UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the thirteen week period ended June 2, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File Number 333-44969-01 DESA HOLDINGS CORPORATION (Exact name of registrant as specified in its charter) Delaware 61-1251518 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 236 Public Square, Suite 103, Franklin, TN 37064 (Address of principal executive offices) (Zip Code) (615) 599-6501 (Registrant's telephone number, including area code) Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of June 29, 2001, there were 26,194,672 shares of Registrant's Common Stock, $.01 par value per share, and 90,604 shares of the Registrant's Nonvoting Common Stock, $.01 par value per share, outstanding. DESA HOLDINGS CORPORATION FORM 10-Q June 2, 2001 INDEX PART I FINANCIAL INFORMATION PAGE Item 1. Consolidated Financial Statements (Unaudited) 2 Consolidated Balance Sheets - June 2, 2001 and March 3, 2001 3 Consolidated Statements of Operations - Thirteen Weeks ended June 2, 2001 and Fourteen Weeks ended June 3, 2000 4 Consolidated Statements of Cash Flows - Thirteen Weeks ended June 2, 2001 and Fourteen Weeks ended June 3, 2000 5 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 1 DESA HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEETS June 2, March 3, 2001 2001 ----------- ---------- (in (in thousands) thousands) Assets (Unaudited) Current assets: Cash and cash equivalents $ 1,502 $ 2,388 Accounts receivable, net of allowances of ($942) at June 2, 2001 and ($919) at March 3, 2001 35,208 41,894 Inventories: Raw materials 544 486 Work-in-process 13,330 10,938 Finished goods 39,636 37,869 ---------- ---------- 53,510 49,293 Deferred tax assets 3,274 3,274 Other current assets 4,269 6,376 ---------- ---------- Total current assets 97,763 103,225 Property, plant and equipment: Land 526 525 Buildings and improvements 6,569 6,561 Machinery and equipment 46,613 43,336 Furniture and fixtures 1,273 1,273 ---------- ---------- 54,981 51,695 Less accumulated depreciation 36,256 35,084 ---------- ---------- 18,725 16,611 Goodwill, net 94,551 95,312 Other assets 17,907 18,748 ---------- ---------- Total assets $ 228,946 $ 233,896 ========== ========== Liabilities and stockholders' equity (deficit) Current liabilities: Accounts payable $ 28,459 $ 28,701 Accrued interest 6,360 3,195 Other accrued liabilities 7,723 13,824 Current portion of long-term debt 41,053 50,874 ---------- ---------- Total current liabilities 83,595 96,594 Long-term debt 257,629 249,163 Other liabilities 15,138 15,139 ---------- ---------- Total liabilities 356,362 360,896 Commitments and contingencies Series C redeemable preferred stock, $.01 par value; authorized--40,000 shares; issued and outstanding-- 25,245 shares at June 2, 2001 and 25,245 shares at March 3, 2001 (liquidation preference - $26,515 at June 2, 2001 and $25,759 at March 3, 2001) 23,118 23,057 Stockholders' equity (deficit): Common stock, $.01 par value; authorized-- 50,000,000 shares; issued and outstanding-- 25,557,829 shares at June 2, 2001 and 16,373,148 shares at March 3, 2001 262 164 Nonvoting common stock, $.01 par value; authorized-- 3,000,000 shares; issued and outstanding-- 90,604 shares at June 2, 2001 and March 3, 2001 1 1 Capital in excess of par value 113,535 103,334 Accumulated deficit (258,257) (250,906) Notes Receivable - Officers (2,789) - Accumulated other comprehensive loss (3,286) (2,650) ---------- ---------- Total stockholders' equity (deficit) (150,534) (150,057) ---------- ---------- Total liabilities and stockholders' equity (deficit) $ 228,946 $ 233,896 ========== ========== See accompanying notes 2 DESA HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (Unaudited) Thirteen Weeks Fourteen Weeks Ended Ended June 2, 2001 June 3, 2000 -------------- -------------- Net sales $ 57,812 $ 70,619 Cost of sales 40,941 49,627 -------------- -------------- Gross profit 16,871 20,992 Operating costs and expenses: Selling 14,932 15,142 General and administrative 4,183 4,416 Other 1,972 1,734 -------------- -------------- 21,087 21,292 -------------- -------------- Operating loss (4,216) (300) Interest expense 6,856 8,192 -------------- -------------- Loss before provision for income taxes (11,072) (8,492) Income tax benefit (4,540) (3,990) -------------- -------------- Net loss (6,532) (4,502) Dividends and accretion on preferred stock 818 789 -------------- -------------- Loss applicable to common stockholders $ (7,350) $ (5,291) ============== ============== See accompanying notes 3 DESA HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Thirteen Weeks Fourteen Weeks Ended Ended June 2, 2001 June 3, 2000 -------------- -------------- Cash flows from operating activities Net loss $ (6,532) $ (4,502) Adjustments to reconcile net loss to net cash used used in operating activities: Depreciation 1,172 986 Amortization 1,575 1,590 Equity in undistributed earnings of joint venture (51) (51) Change in operating assets and liabilities, net of effects of acquisition: Accounts receivable, net 6,686 (6,250) Inventories (4,217) (17,280) Other current assets 2,107 (825) Accounts payable (242) 7,136 Accrued interest 3,165 1,794 Other accrued liabilities (2,649) (2,084) Income taxes payable (4,828) (4,452) Other liabilities - 169 -------------- -------------- Net cash used in operating activities (3,814) (23,769) -------------- -------------- Investing activities Capital expenditures (3,286) (438) Dividends received from joint venture 49 65 Net cash paid for acquisition of businesses - (11,090) Other (3) (1) -------------- -------------- Net cash used in investing activities (3,240) (11,464) -------------- -------------- Financing activities Net proceeds from working capital loan 4,595 32,742 Net proceeds from Guaranteed Line of Credit 1,550 - Decrease in note payable - (1,842) Proceeds from term loans - 6,000 Principal payments of term loans (3,885) (2,868) Principal payments of acquisition loans (3,615) (3,125) Issuance of common stock 7,509 5,007 Payment of debt financing costs - - -------------- -------------- Net cash provided by financing activities 6,154 35,914 Effect of exchange rate changes on cash 14 - -------------- -------------- Increase (decrease) in cash and cash equivalents for the period (886) 681 Cash and cash equivalents at beginning of period 2,388 173 -------------- -------------- Cash and cash equivalents at end of period $ 1,502 $ 854 ============== ============== See accompanying notes 4 DESA HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION The interim consolidated financial statements for the periods presented herein have not been audited by independent auditors. In the opinion of management of DESA Holdings Corporation (with its consolidated subsidiaries, "Company" or "Holdings"), all adjustments (consisting only of normal recurring accruals) considered necessary to present fairly the results of operations for the periods have been included. Interim results are not necessarily indicative of results for a full year. Sales of the Company's zone heating products follow seasonal patterns that affect the Company's results of operations. Demand for the Company's zone heating products has been historically highest in the third quarter, as consumers prepare for