Distribution
12
<PAGE>
<CAPTION>
Location Square Footage Ownership Function
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hong Kong, China 9,100 Leased Procurement, Distribution
Santa Ana, California 101,125 Leased Manufacturing, Distribution
</TABLE>
Management believes its facilities are in good condition and are adequate for
its operating needs for the foreseeable future without significant modifications
or capital investment.
Item 3. Legal Proceedings.
DESA is a party to various litigation in the normal course of its business
activities, none of which is expected to have a material adverse effect on the
Company. Although the Company has not experienced significant product liability
claims to date, the Company carries occurrence-based product liability insurance
coverage with a $101 million limit, $250,000 self insured retention ("SIR") and
an aggregate annual capped SIR exposure to DESA of $1 million.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
There is no established public trading market for the Company's Common Stock or
the Nonvoting Common Stock.
There are 81 holders of the Company's Common Stock and one holder of the
Company's Nonvoting Common Stock as of May 19, 2000. The Company has not paid
any dividends on any class of common equity in the last two years and is
prohibited from doing so by the terms of the senior credit facility.
On February 24, 2000, the Company issued approximately 10,108 common shares to
an employee of the Company in exchange for non-cash assets with a value of
$65,705. The sale was exempt from registration under the Securities Act of 1933,
as amended, pursuant to Section 4(2) thereunder.
Item 6. Selected Consolidated Financial and Operating Information.
Set forth below are selected historical consolidated financial data and other
historical consolidated operating data of DESA. The summary historical
consolidated financial data as of February 26, 2000 and February 27, 1999 and
for each of the years in the three year period ended February 26, 2000 have been
derived from our audited consolidated financial statements. The summary
historical consolidated financial data as of March 1, 1997 and March 2, 1996 and
for the two year period ended March 1, 1997 have been derived from our audited
consolidated financial statements which are not included elsewhere herein. The
information presented below is qualified in its entirety by, and should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and notes
thereto included elsewhere in this Annual Report.
13
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------------------------------
2000 1999 (10) 1998(1)(9) 1997 1996(1)(2)
---- --------- ---------- ---- ----------
(in Thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operating Data:
Net sales(3) $ 393,924 $ 317,237 $ 224,169 $ 209,105 $ 186,324
Cost of sales 262,742 213,828 145,486 130,890 116,217
-----------------------------------------------------------------
Gross profit 131,182 103,409 78,683 78,215 70,107
Operating costs and expenses 91,799 73,043 50,191 45,257 37,828
-----------------------------------------------------------------
Operating profit 39,383 30,366 28,492 32,958 32,279
Interest expense 28,853 27,864 17,327 14,509 7,073
-----------------------------------------------------------------
Income before provision for income taxes 10,530 2,502 11,165 18,449 25,206
Income taxes 5,536 1,166 5,545 7,733 10,703
-----------------------------------------------------------------
Income before extraordinary item 4,994 1,336 5,620 10,716 14,503
Extraordinary item(4) -- -- 2,308 -- 2,638
-----------------------------------------------------------------
Net income 4,994 1,336 3,312 10,716 11,865
Less dividends and accretion on
preferred stock 2,769 2,480 607 716 853
-----------------------------------------------------------------
Net income (loss) available for common
stockholders $ 2,225 $ (1,144) $ 2,705 $ 10,716 $ 11,012
=================================================================
Ratio of earnings to fixed charges(5) 1.3x 1.1x 1.6x 2.2x 4.0x
Other Data:
EBITDA(6) 49,858 38,953 33,204 37,494 36,574
EBITDA margin(7) 12.7% 12.3% 14.8% 17.9% 19.6%
Capital expenditures 5,529 4,462 5,475 2,770 2,122
Depreciation 4,425 3,589 2,456 2,432 2,332
Amortization 6,050 4,998 2,256 2,104 1,963
Net cash provided by operating 14,590 2,307 1,146 18,398 19,375
activities
Net cash used in investing activities (5,434) (45,233) (45,980) (2,882) (2,060)
Net cash provided by (used in) (9,871) 43,012 40,590 (10,599) (17,989)
financing activities
Balance Sheet Data (at period end):
Cash and cash equivalents 173 888 794 5,058 145
Working capital (deficit)(8) 17,999 27,643 27,095 (8,566) (1,194)
Total assets 229,777 203,352 155,636 91,984 85,545
Long-term debt (less current portion) 265,846 285,138 261,105 130,600 149,709
Redeemable preferred stock 19,937 17,207 14,661 -- --
Stockholders' equity (deficit) (150,633) (151,938) (162,407) (84,754) (95,402)
- ---------
<FN>
(1) DESA was party to recapitalizations in November 1997 and January 1996 which impacted interest expense,
stockholders' equity (deficit) and long term debt.
(2) 53-week fiscal year.
(3) Net sales constitute gross sales net of an accrual for returns and allowances and cash discounts.
14
<PAGE>
(4) Extraordinary items relate to the write-off of unamortized deferred financing costs at the time the
Company refinanced its existing debt obligations and other expenditures related to the recapitalization
transactions in fiscal years 1998 and 1996.
(5) For purposes of computing this ratio, earnings consist of income before income taxes plus fixed charges.
Fixed charges consist of interest expense, amortization of deferred financing cost and 33% of rent
expense from operating leases which the Company believes is a reasonable approximation of the interest
factor included in the rent.
(6) EBITDA is defined as income before income taxes plus interest expense and depreciation as well as
amortization of intangibles and deferred charges. EBITDA is presented because it is a widely accepted
financial indicator of a leveraged company's ability to service and/or incur indebtedness and because
management believes that EBITDA is a relevant measure of the Company's ability to generate cash without
regard to the Company's capital structure or working capital needs. However, EBITDA should not be
considered as an alternative to net income as a measure of a company's operating results or to cash
flows from operating activities as a measure of liquidity. EBITDA as presented may not be comparable to
similarly titled measures used by other companies, depending upon the non-cash charges included. When
evaluating EBITDA, investors should also consider other factors which may influence operating and
investing activities, such as changes in operating assets and liabilities and purchases of property and
equipment.
(7) EBITDA margin is defined as EBITDA divided by net sales.
(8) The Company's business is subject to a pattern of seasonal fluctuation. As such, the Company's needs for
working capital tend to peak in the second and third fiscal quarters.
(9) Includes Heath/Zenith data for the period from February 4, 1998 (date of acquisition) to February 28,
1998.
(10) Includes FMI and UHI (as hereinafter defined) data for the period from August 19, 1998 (date of
acquisitions) through February 27, 1999.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
The following discussion should be read in conjunction with "Selected
Consolidated Financial and Operating Information" and the audited Consolidated
Financial Statements of DESA and the notes thereto included elsewhere in this
Annual Report.
The Company is organized into two primary product categories: (a) Zone Heating
Products (56% of fiscal 2000 net sales), which includes indoor room heaters,
hearth products and outdoor heaters, and (b) Specialty Products (44% of fiscal
2000 net sales), which includes powder-actuated fastening systems (tools and
accessories), electrical products and home security products. The Company
records sales upon shipment of products to its customers. Net sales constitute
gross sales net of returns and allowances and cash discounts.
Principally due to sales of zone heating products, DESA's business is seasonal,
as depicted by the following table that sets forth certain operating results of
DESA for each of the four consecutive fiscal quarters in the periods ending
February 26, 2000, February 27, 1999 and February 28, 1998 (dollars in
thousands):
15
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 2000
Total Net Sales $ 67,793 $ 97,924 $156,763 $ 71,444 $393,924
Operating Profit $ 581 $ 11,030 $ 24,552 $ 3,220 $ 39,383
Fiscal 1999
Total Net Sales $ 40,754 $ 75,416 $134,679 $ 66,388 $317,237
Operating Profit (loss) $ (1,372) $ 8,746 $ 22,580 $ 412 $ 30,366
Fiscal 1998
Total Net Sales $ 24,754 $ 65,635 $103,015 $ 30,765 $224,169
Operating Profit (Loss) $ 72 $ 12,157 $ 20,375 $ (4,112) $ 28,492
</TABLE>
Approximately 68% of annual sales occur in the second and third fiscal quarters
(June-November) as the Company's zone heating customers place early booking
orders for shipment in anticipation of the winter selling season. Approximately
49% of the Company's annual sales volume are booked in the five-month period of
March through July.
Results of Operations
The following table sets forth certain income statement information for DESA for
the fiscal years ended February 26, 2000, February 27, 1999 and February 28,
1998.
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------------------
Percentage Percentage Percentage
2000 of Net Sales 1999 of Net Sales 1998 of Net Sales
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $393,924 100.0% $317,237 100.0% $224,169 100.0%
Cost of sales 262,742 66.7% 213,828 67.4% 145,486 64.9%
-----------------------------------------------------------------------------
Gross profit 131,182 33.3% 103,409 32.6% 78,683 35.1%
Operating costs and 91,799 23.3% 73,043 23.0% 50,191 22.4%
expenses -----------------------------------------------------------------------------
Operating profit 39,383 10.0% 30,366 9.6% 28,492 12.7%
Interest expense 28,853 7.3% 27,864 8.8% 17,327 7.7%
-----------------------------------------------------------------------------
Income before provision for 10,530 2.7% 2,502 0.8% 11,165 5.0%
income taxes
Provision for income taxes 5,536 1.4% 1,166 0.4% 5,545 2.5%
-----------------------------------------------------------------------------
Income before extraordinary 4,994 1.3% 1,336 0.4% 5,620 2.5%
item
Extraordinary item -- 0.0% -- 0.0% 2,308 1.0%
-----------------------------------------------------------------------------
Net income $ 4,994 1.3% $ 1,336 0.4% $ 3,312 1.5%
=============================================================================
</TABLE>
Year Ended February 26, 2000 Compared to the Year Ended February 27, 1999
Net Sales. Net sales for fiscal 2000 were $393.9 million, an increase of $76.7
million or 24.2% compared to fiscal 1999 sales of $317.2 million. Zone heating
product sales were $218.8 million, an increase of $41.0 million or 23.1% from
fiscal 1999. This increase is primarily due to an increased demand for the
outdoor heating and hearth product lines and the acquisition of Fireplace
Manufacturers Inc. ("FMI") in fiscal 1999.
16
<PAGE>
Specialty products had sales of $175.1 million, an increase of $35.7 million or
25.6% from fiscal 1999. This increase is primarily due to an increased demand
for generators related to concerns of year 2000 computer problems and new
product sales. These increases were offset by a major customer adjusting their
decorative lighting inventories which resulted in lower fiscal 2000 demand for
related product lines. In April, 2000, the Company acquired the assets of Trine
Products Company ("Trine") of Bronx, New York. Trine had sales for the year
ended June 30, 1999 of approximately $25 million.
Cost of Sales. Cost of sales for fiscal 2000 were $262.7 million, an increase of
$48.9 million or 22.9% from fiscal 1999. This increase is primarily attributable
to increased sales in the period. Cost of sales as a percentage of net sales
improved to 66.7% in fiscal 2000 from 67.4% in fiscal 1999. The improvement is
primarily due to lower manufacturing overhead per unit of zone heating product
and the Company's focus on cost reduction programs. As a result, gross margins
improved to 33.3% in fiscal 2000 compared to 32.6% in 1999.
Operating Costs and Expenses. Operating costs and expenses for fiscal 2000 were
$91.8 million, an increase of $18.8 million or 25.7% from fiscal 1999. This
increase is primarily attributable to the net sales increase. As a percentage of
sales, operating costs and expenses increased to 23.3% in fiscal 2000 from 23.0%
in fiscal 1999. This increase is primarily attributable to the benefits obtained
by the absorption of fixed administrative and engineering costs over a greater
unit volume of sales offset by inefficiencies encountered with the set-up of a
new distribution facility for zone heating products and increased customer sales
program costs.
Operating Profit. Operating profit was $39.4 million in fiscal 2000, an increase
of $9.0 million or 29.8% from fiscal 1999. Operating profit attributable to zone
heating products was $27.1 million or 40.9% higher than fiscal 1999. This is
mainly attributable to increased net sales and higher factory overhead
absorption offset by higher selling costs and shipping costs. Operating profit
attributable to specialty products was $17.4 million in fiscal 2000, an increase
of $2.0 million or 12.7% from fiscal 1999. This is primarily attributable to
increased sales offset by a change in sales mix related to generator sales.
EBITDA. EBITDA for fiscal 2000 was $49.9 million, an increase of $10.9 million
or 28.0% from fiscal 1999. 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 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 measure of
liquidity as defined by generally accepted accounting principles.
Interest Expense. Interest expense for fiscal 2000 was $28.9 million, an
increase of $1.0 million or 3.6% compared to fiscal 1999. The increase is
primarily associated with higher interest rates.
Income Taxes. The income tax rate for fiscal 2000 was 52.4% compared to 46.6% in
fiscal 1999. The increase is due primarily to differences in the mix of taxable
income from domestic and foreign sources and goodwill amortization that is not
deductible for tax purposes.
Net Income. Net income was $5.0 million in fiscal 2000 compared to $1.3 in
fiscal 1999. The increase of $3.7 million or 273% is due primarily to higher
sales volume offset by related taxes and expenses.
17
<PAGE>
Year Ended February 27, 1999 Compared to the Year Ended February 28, 1998
Net Sales. Net sales increased 41.5% from $224.2 million for the year ended
February 28, 1998 to $317.2 million for the year ended February 27, 1999. Zone
heating product sales increased 2.3% from $173.8 million to $177.8 million as a
result of higher hearth product sales due to increased market penetration and
the introduction of new products including the Direct Vent Fireplace, tempered
by the extremely warm 1998/1999 winter. Specialty product sales increased 177%
from $50.4 million to $139.4 million due primarily to the acquisition of the
Heath/Zenith business and the continued growth in the consumer channel for
powder-actuated tools and electric chain saws.
Cost of Sales. Cost of sales increased 47% from $145.5 million in fiscal year
1998 to $213.8 million in fiscal year 1999. The increase was driven primarily by
sales growth of 41.5% for the same period. Gross profit margin, as a percentage
of sales, declined from 35.1% to 32.6%. Gross margins were negatively affected
by a shift in product mix, competitive pricing pressures, and less favorable
manufacturing variances due to lower zone heating production volume partially
offset by cost reductions.
Operating Costs and Expenses. Operating costs and expenses increased 45.4% from
$50.2 million in fiscal year 1998 to $73.0 million in fiscal year 1999. The
increase is primarily a result of sales growth of 41.5%. Operating costs and
expenses increased modestly as a percentage of sales from 22.4% in fiscal 1998
to 22.5% in fiscal 1999.
Operating Profit. Operating profit increased by 6.7% from $28.5 million in
fiscal 1998 to $30.4 million in fiscal 1999 due to the factors mentioned above.
EBITDA. EBITDA for fiscal 1999 was $39.0 million, an increase of $5.7 million or
17.3% from fiscal 1998. 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 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 need. 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 measure of
liquidity as defined by generally accepted accounting principles.
Interest Expense. Interest expense increased 60.8% from $17.3 million in fiscal
1998 to $27.9 million in fiscal 1999. The higher interest expense relates to the
increased borrowings associated with the recapitalization in November 1997 (the
"Recapitalization") and the acquisition loan advances for the purchases of FMI,
Universal Heating, Inc. ("UHI") and Heath/Zenith.
Income Taxes. Income taxes decreased by 70.7% from $4.1 million in fiscal 1998
to $1.2 million in fiscal 1999, primarily as the result of the increase in
interest expense discussed above. The overall effective income tax rate
decreased from 50% in fiscal 1998 to 47% in fiscal 1999. The effective tax rate
is greater than the statutory rate due to the non-tax deductibility of goodwill
amortization.
Net Income. Net income decreased 67.4% from $3.3 million in fiscal 1998 to $1.1
million in fiscal 1999.
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
18
<PAGE>
and borrowings under its credit facilities. The Company's business is subject to
a pattern of seasonal fluctuation. The Company's needs for working capital and
the corresponding debt levels tend to peak in the second and third fiscal
quarters. The amount of sales generated during the second and third fiscal
quarters generally depends upon a number of factors, including the level of
retail sales for heating products during the fall and winter, weather conditions
affecting the level of sales of heating products, general economic conditions,
and other factors beyond the Company's control.
Cash provided by operating activities for fiscal 2000 was $14.6 million compared
to $2.3 million for fiscal 1999, an increase of $12.3 million. Cash provided by
operating activities in fiscal 2000 was principally the result of current year
income and increased current liabilities offset by increased inventory. Net cash
provided by operating activities was $1.1 for fiscal 1998.
Net cash used in investing activities was $5.4 million compared to net cash used
of $45.2 and $46.0 million in fiscal 1999 and 1998, respectively. Net cash used
in investing activities reflects capital expenditures of $5.5 million in fiscal
2000. Cash used for investing activities in fiscal 1999 and fiscal 1998 reflects
the acquisition of FMI, UHI and Heath/Zenith.
Net cash (used in) provided by financing activities was ($9.9) million in fiscal
2000, $43.0 million in fiscal 1999 and $40.6 million in fiscal 1998. Net cash
used for financing activities primarily show the repayment of debt in fiscal
2000 and proceeds of the acquisition loans utilized for the FMI and UHI
acquisitions in fiscal 1999 and Heath Zenith acquisition in fiscal 1998.
Concurrently with the Recapitalization (as hereinafter defined), the Company's
wholly owned subsidiary, DESA International, Inc., issued 9 7/8% Senior
Subordinated Notes due 2007 (the "Old Notes"), guaranteed by the Company, for
$130.0 million in gross proceeds, and entered into a $100.0 million senior
secured term loan facility (the "Term Loan Facility") and a $75.0 million senior
secured revolving credit facility (the "Working Capital Facility," and together
with the Term Loan Facility and certain other facilities, the "Credit
Facility"). The Term Loan Facility is comprised of two tranches, each in the
aggregate principal amount of $50.0 million. The Working Capital Facility
provides revolving loans in an aggregate amount of up to $75.0 million. Upon
closing of the Recapitalization, the Company borrowed the full amount available
under the Term Loan Facility and $35.5 million under the Working Capital
Facility. Borrowings under the Working Capital Facility were used partially to
refinance seasonal borrowings outstanding under the Company's existing credit
facility. The amount remaining available under the Working Capital Facility is
available to fund the working capital requirements of the Company. Proceeds to
the Company from the issuance of the Old Notes and from initial borrowings under
the Credit Facility, less the repayment of the existing credit facility and
other indebtedness, and transaction expenses, were used to partially finance the
Recapitalization and the fees and expenses of DESA incurred in connection
therewith. To provide additional financing to fund the Recapitalization, DESA
raised (i) $73.8 million through the sale to J.W. Childs Equity Partners, L.P.
("Childs") and certain other investors, including UBS Capital LLC (together with
Childs, the "Equity Investors") of DESA Common Stock (representing 89.6% of the
outstanding shares upon completion of the Recapitalization), (ii) $14.6 million
through the issuance to Childs and the other Equity Investors of the DESA
Preferred Stock and (iii) $3.0 million through the issuance of 463,232 warrants
to purchase DESA Nonvoting Common Stock at an exercise price of $.01 per share.
In addition, existing stockholders retained DESA Common Stock valued at $8.6
million (representing 10.4% of the outstanding shares upon completion of the
Recapitalization). The above transactions have been accounted for as a
recapitalization (the "Recapitalization"), with all amounts paid to the former
shareholders recorded as a reduction in stockholders equity (deficit).
The proceeds of the Old Notes, the DESA Preferred Stock, the DESA warrants, the
DESA Common Stock and the initial borrowings under the Credit Facility were used
to finance the purchase of all previously outstanding shares of DESA's capital
stock, to refinance outstanding indebtedness of the Company and to pay fees and
expenses incurred in connection with the Recapitalization.
19
<PAGE>
Borrowings under the Credit Facility bear interest at a rate per annum equal (at
the Company's option) to a margin over either a base rate or LIBOR. The Working
Capital Facility will mature six years after the closing date. The two tranches
of the Term Loan Facility will be amortized over a six-year and a seven-year
period, respectively. The Credit Facility and the guarantees thereof are secured
by substantially all assets of DESA (including the capital stock of the Company)
and its direct and indirect domestic subsidiaries and a pledge of the capital
stock of all the Company's direct and indirect subsidiaries, subject to certain
limitations with respect to foreign subsidiaries. The Credit Facility contains
customary covenants and events of default, including substantial restrictions on
the Company's ability to make dividends or distributions to stockholders. The
Company can utilize letters of credit under the Working Capital Facility up to
$10,000,000. As of February 26, 2000, letters of credit of $1.5 million are
outstanding under the Working Capital Facility.
Commencing in fiscal 1999, the required annual payments under the Term A and
Term B Term Loans are increased by 50% of any excess cash flows at the end of
the fiscal year, as defined. An excess cash flow payment of $910,000 was
required in fiscal 2000 which will be applied against the next scheduled
principal payments.
On May 25, 1999, DESA entered into Amendment and Waiver No. 4 to the Loan
Documents (the "Amendment"), an amendment to their Credit Facility that waived
DESA's failure to comply with the Clean-Up Period, as defined, occurring between
January 1, 1999 and May 30, 1999. As part of the Amendment, DESA's interest
rates on all existing outstanding borrowings under the Credit Facility were
increased by 1/4%.
The Amendment also modified the Clean-Up Period requirement, 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 February 26, 2000 and for the
Clean-Up period ending May 30, 2000, DESA has complied with all the financial
covenants, including the total leverage ratio, the fixed charge coverage ratio
and the interst coverage ratio.
In conjunction with the Amendment, J.W. Childs Associates L.P. and UBS Capital
LLC (the "Advisors") agreed to defer any obligation of DESA to pay management
fees under their respective management agreements until Holdings' fiscal year
2000 financial statements have been delivered to the Lenders, as defined. At
such time, Holdings would be obligated to pay such management fees only if the
Consolidated EBITDA, as defined, of Holdings for fiscal year 2000 is greater
than $51.6 million and no default, as defined, has occurred under the credit
agreement, as amended. Holdings' EBITDA for the fiscal year 2000 was $ 49.9
million and accordingly, no management fees have been paid.
The Company entered into an agreement for a $15.0 million line of credit (the
"Line of Credit") on May 25, 1999, which matures on May 31, 2001. The Line of
Credit is unsecured and is unconditionally guaranteed by J.W. Childs Equity
Partners, L.P., a shareholder of the Company. Borrowings under the Line of
Credit bear interest at an annual rate equal to either (at the Company's option)
a margin over a base rate or a margin over LIBOR. The Line of Credit contains
customary covenants and events of default.
The DESA Preferred Stock bears cumulative dividends at the rate of 12% per annum
(payable semi-annually). Dividends will compound to the extent not paid. Subject
to restrictions imposed by the Indenture dated November 26, 1997 (the
"Indenture"), the Credit Facility and other documents relating to the Company's
indebtedness, DESA may exchange the DESA Preferred Stock for junior subordinated
notes (the "Exchange Notes") having substantially the same terms as the DESA
Preferred Stock. The Indenture permits DESA, under certain circumstances, to
20
<PAGE>
exchange all outstanding DESA Preferred Stock for Exchange Notes in an aggregate
principal amount equal to the aggregate liquidation preference of the DESA
Preferred Stock so exchanged. The Exchange Notes will require DESA to make
semi-annual interest payments thereon at a rate of 12% per annum. Subject to
compliance with the debt agreements of the Company, such payments must be in
cash. The Indenture restricts, but does not prohibit, the Company from making
such cash interest payments. Under the Exchange Notes, DESA may defer the
payment of interest payable on or before November 30, 2001, with any such
deferred interest bearing interest at 12% per annum, compounded semi-annually.
DESA will be required to make a catch-up payment immediately prior to the first
interest payment date after the fifth anniversary of the date of issuance to the
extent the aggregate amount of such deferred interest exceeds an amount equal to
one year's interest on the originally issued Exchange Notes. The Indenture
restricts, but does not prohibit, the ability of DESA to make such catch-up
payment.
The acquisition of Heath/Zenith, consummated in February 1998, was financed with
the proceeds of the $20 million acquisition facility included in the Credit
Facility and with $7.0 million in additional equity contributed to the Company
by DESA. On May 13, 1998, the Company entered into an agreement to acquire 92.1%
of the issued and outstanding common stock of FMI for an aggregate purchase
price of approximately $25.7 million. As of such date, DESA already owned the
remaining 7.9% of FMI's issued and outstanding common stock. In connection with
the acquisition of FMI, DESA entered into non-compete agreements with three
officers of FMI, each with a term of three years. DESA paid such officers an
aggregate of $3.05 million, included in the aggregate purchase price. Also, in
April 1998, the Company entered into a letter of intent with UHI to acquire the
worldwide rights (except in China) to distribute UHI's indoor and outdoor
heating products and to form a joint venture to manufacture various products in
China that will be marketed by the Company. DESA is continuing to work with UHI
to complete the joint venture. Such worldwide rights have been acquired for
approximately $13 million. The Company expects to pay approximately $3 million
dollars in connection with the formation of the joint venture. The Company
financed these acquisitions with the proceeds of the $30 million acquisition B
facility which has been added to the Credit Facility.
The Credit Facility provides for commitments in an aggregate amount of up to
$197.5 million. Borrowings outstanding under the Credit Facility were $159.3
million on February 26, 2000. The Company had the ability to incur additional
indebtedness of $36.7 million under the Credit Facility at February 26, 2000.
Management believes that cash flow from operations and availability under the
Working Capital Facility and Line of Credit will provide adequate funds for the
Company's foreseeable working capital needs, planned capital expenditures and
debt service obligations. 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 Company's ability to fund its
operations and make planned capital expenditures, to make scheduled debt
payments, to refinance indebtedness and to remain in compliance with all of the
financial covenants under its debt agreements depends on its future operating
performance and cash flow, which in turn, are subject to prevailing economic
conditions and to financial, business and other factors, some of which are
beyond its control.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Market risks relating to the Company's operations result primarily from changes
in interest rates. The Company also has limited foreign currency risk associated
with its Canadian, European, and Hong Kong operations. A portion of the
Company's operations consists of purchasing and sales activities in foreign
jurisdictions. The Company manufactures its 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
21
<PAGE>
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.
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. In
fiscal 1999, the Company entered into interest rate swap agreements with Bank of
America, formerly Nations Bank, to manage its exposure to interest rate
fluctuations. The interest rate swap agreements provided for payment by the
Company of fixed rates of interest based on three month LIBOR. Notional
principal amounts of these agreements totaled $125 million, of which $75 million
terminated in November 1999 and $50 million was canceled at the option of
Nations Bank in February 2000. The notional amounts were 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 $573,000 were recorded as
adjustments to interest expense in fiscal 2000.