winter. Consequently, the Company's net sales and the Company's fiscal operating profit have also been historically highest during the Company's fiscal third quarter. Management believes that the Company's results of operations will continue to follow this pattern; there can be no assurance, however, that third quarter results will always surpass those of the first and second quarters, or that any improvement shown will be as great as that shown in previous years. In particular, unusually warm weather in the fall may reduce demand for zone heating products. The unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. The consolidated balance sheet presented as of March 3, 2001, has been derived from the consolidated financial statements that have been audited by the Company's independent auditors. The consolidated financial statements and notes thereto included herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation ------------- The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, DESA International, Inc. ("DESA") and all of its wholly-owned subsidiaries, including DESA Industries of Canada, Inc., DESA Europe BV, DESA Industries of V.I., Inc., Heath Company Limited and Desico, S.A. De C.V. All significant intercompany accounts and transactions have been eliminated. DESA's 50% interest in a joint venture is accounted for using the equity method. Use of Estimates ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Receivables Related to Stock Transactions ----------------------------------------- Amounts receivable from officers and directors resulting from sales of stock are presented separately as a deduction from stockholders' equity (deficit). 5 DESA HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. FINANCING ARRANGEMENTS Outstanding borrowings consist of the following (in thousands): June 2, March 3, 2001 2001 ---------------------- 9 7/8% Senior Subordinated Notes due 2007 (A) $ 130,000 $ 130,000 Credit Facility: Bank of America and various banks Term A Loan (B) 24,608 27,500 Bank of America and various banks Term B Loan (C) 44,723 45,435 Bank of America and various banks Term C Loan (D) 5,119 5,400 Bank of America and various banks Working Capital Loan Commitment (E) 48,472 43,877 Bank of America and various banks Acquisition Loan (F) 12,304 13,750 Bank of America and various banks Acquisition B Loan (G) 18,456 20,625 Guaranteed Line of Credit (H) 15,000 13,450 ---------------------- Total outstanding borrowings 298,682 300,037 Less current portion of long-term debt 41,053 50,874 ---------------------- Total long-term debt $ 257,629 $ 249,163 ====================== (A) The Senior Subordinated Notes are payable on December 15, 2007 and accrue interest at a rate of 9.875% per annum. Interest is payable semi-annually on June 15 and December 15. The Senior Subordinated Notes can be redeemed prior to the mandatory redemption date based upon the occurrence of certain events, as defined. DESA is the issuer of the Senior Subordinated Notes, which are fully and unconditionally guaranteed by Holdings. (B) The Term A Loan is payable in quarterly installments through November 26, 2003, and accrues interest at the prime rate plus 2.50% or LIBOR plus 3.50% 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 8.21% in first quarter 2002 and 9.58% in fiscal 2001. 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 2.75% or LIBOR plus 3.75% at the option of DESA. Interest is payable on a quarterly basis under the prime rate option or at the end of each LIBOR period. The weighted average interest rate was 8.46% in first quarter 2002 and 9.82% in fiscal 2001. Once repaid, the Term B Loan may not be reborrowed. (D) The Term C Loan is payable in quarterly installments which commenced in May 2000 and extend through November 26, 2003, and accrues interest at the prime rate plus 2.75% or LIBOR plus 3.75% at the option of DESA. Interest is payable on a quarterly basis under the prime rate option or at the end of each LIBOR period. The weighted average interest rate was 8.46% in first quarter 2002 and 9.65% in fiscal 2001. Once repaid, the Term C Loan may not be reborrowed. 6 DESA HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (E) 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 2.50% or LIBOR plus 3.50%, at the option of DESA. The weighted average interest rate was 8.37% in first quarter 2002 and 9.50% in fiscal 2001. 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 June 2, 2001 and March 3, 2001, letters of credit of $1.8 million were outstanding under the Working Capital Loan Commitment. Borrowings are generally limited to specific percentages of eligible trade receivables and inventory. Holdings pays commitment fees of 1/2 of 1% per annum on the daily unutilized Working Capital Loan Commitment. (F) The Acquisition Loan is payable in quarterly installments which commenced in February 2000 and extend through November 26, 2003, and accrues interest, which is payable quarterly, at the prime rate plus 2.75% or LIBOR plus 3.75% at the option of DESA. The weighted average interest rate was 8.46% in first quarter 2002 and 9.77% in fiscal 2001. Once repaid, the Acquisition Loan may not be reborrowed. (G) The Acquisition B Loan is payable in quarterly installments which commenced in February 2000 and extend through November 26, 2003 and accrues interest, which is payable quarterly, at the prime rate plus 2.75% or LIBOR plus 3.75% at the option of DESA. The weighted average interest rate was 8.46% in first quarter 2002 and 9.85% in fiscal 2001. Once repaid, the Acquisition B Loan may not be reborrowed. (H) The Guaranteed Line of Credit loan, as extended, is payable at any time at the option of DESA prior to November 26, 2003, and accrues interest at the prime rate plus .25% or LIBOR plus 1.75%, at the option of DESA. Interest is payable on a quarterly basis under the prime rate option or at the end of each LIBOR period. The weighted average interest rate was 6.84% in first quarter 2002 and 8.30% in fiscal 2001. In accordance with the terms of the Credit Facility, the ability of the Company to incur additional indebtedness is limited, as defined therein. At June 2, 2001, the Company can incur additional indebtedness of $9.1 million. 4. COMPREHENSIVE LOSS Comprehensive loss consisted of the following (in thousands): June 2, June 3, 2001 2000 (Thirteen Weeks) (Fourteen Weeks) ---------------------------------------- Net loss $ (6,532) $ (4,502) Unrealized loss on cash flow hedges (358) - Net change in foreign currency translation adjustment (278) (154) ---------------------------------------- Comprehensive loss $ (7,168) $ (4,656) ======================================== 7 DESA HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) As of June 2, 2001 and June 3, 2000 the accumulated other comprehensive loss consisted of the Company's foreign currency translation adjustment and cumulative loss on cash flow hedges. 