The following table summarizes the carrying amounts and estimated fair values
the Company's remaining financial instruments at February 26, 2000 and February
27, 1999 (bracketed amount represents an asset):
February 26, 2000 February 27, 1999
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------
(in thousands)
Bank debt 157,504 157,504 166,307 166,307
Senior subordinated notes 130,000 96,850 130,000 102,700
Note payable 1,842 1,842 2,138 2,138
Interest rate swap agreements -- -- -- (438)
Foreign exchange contracts -- 473 -- 228
Based on the average outstanding amount of variable rate indebtedness of the
Company in fiscal years 2000 and 1999, a one percentage point change in the
interest rates for the Company's variable rate debt would have impacted the
Company's fiscal years 2000 and 1999 interest expense by an aggregate of
approximately $1.9 and $1.6 million, respectively, 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 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
22
<PAGE>
does not have significant foreign sales, 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.
Item 8. Financial Statements and Supplementary Data.
Reference is made to the Consolidated Financial Statements and Supplementary
Schedules contained in Part IV hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth the name, age and position of each of the
Company's directors, directors designate, executive officers and other
significant employees. All of the Company's officers are elected annually and
serve at the discretion of the Board of Directors. The Board of Directors is
elected annually and serves until the next annual meeting of shareholders.
Pursuant to the Recapitalization Agreement, concurrently with the closing of the
Recapitalization, the Company, the Equity Investors and the Existing
Stockholders (the "Stockholders") entered into a Stockholders Agreement (the
"Stockholders Agreement"). The Stockholders Agreement also obligates DESA and
the Stockholders to take all necessary actions to include certain nominees of
Childs and its affiliates and associates ("JWC Holders") (who could constitute a
majority of the board of directors) and one nominee of UBS Capital LLC on the
Company's board of directors and to ensure that certain representatives of the
other Stockholders may attend meetings. The Stockholders Agreement also
restricts the Company's right to enter into agreements with JWC Holders without
the consent of the other Stockholders.
Name Age Positions
- ------------------------------------------------------------------------------
Raymond B. Rudy 69 Chairman and Director
W. Michael Clevy 51 Chief Executive Officer, President, Director
John W. Childs 58 Director
Adam L. Suttin 32 Director
Michael Greene 38 Director
Joseph J. Incandela 53 Director
James E. Ashton 57 Director
Terry G. Scariot 51 Director
Stephen L. Clanton 48 Senior Vice President, Chief Financial Officer
Augusto H. Millan 50 President - International Division
David B. Schumacher 40 President - Zone Heating Division
James R. Wiese 50 President - Specialty Products Division
Edward G. Patrick 53 Vice President of Finance, Treasurer
Scott M. Nehm 50 Vice President, Controller
Raymond B. Rudy was appointed the Company's Chairman in April 1999. Mr. Rudy has
been a Managing Director of J.W. Childs Associates ("JWCA") since July 1995.
Prior to that time, he was Deputy Chairman and Director of Snapple Beverage
Corporation from 1992 until the company was sold in 1994. From 1987 to 1989, Mr.
Rudy was President of Best Foods Subsidiaries of CPC International. From 1984 to
1986, Mr. Rudy was Chairman, President and CEO of Arnold Foods Company, Inc. He
is Chairman of Beltone Electronics Corp., Vice Chairman of Empire
23
<PAGE>
Kosher Poultry, Inc. and a director of International DiverseFoods, Inc., Widmer
Brothers Brewing Company and American Safety Razor Company.
W. Michael Clevy joined DESA in September 1999 as a Director and became
President and Chief Executive Officer in November 1999. Prior to joining the
Company, he held positions with International Comfort Products Corporation,
Toronto, Ontario, Canada as President and Chief Executive Officer from 1995
until their acquisition by United Technologies Corporation in 1999 and as
President and Chief Operating Officer of the International Comfort Products
Corporation's U.S. operating subsidiary from 1994 to 1995.
John W. Childs has been President of JWCA since July 1995. Prior to that time,
he was an executive at Thomas H. Lee Company, a Boston based private equity
investment company, from May 1987, most recently holding the position of Senior
Managing Director. Prior to that, Mr. Childs was with the Prudential Insurance
Company of America where he held various executive positions in the investment
area ultimately serving as Senior Managing Director in charge of the Capital
Markets Group. He is a director of Big V Supermarkets, Inc., Quality Stores,
Inc., Chevys Holdings, Inc., Beltone Electronics Corp., Pan Am International
Academy, Inc., American Safety Razor Company and The Edison Project, Inc.
Adam L. Suttin has been a Managing Director of JWCA since January 1998, and has
been with JWCA since July 1995. Prior to that time, he was an executive at
Thomas H. Lee Company from August 1989, most recently holding the position of
Associate. He is a director of Quality Stores, Inc., American Safety Razor
Company and Empire Kosher Poultry, Inc.
Michael Greene is a Managing Director of UBS Capital, LLC, which is the private
equity subsidiary of the Union Bank of Switzerland. Mr. Greene has worked in
Union Bank of Switzerland's private equity and leveraged finance business since
he joined Union Bank of Switzerland in 1990. Mr. Greene serves on the board of
directors of CBP Resources, Inc. and Metrocall, Inc.
Joseph J. Incandela, elected a Director of the Company in April 1999, served as
a Managing Director of the Thomas H. Lee Company, a Boston based private equity
investment company from 1992-1998. Mr. Incandela was CEO of Darling
International Corp., Chairman and CEO of Amerace Corp. and President and CEO of
Conductron Corp. during the period of 1983 through 1991. Prior to 1983 Mr.
Incandela served as a General Manager of the Thomas & Betts Corporation's
Electronic Connector Products Division. Mr. Incandela serves on the board of
directors of Morgan Grenfell Smallcap Fund Inc. and Southern Energy Homes Corp.
Mr. Incandela has a Bachelor of Arts in Economics from Wagner College.
Dr. James E. Ashton was elected a Director of the Company in April 2000. He is
Chairman and Chief Executive officer of Precision Partners, Inc., a contract
mechanical manufacturing services supplier of complex precision metal parts,
tooling and assemblies for original equipment manufacturers. Prior to joining
Precision Partners Inc., he was Chairman and CEO of Fiberite, Inc., a
manufacturer of composite materials. He is on the board of Lokring Corporation
and Diametrics Medical Corporation and holds a Ph.D., M.S. from Massachusetts
Institute of Technology and an MBA from Harvard Business School.
Terry G. Scariot joined AMCA International Consumer and Automotive Products
Division as Vice President - Finance in 1984 and was appointed Chief Financial
Officer of DESA International, Inc. in 1985. He held that position until April
1999 when he was appointed Chief Executive Officer for the Company. He resigned
as Chief Executive Officer in November 1999. He has been a Director of the
Company since 1996.
Stephen L. Clanton joined DESA as Senior Vice President, Chief Financial Officer
in December 1999. Prior to joining the Company, he was Senior Vice President,
Chief Financial Officer and Treasurer for International Comfort Products
Corporation, Toronto, Ontario, Canada, from 1996
24
<PAGE>
to 1999 and Executive Vice President and Chief Financial Officer for Falcon
Products Inc., St. Louis, Missouri, from 1988 to 1996.
Augusto H. Millan joined DESA as President, International Division in December
1999. Prior to joining the Company he held positions with International Comfort
Products Corporation, Toronto, Ontario, Canada as Senior Vice President and
General Manager, International Sales and General Manager, Aftermarket Sales from
1996 to 1999 and Vice President, Financial Operations from 1994 to 1996.
David B. Schumacher joined DESA as President - Zone Heating Division in December
1999. Prior to joining the Company, he held positions with International Comfort
Products Corporation, Toronto, Ontario, Canada as Vice President and General
Manager, Commercial Products Group from 1997 to 1999, as Senior Director,
Product Marketing from 1995 to 1997 and Manager - Product Marketing from 1993 to
1995.
James R. Wiese joined DESA as President - Specialty Products Division in
December 1999. Prior to joining the Company he held positions with International
Comfort Products Corporation, Toronto, Ontario, Canada as Senior Vice President
and General Manager, Residential Products Group 1997 to 1999, Senior Vice
President, Marketing from 1993 to 1997, Senior Director - Sales from 1992 to
1993 and Director, Dealer Development from 1988 to 1992.
Edward G. Patrick has been associated with DESA International, Inc. and its
predecessor company since January 1985, joining the company as Director of
Credit and Accounts Receivable. In May of 1991, he was appointed Treasurer and
in January 1995 appointed Vice President of Finance. Prior to joining DESA, Mr.
Patrick held financial positions with Benchmark Tool Company, a subsidiary of
Shopsmith Inc. (1981-1985), McGraw Edison Company (1975-1981), and General
Motors Corp. (1972-1975). Mr. Patrick received his Bachelor's Degree from
Northeast Missouri State University.
Scott M. Nehm has been with DESA and the predecessor operation since 1982. In
January 1995, he was appointed Vice President, Controller. Prior to DESA, Mr.
Nehm has held positions of increasing responsibility in financial management at
Modine Manufacturing Company (1971-1973), Koehring Company (1974-1979), and
Allied Products Inc. (1980-1981). Mr. Nehm has a CPA Certificate, BBA and MBA
degrees from the University of Wisconsin in Accounting, Finance and Marketing.
Item 11. Executive Compensation.
The following table sets forth compensation earned for all services rendered to
the Company during fiscal 2000, fiscal 1999 and fiscal 1998 as applicable, by
the Company's chief executive officers and the most highly compensated executive
officers other than the Company's chief executive officers (collectively, the
"Named Executive Officers").
25
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
-------------------------------------------------- Long-Term
Compensation
Awards
--------------
All
Number of Other
Other Annual Securities Comp-
Name and Principal Fiscal Salary Bonus(1) Compensation Underlying ensation
Position at Year ($) ($) ($) Options ($) (21)
February 26, 2000
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
W. Michael Clevy (2) 2000 124,942 34,400 -- -- --
President and Chief 1999 -- -- -- -- --
Executive Officer 1998 -- -- -- -- --
Terry G. Scariot (2) (3) 2000 337,158 -- 29,171 (5) -- 9,330
1999 297,391 -- 26,719 (6) 277,822 (20) 4,800
1998 274,946 240,000 26,856 (7) -- 4,800
Robert H. Elman (3) 2000 339,038 -- 61,736 (8) -- 3,779
1999 600,961 -- 128,327 (9) 614,133 (19) 4,800
1998 612,115 630,000 106,808 (9) -- 4,800
John M. Kelly (4) 2000 337,158 -- 43,858 (10) -- 9,330
1999 297,391 -- 47,224 (11) 277,822 (20) 4,800
1998 274,946 240,000 37,788 (12) -- 4,800
Edward G. Patrick 2000 96,277 27,500 23,859 (13) 5,000 4,418
Vice President of 1999 84,994 12,500 16,132 (14) 15,000 2,925
Finance, Treasurer 1998 78,555 25,000 11,809 (15) -- 2,882
Scott M. Nehm 2000 96,277 27,500 29,258 (16) 5,000 4,418
Vice President, 1999 84,994 12,500 19,533 (17) 15,000 2,925
Controller 1998 78,555 25,000 10,578 (18) -- 2,882
<FN>
(1) Annual bonuses are indicated for the year in which they were earned and accrued. Annual bonuses for any year
are generally paid in the following fiscal year.
(2) Mr. Scariot resigned from the offices of President and Chief Executive Officer as of November 10, 1999 and Mr.
Clevy was elected to those offices on that date.
(3) Mr. Elman retired as of April 5, 1999 and Mr. Scariot was elected Chief Executive Officer on that date.
(4) Mr. Kelly was elected Chief Operating Officer on April 5, 1999. Previously, he was Executive Vice President.
Mr. Kelly resigned as of November 10, 1999.
(5) Includes $7,884 for country club memberships and $8,607 for tax planning.
(6) Includes $7,034 for tax planning.
(7) Includes $7,370 for country club memberships.
26
<PAGE>
(8) Includes $31,000 for life insurance.
(9) Includes $52,761 for life insurance.
(10) Includes $25,222 for medical expenses.
(11) Includes $27,714 for medical expenses.
(12) Includes $22,378 for medical expenses.
(13) Includes $11,753 for company car.
(14) Includes $9,060 for company car.
(15) Includes $9,541 for company car.
(16) Includes $10,976 for company car and $10,541 for medical expenses.
(17) Includes $7,337 for company car and $5,890 for medical expenses.
(18) Includes $8,289 for company car.
(19) Mr. Elman's options were cancelled on April 5, 1999.
(20) Mr. Scariot's and Mr. Kelly's options were cancelled on April 30, 2000.
(21) Includes Company contributions to the DESA Savings and Investment Plan (401K plan). Contributions are shown
in the year made.
</FN>
</TABLE>
The Company granted the options set forth and described in the following table
to the Named Executive Officers in fiscal 2000:
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Potential Realizable
Value at Assumed
Annual Rates of Stock
Number of % of Total Price Appreciation for
Securities Options/SARs Option Term
Underlying Granted to Exercise of --------------------------
Option/SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Edward G. Patrick 5,000 5 6.50 7/18/10 20,439 51,797
Scott M. Nehm 5,000 5 6.50 7/18/10 20,439 51,797
</TABLE>
The following table sets forth the number of securities underlying the options
held by the Named Executive Officers at the end of fiscal 2000:
27
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
(e) Value of
Unexercised
(d) Number of Securities in-the-Money
Underlying Unexercised Options/SARs at
Options / SARs at Fiscal Fiscal Year-End ($)
(b) Shares Acquired on (c) Value Year-End (#) Exercisable / Exercisable /
(a) Names Exercise (#) Realized ($) Unexercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward G. Patrick 750 -- 664/18,586 --
Scott M. Nehm -- -- 1,414/18,586 --
Terry G. Scariot -- -- 0/277,822 (1) --
John M. Kelly -- -- 0/277,822 (1) --
<FN>
(1) Mr. Scariot's and Mr. Kelly's options were cancelled on April 30, 2000.
</FN>
</TABLE>
Employment Arrangements with Executive Officers
Mr. Clevy is currently employed pursuant to an employment agreement that carries
a three-year term. Under this agreement, Mr. Clevy receives an annual salary of
$445,000. Pursuant to the employment agreement, the salary of Mr. Clevy will be
subject to annual increases at the discretion of the Board of Directors of the
Company. Mr. Clevy is eligible to receive an annual bonus based upon the
Company's performance against the Company's annual management plan, as approved
by the Board of Directors.
Director Compensation
No director received any compensation for his services as director in fiscal
year 2000 except Mr. Incandela who received a director's fee of $10,000 per year
plus a $1,000 per meeting attended. Mr. Incandela has been granted options to
purchase 10,000 shares of the Company's common stock at $6.49 per share. Said
options vest annually in equal installments in fiscal years 2000, 2001 and 2002.
Change of Control Arrangement
In the event of a change of control of the Company after which the employment of
Mr. Clevy with the Company is not continued, Mr. Clevy will be entitled to
change of control benefits unless the equity investment of Mr. Clevy in DESA
shall have tripled in value. Such benefits are comprised of twelve months of
salary or salary for the remainder of his employment agreement, whichever is
greater, fringe benefits and a pro-rated portion of any bonus for which he would
otherwise be eligible.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors of the Company is comprised
of Messrs. Rudy, Childs, Greene, and Clevy. Prior to his resignation, Mr.
Scariot also served on the Compensation Committee. Mr. Clevy is an executive
officer of the Company. Mr. Rudy is a Managing Director of JWCA, Mr. Childs is
President of JWCA, and Mr. Greene is a Managing Director of UBS Capital LLC.
28
<PAGE>
Board Compensation Committee Report on Executive Compensation
It is the Compensation Committee's responsibility to review, recommend and
approve the Company's compensation policies and programs, including all
compensation for the Chief Executive Officer and the other executive officers of
the Company. The Compensation Committee administers the Company's 1998 Stock
Option Plan. The Chief Executive Officer of the Company does not participate in
Committee decisions regarding his compensation.
The purpose of the 1998 Stock Option Plan is to encourage key employees,
officers and directors of the Company who render services of special importance
to, and who have contributed or are expected to contribute materially to the
success of, the Company to continue their association with the Company by
providing favorable opportunities for them to participate in the ownership of
the Company and in its future growth. The Compensation Committee made stock
option grants to Messrs. Patrick and Nehm in fiscal 2000.
The Compensation Committee determined the salary levels of the Company's
executive officers, including the Chief Executive Officer, for fiscal 2000, as
well as the amounts of bonuses paid in fiscal 2000 for performance in fiscal
1999. The compensation policies implemented by the Compensation Committee, which
combine base salary and incentive compensation in the form of cash bonuses and
long-term stock options, are designed to achieve the operating and acquisition
strategies and goals of the Company. In particular, in determining bonuses paid
in 2000 in respect of 1999 and salary levels for fiscal 2000, the Compensation
Committee took into account the past or expected future contributions of each
executive officer to the Company's strategic goals.
COMPENSATION COMMITTEE
RAYMOND B. RUDY, Chairman
W. MICHAEL CLEVY
MICHAEL GREENE
JOHN W. CHILDS
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information regarding the beneficial ownership of
the Common Stock of DESA by each person known to the Company to be the
beneficial owner of more than five percent of the common stock of DESA, each
director of the Company, each Named Executive Officer and all directors and
executive officers of the Company as a group. Except as otherwise indicated, the
beneficial owners of the voting stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares. Such Information is presented as of May 1, 2000, except as
otherwise indicated.
Shares
Beneficially
Name and Address Owned Percent
- -------------------------------------------------------------------------------
J.W. Childs Equity Partners, L.P.(1)
One Federal Street
Boston, Massachusetts 10,381,854 64.0%
UBS Capital LLC(2)
299 Park Avenue
New York, New York 2,923,718 18.0
29
<PAGE>
Shares
Beneficially
Name and Address Owned Percent
- -------------------------------------------------------------------------------
John W. Childs(1)(3)(4)
One Federal Street
Boston, Massachusetts 10,801,578 66.6
Raymond B. Rudy(1)(3)(5)
One Federal Street
Boston, Massachusetts 10,410,401 64.2
Adam L. Suttin(1)(3)(6)
One Federal Street
Boston, Massachusetts 10,423,312 64.3
Michael Greene(2)(7)
299 Park Avenue
New York, New York 2,923,718 18.0
Joseph Incandela(8) 3,330 *
W. Michael Clevy 230,770 1.4
James E. Ashton 0 *
Terry G. Scariot 0 *
John M. Kelly 0 *
Robert H Elman(9) 377,602 2.3
Stephen L. Clanton 61,539 *
David B. Schumacher 7,692 *
James R. Wiese 61,539 *
Augusto H. Millan 15,385 *
Edward G. Patrick(10) 41,117 *
Scott M. Nehm(11) 35,396 *
All Directors and executive officers as a group (16
persons)(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)
14,629,671 90.2%
* Less than 1.0%
(1) Includes 148,572 shares deemed beneficially owned by Childs pursuant to
warrants.
(2) Includes 43,504 shares deemed beneficially owned by UBS Capital LLC
pursuant to warrants.
(3) Includes all shares beneficially owned by Childs, as to which Messrs.
Childs, Rudy and Suttin may be deemed also to be beneficial owners.
(4) Includes 6,501 shares deemed beneficially owned by Mr. Childs pursuant to
warrants.
(5) Includes 336 shares deemed beneficially owned by Mr. Rudy pursuant to
warrants.
(6) Includes 585 shares deemed beneficially owned by Mr. Suttin pursuant to
warrants. Also includes 476 shares held by Mr. Suttin as Trustee for the
Suttin Family Trust and 11,409 shares held in the Suttin Family Trust.
(7) All shares shown are beneficially owned by UBS Capital LLC. Mr. Greene may
also be deemed to be a beneficial owner.
(8) Includes 3,330 shares that Mr. Incadela has the right to acquire pursuant
to currently exercisable options.
(9) Includes 177,494 shares owned by Mr. Elman's family.
(10) Includes 750 shares that Mr. Patrick has the right to acquire pursuant to
currently exercisable options.
(11) Includes 1,500 shares that Mr. Nehm has the right to acquire pursuant to
currently exercisable options.
30
<PAGE>
Item 13. Certain Relationships and Related Transactions
The Company pays JWCA an annual management fee of $189,000 in consideration of
JWCA's ongoing provision of certain consulting and management advisory services.
Payments under this management agreement may be made only to the extent
permitted by the Credit Facility and the Indenture. The management agreement is
for a five-year term expiring in November 2002 and automatically renewable for
successive extension terms of one year, unless JWCA or the Company shall give
notice of termination.
The Company pays UBS Capital LLC an annual management fee of $51,000 in
consideration of UBS Capital LLC's ongoing provision of certain consulting and
management advisory services. Payments under this management agreement may be
made only to the extent permitted by the Credit Facility and the Indenture. The
management agreement is for a five-year term expiring in November 2002 and
automatically renewable for successive extension terms of one year, unless UBS
Capital LLC or the Company shall give notice of termination.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements
DESA HOLDINGS CORPORATION
Report of Independent Auditors F-1
Consolidated Balance Sheets at February 26, 2000 and F-2
February 27, 1999
Consolidated Statements of Income for the fiscal years ended
February 26, 2000, February 27,1999 and February 28, 1998 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
fiscal years ended February 26, 2000, February 27, 1999 and
February 28, 1998 F-5
Consolidated Statements of Cash Flows for the fiscal years ended
February 26, 2000, February 27, 1999 and February 28, 1998 F-7
Notes to Consolidated Financial Statements for the fiscal years
ended February 26, 2000, February 27, 1999 and February 28, 1998. F-8
(a)(2) Financial Statement Schedules
SCHEDULE II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and
therefore have been omitted.
31
<PAGE>
<TABLE>
<CAPTION>
(a) (3) Exhibits
Exhibit No. Description of Document
<S> <C> <C>
2.1 Recapitalization Agreement, dated as of October 8, 1997, among J.W. Childs *
Equity Partners, L.P., Desa Holdings Corporation and each Stockholder of Desa
Holdings Corporation named therein
2.2 Stock Purchase Agreement, dated as of January 12, 1998, by and among Heath *
Holding Corp., its Shareholders and Optionholders and the Company
2.3 Agreement and Plan of Reorganization, dated May 13, 1998 by and among the **
Company, FMI Acquisition, Inc., Fireplace Manufacturers, Inc et al.
3.1 Articles of Incorporation of DESA International, Inc. *
3.1A Articles of Incorporation of the Company *
3.2 By-laws of the DESA International, Inc. *
3.2A By-laws of the Company *
4.1 Indenture, dated as of November 26, 1997, by and among the Company, DESA *
International, Inc., and Marine Midland Bank relating to $130,000,000 of
the Company's 9 7/8% Senior Subordinated Notes Due 2007
4.2 Registration Rights Agreement, dated as of November 26, 1997 by and among *
the Company, DESA International, Inc., NationsBanc Montgomery Securities,
Inc. and UBS Securities LLC
4.3 Purchase Agreement, dated as of November 21, 1997, by and among the *
Company, DESA International, Inc., NationsBanc Montgomery Securities, Inc.
and UBS Securities LLC
4.4 Global Note Payable to CEDE & Co. *
4.5 Company Guarantee *
10.1 Credit Agreement, dated as of November 26, 1997 by and among the Company, *
DESA International, Inc., NationsBank, N.A., UBS Securities LLC
and NationsBanc Montgomery Securities, Inc.
10.2 Management Incentive Plans of the Company, dated March 1, 1997 *
10.3 Sales Compensation and Incentive Plan of the Company for fiscal year 1998 *
10.4 Services Agreement between the Company and Hamilton Ryker Company *
10.5 Services Agreement between the Company and Manpower Services *
10.6 Representative Manufacturer's Representative Agreement *
10.15 Intellectual Property Agreement between the Company and Worgas Bruciatori *
SRL dated December 1, 1996
10.16 Intellectual Property Agreement between the Company and Valor Limited dated *
May 21, 1996
10.17 Intellectual Property Agreement between the Company and Remington Arms *
Company dated August 29, 1969
10.18 Intellectual Property Agreement between the Company and Remington Arms *
Company dated January 29, 1988
10.19 Lease Agreement between the Company and Shelbyville Industrial Spec. *
Building - WRS Partnership
10.20 Agreement to produce and sell finished goods between the Company and *
Tangible/Shinn Fu
10.21 Agreement to produce and sell finished goods between the Company and BYSE *
10.22 Agreement to produce and sell finished goods between the Company and NU- *
TEC
32
<PAGE>
Exhibit No. Description of Document
<S> <C> <C>
10.23 Agreement to produce and sell finished goods between the Company and *
International Pin
10.24 Agreement to produce and sell finished goods between the Company and *
Kingsman Industries
10.25 Agreement to produce and sell finished goods between the Company and Sealey *
10.26 Agreement to produce and sell finished goods between the Company and *
Hudson Manufacturing
10.27 Agreement to produce and sell finished goods between the Company and *
Sengoka Works, Ltd
10.28 Employment Agreement, dated as of November 26, 1997, between the Company *
and Robert H. Elman
10.29 Employment Agreement, dated as of November 26, 1997, between the Company *
and John M. Kelly
10.30 Employment Agreement, dated as of November 26, 1997, between the Company *
and Terry G. Scariot
10.31 The Company's 1998 Stock Option Plan ***
10.32 The Company's Stockholders Agreement dated as of November 26, 1997 among ***
the Company and the persons named therein
10.33 The Company's Amended and Restated Stockholders Agreement dated as of ****
October 9, 1998 among the Company and the persons named therein
10.34 The Company's Purchase Agreement dated as of October 9, 1998 among the ****
Company and the persons named therein
10.35 Preferred Stock Tagalong Agreement dated as of October 9, 1998 among the ****
Company and the persons named therein
10.36 Form of Warrant ****
10.37 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.
10.38 Employment agreement, dated as of November 10, 1999 between the Company and W. Michael ******
Clevy
27 Financial Data Schedule Filed
herewith
<FN>
* Incorporated by reference to the Company's Registration Statement on Form S-4 filed on August 5, 1998
(File No. 333-44969)
** Incorporated by reference to the Company's Statement on Schedule 13D in respect of the common stock
of Fireplace Manufacturers, Inc. filed on June 5, 1998
*** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended August
29, 1998
**** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended
November 28, 1998
***** Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended February
27, 1999
****** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended
November 27, 1999
</FN>
</TABLE>
33
<PAGE>
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during fourth quarter, 2000.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy materials have been sent to security holders.