5. SEGMENT INFORMATION The Company is organized into three divisions. Each division is comprised of dedicated operational resources required to support their specific product and geographic categories, and shared administrative resources for certain corporate functions. The divisions are: (a) zone heating division, which includes indoor room heaters, hearth products and outdoor heaters sold in the United States, (b) specialty products division, which includes specialty tools and home security products sold in the United States and all products sold in Canada and (c) international division, which includes zone heating and specialty products sold in all geographic areas other than the United States and Canada. Zone heating division and specialty products division are reportable segments. Identifiable assets are those assets of the Company that are identified with the operations in each segment. Prior amounts have been reclassified to conform to the current year's presentation. Operating results and other financial data for the business segments for the periods ended June 2, 2001 and June 3, 2000 are presented below (in thousands): Specialty Zone Heating Products Division Division Other Total ----------------------------------------- Thirteen weeks ended June 2, 2001: Net sales $ 16,691 $ 39,899 $ 1,222 $ 57,812 Operating profit (loss) (5,939) 2,973 (1,250) (4,216) Depreciation and amortization 1,586 1,041 120 2,747 Identifiable assets 118,197 101,204 9,545 228,946 Capital expenditures 2,623 360 303 3,286 Fourteen weeks ended June 3, 2000: Net sales $ 23,869 $ 46,034 $ 716 $ 70,619 Operating profit (loss) (3,752) 4,312 (860) (300) Depreciation and amortization 1,750 770 56 2,576 Identifiable assets 134,590 122,592 7,730 264,912 Capital expenditures 364 74 0 438 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective, as amended, for fiscal years beginning after June 15, 2000. SFAS 133 requires that all derivative financial instruments and hedging activities be recognized in the consolidated financial statements and measured at fair value regardless of their intended use. Changes in the fair value of the derivative financial instruments would then be recognized periodically in operations or stockholders' equity (deficit) (as a component of other comprehensive income) depending on whether the derivative is being used to hedge changes in fair value or cash flows. 8 DESA HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The Company adopted the provisions of SFAS 133 effective March 4, 2001. 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 adoption of the statement resulted in a cumulative after-tax increase to other comprehensive loss of $23,000. The change in fair value of forward contracts resulted in an unrealized loss of $335,000 which was included in other comprehensive income for the thirteen weeks ended June 2, 2001. 7. PARENT GUARANTEE OF SUBSIDIARY DEBT DESA's obligations under the 9 7/8% Senior Subordinated Notes ("Notes") are fully and unconditionally guaranteed by Holdings. The Company's condensed consolidating financial information is provided below: Condensed Consolidating Balance Sheet As of June 2, 2001 (in thousands) Parent DESA Combined Guarantor International, Non-Guarantor Consolidating (Holdings) Inc. Subsidiaries Adjustments Consolidated ------------------------------------------------------------------ Assets: Cash and cash equivalents $ - $ 1,036 $ 466 - $ 1,502 Accounts receivable, net - 129,465 16,501 $(110,758) 35,208 Inventories: Raw materials - 544 - - 544 Work-in-process - 13,330 - - 13,330 Finished goods - 33,484 6,152 - 39,636 ----------------------------------------------------------------- - 47,358 6,152 - 53,510 Other current assets - 6,555 988 - 7,543 ----------------------------------------------------------------- Total current assets - 184,414 24,107 (110,758) 97,763 Property, plant and equipment - 53,204 1,777 - 54,981 Less accumulated depreciation - 35,675 581 - 36,256 ----------------------------------------------------------------- - 17,529 1,196 - 18,725 Investment in subsidiaries (30,228) 12,181 - 18,047 - Other assets 1,064 111,054 383 (43) 112,458 ----------------------------------------------------------------- Total assets $ (29,164) $325,178 $25,686 $ (92,754) $ 228,946 ================================================================= Liabilities and stockholders' equity (deficit): Current liabilities: Accounts payable $ 96,581 $ 30,298 $12,338 $(110,758) $ 28,459 Accrued interest - 6,360 - - 6,360 Other accrued liabilities 1,270 5,305 1,148 - 7,723 Current portion of long-term debt - 41,053 - - 41,053 ----------------------------------------------------------------- Total current liabilities 97,851 83,016 13,486 (110,758) 83,595 Long-term debt - 257,629 - - 257,629 Other liabilities - 15,119 19 - 15,138 Series C redeemable preferred stock 23,118 - - - 23,118 Stockholders' equity (deficit) (150,133) (30,586) 12,181 18,004 (150,534) ----------------------------------------------------------------- Total liabilities and stockholders' equity (deficit) $ (29,164) $325,178 $25,686 $ (92,754) $ 228,946 ================================================================= 9 DESA HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Condensed Consolidating Balance Sheet As of March 3, 2001 (in thousands) Parent DESA Combined Guarantor International, Non-Guarantor Consolidating (Holdings) Inc. Subsidiaries Adjustments Consolidated ------------------------------------------------------------------ Assets: Cash and cash equivalents $ - $ 1,844 $ 544 - $ 2,388 Accounts receivable, net - 142,566 13,102 $(113,774) 41,894 Inventories: Raw materials - 486 - - 486 Work-in-process - 10,938 - - 10,938 Finished goods - 31,370 6,499 - 37,869 ---------------------------------------------------------------- - 42,794 6,499 - 49,293 Other current assets - 8,346 1,304 - 9,650 ----------------------------------------------------------------- Total current assets - 195,550 21,449 (113,774) 103,225 Property, plant and equipment - 50,223 1,472 - 51,695 Less accumulated depreciation - 34,621 463 - 35,084 ---------------------------------------------------------------- - 15,602 1,009 - 16,611 Investment in subsidiaries (23,425) 13,137 - 10,288 - Other assets 1,073 112,614 416 (43) 114,060 ---------------------------------------------------------------- Total assets $ (22,352) $336,903 $22,874 $(103,529) $ 233,896 ================================================================ Liabilities and stockholders' equity (deficit): Current liabilities: Accounts payable $ 104,090 $ 30,051 $ 8,334 $(113,774) $ 28,701 Accrued interest - 3,195 - - 3,195 Other accrued liabilities 515 11,925 1,384 - 13,824 Current portion of long-term debt - 50,874 - - 50,874 ---------------------------------------------------------------- Total current liabilities 104,605 96,045 9,718 (113,774) 96,594 Long-term debt - 249,163 - - 249,163 Other liabilities - 15,120 19 - 15,139 Series C redeemable preferred stock 23,057 - - - 23,057 Stockholders' equity (deficit) (150,014) (23,425) 13,137 10,245 (150,057) ---------------------------------------------------------------- Total liabilities and stockholders' equity (deficit) $ (22,352) $336,903 $22,874 $(103,529) $ 233,896 ================================================================ 10 DESA HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Condensed Consolidating Statement of Operations Thirteen Weeks Ended June 2, 2001 (in thousands) Parent DESA Combined Guarantor International, Non-Guarantor Consolidating (Holdings) Inc. Subsidiaries Adjustments Consolidated ------------------------------------------------------------------ Net sales $ - $ 55,525 $11,730 $ (9,443) $ 57,812 Cost of sales - 39,698 10,686 (9,443) 40,941 ------------------------------------------------------------------ Gross profit - 15,827 1,044 - 16,871 Operating costs and expenses: Selling - 13,604 1,328 - 14,932 General, administrative and other 8 5,999 148 - 6,155 Undistributed loss of subsidiaries 6,524 463 - (6,987) - ------------------------------------------------------------------ 6,532 20,066 1,476 (6,987) 21,087 ------------------------------------------------------------------ Operating loss (6,532) (4,239) (432) 6,987 (4,216) Interest expense - 6,856 - - 6,856 ------------------------------------------------------------------ Loss before provision (benefit) for income taxes (6,532) (11,095) (432) 6,987 (11,072) Provision (benefit) for income taxes - (4,571) 31 - (4,540) ------------------------------------------------------------------ Net loss $(6,532) $ (6,524) $ (463) $ 6,987 $ (6,532) ================================================================== Condensed Consolidating Statement of Operations Fourteen Weeks Ended June 3, 2000 (in thousands) Parent DESA Combined Guarantor International, Non-Guarantor Consolidating (Holdings) Inc. Subsidiaries Adjustments Consolidated ------------------------------------------------------------------ Net sales $ - $ 68,321 $20,156 $(17,858) $ 70,619 Cost of sales - 48,843 18,642 (17,858) 49,627 ------------------------------------------------------------------ Gross profit - 19,478 1,514 - 20,992 Operating costs and expenses: Selling - 14,127 1,015 - 15,142 General, administrative and other 8 6,050 92 - 6,150 Undistributed earnings of subsidiaries 4,480 (258) - (4,222) - ------------------------------------------------------------------ 4,488 19,919 1,107 (4,222) 21,292 ------------------------------------------------------------------ Operating profit (loss) (4,488) (441) 407 4,222 (300) Interest expense 14 8,178 - - 8,192 ------------------------------------------------------------------ Income (loss) before provision (benefit) for income taxes (4,502) (8,619) 407 4,222 (8,492) Provision (benefit) for income taxes - (4,139) 149 - (3,990) ------------------------------------------------------------------ Net income (loss) $(4,502) $ (4,480) $ 258 $ 4,222 $ (4,502) ================================================================== 11 DESA HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Condensed Consolidating Statement of Cash Flows Thirteen Weeks Ended June 2, 2001 (in thousands) Parent DESA Combined Guarantor International, Non-Guarantor Consolidating (Holdings) Inc. Subsidiaries Adjustments Consolidated ------------------------------------------------------------------ Net cash (used in) provided by operating activities $(7,509) $ 3,480 $ 215 $ - $ (3,814) Net cash (used in) investing activities - (2,933) (307) - (3,240) Net cash provided by (used in) financing activities 7,509 (1,355) - - 6,154 Effect of exchange rate changes on cash - - 14 - 14 ------------------------------------------------------------------ Decrease in cash and cash equivalents for the year - (808) (78) - (886) Cash and cash equivalents at beginning of year - 1,844 544 - 2,388 ------------------------------------------------------------------ Cash and cash equivalents at end of year $ - $ 1,036 $ 466 $ - $ 1,502 ================================================================== Condensed Consolidating Statement of Cash Flows Fourteen Weeks Ended June 3, 2000 (in thousands) Parent DESA Combined Guarantor International, Non-Guarantor Consolidating (Holdings) Inc. Subsidiaries Adjustments Consolidated ------------------------------------------------------------------ Net cash (used in) provided by operating activities $(3,165) $(20,591) $ (13) $ - $(23,769) Net cash (used in) investing activities - (11,390) (74) - (11,464) Net cash provided by financing activities 3,165 32,749 - - 35,914 ------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents for the year - 768 (87) - 681 Cash and cash equivalents at beginning of year - 8 165 - 173 ------------------------------------------------------------------ Cash and cash equivalents at end of year $ - $ 776 $ 78 $ - $ 854 ==================================================================

12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This quarterly report on Form 10-Q of DESA Holdings Corporation (the "Company"), which includes its consolidated subsidiaries unless the context indicates otherwise, contains statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Those statements appear in a number of places in this report and include statements regarding the strategies, plans, beliefs or current expectations of the Company and its management and other statements that are not historical facts. Forward looking statements generally can be identified by the use of forward looking terminology such as "may," "will," "expect," "intend," "estimate," "could," "anticipate," "believe," continue," (or the negative thereof) or similar terminology. Readers are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those set forth in such forward looking statements as a result of various factors. Such factors include, but are not limited to, the Company's vulnerability to adverse general economic and industry conditions because of its leverage, the Company's ability to obtain future financing on acceptable terms, the Company's ability to integrate acquired companies and to complete acquisitions on satisfactory terms, the demand and price for the Company's products relative to production costs and the seasonality of the Company's business. The Company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements that may be made to reflect errors or circumstances that occur after the date hereof. The following discussion of the Company's results of operations and financial condition for the thirteen week period ended June 2, 2001 and the fourteen week period ended June 3, 2000, should be read in conjunction with the consolidated financial statements of the Company and the notes thereto contained herein, as well as for the fiscal year ended March 3, 2001, included in the Company's Annual Report on Form 10-K. OVERVIEW The Company is organized into three divisions. Each division is comprised of dedicated operational resources required to support their specific product and geographic categories, and shared administrative resources for certain corporate functions. The divisions are: (a) zone heating division, which includes indoor room heaters, hearth products and outdoor heaters sold in the United States, (b) specialty products division, which includes specialty tools and home security products sold in the United States and all products sold in Canada and (c) international division, which includes zone heating and specialty products sold in all geographic areas other than the United States and Canada. Sales of the Company's zone heating products follow seasonal patterns that affect the Company's results of operations. Demand for the Company's zone heating products has been historically highest in the fiscal third quarter, as consumers prepare for winter. Consequently, the Company's net sales and the Company's fiscal operating profit have also