34
<PAGE>
Consolidated Financial Statements
DESA Holdings Corporation
Fiscal years ended February 26, 2000,
February 27, 1999 and February 28, 1998
with Report of Independent Auditors
<PAGE>
DESA Holdings Corporation
Consolidated Financial Statements
Fiscal years ended February 26, 2000,
February 27, 1999 and February 28, 1998
Contents
Report of Independent Auditors........................................... F-1
Consolidated Balance Sheets.............................................. F-2
Consolidated Statements of Income........................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit)................ F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-8
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
DESA Holdings Corporation
We have audited the accompanying financial statements and schedule of DESA
Holdings Corporation (the "Company") as listed in the accompanying index to the
financial statements (Item 14 (a)). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements listed in the accompanying index to the
financial statements (Item 14(a)) present fairly, in all material respects, the
consolidated financial position of DESA Holdings Corporation at February 26,
2000 and February 27, 1999, and the consolidated results of its operations and
its cash flows for each of the three fiscal years in the period ended February
26, 2000, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects the information set forth therein.
Ernst & Young LLP /s/
Stamford, Connecticut
April 21, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
DESA Holdings Corporation
Consolidated Balance Sheets
February 26, February 27,
2000 1999
---------------------------------
(In Thousands, Except
Number of Shares)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 173 $ 888
Accounts receivable, net 32,921 30,390
Inventories:
Raw materials 209 986
Work-in-process 9,756 6,376
Finished goods 50,192 37,891
--------------------------------
60,157 45,253
Deferred tax assets 1,743 2,137
Other current assets 2,003 1,321
--------------------------------
Total current assets 96,997 79,989
Property, plant and equipment:
Land 525 390
Buildings and improvements 6,294 6,173
Machinery and equipment 39,361 34,527
Furniture and fixtures 1,090 725
--------------------------------
47,270 41,815
Less accumulated depreciation 30,574 26,182
--------------------------------
16,696 15,633
Goodwill, net 93,818 81,882
Deferred tax assets -- 598
Other assets, net 22,266 25,250
--------------------------------
Total assets $ 229,777 $ 203,352
================================
See accompanying notes
F-2
<PAGE>
<CAPTION>
February 26, February 27,
2000 1999
---------------------------------
(In Thousands, Except
Number of Shares)
<S> <C> <C>
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 37,040 $ 25,232
Accrued interest 5,233 3,075
Other accrued liabilities 13,225 10,732
Current portion of long-term debt 23,500 13,307
--------------------------------
Total current liabilities 78,998 52,346
Long-term debt 265,846 285,138
Deferred tax liabilities 789 --
Other liabilities 14,840 599
--------------------------------
Total liabilities 360,473 338,083
Commitments
Series C redeemable preferred stock, $.01 par value;
authorized--40,000 shares at February 26, 2000 and
February 27, 1999; issued and outstanding--22,461
shares at February 26, 2000 and 19,990 shares at
February 27, 1999 (liquidation preference--
$22,882,000 at February 26, 2000 and $20,371,000 at
February 27, 1999) 19,937 17,207
Stockholders' equity (deficit):
Common stock, $.01 par value; authorized--
50,000,000 shares at February 26, 2000 and February
27, 1999; issued and outstanding--15,562,656
shares at February 26, 2000 and 15,548,692 shares at
February 27, 1999 155 155
Nonvoting common stock, $.01 par value; authorized--
3,000,000 shares at February 26, 2000 and
February 27, 1999; issued and outstanding--90,604
shares at February 26, 2000 and February 27, 1999 1 1
Capital in excess of par value 98,075 97,984
Carryover predecessor basis adjustment (32,309) (32,309)
Retained earnings (deficit) (214,518) (216,742)
Accumulated other comprehensive loss (2,037) (1,027)
--------------------------------
Total stockholders' equity (deficit) (150,633) (151,938)
--------------------------------
Total liabilities and stockholders' equity (deficit) $ 229,777 $ 203,352
================================
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
DESA Holdings Corporation
Consolidated Statements of Income
Fiscal year ended
February 26, February 27, February 28,
2000 1999 1998
---------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net sales $ 393,924 $ 317,237 $ 224,169
Cost of sales 262,742 213,828 145,486
-------------------------------------------------
Gross profit 131,182 103,409 78,683
Operating costs and expenses:
Selling 69,821 54,084 36,081
General and administrative 15,890 13,597 11,199
Other 6,088 5,362 2,911
-------------------------------------------------
91,799 73,043 50,191
-------------------------------------------------
Operating profit 39,383 30,366 28,492
Interest expense 28,853 27,864 17,327
-------------------------------------------------
Income before provision for income taxes 10,530 2,502 11,165
Provision for income taxes 5,536 1,166 5,545
-------------------------------------------------
Income before extraordinary item 4,994 1,336 5,620
Extraordinary loss, net of income tax benefit -- -- (2,308)
-------------------------------------------------
Net income 4,994 1,336 3,312
Less dividends and accretion on preferred stock 2,769 2,480 607
-------------------------------------------------
Income (loss) available to common stockholders $ 2,225 $ (1,144) $ 2,705
=================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
DESA Holdings Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
Non Carryover Accumulated Total
voting Capital in Predecessor Retained Other Stockholders'
Common Common Excess of Basis Earnings Comprehensive Equity
Stock Stock Par Value Adjustment (Deficit) Loss (Deficit)
--------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 1, 1997 $236 $ 18 $ 26,722 $(32,309) $ (79,113) $ (308) $ (84,754)
Comprehensive income:
Net income -- -- -- -- 3,312 -- 3,312
Foreign currency translation adjustment -- -- -- -- -- (256) (256)
----------
Comprehensive income -- -- -- -- -- -- 3,056
Exercise of stock options -- -- 5 -- -- -- 5
Exercise of stock options simultaneously
with the Recapitalization 2 -- 148 -- -- -- 150
Tax benefit on exercise of stock options -- -- 177 -- -- -- 177
Repurchase of common stock during the
Recapitalization (223) (17) (18,276) -- (139,190) -- (157,706)
Issuance of common stock during the
Recapitalization 112 -- 73,703 -- -- -- 73,815
Expenses attributable to the Recapitalization -- -- (6,536) -- -- -- (6,536)
Issuance of warrants during the Recapitalization -- -- 3,002 -- -- -- 3,002
Issuance of common stock 11 -- 7,050 -- -- -- 7,061
Repurchase of common stock (1) -- (69) -- -- -- (70)
Dividends on preferred stock -- -- -- -- (544) -- (544)
Accretion of preferred stock -- -- -- -- (63) -- (63)
------------------------------------------------------------------------------
Balance at February 28, 1998 137 1 85,926 (32,309) (215,598) (564) (162,407)
Comprehensive income:
Net income -- -- -- -- 1,336 -- 1,336
Foreign currency translation adjustment -- -- -- -- -- (463) (463)
----------
Comprehensive income -- -- -- -- -- -- 873
Accretion of preferred stock -- -- -- -- (253) -- (253)
Dividends on preferred stock -- -- -- -- (2,227) -- (2,227)
Issuance of common stock 18 -- 12,058 -- -- -- 12,076
------------------------------------------------------------------------------
Balance at February 27, 1999 155 1 97,984 (32,309) (216,742) (1,027) (151,938)
Comprehensive income:
Net income 4,994 4,994
Foreign currency translation adjustment (1,010) (1,010)
----------
Comprehensive income 3,984
Accretion of preferred stock (259) (259)
Dividends on preferred stock (2,511) (2,511)
Issuance of common stock 91 91
------------------------------------------------------------------------------
Balance at February 26, 2000 $155 $ 1 $ 98,075 $(32,309) $(214,518) $ (2,037) $(150,633)
==============================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
<CAPTION>
DESA Holdings Corporation
Consolidated Statements of Cash Flows
Fiscal year ended
February 26, February 27, February 28,
2000 1999 1998
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 4,994 $ 1,336 $ 3,312
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,425 3,589 2,456
Amortization 6,050 4,998 2,256
Deferred income taxes 1,782 271 (36)
Equity in undistributed earnings of joint venture (233) (170) (157)
Extraordinary item -- -- 2,308
Change in operating assets and liabilities, net of
acquisitions:
Accounts receivable, net (2,531) (7,888) 131
Inventories (14,904) (1,212) (6,996)
Other current assets (682) 211 (153)
Accounts payable 11,808 8,592 (7,646)
Accrued interest 2,318 (2,512) 4,437
Other accrued liabilities 1,443 (5,025) 512
Income taxes payable 965 (49) 565
Other liabilities 121 166 157
---------------------------------------------
Net cash provided by operating activities 14,590 2,307 1,146
---------------------------------------------
Investing activities
Capital expenditures (5,529) (4,462) (5,475)
Dividends received from joint venture 185 170 157
Cash paid for acquisitions, net of cash acquired -- (40,957) (40,294)
Other (90) 26 (368)
---------------------------------------------
Net cash used in investing activities (5,434) (45,223) (45,980)
---------------------------------------------
F-6
<PAGE>
<CAPTION>
DESA Holdings Corporation
Consolidated Statements of Cash Flows (continued)
Fiscal year ended
February 26, February 27, February 28,
2000 1999 1998
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Financing activities
Proceeds from debt $ -- $ -- $ 265,500
Proceeds from issuance of Series C
Redeemable Preferred Stock -- -- 14,598
Proceeds from issuance of warrants -- -- 3,002
Proceeds from issuance of common stock -- -- 73,815
Repurchase of common stock -- -- (157,706)
Repayment of Term Loans -- -- (183,095)
Payment of expenses attributable to the
Recapitalization -- -- (17,670)
Decrease in note payable (456) -- --
Net proceeds from revolving loan -- -- 43,000
Net (payments on) proceeds from working capital loan 2,697 7,202 (20,020)
Principal payments of Term Loans (8,375) (5,250) (7,980)
Proceeds from Acquisition Loans (3,125) 30,000 20,000
Payments for repurchase of common stock -- -- (70)
Exercise of stock options -- -- 155
Proceeds from issuance of common stock 91 12,076 7,061
Payment of debt financing costs (703) (1,016) --
---------------------------------------------
Net cash (used in) provided by financing activities (9,871) 43,012 40,590
Effect of exchange rate changes on cash -- (2) (20)
---------------------------------------------
(Decrease) increase in cash and cash equivalents
for the year (715) 94 (4,264)
Cash and cash equivalents at beginning of year 888 794 5,058
---------------------------------------------
Cash and cash equivalents at end of year $ 173 $ 888 $ 794
=============================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements
February 26, 2000
1. Organization and Basis of Presentation
DESA Holdings Corporation ("Holdings") was formed in 1993 by a group of
investors led by Hicks, Muse, Tate & Furst ("Hicks Muse") and certain management
shareholders. Hicks Muse owned 60% of the outstanding voting shares of Holdings
with the remaining shares owned by the management shareholders. In December
1993, Holdings acquired all of the outstanding common shares of DESA
International, Inc. ("DESA") (the "Restructuring" transaction). This
Restructuring met the criteria under the Emerging Issues Task Force Issue No.
88-16, "Basis in Leveraged Buyout Transactions". Consequently, management's
entire residual interest in Holdings was valued at its predecessor basis and is
shown as a Carryover Basis Adjustment of $32,308,744, which reduces
stockholders' equity (deficit) on the consolidated balance sheets whereas Hicks
Muse's residual interest was valued at fair value.
On November 26, 1997, J.W. Childs Equity Partners, L.P. and certain other
investors (collectively, the "Investors") acquired 89.6% of the outstanding
shares of Holdings. In connection with such transaction, Holdings issued to the
Investors 11,373,973 shares of $.01 par value common stock, for aggregate
consideration of $73.8 million ($6.49 per share) and 17,600 shares of $.01 par
value Series C redeemable preferred stock (the "Preferred Stock") and warrants
to purchase 463,232 shares of Holdings' nonvoting common stock (the "Warrants")
in exchange for aggregate consideration of $17.6 million. In addition, certain
of Holdings' existing stockholders retained a portion of their existing shares
of capital stock which had a total value of $8.6 million ($6.49 per share) and
represent 10.4% of the outstanding shares of Holdings.
Holdings used such proceeds, together with a portion of the proceeds borrowed by
its wholly-owned subsidiary, DESA, under new term loans and a working capital
loan facility (the "Credit Facility") with Bank of America, formerly
NationsBank, N.A., as administrative agent, to repurchase 89.6% of its
outstanding common stock and nonvoting common stock for $157,706,000 ($6.53 per
share, inclusive of $1,119,000 (or $.04 per share) relating to a purchase price
adjustment for net working capital that was higher at the closing date than
originally estimated at the measurement date). The remaining proceeds from the
Credit Facility and the proceeds from the issuance by DESA of $130,000,000 of
Senior Subordinated Notes were used to repay the outstanding amounts under
Holdings' existing credit agreement (see Notes 4 and 6).
F-8
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Basis of Presentation (continued)
The above described transactions have been accounted for as a recapitalization
(the "Recapitalization") with all amounts paid to the former shareholders
recorded as reductions in stockholders' equity (deficit).
Company Operations
Holdings is engaged in the manufacturing and marketing of various consumer
product lines, including zone heating products and specialty products primarily
throughout the United States and Europe. Two significant customers, which
operate in the hardware homecenter industry, accounted for 25% and 13% of net
sales, respectively, in fiscal year 2000, 29% and 11% of net sales,
respectively, in fiscal year 1999 and 17% and 13% of net sales, respectively, in
fiscal year 1998. The receivable balances from these two customers collectively
represented 39% and 37% of Holdings' accounts receivable at February 26, 2000
and February 27, 1999.