been historically highest during the Company's fiscal third quarter. Management believes that the Company's results of operations will continue to follow this pattern; there can be no assurance, however, that third quarter results will always surpass those of the first and second quarters, or that any improvement shown will be as great as that shown in previous years. In particular, unusually warm weather in the fall may reduce demand for zone heating products. Sales of the Company's specialty products do not follow a significant seasonal pattern and are not affected by weather patterns. Historically, these sales have followed a relatively level quarterly pattern. RESULTS OF OPERATIONS THIRTEEN WEEK PERIOD ENDED JUNE 2, 2001, COMPARED TO THE FOURTEEN WEEK PERIOD ENDED JUNE 3, 2000 NET SALES. Net sales in the thirteen weeks ended June 2, 2001 ("first quarter 2002") were $57.8 million, a decrease of 18.1% or $12.8 million compared to the fourteen weeks ended June 3, 2000 ("first quarter 2001"). Zone heating division had net sales of $16.7 million in first quarter 2002, a decrease of 30.1% or $7.2 million in first quarter 2001, primarily due to the timing of certain sales volume related to the de-emphasis of a pre-season sales program for heating product. Specialty products division had net sales of $39.9 million in the first quarter 2002, a decrease of 13 13.3% or $6.1 million from first quarter 2001, primarily due to general economic conditions and one less week in the current quarter. COST OF SALES. Cost of sales for first quarter 2002 was $40.9 million, a decrease of $8.7 million or 17.5% from first quarter 2001. The decrease was attributable to the lower unit sales for the period. Cost of sales was 70.8% of net sales in first quarter 2002 compared to 70.3% for first quarter 2001 and is primarily due to a change in the product mix. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For first quarter 2002, selling, general and administrative expenses were $21.1 million, a decrease of $.2 million or 1.0% from first quarter 2001. As a percentage of net sales, selling, general and administrative expenses were 36.5% for first quarter 2002 compared to 30.2% in first quarter 2001. The increase as a percent of net sales is primarily attributable to timing of fixed costs which are incurred evenly through out the year and their relationship to sales in the quarter and costs associated with the start-up of certain international operations. OPERATING PROFIT (LOSS). Operating loss was $4.2 million for first quarter 2002 compared to $.3 million for first quarter 2001, an increase of $3.9 million. Operating loss attributable to zone heating products was $5.9 million for first quarter 2002, an increase of $2.2 million or 58.3% from first quarter 2001. The increase is primarily the result of decreased sales volume. Specialty products operating profit was $3.0 million for the first quarter 2002, a decrease of $1.3 million or 31.1% from first quarter 2001. This decrease is primarily attributable to a decline in sales volume related to a decline in the general economic conditions. EBITDA. EBITDA for the first quarter 2002 was a loss of $1.5 million, a decrease of $3.7 million from first quarter 2001. EBITDA is defined as income (loss) before income taxes plus interest expense and depreciation as well as amortization expense associated with intangibles and deferred charges. EBITDA is presented because it is a widely accepted financial indicator of a leveraged company's ability to service and/or incur indebtedness and because management believes that EBITDA is a relevant measure of the Company's ability to generate cash without regard to the Company's capital structure or working capital needs. However, EBITDA should not be considered as an alternative to net income as a measure of a company's operating results or to cash flows from operating activities as a measure of liquidity as defined by accounting principles generally accepted in the United States. INTEREST EXPENSE. Interest expense for first quarter 2002 was $6.9 million, a decrease of $1.3 million from first quarter 2001. The decrease is primarily attributable to lower levels of working capital borrowing during the quarter. INCOME TAXES. The effective income tax rate was 41.0% for first quarter 2002, a decrease of 6.0% compared to first quarter 2001 rate of 47.0%. The decrease is primarily due to a change in the mix of foreign and domestic income compared to first quarter 2001. NET LOSS. Net loss was $6.5 million for first quarter 2002 compared to a net loss of $4.5 million for first quarter 2001, an increase of $2.0 million. The increase is primarily attributable to lower sales volumes and related margins, partially offset by lower interest expense. LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash needs have been for working capital, capital expenditures and debt service requirements. The Company's sources of liquidity have been cash flows from operations, borrowings under its revolving credit facilities and the Guaranteed Line of Credit. The Company's business is subject to a pattern of seasonal fluctuation. The Company's needs for working capital and the corresponding debt levels tend to peak in the second and third fiscal quarters. The amount of sales generated during the second and third fiscal quarters generally depends upon a number of factors, including the level of retail sales for heating products during the prior winter, current fall weather conditions affecting the level of sales of heating products, general economic conditions, and other factors beyond the Company's control. Net cash used in operating activities for first quarter 2002 was $3.8 million compared to net cash used of $23.8 million for first quarter 2001. This decreased use of cash in first quarter 2002 was primarily due to a decreased use of cash for working capital purposes offset by lower net income. 14 Net cash used in investing activities was $3.2 million for first quarter 2002, compared to $11.5 million in first quarter 2001. The use of cash in investing activities in first quarter 2002 primarily reflects capital expenditures and the prior period includes the acquisition of Trine Products Company for $11.1 million. Net cash provided by financing activities in first quarter 2002 was $6.2 million, compared to $35.9 million for first quarter 2001. Cash provided by financing activities in first quarter 2002 reflects the sale of $7.5 million of common stock and increases in the working capital loan and the Guaranteed Line of Credit offset by principal payments on term loans and acquisition loans. The Credit Facility provides for commitments in an aggregate amount of up to $162.8 million. Borrowings outstanding under the Credit Facility were $153.7 million on June 2, 2001. Outstanding letters of credit and foreign currency contracts established to facilitate merchandise purchases were $1.9 million and $3.7 million, respectively, at June 2, 2001. The Company had the ability to incur additional indebtedness of $9.1 million at June 2, 2001 under the Credit Facility. The Company entered into an agreement for a $15.0 million Guaranteed Line of Credit on May 25, 1999. The Guaranteed Line of Credit matures on November 26, 2003 and is guaranteed by UBS Capital LLC, a shareholder of the Company. Borrowings under the Guaranteed Line of Credit bear interest at an annual rate equal to either (at the Company's option) a margin over a base rate or a margin over LIBOR. The Guaranteed Line of Credit contains customary covenants and events of default. The Company expects that capital expenditures during fiscal 2002 will not exceed $8.0 million. Capital expenditures are expected to be funded from internally generated cash flows and from borrowings under the Credit Facility. Management believes that cash flow from operations, availability under the Credit Facility and the Guaranteed Line of Credit will provide adequate funds for the Company's foreseeable working capital needs, planned capital expenditures and debt service obligations. Additionally, the Company reviews potential acquisitions and relationships from time to time and may be required to seek additional debt to fund any acquisition. The Credit Facility requires a Clean-Up Period, as defined, under the Working Capital Loan Commitment, for a period of 30 consecutive days occurring between January 1 and May 30 in each calendar year. 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 million. As of June 2, 2001, approximately $18.5 million of working capital borrowings have been classified as current as a result of the Clean-Up requirement. Such amount may be reborrowed after compliance with the Clean-Up Period. The Company's ability to fund its operations, make planned capital expenditures, make scheduled debt payments, make desired acquisitions, refinance indebtedness and remain in compliance with all of the financial covenants under its debt agreements depends on its future operating performance and cash flow, which in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond its control. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risks relating to the Company's operations result primarily from changes in interest rates. The Company also has limited foreign currency risk associated with its Canadian, European, and Hong Kong operations. A portion of the Company's operations consists of purchasing and sales activities in foreign jurisdictions. The Company manufactures its products in the United States and Hong Kong, purchases products in Europe, China, and Japan and sells products primarily in the United States, Canada, and Europe. As a result, the Company's financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company operates. The Company employs established policies and procedures to manage its exposure to fluctuations in interest rates and the value of the foreign currencies. Interest rate and foreign currency transactions are used only to the extent considered necessary to meet the Company's objectives. The Company does not utilize derivative financial instruments for trading or other speculative purposes. There have been no material changes in the market risk to which the Company is exposed since the end of the Company's preceding fiscal year. 15 INTEREST RATE RISK The Company's interest rate risk management objective is to limit the impact of interest rate changes on its earnings and cash flow and to lower its overall borrowing cost. To achieve its objectives, the Company regularly evaluates the amount of its variable rate debt as a percentage of its aggregate debt. The Company manages its exposure to interest rate fluctuations in its variable rate debt through periodic review of the cost of interest rate swap agreements and interest rate cap agreements relative to the perceived interest rate risk. At June 2, 2001, the Company did not have an interest rate swap or interest rate cap agreement in place. The following table summarizes the carrying amounts and estimated fair values of the Company's remaining financial instruments at June 2, 2001 and March 3, 2001: June 2, 2001 March 3, 2001 Carrying Amount Fair Value Carrying Amount Fair Value -------------------------------------------------------- (in thousands) Bank debt $ 153,682 $ 153,682 $ 156,587 $ 156,587 Senior subordinated notes 130,000 59,800 130,000 74,100 Guaranteed Line of Credit 15,000 15,000 13,450 13,450 Foreign exchange contracts - unrealized loss 358 358 -- 23 Based on the average outstanding amount of variable rate indebtedness of the Company in fiscal 2001, a one percentage point change in the interest rates for the Company's variable rate debt would have impacted the Company's fiscal 2001 interest expense by an aggregate of approximately $1.9 million. FOREIGN CURRENCY EXCHANGE RATE RISK The Company does not conduct a significant portion of its manufacturing or sales activity in foreign markets. The Company's reported financial results could be affected, however, by factors such as changes in foreign currency exchange rates in the markets where it operates. When the U.S. dollar strengthens against such foreign currencies, the reported U.S. dollar value of local currency operating profits generally decreases; when the U.S. dollar weakens against such foreign currencies, the reported U.S. dollar value of local currency operating profits generally increases. The Company utilizes foreign exchange forward contracts to mitigate the short-term effect of movements in currency exchange rates on the Company's foreign currency based inventory purchases. The Company regularly hedges by entering into foreign exchange forward contracts, approximately 85% to 95% of its budgeted (future) net foreign currency purchase transactions over a period of four quarters. At June 2, 2001, the Company had forward exchange contracts, with maturities ranging from June 2001 to October 2001, to purchase approximately $3.7 million in foreign currency. The fair value of the derivative instrument has been recorded in accordance with SFAS 133. Because the Company does not have significant foreign operations, the Company does not believe it is necessary to enter into any other derivative financial instruments to reduce its exposure to foreign currency exchange rate risk. PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On April 10, 2001, 1,375 shares were issued to employees upon the exercise of stock options at an aggregate exercise price of $8,938. On May 30, 2001, 9,820,148 shares were issued to current shareholders at an aggregate purchase price of $10,289,580. These shares are exempt from registration under Section 4(2) of the Securities Act. 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the period for which this report is made. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DESA HOLDINGS CORPORATION By: Dated: July 11, 2001 /s/ Stephen L. Clanton Stephen L. Clanton Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) 18

DESA HOLDINGS CORPORATION FORM 10-Q December 2, 2000 INDEX Page PART I Financial Information Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets - December 2, 2000 and February 26, 2000 2 Consolidated Statements of Operations - Thirteen and Forty Weeks ended December 2, 2000 and Thirteen and Thirty-nine Weeks ended November 27, 1999 3 Consolidated Statements of Stockholders' Equity (Deficit) - Forty Weeks ended December 2, 2000 4 Consolidated Statements of Cash Flows - Forty Weeks ended December 2, 2000 and Thirty-nine Weeks ended November 27, 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 PART II Other Information Item 2. Changes in Securities and Use of Proceeds 18 Item 3. Defaults Upon Senior Securities 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19