Other than a small amount of goodwill, Holdings has no assets, operations or
cash flows independent of DESA and, accordingly, separate financial statements
for DESA have not been provided as management believes that such financial
statements are not material to an investor. Holdings has fully and
unconditionally guaranteed the Credit Facility and the Senior Subordinated Notes
(see Note 4).
Summary of Significant Accounting Policies
Fiscal Year
Holdings' fiscal year ends on the Saturday closest to February 28. The fiscal
years for the consolidated financial statements included herein ended on
February 26, 2000 (52 weeks), February 27, 1999 (52 weeks) and February 28, 1998
(52 weeks).
F-9
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Basis of Presentation (continued)
Consolidation
The accompanying consolidated financial statements include the accounts of DESA
Holdings Corporation and its wholly-owned subsidiary, DESA International, Inc.,
and all of its wholly- owned subsidiaries, including DESA Industries of Canada,
Inc., DESA Europe B.V., DESA Industries of V.I., Inc., and Heath Company
Limited. All significant intercompany accounts and transactions have been
eliminated. DESA's 50% interest in a joint venture is accounted for using the
equity method.
Cash Equivalents
Holdings considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. The cost of all
inventories in the United States is valued using the last-in, first-out ("LIFO")
method while the cost of all foreign inventories is valued using the first-in,
first-out ("FIFO") method. Holdings believes the LIFO method results in a better
matching of current costs with current revenues. At February 26, 2000 and
February 27, 1999, approximately 81% and 82%, respectively, of the total
inventories are costed at LIFO. The effect of using the LIFO method in fiscal
years 2000, 1999 and 1998 was to increase pre-tax income by $1,551,000, $541,000
and $284,000, respectively.
If the LIFO method of valuing inventories was not used, total inventories would
have been $2,749,000 and $1,198,000 lower than reported at February 26, 2000 and
February 27, 1999, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and betterments
are capitalized whereas maintenance and repairs are expensed as incurred. Upon
disposition, the asset cost and related accumulated depreciation are removed
from the accounts, and any resulting gain or loss is included in income.
F-10
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Basis of Presentation (continued)
Depreciation of plant and equipment is determined on the straight-line basis
over the following estimated useful lives:
Buildings and improvements 33 years
Machinery and equipment 5-12 years
Furniture and fixtures 5-10 years
Tooling and molds 2-3 years
Revenue Recognition
The Company records sales upon shipment of products to its customers.
Warranty Costs
Holdings warrants its products against defects in design, materials and
workmanship generally for six months to two years, depending on the product. A
provision for estimated future costs related to warranty expense is recorded on
an accrual basis when products are shipped.
Income Taxes
Holdings accounts for income taxes using the liability method. Deferred income
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes and are determined based on tax rates
expected to be in effect when the taxes are actually paid or refunds received.
Financing Costs
Financing costs are deferred and amortized using the interest method over the
life of the related debt instrument. The amortization of these financing costs
is included in other operating expenses in the consolidated statements of
income.
F-11
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Basis of Presentation (continued)
Goodwill
Goodwill is amortized on the straight-line basis over 40 years and is recorded
at cost less accumulated amortization. Holdings reviews the recoverability of
its goodwill by comparing the unamortized carrying value to anticipated
undiscounted future cash flows. Any impairment is charged to expense when such
determination is made. Accumulated amortization at February 26, 2000 and
February 27, 1999 was $9,090,000 and $6,809,000, respectively, and amortization
expense for fiscal years 2000, 1999 and 1998 was $2,281,000, $1,981,000 and
$1,168,000, respectively.
Foreign Currency Translation
All assets, liabilities and results of operations are measured in the primary
currency ("functional currency") in which each entity conducts its business.
Assets and liabilities denominated in a currency other than the functional
currency are remeasured and stated in the functional currency based on current
or historical exchange rates. Gains or losses arising therefrom are included in
net income. Adjustments resulting from translating foreign functional currency
assets and liabilities into U.S. dollars, based on current exchange rates, are
recorded in a separate component of stockholders' equity (deficit) called
"Accumulated other comprehensive loss" and are included in determining
comprehensive income. Revenues and expenses are translated into U.S. dollars at
average monthly exchange rates. The Canadian dollar has been determined to be
the functional currency for DESA's Canadian subsidiary, the Netherlands Guilder
for its European subsidiary and the Hong Kong dollar for its Hong Kong
subsidiary.
Derivative Financial Instruments
Gains and losses related to interest rate protection agreements used to convert
floating rate debt to a fixed rate basis are recorded over the lives of the
agreements as an adjustment to interest expense (see Note 5).
Holdings utilizes forward exchange foreign currency contracts to reduce foreign
exchange risks that arise from exchange rate movements between the dates that
foreign currency transactions for the purchase of inventories are entered into
and the date they are
F-12
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization and Basis of Presentation (continued)
consummated. Gains and losses related to qualifying hedges of foreign currency
risk exposure are deferred and recorded as adjustments to the carrying amounts
of the related assets when the hedge transactions occur.
Advertising Costs
Holdings expenses the costs of advertising as incurred. Advertising expense
totaled approximately $3,345,000, $2,785,000 and $1,587,000 for the fiscal years
ended February 26, 2000, February 27, 1999 and February 28, 1998, respectively,
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 derivative's change
in fair value will immediately be recognized in earnings. Management does not
believe that FAS 133 will have a significant effect on the earnings and
financial position of the Company. The Company expects to adopt FAS 133
beginning in the first quarter of fiscal year 2002 which begins in March 2001.
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.
F-13
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
2. Acquisitions
On February 4, 1998, Holdings purchased all of the issued and outstanding stock
of Heath Holding Corp. ("Heath") for an aggregate purchase price of $42,365,000.
The purchase price consisted of $40,365,000 in cash and a $2,000,000 junior
subordinated note payable. In fiscal year 1999, Holdings incurred an additional
$263,000 of expenses related to the acquisition of Heath. Such expenses have
been included as an addition to goodwill. Heath is engaged in the manufacturing
and distribution of motion-sensor lighting products and wireless home-controlled
devices, all of which are included in the Specialty Products segment of the
Company. Holdings accounted for such acquisition using the purchase method.
The fair value of the assets acquired and liabilities assumed at February 4,
1998 is summarized as follows (in thousands):
Current assets $ 25,757
Property, plant and equipment 458
Other assets 3,428
Goodwill 22,974
Current liabilities (9,989)
----------
$ 42,628
==========
Certain adjustments were recorded during fiscal year1999 to finalize purchase
accounting.
The acquisition of Heath was financed through the issuance by Holdings of
1,081,852 shares of its common stock to certain of the Investors, borrowings of
$20,000,000 under the Bank of America Acquisition Loan Commitment, the issuance
of a $2,000,000 note to H.I.G. Investment Group, L.P. and certain other note
holders, and additional borrowings under the Bank of America Working Capital
Loan Commitment. The goodwill related to the acquisition of Heath is being
amortized over 40 years.
On August 19, 1998, the Company consummated two acquisitions. The Company
acquired by merger Fireplace Manufacturers, Inc. ("FMI") for a net cash purchase
price of $25,805,000. The purchase price includes non-compete agreements with
certain executives of FMI covering a three year period for aggregate payments of
$3,050,000. The Company also acquired certain of the assets of Universal
Heating, Inc. ("UHI") through DESA U.S. Inc., which then merged
F-14
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
2. Acquisitions (continued)
into DESA, for a cash purchase price of $12,634,000, including non-compete
payments of $1,998,000. The Company financed the two acquisitions through
borrowings of $26,363,500 under the Credit Facility (Acquisition Loan B) and the
issuance of common stock for $12,075,500.
The following summarizes the fair value of the assets acquired and liabilities
assumed at August 19, 1998 for the two acquisitions (in thousands):
Current assets $ 4,450
Property, plant and equipment 1,201
Other assets 15,734
Goodwill 34,234
Current liabilities (3,060)
Long Term liabilities (14,120)
--------
$ 38,439
========
Holdings accounted for such acquisitions using the purchase method and
accordingly, certain adjustments were recorded during fiscal 2000 to finalize
purchase accounting. The results of operations of such acquisitions have been
included in Holdings' results of operations from the acquisition dates.
The following unaudited supplemental pro forma information is presented as if
the acquisitions of FMI and UHI had been completed as of March 1, 1998 and March
2, 1997 and as if the acquisition of Heath had been completed as of March 2,
1997 (in thousands):
Fiscal year ended
February 27, February 28,
1999 1998
-------------------------------
Net sales $329,944 $333,991
Operating profit 30,462 34,519
Income before extraordinary item 852 7,119
Net income $ 852 $ 4,811
F-15
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
3. Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of $907,000
and $1,628,000 at February 26, 2000 and February 27, 1999, respectively.
4. Financing Arrangements
As part of the Recapitalization discussed in Note 1, Holdings entered into a new
credit agreement on November 26, 1997 with Bank of America, UBS Securities LLC
and Nationsbanc Montgomery Securities, Inc. (the "Lenders"), which was amended
in May 1999, that consists of a Working Capital Loan Commitment of up to
$75,000,000 (which includes a Swing-Line Loan Commitment of up to $5,000,000), a
Term A Loan Commitment ("Term A Loan") of $50,000,000, a Term B Loan Commitment
("Term B Loan") of $50,000,000, an Acquisition Loan Commitment of up to
$20,000,000 and an Acquisition B Loan Commitment of up to $30,000,000
(collectively, the "Credit Facility"). Also, in connection with the
Recapitalization, DESA issued $130,000,000 aggregate principal amount of Senior
Subordinated Notes to qualified institutional buyers, as defined in Rule 144A
under the Securities Exchange Act of 1933 (the "Senior Subordinated Notes").
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.
Holdings has already complied with the requirements of the Clean-Up Period
occurring between January 1, 2000 and May 30, 2000.
Holdings had a balance of $250,000 drawn against the $5,000,000 Swing-Line Loan
Commitment at February 26, 2000. The Swing-Line Loan, which accrues interest
monthly at the prime rate plus 2.00% per annum, extends to the earlier of
November 26, 2003 or 30 days after the requested borrowing. After the expiration
of the Swing-Line Loan period, the $5,000,000 Commitment remains as part of the
Working Capital Loan Commitment of $75,000,000.
The required annual payments under the Term A and Term B Loans are increased by
50% of any excess cash flows at the end of the fiscal year, as defined. An
excess cash flow payment of $910,000 was required in fiscal 2000 which will be
applied against the next scheduled principal payments.
F-16
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
4. Financing Arrangements (continued)
This credit agreement includes various restrictive covenants which, among other
things, prohibit payment of dividends to common stockholders, set maximum limits
on capitalized lease obligations and capital expenditures, require minimum
consolidated EBITDA (as defined) levels, and set consolidated interest coverage,
fixed charge coverage and leverage ratios. At February 26, 2000, Holdings
complied with the all restrictive covenants required by the credit agreement.
Substantially all of Holdings' consolidated assets are pledged under the Credit
Facility and Senior Subordinated Notes.
Outstanding borrowings consist of the following (in thousands):
<TABLE>
<CAPTION>
February 26, February 27,
2000 1999
------------------------------
<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) 37,500 44,875
Bank of America and various banks Term B Loan (C) 47,750 48,750
Bank of America and various banks
Working Capital Loan Commitment (D) 25,379 22,682
Bank of America and various banks Acquisition Loan (E) 18,750 20,000
Bank of America and various banks Acquisition B Loan (F) 28,125 30,000
Note payable related to acquisition of Heath (G) 1,842 2,138
---------------------------
Total outstanding borrowings 289,346 298,445
Less current portion of long-term debt 23,500 13,307
---------------------------
Total long-term debt $265,846 $285,138
===========================
<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, commencing on June 15, 1998. The Senior Subordinated Notes can be
redeemed prior to the mandatory redemption date based upon the occurrence of certain
events, as defined. DESA is the issuer of the Senior Subordinated Notes, which are
fully and unconditionally guaranteed by Holdings.
F-17
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
4. Financing Arrangements (continued)
(B) The Term A Loan is payable in quarterly installments through November 26, 2003 and
accrues interest at the prime rate plus 2.0% or LIBOR plus 3.0% 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 8.03% and 7.85% in
2000 and 1999, respectively. 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 8.52% and 8.27% in
2000 and 1999, respectively. Once repaid, the Term B Loan may not be reborrowed.
(D) The Working Capital Loan Commitment is payable at any time at the option of DESA
prior to November 26, 2003 and accrues interest at the prime rate plus 2.0% or LIBOR
plus 3.0%, at the option of DESA. The weighted average interest rate was 8.60% and
7.96% in 2000 and 1999, respectively. 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
February 26, 2000 and February 27, 1999, letters of credit of $1,497,000 and
$718,000, respectively, 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.
(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 2.25% or LIBOR plus 3.25% at the option of DESA.
The weighted average interest rate was 8.22% and 8.27% in 2000 and 1999,
respectively. Once repaid, the Acquisition Loan may not be reborrowed.
(F) The Acquisition B Loan is payable in quarterly installments commencing in February
2000 and extending through November 26, 2003 and accrues interest, which is payable
quarterly, at the prime rate plus 2.25% or LIBOR plus 3.25%, at the option of DESA.
The weighted average interest rate was 8.05% and 8.33% in 2000 and 1999,
respectively. Once paid, the Acquisition B Loan may not be reborrowed.