DESA HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEETS December 2, February 26, 2000 2000 -------------- -------------- (in thousands) (in thousands) (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 728 $ 173 Accounts receivable, net of allowances of ($2,016) at 88,019 32,921 December 2, 2000 and ($907) at February 26, 2000 Inventories: Raw materials 604 209 Work-in-process 13,082 9,756 Finished goods 48,375 50,192 --------- --------- 62,061 60,157 Deferred tax assets 1,743 1,743 Other current assets 3,456 2,003 --------- --------- Total current assets 156,007 96,997 Property, plant and equipment: Land 526 525 Buildings and improvements 6,414 6,294 Machinery and equipment 42,355 39,361 Furniture and fixtures 1,106 1,090 --------- --------- 50,401 47,270 Less accumulated depreciation 34,494 30,574 --------- --------- 15,907 16,696 Goodwill, net 95,261 93,818 Other assets 19,393 22,266 --------- --------- Total assets $ 286,568 $ 229,777 ========= ========= Liabilities and stockholders' equity (deficit) Current liabilities: Accounts payable $ 42,013 $ 37,040 Accrued interest 6,880 5,233 Other accrued liabilities 25,621 13,225 Current portion of long-term debt 64,975 23,500 --------- --------- Total current liabilities 139,489 78,998 Long-term debt 255,235 265,846 Other liabilities 15,403 15,629 --------- --------- Total liabilities 410,127 360,473 Commitments and contingencies Series C redeemable preferred stock, $.01 par value; authorized-- 40,000 shares; issued and outstanding--23,805 shares at December 2, 2000 and 22,461 shares at February 26, 2000 (liquidation preference - $25,018,000 at December 2, 2000 and $22,882,000 at February 26, 2000) 21,475 19,937 Stockholders' equity (deficit): Common stock, $.01 par value; authorized-- 50,000,000 shares; issued and outstanding-- 16,373,149 shares at December 2, 2000 and 15,562,656 shares at February 26, 2000 164 155 Nonvoting common stock, $.01 par value; authorized--3,000,000 shares; issued and outstanding--90,604 shares at December 2, 2000 and February 26, 2000 1 1 Capital in excess of par value 103,334 98,075 Carryover predecessor basis adjustment (32,309) (32,309) Accumulated deficit (213,056) (214,518) Accumulated other comprehensive income (3,168) (2,037) --------- --------- Total stockholders' equity (deficit) (145,034) (150,633) --------- --------- Total liabilities and stockholders' equity (deficit) $ 286,568 $ 229,777 ========= =========

DESA HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (Unaudited) Thirteen Weeks Thirteen Weeks Forty Weeks Thirty-nine Weeks Ended Ended Ended Ended December 2, 2000 November 27, 1999 December 2, 2000 November 27, 1999 ----------------- ----------------- ---------------- ------------------ Net sales $144,317 $156,763 $325,558 $317,480 Cost of sales 92,690 100,983 214,664 210,783 -------- -------- -------- -------- Gross profit 51,627 55,780 110,894 106,697 Operating costs and expenses: Selling 24,146 25,363 59,549 54,557 General and administrative 5,176 4,252 14,213 11,300 Other 1,724 1,613 5,185 4,677 -------- -------- -------- -------- 31,046 31,228 78,947 70,534 -------- -------- -------- -------- Operating profit 20,581 24,552 31,947 36,163 Interest expense 8,313 7,589 24,925 21,551 -------- -------- -------- -------- Income before provision for income taxes 12,268 16,963 7,022 14,612 Provision for income taxes 5,668 7,727 3,230 6,788 -------- -------- -------- -------- Net income 6,600 9,236 3,792 7,824 Less dividends and accretion on preferred stock 777 699 2,330 2,047 -------- -------- -------- -------- Income applicable to common stockholders $ 5,823 $ 8,537 $ 1,462 $ 5,777 ======== ======== ======== ========

DESA HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (in thousands) (Unaudited) Carryover Accumulated Nonvoting Capital in Predecessor Other Total Common Common Excess of Basis Accumulated Comprehensive Stockholders' Stock Stock Par Value Adjustment Deficit Loss Deficit ------------------------------------------------------------------------------------------------------- Balance at February 26, 2000 $155 $1 $98,075 ($32,309) ($214,518) ($2,037) ($150,633) Comprehensive income: Net Income 3,792 3,792 Net change in foreign currency translation adjustment (1,131) (1,131) ------------ Comprehensive income 2,661 ------------ Accretion of preferred stock (194) (194) Dividends on preferred stock (2,136) (2,136) Issuance of common stock 9 5,259 5,268 ----------------------------------------------------------------------------------- ------------ Balance at December 2, 2000 $164 $1 $103,334 ($32,309) ($213,056) ($3,168) ($145,034) =================================================================================== ============

DESA HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Forty Weeks Thirty-nine Weeks Ended Ended December 2, 2000 November 27, 1999 ---------------- ------------------ Cash flows from operating activities Net income $ 3,792 $ 7,824 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 3,920 3,767 Amortization 4,866 4,478 Equity in undistributed earnings of joint venture (153) (158) Change in operating assets and liabilities, net of effects of acquisition: Accounts receivable, net (50,912) (57,918) Inventories 3,457 (15,342) Other current assets (1,320) (598) Accounts payable 2,728 23,242 Accrued interest 1,683 5,417 Other accrued liabilities 6,434 11,990 Income taxes payable 3,413 6,470 Other liabilities (309) 161 -------- -------- Net cash used in operating activities (22,401) (10,667) -------- -------- Investing activities Capital expenditures (2,131) (3,069) Dividends received from joint venture 179 139 Net cash paid for acquisition of businesses (11,196) -- Other 16 (825) -------- -------- Net cash used in investing activities (13,132) (3,755) -------- -------- Financing activities Net proceeds from working capital loan 35,281 17,762 Net proceeds from Guaranteed Line of Credit 13,450 -- Decrease in note payable (1,878) (202) Proceeds from term loans 6,000 -- Principal payments of term loans (11,401) (2,775) Principal payments of acquisition loans (10,624) -- Issuance of common stock 5,268 25 Payment of debt financing costs (23) (703) -------- -------- Net cash provided by financing activities 36,073 14,107 Effect of exchange rate changes on cash 15 -- -------- -------- Increase (decrease) in cash and cash equivalents for the period 555 (315) Cash and cash equivalents at beginning of period 173 888 -------- -------- Cash and cash equivalents at end of period $ 728 $ 573 ======== ========

December 2, November 27, December 2, November 27, 2000 1999 2000 1999 (Thirteen (Thirteen (Forty Weeks) (Thirty-nine Weeks) Weeks) Weeks) -------------------------------------------------------- ------------------ Net Sales $144,317 $156,763 $325,558 $317,480 Income before income taxes $ 12,259 $ 16,963 $ 6,983 $ 14,612 Income applicable to common stockholders $ 6,591 $ 9,236 $ 3,753 $ 7,824