F-18
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
4. Financing Arrangements (continued)
(G) The note payable is due on December 31, 2008 and accrues interest, which is payable
semi-annually beginning June 30, 1998, at a rate of 7.5% per annum. DESA may elect,
upon written notice, to defer any interest payments. Such interest payments shall
effectively convert to principal and accrue interest at a rate of 7.5% per annum. In
fiscal years 2000 and 1999, $160,000 and $138,000, respectively, of interest
payments were deferred and were converted into principal. In fiscal year 2000,
$456,000 was deducted from the principal balance for certain payments made under the
terms of the note.
</FN>
</TABLE>
In accordance with the terms of the Credit Facility, the ability of DESA to
incur additional indebtedness is limited, as defined. At February 26, 2000, DESA
can incur additional indebtedness of $36.7 million.
Cash payments for interest for the fiscal years ended February 26, 2000,
February 27, 1999 and February 28, 1998 were $26,564,000, $30,514,000 and
$12,890,000, respectively.
The following table shows the required future repayments under the Company's
financing arrangements (in thousands):
Fiscal years ending:
2001 $ 23,500
2002 23,500
2003 23,500
2004 60,604
2005 26,400
Thereafter 131,842
----------
$ 289,346
==========
5. Financial Instruments
Holdings' financial instruments recorded on the consolidated balance sheets
include cash and cash equivalents, accounts receivable, accounts payable and
debt obligations. Due to their short-term maturity, the carrying amounts of cash
and cash equivalents, accounts receivable and accounts payable approximate fair
market value.
F-19
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
5. Financial Instruments (continued)
The following table summarizes the carrying amounts and estimated fair values of
Holdings' remaining financial instruments at February 26, 2000 and February 27,
1999 (bracketed amount represents an asset) (in thousands):
February 26, 2000 February 27, 1999
-----------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------
Bank debt $ 157,504 $ 157,504 $ 166,307 $ 166,307
Senior subordinated notes 130,000 96,850 130,000 102,700
Note payable 1,842 1,842 2,138 2,138
Interest rate swap agreements -- -- -- (438)
Foreign exchange contracts -- 473 -- 228
Methods and assumptions used in estimating fair values are as follows:
Bank Debt: The carrying amounts of DESA's variable rate bank borrowings for
revolving loans and term loans approximate their fair values.
Senior Subordinated Notes: The fair value of DESA's fixed rate borrowings are
estimated based on quoted market prices.
Note Payable: The carrying amount of Holdings' note payable approximates fair
value because the effective rate of interest approximates the rate at which
Holdings could borrow funds with similar remaining maturities.
Interest Rate Swap Agreements: The are no interest rate swap agreements in
effect at February 26, 2000. The fair value of the interest rate swap agreements
reflect the estimated amount that DESA would receive at February 27, 1999 if
such contracts were terminated based on quoted market prices.
Foreign exchange contracts: The fair value of the foreign exchange contracts
reflect the estimated amount that DESA would pay at February 26, 2000 and
February 27, 1999 if such contracts were terminated based on quoted market
prices.
F-20
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
5. Financial Instruments (continued)
Derivative Financial Instruments
In fiscal 1999, DESA entered into interest rate swap agreements with Bank of
America to manage its exposure to interest rate fluctuations. The interest rate
swap agreements effectively converted interest rate exposure from variable to
fixed rates of interest without the exchange of the underlying principal
amounts. The interest rate swap agreements provided for the payment by DESA of
fixed rates of interest based on three month LIBOR. Notional principal amounts
of these agreements total $125 million, of which $75 million terminated in
November 1999 and $50 million was canceled at the option of Bank of America in
February 2000. There was no payment or receipt upon the cancellation of the swap
contract in February 2000. The notional amounts are used to measure the interest
to be paid or received and do not represent the amount of exposure to credit
loss. Net payments of $573,000 and $100,000 were recorded as adjustments to
interest expense in fiscal years 2000 and 1999, respectively.
Foreign Exchange Contracts
At February 26, 2000, DESA had forward exchange foreign currency contracts, with
maturities ranging from June 2000 to November 2000, to purchase approximately
$4.9 million in foreign currencies to cover future payments to component
suppliers.
6. Series C Redeemable Preferred Stock
Holdings is authorized to issue 40,000 shares of $.01 par value Preferred Stock
which have no voting rights, except under limited conditions, as defined. Such
Preferred Stock has a mandatory redemption date on November 30, 2009 at its
liquidation value of $1,000 per share plus accrued and unpaid dividends. The
liquidation value is adjustable based upon the occurrence of certain future
events, as defined. Such Preferred Stock was initially recorded on the
consolidated balance sheets at $14,598,000 (this amount is net of the fair value
assigned to the Warrants of $3,002,000 -- see Note 8) and is being accreted to
its face value of $17,600,000 over its term. The accretion of Preferred Stock is
shown as a reduction to retained earnings (deficit) on the consolidated
statements of stockholders' equity (deficit).
F-21
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
6. Series C Redeemable Preferred Stock (continued)
The holders of Preferred Stock are entitled to receive cumulative dividends at a
rate of 12% per annum. Such dividends are payable as and when declared by
Holdings' Board of Directors in cash or via the issuance of additional shares of
Preferred Stock at a value of $1,000 per share if a cash dividend is not
declared prior to any May 31 or November 30 before its redemption. In June and
December 1999, Holdings issued 1,189 and 1,281 shares of Preferred Stock as
dividends-in-kind. At February 26, 2000 and February 27, 1999, accrued dividends
(included in other accrued liabilities) on such Preferred Stock were $421,000 or
$18.74 per share and $381,000 or $19.06 per share, respectively.
7. Income Taxes
Significant components of Holdings' deferred tax liabilities and assets are as
follows (in thousands):
February 26, February 27,
2000 1999
-------------------------------
Deferred tax liabilities:
Depreciation and amortization $ 1,167 $ 1,880
Inventory reserves, including LIFO 1,023 454
----------------------------
Total gross deferred tax liabilities 2,190 2,334
Deferred tax assets:
Allowance for doubtful accounts 362 514
Accrued expenses 2,292 2,076
Net operating loss carryforwards 913 3,002
Other--net 198 98
----------------------------
Total gross deferred tax assets 3,765 5,690
Valuation allowance (621) (621)
----------------------------
Net deferred tax (assets) $ (954) $(2,735)
============================
Shown in consolidated balance sheets as:
Current deferred tax (assets) $(1,743) $(2,137)
Noncurrent deferred tax liability (assets) 789 (598)
----------------------------
Net deferred tax (assets) $ (954) $(2,735)
============================
F-22
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
Holdings has federal net operating loss carryforwards of approximately $833,000
available to offset future taxable income which expire in 2019. Holdings also
has $8,000 of Federal minimum tax credit carryforwards which have an unlimited
carryforward period and state net operating loss carryforwards of $27 million
which expires in 2001 and 2002. The Federal net operating loss and minimum tax
credit carryforwards acquired in the acquisition of Heath are subject to
limitations imposed by the Internal Revenue Code.
Management has evaluated the need for a valuation allowance against the deferred
tax assets and has determined that all of the deductible temporary differences,
except $621,000, will be utilized as charges against reversals of future taxable
temporary differences and future taxable income. Accordingly, Holdings has
recorded a $621,000 valuation allowance to reserve for all of the state net
operating loss carryforwards acquired in the Heath acquisition which may not be
realized during the carryforward period. If this net operating loss carryforward
is realized, the reduction of the valuation allowance will be charged against
the goodwill from the Heath acquisition.
The provision for income taxes consists of the following (in thousands):
Fiscal Year
2000 1999 1998
---------------------------------------
Current:
Federal $ 2,367 $ 438 $ 2,530
State and local 936 -- 648
Foreign 451 457 908
-------------------------------------
3,754 895 4,086
Deferred:
Federal 1,731 215 (38)
State and local 51 56 2
-------------------------------------
1,782 271 (36)
-------------------------------------
$ 5,536 $ 1,166 $ 4,050
=====================================
F-23
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
The income statement classification of the provision (benefit) for income taxes
is as follows (in thousands):
Fiscal Year
2000 1999 1998
------------------------------------
Income tax expense attributable to
continuing operations $ 5,536 $ 1,166 $ 5,545
Extraordinary item -- -- (1,495)
-----------------------------------
$ 5,536 $ 1,166 $ 4,050
===================================
Included in earnings before income tax expense and extraordinary item for the
years ended February 26, 2000, February 27, 1999 and February 28, 1998 are
foreign earnings of $706,000, $2,739,000 and $1,249,000, respectively.
Undistributed earnings of Holdings' foreign subsidiaries amounted to
approximately $7,207,000 and $6,860,000 at February 26, 2000 and February 27,
1999, respectively. Approximately $6,468,000 of those earnings are considered to
be permanently reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, Holdings would be subject to
both U.S. income taxes (net of foreign tax credits) and withholding taxes
payable to the various foreign countries. In the event that these permanently
reinvested earnings are distributed, it is estimated that U.S. federal and state
income taxes, net of foreign tax credits, of approximately $2,052,000 would be
due.
The effective income tax rate differs from the statutory rate as follows (in
thousands):
Fiscal Year
2000 1999 1998
------------------------------------
Federal income tax at statutory rate $ 3,685 $ 876 $ 3,908
State income tax, net of federal benefit 663 36 591
Foreign income taxes (benefit) 204 (502) 471
Goodwill amortization 787 599 387
Other--net 197 157 188
------------------------------------
Provision for income taxes $ 5,536 $ 1,166 $ 5,545
====================================
F-24
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
Cash payments for income taxes for the years ended February 26, 2000, February
27, 1999 and February 28, 1998 were $2,914,112, $1,883,000 and $5,154,000,
respectively.
8. Stockholders' Equity (Deficit)
Warrants Issued with Series C Redeemable Preferred Stock
The Warrants issued in conjunction with the Recapitalization entitle the holders
to purchase 463,232 shares of Holdings' nonvoting common stock for $.01 per
share and are exercisable at any time prior to their expiration on November 30,
2009. Such Warrants have been recorded at their fair value at the time of
issuance of $3,002,000 as an addition to capital in excess of par value and a
reduction to the carrying value of the Preferred Stock.
Stock Option Plan
In March 1998, Holdings adopted the 1998 Stock Option Plan, which was
subsequently amended and restated in September 1998. The 1998 Stock Option Plan
terminates in ten years from its date of inception and provides for the issuance
of incentive options or nonqualified stock options for 1,462,222 shares of
common stock. The stock options may be granted to key employees, as defined, as
determined by the Compensation Committee of the Board of Directors, and the term
of the options cannot exceed ten years from the grant date, except for employees
who own stock possessing more than 10% of the combined voting power of all
classes of stock of Holdings, for whom the term of the options is five years.
Certain options
F-25
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (Deficit) (continued)
vest as follows: 5% at the end of year one, 10% at the end of year two, 60% at
the end of year three, 80% at the end of year four and 100% at the end of year
five. The other options vest in nine years and six months from the date of grant
and are subject to acceleration provisions based upon the attainment of certain
future financial performance goals as defined in the agreements.
The exercise price of the incentive options shall be equal to or greater than
the fair market value of the common stock on the date of grant, except for
employees who own stock possessing more than 10% of the combined voting power of
all classes of stock, for whom the exercise price cannot be less than 110% of
the fair market value of the common stock on the date of grant.
The exercise price of the nonqualified options is determined by the Compensation
Committee of the Board of Directors.
The following is a summary of Holdings' incentive options under the 1998 Stock
Option Plan:
Number of
Shares
----------
Outstanding at February 28, 1998 --
Granted on March 19, 1998 at $6.49 per share 177,000
Granted on July 17, 1998 at $6.49 per share 10,750
Granted on September 1, 1998 at $6.49 per share 1,179,777
Canceled in fiscal 1999 (13,000)
----------
Outstanding at February 27, 1999 1,354,527
Granted on April 13, 1999 at $6.50 per share 10,000
Granted on July 17, 1999 at $6.50 per share 81,750
Cancelled in fiscal 2000 (619,133)
----------
Outstanding at February 26, 2000 827,144
==========
10,946 of the options were exercisable at February 26, 2000.
F-26
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (Deficit) (continued)
Of these above options issued, 214,000 options vest as follows: 5% at the end of
year one, 10% at the end of year two, 60% at the end of year three, 80% at the
end of year four and 100% at the end of year five. The other options vest in
nine years and six months from the date of grant and are subject to acceleration
provisions based upon the attainment of certain future financial performance
goals. As of February 26, 2000, the performance goals for certain of the options
have been met and, as such, 6,308 performance based options vested on February
26, 2000.
Holdings accounts for its stock based compensation awards following the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25") for stock
issued to employees. APB 25 requires compensation expense to be recognized only
if the market price of the underlying stock exceeds the exercise price on the
date of grant. Holdings' stock based awards consist of stock options with an
exercise price equal to market price on the date of grant. As such, Holdings has
not recorded compensation expense in connection with these awards.
The weighted average fair value of an option granted for the year ended February
26, 2000 , and February 27, 1999 was $1.96 and $2.42. The fair value of the
options was estimated at the date of grant using a minimum value method and the
following assumptions:
Fiscal Year
2000 1999 1998
---------------------------------------
Risk-free interest rate 5.94% 5.32% 6.31%
Average life 6 years 5 years 3 years
Dividend yield 0% 0% 0%
F-27
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (Deficit) (continued)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Holdings' pro forma
net income is as follows (in thousands):
Fiscal Year
2000 1999 1998
-------------------------------
Pro forma net (loss) income available
for common stockholders $2,148 $(1,280) $2,700
Shares Reserved for Issuance
At February 26, 2000, 635,078 shares of common stock were reserved for the
exercise and future grant of stock options. At February 26, 2000 and February
27, 1999, 90,604 shares of common stock were reserved for issuance upon
conversion of the nonvoting common stock. At February 26, 2000 and February 27,
1999, 463,232 shares of nonvoting common stock were reserved for issuance upon
exercise of outstanding warrants.
9. Pension Plans
All eligible salaried employees are covered by a defined contribution plan
("401k"). After an employee has been employed for six months, Holdings
contributes 2 1/2% of their salary (2% of salary prior to September 1, 1999).
Holdings matches an additional 50% of participant contributions up to a maximum
contribution of 3% (Holdings matched an additional 50% of participant
contributions up to a maximum contribution of 1% prior to September 1, 1999).
The cost of this plan was $632,000, $366,000 and $325,000 for the fiscal years
ended February 26, 2000, February 27, 1999 and February 28, 1998, respectively.
Holdings has a defined benefit pension plan covering substantially all of its
industrial employees. The defined benefits are calculated at the initial
application date as the present value of benefits credited with respect to
service before that date. Holdings' funding policy is consistent with the
requirements of federal laws and regulations.
F-28
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
9. Pension Plans (continued)
Assets of the 401k and deferred benefit pension plans are invested in securities
of governmental agencies, common stocks, insurance contracts and mutual funds.
The following table sets forth the funded status of Holdings' defined benefit
plan and the amount recognized in Holdings' consolidated balance sheets as of
February 26, 2000 and February 27, 1999 (in thousands):
2000 1999
------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 2,805 $ 2,217
Service cost 130 120
Interest cost 201 170
Amendments -- 194
Actuarial loss 73 161
Benefits paid (63) (57)
----------------------
Benefit obligation at end of year 3,146 2,805
----------------------
Change in plan assets
Fair value of plan assets at beginning of year 2,983 2,665
Actual return on plan assets 89 210
Employer contributions 150 165
Benefits paid (63) (57)
----------------------
Fair value of plan assets at end of year 3,159 2,983
Reconciliation of funded status of the plan
Funded status of the Plan 13 178
Unrecognized net actuarial loss 434 198
Unrecognized net transition liability 12 18
Unrecognized prior service cost 268 306
----------------------
Net prepaid asset $ 727 $ 700
======================
F-29
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
9. Pension Plans (continued)
Fiscal Year
2000 1999 1998
--------------------------------
Weighted average assumptions
Discount rate 7.75% 7.25% 7.50%
Expected return on plan assets 9.00 9.00 9.00
A summary of Holdings' net periodic pension cost related to the defined benefit
plan for fiscal years 2000, 1999 and 1998 is as follows (in thousands):
Fiscal Year
2000 1999 1998
------------------------
Service cost--benefits earned during the year $ 130 $ 120 $ 94
Interest cost on projected benefit obligation 201 170 149
Expected return on plan assets (253) (218) (181)
Net amortization and deferral 44 33 25
-----------------------
Net pension cost $ 122 $ 105 $ 87
=======================
10. Extraordinary Item
In connection with the Recapitalization (see Note 1), Holdings recorded an
extraordinary loss of $2,308,000, net of an income tax benefit of $1,495,000,
related to the write-off of the unamortized balance of deferred financing costs
associated with a prior refinancing.
11. Lease Commitments
Holdings leases certain machinery and equipment for periods up to five years,
expiring between 2001 and 2005, and office and manufacturing facilities for
periods up to ten years, expiring between 2001 and 2010, under operating lease
agreements. Total rent expense for fiscal years 2000, 1999 and 1998 was
approximately $4,808,000, $3,299,000 and $2,718,000, respectively. Certain of
the leases contain renewal and escalation options for periods up to ten years
after the initial term of the lease.
F-30
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
11. Lease Commitments (continued)
Future minimum lease payments under all noncancellable operating leases at
February 26, 2000 are as follows (in thousands):
Fiscal years ending:
2001 $ 4,041
2002 3,408
2003 2,795
2004 2,492
2005 2,282
Thereafter 7,587
----------
Total minimum lease payments $ 22,605
==========
12. Other Assets
Other assets as of February 26, 2000 and February 27, 1999 consist of the
following, net of related amortization (in thousands). Accumulated amortization
at February 26, 2000 and February 27, 1999 was $7,777 and $4,017, respectively:
2000 1999
--------------------------
Non-compete agreements $ 2,797 $ 4,219
Trademarks and intellectual property 9,205 9,903
Deferred financing costs 9,310 10,230
Other 954 898
-------------------------
$ 22,266 $ 25,250
=========================
F-31
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
13. Segment Information
Holdings is organized into two primary product categories: (a) zone heating
products, which include indoor room heaters, hearth products and outdoor heaters
and (b) specialty products, which include specialty tools and home security
products.
Holdings evaluates performance and allocates resources based on the reportable
segments operating profit or loss. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies (see Note 1).
Corporate expense includes corporate headquarters staff, a modest portion of the
cost of certain support functions, including accounting, management information
systems, human resources and treasury and the amortization of deferred financing
costs.
Identifiable assets are those assets of Holdings that are identified with the
operations in each product segment. Corporate assets include primarily cash,
deferred income taxes and deferred financing costs.
F-32
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
Operational results and other financial data for the two business segments for
the years ended February 26, 2000, February 27, 1999 and February 28, 1998 are
presented below (in thousands):
Zone
Heating Specialty General
Products Products Corporate Total
--------------------------------------------
Year ended February 26, 2000
Net sales $218,820 $175,104 $ -- $393,924
Operating profit (loss) 27,195 17,373 (5,185) 39,383
Depreciation and amortization 6,185 2,642 1,648 10,475
Segment assets 121,359 95,993 12,425 229,777
Capital expenditures 4,033 1,468 28 5,529
Year ended February 27, 1999
Net sales 177,815 139,422 -- 317,237
Operating profit (loss) 19,239 15,412 (4,285) 30,366
Depreciation and amortization 4,904 2,072 1,611 8,587
Segment assets (2) 107,227 81,029 15,096 203,352
Capital expenditures 3,675 694 93 4,462
Year ended February 28, 1998 (1)
Net sales 173,753 50,416 -- 224,169
Operating profit (loss) 28,428 5,435 (5,371) 28,492
Depreciation and amortization 3,143 481 1,088 4,712
Segment assets (1) 68,650 71,128 15,858 155,636
Capital expenditures 4,619 744 112 5,475
(1)--Reflects acquisition of home security business, which was acquired on
February 4, 1998--see Note 2.
(2)--Reflects acquisitions of FMI and UHI, which were acquired on
August 19, 1998--see Note 2.
F-33
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
Financial information relating to Holdings' operations by geographic area is as
follows (in thousands):
Net Sales
------------------------------------------------
Fiscal Year Ended
February 26, February 27, February 28,
2000 1999 1998
------------------------------------------------
United States $374,419 $294,581 $206,194
Foreign 19,505 22,656 17,975
--------------------------------------------
Consolidated $393,924 $317,237 $224,169
============================================
Long-Lived Assets
------------------------------------------------
Fiscal Year Ended
February 26, February 27, February 28,
2000 1999 1998
------------------------------------------------
United States $132,134 $122,086 $ 87,878
Foreign 646 679 600
--------------------------------------------
Consolidated $132,780 $122,765 $ 88,478
============================================
14. Related Party Transactions
Pursuant to the 1998 Recapitalization, Holdings entered into management
agreements with J.W. Childs Associates L.P. and UBS Capital Management Inc. (the
"Advisors") which provide for aggregate annual management fees of $240,000 as
consideration for ongoing consulting and management advisory services. Under
these agreements, the Advisors were paid an aggregate of $88,000, $284,000 and
$81,000 in fiscal years 2000, 1999 and 1998, respectively. Payments may be made
to the extent permitted by the Credit Facility and Indenture. The agreements
extend for a period of five years upon which they shall automatically extend for
successive periods of one year each, unless terminated by Holdings or the
Advisors.
F-34
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
15. Litigation
Holdings is subject to legal proceedings and claims which arise in the ordinary
course of its business and have not been formally adjudicated. In the opinion of
management, settlement of these actions when ultimately concluded will not have
a material adverse effect on the results of operations, cash flows or financial
condition of Holdings.
16. Summarized Financial Information of DESA International, Inc. (Unaudited)
DESA International, Inc. is the issuer of the 9 7/8% Senior Subordinated Notes.
Holdings has not presented separate financial statements and other disclosures
concerning DESA International, Inc. because management has determined that such
information is not material to holders of the Senior Subordinated Notes.
The following summarized consolidated financial information is being provided
for DESA International, Inc. as of February 26, 2000 and February 27, 1999 and
for the fiscal years ended February 26, 2000, February 27, 1999 and February 28,
1998.
Summarized consolidated balance sheet information (in thousands):
February 26, February 27,
2000 1999
--------------------------------
Assets
Current assets $205,265 $187,892
Net fixed assets 16,696 15,633
Goodwill, net 92,713 80,744
Deferred tax assets -- 598
Other assets 22,266 25,250
----------------------------
$336,940 $310,117
============================
F-35
<PAGE>
DESA Holdings Corporation
Notes to Consolidated Financial Statements (continued)
16. Summarized Financial Information of DESA International, Inc. (Unaudited)
(continued)
Liabilities and stockholders' equity (deficit)
Current liabilities $ 78,554 $ 51,939
Long-term debt 134,004 153,000
9 7/8% Senior Subordinated Notes 130,000 130,000
Deferred tax liabilities 789 --
Other liabilities 14,840 599
Stockholders' equity (deficit) (21,247) (25,421)
----------------------
$ 336,940 $ 310,117
======================
Summarized consolidated statements of operations information (in thousands):
Fiscal Year Ended
February 26, February 27, February 28,
2000 1999 1998
------------------------------------------------
Net sales $393,924 $317,237 $224,169
Income before income taxes 10,719 2,698 11,198
Net income 5,182 1,532 3,345 (1)
(1)--Includes an extraordinary loss of $2,308,000, net of an income tax benefit
of $1,405,000
17. Subsequent Events
Subsequent Acquisition
On April 3, 2000, DESA acquired the assets of Trine Products Company ("Trine")
located in Bronx, New York for an aggregate purchase price of $11,097,000. The
acquisition was financed through the issuance by Holdings of 769,231 shares of
its common stock to certain of the Investors and borrowings of $6,000,000 under
the Credit Facility as amended (Acquisition Loan C). Trine's annual sales for
their most recent year-end 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.
F-36
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - Valuation and Qualifying Accounts
DESA International, Inc.
COL. A COL. B COL. C COL. D COL. E
-------------------------------------
Additions
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Charged (credited) Charged to Other Deductions - Balance at
Description Beginning of Period to Costs and Expenses Accounts-Describe Describe End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended February 26, 2000:
Deducted from assets accounts:
Allowance for doubtful accounts $ 1,628,000 $(608,000) $ 113,000 (1) $ 907,000
Year Ended February 27, 1999:
Deducted from assets accounts:
Allowance for doubtful accounts 1,517,000 49,000 202,000 (2) 140,000 (1) 1,628,000
Year Ended February 28, 1998:
Deducted from assets accounts:
Allowance for doubtful accounts 936,000 (143,000) 747,000 (3) 23,000 (1) 1,517,000
- ---------------------------
<FN>
(1) Uncollectible accounts written off, net of recovery.
(2) Part of net assets acquired from FMI.
(3) part of net assets acquired from Health Holding Corp.
</FN>
</TABLE>
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DESA Holdings Corporation
By: W. Michael Clevy /s/
Name: W. Michael Clevy
Title: Chief Executive Officer
and President and Director
Dated: May 26, 2000
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
Signature Title Date
Chief Executive Officer and
W. Micheal Clevy /s/ President and Director May 26, 2000
W. Michael Clevy (Principal Executive Officer)
Raymond B. Rudy /s/ Chairman May 26, 2000
Raymond B. Rudy
John W. Childs /s/ Director May 26, 2000
John W. Childs
Adam L. Suttn /s/ Director May 26, 2000
Adam L. Suttin
Michael Greene /s/ Director May 26, 2000
Michael Greene
Joseph J. Incadela /s/ Director May 26, 2000
Joseph J. Incandela
James E. Ashton /s/ Director May 26, 2000
James E. Ashton
Terry G. Scariot /s/ Director May 26, 2000
Terry G. Scariot
Senior Vice President, Chief
Financial Officer
Stephen L. Clanton /s/ (Principal Accounting and May 26, 2000
Stephen L. Clanton Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-26-2000
<PERIOD-END> FEB-26-2000
<CASH> 173
<SECURITIES> 0
<RECEIVABLES> 33,828
<ALLOWANCES> (907)
<INVENTORY> 60,157
<CURRENT-ASSETS> 96,997
<PP&E> 47,720
<DEPRECIATION> 30,574
<TOTAL-ASSETS> 229,777
<CURRENT-LIABILITIES> 78,998
<BONDS> 265,846
19,937
0
<COMMON> 155
<OTHER-SE> (150,788)
<TOTAL-LIABILITY-AND-EQUITY> 229,777
<SALES> 393,924
<TOTAL-REVENUES> 393,924
<CGS> 262,742
<TOTAL-COSTS> 262,742
<OTHER-EXPENSES> 91,799
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,853
<INCOME-PRETAX> 10,530
<INCOME-TAX> 5,536
<INCOME-CONTINUING> 4,994
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,994
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