December 2, February 26, 2000 2000 ---------------------------------- 9 7/8% Senior Subordinated Notes due 2007 (A) $130,000 $130,000 Bank of America and various banks Term A Loan (B) 29,001 37,500 Bank of America and various banks Term B Loan (C) 45,435 47,750 Bank of America and various banks Term C Loan (D) 5,413 -- Bank of America and various banks Working Capital Loan Commitment (E) 60,660 25,379 Bank of America and various banks Acquisition Loan (F) 14,500 18,750 Bank of America and various banks Acquisition B Loan (G) 21,751 28,125 Note payable related to acquisition of Heath (H) -- 1,842 Guaranteed Line of Credit (I) 13,450 -- -------- -------- Total outstanding borrowings 320,210 289,346 Less current portion of long-term debt 64,975 23,500 -------- -------- Total long-term debt $255,235 $265,846 ======== ======== (A) The Senior Subordinated Notes are payable on December 15, 2007 and accrue interest at a rate of 9.875% per annum. Interest is payable semi-annually on June 15 and December 15. The Senior Subordinated Notes can be redeemed prior to the mandatory redemption date based upon the occurrence of certain events, as defined. DESA is the issuer of the Senior Subordinated Notes, which are fully and unconditionally guaranteed by Holdings. (B) The Term A Loan is payable in quarterly installments through November 26, 2003, and accrues interest at the prime rate plus 2.00% or LIBOR plus 3.00% at the option of DESA. Interest is payable on a quarterly basis under the prime rate option or at the end of each LIBOR period. The weighted average interest rate was 9.54% in year to date fiscal 2001 and 8.03% in fiscal year 2000. Once repaid, the Term A Loan may not be reborrowed. (C) The Term B Loan is payable in quarterly installments through November 26, 2004, and accrues interest at the prime rate plus 2.25% or LIBOR plus 3.25% at the option of DESA. Interest is payable on a quarterly basis under the prime rate option or at the end of each LIBOR period. The weighted average interest rate was 9.79% in year to date fiscal 2001 and 8.52% in fiscal year 2000. Once repaid, the Term B Loan may not be reborrowed. (D) The Term C Loan is payable in quarterly installments which commenced in May 2000 and extend through November 26, 2003, and accrues interest at the prime rate plus 2.25% or LIBOR plus 3.25% at the option of DESA. Interest is payable on a quarterly basis under the prime rate option or at the end of each LIBOR period. The weighted average interest rate was 9.68% in year to date fiscal 2001. Once repaid, the Term C Loan may not be reborrowed. 8 DESA HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (E) 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 2.00% or LIBOR plus 3.00%, at the option of DESA. The weighted average interest rate was 9.51% in year to date fiscal 2001 and 8.60% in fiscal year 2000. Interest is payable on a quarterly basis under the prime rate option or at the end of each LIBOR period. DESA can utilize letters of credit under the Working Capital Loan Commitment up to $10 million. As of December 2, 2000 and February 26, 2000, letters of credit of $3.0 million and $1.5 million were outstanding under the Working Capital Loan Commitment. Borrowings are generally limited to specific percentages of eligible trade receivables and inventory. Holdings pays commitment fees of 1/2 of 1% per annum on the daily unutilized Working Capital Loan Commitment. (F) The Acquisition Loan is payable in quarterly installments which commenced in February 2000 and extend through November 26, 2003, and accrues interest, which is payable quarterly, at the prime rate plus 2.25% or LIBOR plus 3.25% at the option of DESA. The weighted average interest rate was 9.78% in year to date fiscal 2001 and 8.22% in fiscal year 2000. Once repaid, the Acquisition Loan may not be reborrowed. (G) The Acquisition B Loan is payable in quarterly installments which commenced in February 2000 and extend through November 26, 2003 and accrues interest, which is payable quarterly, at the prime rate plus 2.25% or LIBOR plus 3.25% at the option of DESA. The weighted average interest rate was 9.82% in year to date 2001 and 8.05% in fiscal year 2000. Once repaid, the Acquisition B Loan may not be reborrowed. (H) The note payable is due on December 31, 2008 and accrues interest, which is payable semi-annually at a rate of 7.5% per annum. DESA may elect, upon written notice, to defer any interest payments, in which event such interest payments shall effectively convert to principal and accrue interest at a rate of 7.5% per annum. In March 2000, the loan was fully satisfied through reductions of principal for certain payments made under the terms of the note. (I) The Guaranteed Line of Credit loan, as extended, is payable at any time at the option of DESA prior to May 31, 2002, and accrues interest at the prime rate plus .25% or LIBOR plus 1.75%, at the option of DESA. Interest is payable on a quarterly basis under the prime rate option or at the end of each LIBOR period. The weighted average interest rate was 8.54% in year to date fiscal 2001.

December 2, November 27, December 2, November 27, 2000 1999 2000 1999 (Thirteen (Thirteen (Forty Weeks) (Thirty-nine Weeks) Weeks) Weeks) ------------------------------------------------------------------------------- Net income $ 6,600 $9,236 $ 3,792 $ 7,824 Net change in foreign currency translation adjustment (591) (425) (1,131) (727) ------------------------------------------------------------------------------- Comprehensive Income $ 6,009 $8,811 $ 2,661 $ 7,097 ===============================================================================

Specialty Zone Heating Products Division Division Other Total ------------------------------------------------------------------- Thirteen weeks ended December 2, 2000: Net sales $ 97,516 $ 41,954 $ 4,847 $ 144,317 Operating profit (loss) 17,551 2,920 110 20,581 Depreciation and amortization 2,302 860 58 3,220 Identifiable assets 159,430 115,132 12,006 286,568 Capital expenditures 322 553 192 1,067 Thirteen weeks ended November 27, 1999: Net sales $ 97,508 $ 51,933 $ 7,322 $ 156,763 Operating profit (loss) 19,214 3,778 1,560 24,552 Depreciation and amortization 2,259 654 47 2,960 Identifiable assets 157,758 113,712 15,188 286,658 Capital expenditures 4 417 0 421

Specialty Zone Heating Products Division Division Other Total ------------------------------------------------------------------- Forty weeks ended December 2, 2000: Net sales $ 185,111 $ 132,703 $ 7,744 $325,558 Operating profit (loss) 22,581 10,738 (1,372) 31,947 Depreciation and amortization 6,164 2,452 170 8,786 Identifiable assets 159,430 115,132 12,006 286,568 Capital expenditures 1,077 724 330 2,131 Thirty-nine weeks ended November 27, 1999: Net sales $ 166,678 $ 140,062 $ 10,740 $317,480 Operating profit (loss) 20,752 14,866 545 36,163 Depreciation and amortization 6,165 1,930 150 8,245 Identifiable assets 157,758 113,712 15,188 286,658 Capital expenditures 1,930 1,139 0 3,069

December 2, 2000 February 26, 2000 Carrying Amount Fair Value Carrying Amount Fair Value ---------------------------------------------------------------------------- (in thousands) Bank debt $176,760 $176,760 $157,504 $157,504 Senior subordinated notes 130,000 84,500 130,000 96,850 Guaranteed Line of Credit 13,450 13,450 -- -- Note payable -- -- 1,842 1,842 Foreign exchange contracts -- 77 -- 473

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